Vad's Best Ideas

Fear is better than greed

Rating: 2.40 not yet rated(5 votes)    Vote:

You are logged in as | Logout

"The greatest mistake you can make in life is to be continually fearing you will make one" Elbert Hubbard

Here it comes... Bloodshed and fear have finally visited the "new leaders" of the world economy. I guess it might be the right time for me to claim that I did get it right after all, but on the other hand it is also unfortunate that many of the poor Chinese retail investors are learning in a very hard way that nothing ever goes up forever...

Greed can force people to do stupid things and the "this time will be different" speech is almost always a "sure thing" sell signal. But I wonder what will all the China bulls are going to say now? I guess we might just hear another reason why the Chinese stocks are so ridiculously cheap and why was PetroChina worth more than GE and Exxon combined... One thing is a fact -Hang Seng has declined an astounding 11% in only two days and no one can say for sure just how much lower it could go...

I have been a China "Bear" since late October of 2007 and have endured some serious pain from Ultra Short China ETF (FXP) being one of the only few significant decliners in my SLO-1 fund. My rationale for being short China has been very simple-it has simply gone too far too fast. Irrational behavior of Chinese corporations making almost a third of their profits from investments in other companies, astounding real estate price gains etc just simply could not continue forever...

The real question now is how fast the pain from the stock market decline in the emerging economies would transfer to the hard issues like real estate bubbles, manufacturing overcapacity, rampant inflation and lack of sound market principle based economic foundation. I think that China is positioned somewhat better than Japan was during the last "New Deal" bubble due to the huge $1T "foreign-exchange" reserve that could be used to shore up the onslaught of "bad loans"; but driven by the recent "irrational exuberance" attached to anything with the name China in it, by the time its over -the US sub prime fiasco might just look like a joke...

The latest question of the week asked what an average investor should do when markets decline as severely as they have in the last several weeks- my answer to this question is simple- when fear takes such a firm control of the market- the safest bets are shorting and protecting principal by investing into agency bonds... As I mentioned during the last few weeks - ultra short ETFs like FXP, EEV and TWM as well as some bond fund ETFs (TLT,TIP, SHY) could just do the trick...

P.S. I am willing to bet that after looking at the Asian market declines Bernanke and Co are probably now meeting in the "war room" and trying to arrange some kind of remedy before the market opens tomorrow... Otherwise we might just see another "Black Tuesday" decline that could make some kind of history :)

Stay safe and short :)
SkepticalCapitalist.com