Remember when investors cared about China? It seems like ages ago, a simpler time before Europe entered its populist paroxysms, before the pungent orange cloud called Trump had enveloped the American body politic. Actually it was January 2016, according to Bank of America Merrill Lynch's most recent global survey of fund managers:
Now that we're back to fretting about our rival to the East, it makes sense to check in on the Cassandra of China shorts to get a sense of how imminent collapse may be. It's time to ring Kyle Bass:
“What the public narrative is and what they have been doing behind the scenes are two completely different stories,” Bass said in a telephone interview. “China has been masterful controlling the public narrative. As a fiduciary, I have no idea how anyone can invest in China.”
As you'll recall, Bass’s Hayman Capital Management assembled a massive short against the yuan in early 2016, predicting that China's looming financial implosion would be enough of a doozie to send the yuan down 30 percent. “When you talk about orders of magnitude, this is much larger than the subprime crisis,” he said. Eighteen months and untold millions in short costs later, his story hasn't changed. Indeed, the risks have “metastasized.”
No serious person will dispute that shitisbonkers in China. But Bass's mission is quixotic. Being short the yuan is like being short Santa Claus. You may be totally correct that there are major logical inconsistencies in the public narratives propping up both, but good luck making your version of reality the dominant one.
Consider another big-ticket short, the Herbalife-Ackman saga. Pershing Square wasn't wrong to call out Herbalife as a deeply skeezy company built on financial argle-bargle. But an all-or-nothing short requires that you be right not just on some numbers, but in the public square where those numbers become trades. It's hard enough to prevail when you have to fight a multibillion-dollar corporation and its pals. It's that much more difficult when your adversary is a sovereign currency issuer.
Bass expects what is truly a monstrous credit bubble in China to burst sometime soon enough for his bet to pay off. A credit bubble matters when one set of counterparties can no longer honor their agreement to pay the other set of counterparties. But when the state has a hand in basically every layer of the process – and isn't afraid to resort to unconventional measures to restore order – the bubble thesis looks less and less certain.
We'll check back in next year.