There is a front page Wall Street Journal article today outlining how Ray Dalio of Bridgewater Associates is changing his view on Chinese investments.  Dalio and his team until recently have been proponents of investing selectively across China. 

ChinaRay Dalio is arguably the most successful hedge fund manager of all time.  Dalio’s firm, Bridgewater Associates manages some $169Bn in assets which means it’s a monster amongst monsters.  This size fund is absurd in terms of its potential impact on markets if it decides the make an allocation shift. 

All of this is why when Dalio writes a letter to his investors making a big investment call it is news.  When the call happens to be a view on China (FXI, quote) it’s even bigger news because China is an emotional target for many investors for many obvious reasons.  When the investment call is to move from being an advocate of Chinese investing and to saying he is staying clear of China and that he “sees no safe place to hide” this becomes a front page of the Wall Street Journal article and people react.  Often people overreact.  

I don’t read Ray Dalio’s letter as saying he thinks China is blowing up or that there is a major fallout for global markets to come from China.  As mentioned, I think it’s easy to try and draw these conclusions as a journalist and a front page WSJ article will often be prey on emotion that is already out there for most market players.  This type of articles feels more like the type of article you see as a defining sentiment bottom.  

My question do investors and readers of the WSJ is:  do you think Dalio writes the note and sells later?  No it’s the opposite.  He sells then writes the note. He is saying that they are now more cautious after the recent stock mkt events and don’t see how it won’t affect other parts of the economy.  

What’s confusing is that the article talks about how the stock mkt, debt mkt and real estate mkts are crashing at the same time.  They are not.  The equity mkt was pumped up because the real estate mkt had already crashed.  Credit mkt issues are also already well known and have been part of the Chinese slowdown that is now in its third year.  Where is the sudden impact?  China will continue to be a drag on regional economies and some EM economies who got fat on China’s insatiable demand for commodities and infrastructure, but I would argue that Chinese macro is stabilizing not crashing. 

Drawing a straight line between the Chinese stock market and US corporate earnings is also something that I think is grossly overstated in terms of potential impact.  In China, 8% of the population owns stocks.  Half of this group has any meaningful investment in the mkt.  One half of that group is the group that was speculating late into the stock mkts plunge.  Is this really the group that is going to take down Apples China growth trajectory or Yum Brands top line in China? 

Those are rhetorical questions.   

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