"When the blind men had felt the elephant, the raja went to each of them and said to each, 'Well, blind man, have you seen the elephant? Tell me, what sort of thing is an elephant?'
They assert the elephant is like a pot (head), winnowing basket (ear), ploughshare (tusk), plough (trunk), granary (body), pillar (foot), mortar (back), pestle (tail), or brush (tip of the tail).
The men come to blows, which delights the raja. The raja says:
- O how they cling and wrangle, some who claim
- For preacher and monk the honored name!
- For, quarreling, each to his view they cling.
- Such folk see only one side of a thing.
Of course the point of this story is that what one sees depends entirely on one's perspective. The current situation in the markets appears to also resemble something of a bunch of blind men arguing with each other. So who are these blind men?
First we have the "Chindis". These are the rather emotional types who believe that China is the only thing that matters for the markets now. Haven't you heard? Its 15% growth rates forever now. All the money is in China, all the building work, all the infrastructure, all the future wealth, all the growth. This the place to be man. This is where it is at! Unfortunately the Chindis fail to see all the glaring problems staring them in the face such as: 1) Despite the high growth rates, China, and the rest of the BRIC and emerging markets for that matter, is still a massively geared play on the OECD. To see this, one doesn't need to look any further than the consumption data, which clearly shows that domestic consumption is still a relatively small portion of GDP (compared to the OECD). 2) Much of their growth is still dependent on exports, something which the official data do not really pick up due to the prevalence of exporting and re-exporting along the value chain. Therefore, if you believe the OECD economies are going to slow (as many of the Chindis I know do), it almost inconceivable that China can continue to grow at its current pace.
Then we have the "Commis". These are the mining and commodity analysts and traders. These blind men are touching a similar part of the elephant to the Chindis although their knowledge base is more specific. Apparently the managements of Rio Tinto, Xstrata and BhpBilliton are saying that demand for commodities is really strong, and a lot of it is coming from China and India. Wow! Now there is some really conclusive evidence for you. Its got to be "stronger for longer" if the managements of the mining companies say so. The most patently ridiculous aspect of this argument is the idea that what these managements are saying has any bearing at all on what is going to happen in the future. Everyone knows that China is still growing, so obviously these managements are going to be bullish. Unfortunately, as with the Chindis, the Commis fail to see the extent to which their thesis collapses if and when the OECD slows down - the potential for downgrades at the mining companies (which, by the way, are at all time highs and are the main reason the UK market is where it is today, or at least before this week) is so much larger than anything else, that it is this sector that is likely to lead the market down if and when we do enter a bear market.
Next we have the "junkies". These are the blind men who operate in the credit market, or at least used to until they all got fired. These guys are the most bearish of anyone. Jesus! Where have you been man!? Don't you know that the credit market is CLOSED!? Game over man, game over. At a party some weeks ago, I randomly met a risk manager at a major bank who was responsible for the leveraged loan, ABS and sub-prime desks. He very much epitomised this category of blind man. Since he worked all day in the credit market, he seemed to take the view that the credit market must be correctly pricing the real economic risks, and that therefore the equity market was vastly overpriced. Of course it did not occur to him that perhaps it might be the equity market that was correctly pricing the risks, while the credit market that he knew so well was not actually a very good indicator given all the forced selling and general lack of liquidity. The Buddha would be laughing in his grave. To be fair to the poor chap, he was willing to put his money where his mouth was by betting me that the FTSE would be down at least 40% by the end of the next year.
And finally, as always, there are the contrarians. These are the guys who want to buy the bank stocks. In my last post I stated my reasons why I would not get involved in this area yet, although I must say that the contrarians are increasingly counting a large number of investors that I highly respect such as Anthony Bolton and Bill Miller.
The point of all this is not for me to try and say who is right (I haven't got a clue) but rather to point out some of the inconsistencies between people who hold one or other view. The most glaring example is of the course the Chindi-Junkie cross-breed, those who think that stock markets are going to fall heavily but that China is still going to hold up and that therefore we should all be loading up on everything with exposure to China. Perhaps I will be wrong, but I find this outcome highly unlikely, for it would an entail an even more bizarre shift in the construction of the index, with mining, capital goods and industrials taking up an even larger share of the index. I guess to some extent it depends on your time frame. The commis and Chindis will be OK provided they are astute enough to get out in time, but that will probably prove difficult, especially given how wedded many of them are to their thesis.
