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06/25/2012

More than the Mainstream: Bronte Capital


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More than the Mainstream

For years, people would complain about what they saw as the inherent partisanship of the mainstream media, “The Times is too liberal!” a Republican would yell. “The Journal is too right-wing!” Democrats would yell.

While I found this to be true, what really bothered me was the inability of mainstream media to create a connection between the day’s headlines and the larger picture.

So while I would use sources like the Wall Street Journal, the New York Times, and Bloomberg to monitor the headlines, I always was searching for sources that would help me bring context to them.

The great thing about blogs is that they are one person’s soapbox. The person who has the audacity to shout from the mountaintops and start his/her own blog is not usually interested in just headline creation—they want their voice to be heard on the big events.

You can see the difference between mainstream media and the blog world in the recent news that Bloomberg broke—in response to short-sellers using public government data to prove Chinese frauds, the Chinese government is not going to allow the data to become public. Bloomberg has some dry quotes from lawyers involved like this one, “In recent months, the Industry & Commerce Administrations in many key cities and provinces around China have implemented measures restricting access to the AIC files of Chinese companies.” This was followed up by reporting the dreadful performance of the Bloomberg China Reverse Index. It "fell 62 percent last year while the Standard & Poor’s 500 Index was unchanged."

This article is helpful as it gives great data to prove to the reader that they should watch out for Chinese companies traded in the US.

But after reading the article I needed more—why is it that China has such a bad reputation? What has been the impact of such corruption? What will happen going forward?

I found the answers to these questions (and some I hadn't thought of) at the blog that I recently reviewed for Blogs for the Buyside, John Hempton’s Bronte Capital.

Hempton pointed out the Bloomberg article to his reader (I had missed it myself) and then comes up with a great thesis on how he thinks that the Chinese “kleptocracy” is not just a small element of the Chinese economy hiding in a dark corner but a near “economic policy”. As he says in the beginning, “China is a kleptocracy of a scale never seen before in human history. This post aims to explain how this wave of theft is financed, what makes it sustainable and what will make it fail.”

He talks about how the ”country [is] ruled by thieves” and the economic policies, including negative real-interest rates, corrupt security filings, and empty apartment buildings that are used as savings vehicles are all elements that are either encouraged by or unintended consequences of the kleptocracy.

Hempton speculates towards the end of the article that the negative real rates forced on the population have allowed the thievery to take place. The Kleptocrats benefit from inflation as the products they produce increase in value, even while they skim off the profits.

So in a deflationary environment investors in China should “expect a revolution.”

It was a thesis that I would never find in the mainstream media because of its emphasis on generating quick headlines filled with a “just the facts” attitude.

That's why I find blogs so helpful in the investing process.

–Aram Fuchs

Aram Fuchs, General Partner, Fertilemind Capital, is captivated by the ability of the Internet to change buyside research. He founded a website called Capitalist Collective, where he invites finance professionals to share their research and learn from others.

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