Former chess grandmaster-turned hedge fund manager Patrick Wolff is betting on a stock market crash in China, where he says corruption and bad debts have spiraled to dangerous levels.
Speaking to Reuters on the sidelines of the GAIM conference in Monaco, Wolff said investors were too focused on trying to work out when easy money policies will taper off in the United States and ignoring a looming correction in China.
“People are talking way too much about the Federal Reserve and not enough about China,” he said. “We’ve been saying that the US is the safest place to invest, while China is a crash waiting to happen.”
He is short on Chinese stocks and generally long on US equities.
Financial markets have sold off heavily in recent weeks on fears that US quantitative easing - money printing to fund asset purchases - will end off sooner rather than later.
However, Wolff, who is managing member of San Francisco-based Grandmaster Capital, said it was a “non-issue” as the US Federal Reserve was “highly unlikely” to tighten monetary policy without evidence of the US economy overheating.
He was speaking before Fed Chairman Ben Bernanke said on Wednesday the Fed could start to pare back its monthly purchases of US Treasuries before the end of the year if the economic rally continues.
Instead, Wolff said investors should pay more attention to China, whose rampant growth over the past decade has helped support global growth and fueled an unsustainable boom in commodity prices, but which now “just looks awful.”
“China’s centrally planned economy inevitably means massive corruption and a massive misallocation of capital,” he said, pointing to increasing funding problems for Chinese companies.
“Interbank lending rates have shot up and many companies are facing a cash crunch.”
Wolff, who was US chess champion in 1992 and 1995 and at his peak ranked in the world top 50, is positive on US stocks, which account for most of the stocks he owns, and short Chinese stocks. Shorting means betting on a lower price for a security in the future.
Wolff, who became a fund manager after reading Warren Buffett’s investor letters, said his confidence in the US economy was based on its lower dependence on growth in other countries, as well as the end of the housing slump and the recapitalisation of its banking system.
“We have been and remain structurally bullish on US equities,” he said. “The kinds of companies that were massively overvalued 15 years ago have become good investments - blue-chip, large-cap, quality businesses. It’s technology companies but plenty of other companies too.”
He said he does not like stocks in the energy, materials, mining and industrials sector, which he says have outperformed in the last decade on the back of Chinese growth. “These are exactly the wrong place to be looking,” Wolff said.