The Dumbest Macro Call Ever

Don't you love how the same bozos who kept insisting that there wouldn't be a recession, that there wasn't a housing crisis, and that Fannie Mae (NYSE: FNM  ) and Freddie Mac (NYSE: FRE  ) wouldn't need to be bailed out now claim to know when we're going to come out of the current downturn?

Heck, if the talking heads were to be believed, the only folks who have seen more bottoms than the stock market in the past year or so photograph lingerie models for a living. (Zing!)

Here's what you need to remember
The financial media is tasked with filling up the airwaves with something 24 hours a day. Bonus if that something is interesting. Bigger bonus if it's interesting and somewhat useful. Enormous bonus if it's Limited Brands' (NYSE: LTD  ) earnings report and they get to show stock footage of Victoria's Secret models parading down the runway.

But there's no accountability. No one remembers that you said something stupid. That's how the game works, my friends.

Which brings me to ...
Do you remember the widely held belief that the Chinese stock market would be buoyed by the Beijing Olympics? Many claimed that this was a surefire bet since the Chinese Securities Regulatory Commission would do everything in its power to keep domestic stocks stable while the world's focus was on Beijing.

Let's look at the tape, shall we?

1-year performance of the Shanghai Stock Exchange (SSE) Composite Index

Aug. 21, 2007 4955.21

Aug. 22, 2008

2405.23

Return

(51%)

Prices from Yahoo! Finance.

And now, let's look at what has happened since the Olympics began 14 days ago:

14-day performance of the Shanghai Stock Exchange Composite Index

Aug. 8, 2007 2605.72

Aug. 22, 2008

2405.23

Return

(8%)

Prices from Yahoo! Finance.

Here's stating the obvious
This widely held belief has been thoroughly discredited. Yet that does not mean that it was solely the stuff of fantasy. After all, the Chinese Securities Regulatory Commission said as recently as a few weeks ago that it would "spend all their resources keeping the capital market functioning stably." Perhaps more amazingly, it asked fund managers not to make decisions that might damage the stability of the stock market.

Yet the biggest Chinese index is down 10% in just two weeks. And while quality companies such as China Mobile (NYSE: CHL  ) , General Steel (NYSE: GSI  ) , and Baidu.com (Nasdaq: BIDU  ) have come down modestly in price, lower-quality companies restricted to the Chinese exchanges have gotten absolutely crushed.

Capitalism 1, Authoritarianism 0
What was truly amazing to me was that regulatory statements from China's Communist Party became the basis upon which many commentators became short-term China bulls. Think about it -- a year ago you'd be hard pressed to find many China market skeptics speaking their minds. Now nearly three-quarters of fund managers think the stock market boom in China is over.

Wow, just in time.

The problem should have been obvious
If you believe that something will happen at a given point in time, then you would rationally attempt to get yourself into position to profit from this event before it happens. The more the Chinese government jawbones stocks for the sake of the Olympics, the more thousands and millions of investors are going to make the individual decision to get themselves situated by selling their shares in advance.

In fact, the best sell signal may have come in the form of PetroChina's (NYSE: PTR  ) Chinese IPO, in which the company was suddenly, artificially, valued at more than $1 trillion. There isn't any direction from there but down.

The Olympics support theorem was bogus from the start because it had a withdrawal date attached. Yet commentators throughout the world bought it hook, line, and sinker simply because the Chinese government insisted that it would be so. The invisible hand, once again, kicked the snot out of the visible hand.

So, is China doomed?
My team at Global Gains and I traveled to China in June 2007 and then again in June 2008. On our first trip, we were energized by the growth we saw in the country, though we returned with few investible ideas given that valuations were so outrageous. But in the meantime, the market has been smoked and ideas that weren't interesting to us a year ago are very interesting to us today.

That's because China is not doomed. It should be clear that no great growth story ever happens in a straight line. Always there are excesses. Always there are bad investments that have to be wrung out. Always there are assumptions that turn out to be wrong.

And while I don't have much insight into what the Chinese stock market will look like a year from now, I've got a pretty good idea that the state-sponsored entrepreneur class that is driving the phenomenal rate of growth in China is going to continue to wring gains out of this incredible market for quite a long time.

