Want to see a scary chart? Take a gander at the Chinese Shanghai Stock Exchange Index.
It’s not often that a stock index more than doubles in less than a year. And with that meteoric rise has come all sorts of dire warnings about the massive bubble that is being blown. A favourite indicator with the doomsday crowd is the chart of the number of new stock accounts that are being opened in China.
Over 3 million new accounts are being opened every week. And more importantly, that number is rising at a parabolic rate.
There can be no denying that a little bit of a stock mania has swept over China. I am not going to bother trying to make a prediction of whether this rise will continue or not. I don’t have a clue, and I am not sure anyone else does either.
But I want to take a moment to discuss how Stanley Druckenmiller is interpreting this development. We all know that Druckenmiller is the legendary trader who “broke the Bank of England” with George Soros. Unlike the next generation of hedge fund managers who never found a TV show they felt couldn’t be improved with their smarmy smiles and “brilliant” insights, Stanley is an old school hedge fund manager who for many decades completely eschewed the media. Apart from the classic chapter in Jack Schwager’s Market Wizards, for many years the public knew precious little about one of the greatest traders of all time. But old age has mellowed Stanley, and lately he has been giving a few more interviews.
Earlier this year Stanley gave a private speech that was secretly recorded. Although most people believe that nothing moves faster through social media than the latest teenage girl rumour, they haven’t experienced the sort of velocity that traders pass around speeches from true gurus like Stanley Druckenmiller. Before you could blink, Stanley’s comments were being quoted by every trading desk. The media also began picking it up. His speech had gone fully viral.
Stanley felt that many people were cherry picking his comments, and misinterpreting what he was trying to say. So Druckenmiller agreed to an interview with Bloomberg’s Stephanie Rule. And what a great interview it was! Thank goodness he did it at a real business channel, saving us the agony of having to suffer through some idiot TV personality on CNBC. Stanley’s main purpose was to highlight the dangers of the Fed’s extraordinary easy monetary policy, but he also veered into some other topics in the 45 minute interview. If you haven’t watched it, then I highly suggest you take the time out to do so.
In this interview Stan spoke about the recent developments with the Chinese stock market. His thinking on this matter exemplifies why he is one of the greatest traders who has ever lived. Druckenmiller doesn’t bother opining about whether the Chinese stock market is a bubble or not. He doesn’t stand in there and say you should either buy or sell Chinese stocks. Instead of focusing on the primary asset, he simply accepts the price movement and thinks about what that means for derivative prices. He doesn’t bother to question why the Chinese stocks are rallying so hard, but rather focuses on what that means.
His conclusion is that given the massive rally in Chinese stocks, the odds favour a dramatic rebound in the Chinese (and also world) economy in the coming quarters. Although he acknowledges that the Chinese stock market is a relatively young market and therefore could be prone to false signals, Druckenmiller sums it up like this:
“The Chinese stock market is up, I don’t know, 140% in six months, after being in a downtrend for 5 to 7 years. And is doing so on record volume with record breadth. If it were any other stock market, or certainly any other developed market, I would tell you, being a market observer that there is a 98% chance that China will be in a cyclical boom six to twelve months from now. Because it’s China, and we don’t know the nature with what we are dealing with here relative to normal mature markets, I would downgrade that assessment from 95% but I would still hold it over…”
And then we get a CNBC style interruption from Stephanie, but Druckenmiller continues:
“no, it’s not the data, I am watching the markets. And whenever I have seen a stock market explode with record volume and record breadth, and move to that degree, like **day follows night,** six to twelve months down the road you are out of that recession and into a full blown recovery. ”
Think about how different Druckenmiller’s thinking is from most other analysts. Instead of second guessing the Chinese stock market rally, he simply accepts it, and says to himself, “what does this mean?” He then thinks, if that happens, “how is everyone else positioned? And where are the surprises going to come from?”
He also acknowledges that the odds simply favour this happening, as opposed to the other Jim Cramer BUY! BUY! BUY! recommendations that predict a certain outcome.
This is why Stanley Druckenmiller is one of the greatest traders that has ever lived.
As for his call, I completely agree. The markets have become much too pessimistic about China’s prospects. In a complete 180 degree turn from half a dozen years ago when everyone was a raging China bull (“if you haven’t been to China and experienced the growth, then you don’t know what you are talking about being negative on it” was the typical refrain), we have now hit the point where any Chinese bullishness is met with warnings about all the over capacity and other well known problems. I am not smart enough to pin point the timing of the turn, but Stanley has been kind enough to articulate it with an amazing clarity.
Druckenmiller’s basic message is don’t overthink the Chinese stock market move. It means the world economy is about to get better.
After the end of the interview, Stephanie and Stanley mistakenly left their mikes on. Most people missed it, but Stan was pretty clear when he said, “don’t fade the banana stand guy – there is always money in the banana stand…”