Why the ‘Pros’ Will Probably be Wrong About China Again


Maybe that’s the best way to explain it — to explain why the apparent professionals get it wrong so frequently.

Maybe you saw the recent headline: Mezvinsky to Close Greek Hedge Fund After Losing 90% of Value.

Yeah. Chelsea Clinton’s husband opened a fund to invest in Greece’s inevitable recovery. Only two years after opening the fund, it has gone bust.

Per my father’s reaction when he sent me the story: "Genius."


OK. Maybe Mezvinsky isn’t really a pro … he’s just so connected, he can get guys like Goldman’s Lloyd C. Blankfein to sign on and help promote the fund.

But I read that story at about the same time that I read about Jeremy Grantham’s latest admission of doing wrong.

Hanging On for Too Long

Recall, Mr. Grantham is a legendary investor as well as the Chief Investment Strategist at GMO, his asset management firm. He makes big, long-term calls based largely on probabilities and mean reversion.

Just last week he announced he was way wrong about China and metals.

Well, maybe he wasn’t way wrong. Rather, he just underestimated how wrong he could be.

Grantham was speaking primarily to metals and China. His data simply did not show any likelihood of an economic collapse in China — at least, not one serious enough to undermine he fundamentals that would drive metals and commodities prices.


China’s economy landed hard.

The price of commodities followed. Or perhaps it’s that lower commodity prices helped lead China’s economy lower.

Either way, I guess that remains to be seen. After all, China still has some landing to do … and commodity prices may or may not have found bottom.

Not to point fingers at Grantham and GMO, and not to say they were necessarily married to their commodities call … but weren’t they?

Weren’t they caught up in their system that crunches data and produces probabilities or mean reversion and/or unlikely tail risk scenarios?

I don’t know for sure, since I don’t have money invested with them.

But it’s pretty easy to say with the gift of hindsight that maybe they should have reconsidered their 2011 commodity prediction a little sooner.

Maybe there was something else that kept them from wavering?

The Anti-Conference Mindset

Let’s fast-forward to some current predictions made by more professionals.

Stanley Druckenmiller is bearish.

At the Ira Sohn Investment Conference, Druckenmiller cites a too-easy Fed, Chinese slowdown and poorly allocated U.S. corporate debt as reasons to get out of equities.

Can you blame him?

To be sure, Druckenmiller, the recently retired leader at Duquesne Capital, is not a guy who gets it wrong too often. In fact, his track record of 30% average annual returns without a losing year suggests he gets it right way more than he gets it wrong.

At another conference, SALT, the SkyBridge Alternatives Conference, professional investors were equally bearish.



And that’s a notable contrast to last year’s SALT conference, where most money managers were confident in China’s ability to persevere.

Probably not a good idea.

Again, because I have the gift of hindsight, betting on China last May turned out to be a disaster.

China’s GDP growth rate:

And the Shanghai Composite:

China’s leading economic index:

What’s interesting, looking at that last chart, is this …

Now that China’s leading economic index has strengthened this year, managers are worrying about China.

And surely they have reasons to worry. Chinese banks are facing a pile of nonperforming loans upward of 20% of their book.

But what’s the real story here?

Or maybe I should ask: Is China going to spark a major market exodus?

Before I read about the sentiment of managers at SALT, I thought China wouldn’t catalyze a significant market sell-off anytime soon.

Now that I know these professionals are bearish, I definitely don’t think China will cause markets to crack anytime soon.

Just kidding.

But not really.

I’ve recently explained my outlook for China in From Sigmund Freud to China and before that in What in the World is China Smoking?

To summarize: China worry could cause a very near-term rethink that wipes away some of the global market optimism. But ultimately, China’s situation is not going to unleash havoc on the markets unless we — traders and investors — think policymakers are throwing in the towel on their "perceptions-management" campaign.

In short: The increased bearishness among money managers suggests that, save a few hiccups in the near term, markets will continue to trend higher on a foundation of policy-managed sentiment.

Again, why?

Because most investors — even the professional … especially the professional … kind — get caught up with ego.

And ego is concerned first and foremost with being right, even if it doesn’t go hand-in-hand with doing right.

I’d rather take the other side of the ego trade … even if it feels wrong.

Do right,

JR Crooks

“JR” specializes in trading commodities, currencies and options. He has spent nearly 10 years analyzing financial markets and writing about global economics. JR honed his trading techniques and global-macro worldview alongside his father, Jack Crooks, at Black Swan Capital. JR also…