That's why we're taking advantage of weakness in the Chinese stock market to recommend our subscribers buy shares of Chinese companies while other investors are fleeing. Though there will be volatility in the near term, China's long-term picture remains extremely promising.

You can see all of our research and recommendations, as well as our notes from our trip to China in June, by joining Global Gains free for 30 days. Click here for more information.

Bill Mann is the advisor of Motley Fool Global Gains. He does not own shares of any company mentioned. General Steel Holdings is a Global Gains recommendation. Baidu.com is a Rule Breakers pick. Since it's just 15 years old, the Fool's disclosure policy was unable to compete in gymnastics at this year's Olympics.


Read/Post Comments (11) | Recommend This Article (39)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On August 23, 2008, at 1:49 AM, none0such wrote:

    15 years old? If it is going to turn 16 in the year of the Olympics then it qualifies to compete.

  • Report this Comment On August 23, 2008, at 10:01 PM, MazonCreekRich wrote:

    Actually, Bill is using base 10 when he says the disclosure policy is "15" years old. After seeing the "16-year-old" Chinese gymnasts, I believe the correct procedure is to use base 7, which would make the Motley Fool disclosure policy "21" years old.

  • Report this Comment On August 25, 2008, at 3:42 PM, staffier wrote:

    Wait, there's been a recession?? Oh right...that still hasn't happened yet

  • Report this Comment On August 25, 2008, at 6:53 PM, TMFDiogenes wrote:

    none0such -- excellent point you bring up. However, the Fool just turned 15 a few weeks ago, so it's ineligible by just 1/2 a year :(

  • Report this Comment On August 27, 2008, at 2:06 AM, tshaw98 wrote:

    I can't recall any official government announcement to substantiate:"The Olympics support theorem was bogus from the start because it had a withdrawal date attached. Yet commentators throughout the world bought it hook, line, and sinker simply because the Chinese government insisted that it would be so."

    I do remember many analysts saying that but not government "insisting that it would be so". I agree with your conclusion that "China's long-term picture remains extremely promising."

  • Report this Comment On August 27, 2008, at 3:37 PM, drobertus wrote:

    You show Capitalism vs Authoritarianism. The opposite of Authoritarianism is Democracy- not Capitalism. The opposite of Capitalism is broke.

  • Report this Comment On August 29, 2008, at 10:59 AM, ziq wrote:

    ??

    "15" in base 7 is 12. To write 21 in base 7 it's "30".

  • Report this Comment On August 29, 2008, at 4:13 PM, JPMillerHOU wrote:

    Doesn't the world get it yet? Massive central government spending (a la Olympics) does not create wealth. It consumes it.

    Wealth is created from the investment into capital used to produce goods and services people wish to buy.

  • Report this Comment On August 29, 2008, at 9:47 PM, oconnmic wrote:

    I think it was during the Reagan Administration, that capitalism became synonymous with democracy. In the minds of many being anti-capitalist even criticizing it make you undemocratic. In China, we may be seeing the transition from communism to fascism, which is not opposed to capitalism. It remains to be seen if capitalism is anathema to totalitarianism

  • Report this Comment On August 29, 2008, at 9:53 PM, oconnmic wrote:

    To paraphrase 1960s satarist Tom Leher, "Base 7 is exactly like base 10 if you are missing 3 fingers"

  • Report this Comment On September 12, 2008, at 10:04 AM, waropayk wrote:

    Hi ziq,

    You are writing Base 7 in the direction a computer programmer writes Base2 (binary) or base16 (hexadecimal) numbers that computers use. BrokeIntheBurgh is not wrong. To write the number 15 in base7 is "21". Numbers in the mathematical world are written Right-To-Left lowest to highest. Computer programmers write 8-digit binary numbers Left-to-Right (lowest to highest) the way we write the English Language.

    http://www.purplemath.com/modules/numbbase.htm

    Well, if we use dog years, the fool.com is too old for the olympics...15*7=105. Seems kinda fitting given the knowledge we all expose on the site. :-)

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