Mark Twain and China’s Yuan

The brilliant nanotech investor and analyst Josh Wolfe of Forbes offers three invaluable investment insights premised on the maxims of literary and philosophy luminaries: F. Scott Fitzgerald, Mark Twain and Arthur Schopenhauer

The wisdom from the select quotes of the three wise men seem representative of openmindedness (Fitzgerald), the risks of overconfidence and comfort of crowds or the contrarian stance (Twain) and innovation (Schopenhauer).

Read them here

I’d like to make a brief comment on the Mark Twain situation applied to the Yuan

Mr. Wolfe writes, (bold emphasis mine)

Mark Twain said that: “it ain’t what you don’t know that gets you into trouble. It’s what you know for sure that just aint’ so.”

Twain Situations are those where the consensus is near certain about something. But as Buffett has noted, you pay a high price for a cheery consensus. These are situations with payoff structures that Nassim Taleb would call Black Swans. The opposite of the consensus is often entirely unrecognized, unappreciated and massively underpriced. If they are wrong, it’s a massive blow-up. Buying puts and expressing a contrarian view, with cheap insurance may be ways to express this “Twain” view. And this is precisely where the prescient Cullen Thompson and Bienville Capital Management LLC has done along with Mark Hart of Corriente Advisors LLC (who correctly nailed the huge asymmetric payoff with a contrary to consensus view on subprime housing, when all others believed housing prices could only rise). Here is Thompson quoted in today’s WSJ:

“Given the magnitude of China’s credit problems, it’s at least a possibility the yuan drops sharply. The potential of the trade is so great, and when there’s cheap insurance in today’s environment it’s silly not to buy it”

Everybody I speak: politicians, pundits and principal investors all believe, nay they “know” that the Yuan is undervalued and must rise. It just must! And therein lies the opportunity.

Like Mr. Wolfe, I have been saying that the consensus expectations of an overvalued yuan have been misplaced.

That’s because the mainstream’s macro analysis and prescription over ‘global imbalances’ has been premised on flimsy and tenuous grounds.

First, global imbalances have been a diversion (if not a patent misdiagnose) from the true problem: the US dollar paper money system that abets inflationism and interventionism.

Second, the currency valve policy resolution is too oversimplistic and naive, which essentially views the global economy as homogenous.

Lastly, the excessive fixation over these two supposed cause and effect dynamic overlooks the bubble nature of China’s economy.

This reminds me of the Asian crisis where the Thai baht largely operating on a fixed or pegged exchange rate blew up as the Asian crisis emerged (above window).

China’s quasi pegged currency trend looks alot like the Thai baht prior to the Asian crisis (below window). [Charts courtesy of Thai Baht Tradingeconomics.com and Yuan forecastchart.com]

Inflationism only obscures the way the public reads or analyze markets.

As Murray N. Rothbard wrote,

Inflation has other disastrous effects. It distorts that keystone of our economy: business calculation.