Betting on a 50% currency implosion for China - credit bust coming

SpacePete · Sep 23, 2015

Would result in a mega route of other currencies too. The greatest carry trade in modern history may be ready to catastrophically unwind. A race to safety will drive the USD higher.

A Big Bet That China's Currency Will Devalue Further

When Mark L. Hart III, a hedge fund investor based in Texas, makes an investment bet, he does it in the style of his home state: big time.

Since 2007, his winners have included high-risk, high-return wagers that the United States housing market would collapse and that Greece would go bankrupt.

But Mr. Hart's most audacious gamble to date may well be the one he is making on China. He is betting that the mini-devaluation of China's currency last month was a mere appetizer to a 50 percent currency implosion that he predicts will come when foreign investors pull their money out of China.

Such an extreme drop in China's currency, the renminbi, would propel a broader rout in emerging market currencies from South Korea to Turkey to Brazil and result in a sustained global slump as China's borrowing binge grinds to a halt.

"Extreme credit growth usually leads to a credit bust," Mr. Hart said in an interview on Real Vision TV a new media venture in which sophisticated investors and financial experts offer their insights to fellow practitioners in a Charlie Rose-style format. In the video, which was produced a year ago well before the recent currency devaluation Mr. Hart explained how investors pulling their money out of China would lead to a collapse of the renminbi. "It is the story of 1997 and the Asian currency crisis," he warned.

A growing number of investors like Mr. Hart have concluded that a dollar that strengthens with the United States economy will have a devastating effect not only on China but on emerging markets in general. Their view is that the trillions of dollars that chased risky investment opportunities in China, Brazil, Turkey and other countries is swiftly exiting and that the pace will pick up when the Federal Reserve eventually raises interest rates.

The result, they say, will be plunging currencies, corporate defaults and a sustained growth slowdown over the next few years. This week, emerging market currencies continued their decline, led by Brazil, Turkey, Mexico and South Africa.

John H. Burbank III, a veteran emerging market investor at Passport Capital, a $4 billion hedge fund in San Francisco, has earned stellar returns this year by betting on weak commodities and imploding emerging market stock markets and currencies.

"Emerging markets are being liquidated," Mr. Burbank said in a separate Real Vision interview. This will continue, he argued, as investors keep taking their dollars out of these economies.

At the root of this investment thesis is the belief that China's 3 percent currency devaluation last month was not a one-time event, as many analysts have suggested.

Instead, these investors think that after a borrowing and investing frenzy much of which was financed by dollar-based lenders China is experiencing a run on the bank similar to what happened to Asian countries in 1997 when their semi-pegged currencies collapsed.

According to Tim Lee of Pi Economics, a research firm based in Greenwich, Conn., emerging market borrowers have accumulated $3 trillion in cheap dollar-based loans in the last decade of extra-loose central bank policies.

China has been at the forefront of this so called carry trade, in which corporations and countries tap dollar-based lenders and then invest the proceeds in higher yielding assets denominated in local currencies such as real estate, commodities and large-scale investments.

Mr. Hart calculates that the size of the Chinese carry trade is around $2 trillion, by far the highest figure for any emerging market borrower. And his view from the beginning has been that dollars that have flowed into China financing an investment rate of 50 percent of the overall economy must eventually flow out again.

"It is the greatest carry trade in modern history," Mr. Hart said. "There is nothing that is even close."

"If there is a run on the currency, everyone will want to turn their yuan into dollars," said Jurgen Odenius, the chief economist of Prudential Fixed Income. Yuan is a shorthand reference to China's currency. "And on that basis, China's foreign exchange reserves do not rank among the stronger countries. There is a lot of leverage in the system."

But many analysts point to the weakness in currencies that are trade competitors with China as being a more telling sign that China's currency will devalue further.

...

In his Real Vision interview, Mr. Hart explained that since 2006, he has been putting on a series of disaster trades in the belief that the world economy would be entering a sustained phase of deflation and low growth.

The United States mortgage and European bets represented the first two legs of this thesis, with China being the third.

"My fund would have benefited quite a bit, but my timing was off," Mr. Hart said in an email exchange. "I believe that there is still much more downside in the yuan."

http://www.nytimes.com/2015/09/24/b...hat-chinas-currency-will-devalue-further.html
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trew · Sep 24, 2015

Well those guys at Long Term Capital thought they knew what they were doing too

hyphenated · Sep 24, 2015

... and for a trader to get the timing wrong is a little embarrassing.

Interesting points, and the observations on the magnitude of dollar/yuan carry trading wind-ups are sobering. I wonder what his SHTF preparations are, given he is effectively betting big on fiscal disaster scenarios.

JulieW · Sep 24, 2015

Another on the massive list of ways this massive ponzi scheme can implode.

trew · Sep 24, 2015

hyphenated said:

I wonder what his SHTF preparations are, given he is effectively betting big on fiscal disaster scenarios.
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retire to the bahamas

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Betting on a 50% currency implosion for China - credit bust coming

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