In their recent episode of the VALUE: After Hours Podcast, Taylor, Brewster, and Carlisle discussed The Impact Of China’s Widening Crackdown. Here’s an excerpt from the episode:
Tobias: I think the argument we had– not the argument, but JT and I discussing it last week, it’s undervalued. The only question is how comfortable can you get with that regime? I think it’s an investment that you probably can make, but everybody’s got to make that decision for themselves.
Bill: This is interesting, because a bear could tell you that, and I know that I argued this just the past two weeks, but you can make an argument that China is now saying that they’re going to return capital back to the people, and that they’re not going to let these corporations keep the money. So, forget about my previous stances about the VIE structure and whether or not you can trust that. Now, it’s about whether or not the corporation has the right to actually have the cash. I don’t have a good idea of what’s going on, and I think people should follow Rui Ma if they want to. Rui spells her name R-U-I.
I think there’s an argument to be made that you can’t out value these stocks at all. Probabilistically, I don’t know what it is, but it’s interesting on the back of an NFTs comment to hear us say like, “Oh, well, Baba is undervalued.” Why? I’m not sure you have a claim to any of the cash. People would argue that you don’t.
Tobias: Well, that’s what I’m saying.
Jake: That’s a good question.
Tobias: If you take away that metaphysical risk or whatever it is, the thing is objectively undervalued on its financial statements. But you have a question that you have to resolve which is as a shareholder, whether you’re ultimately going to participate in that valuation or what you are rights are to that. The VIE is one issue. Then, there’s other just amorphous regulatory changes that China seems to make at the drop of a hat that will come in the future, one of which might be, “Yeah, we’ve just decided that you can’t have the cash, we’re paying out the cash.” That’s the thing you have to get comfortable with. That’s where–
I don’t know. You’ve got to go on a balance of probabilities, so you get buy a LEAP or there’s– I don’t own any Baba. I find it an interesting thing to consider. But that’s the problem. The issue is not is this thing undervalued. The issue is, what is your right to that valuation? What is your right to share the value?
Bill: Yeah. There some off balance sheet obligation to the government that you don’t see.
Jake: I don’t really see this being that dramatically different in the grand scheme of things as every value investment that has hair on it that you are trying to assess the probabilities of, shit, is this business going to– is it a going concern? Can they turn it around? Do they have assets enough to do it? It’s always the same that often existential crisis that you’re trying to nail down and get figured out. This is just a permutation of that.
Tobias: Yeah, I think I meant existential when I said metaphysical.
Bill: Yeah. I think that’s right.
Jake: It’s okay, we got you, tsetse.
Bill: This guy, Success From Chess, has now asked the same question twice. It says, I believe Kindleberger’s “Manias, Panics and Crashes” made the point that surges in real estate often precede financial crises, so why do you see housing as a positive, and how confident are you? I guess I don’t really understand what he’s asking, because I just think that we have tight supply, bad housing stock, pretty good affordability, consumers’ balance sheets are as good as they’ve ever been, and outside of the sky will fall one day and real estate will lead it, I’m not sure how you come to a negative conclusion.
Jake: I think real estate has always been often the problem because it lends itself to leverage, and therefore, the damage that it can do gets more extreme. It’ll sweep the banking sector into it often.
Bill: Yeah. We’re structurally undersupplied right now. So, a price surge is just how capitalism works.
Tobias: The only thing that’s not obvious to me from that ALFRED chart is that we are in fact structurally undersupplied. It’s just not in that data, and I just wasn’t sure, and I don’t know where else to look. So, anybody let me know if you’ve got a better idea about this. But I just looked at–
Jake: Where’s Mike Mitchell?
Tobias: Yeah, we probably didn’t–
Bill: Well, talk to real estate people.
Tobias: I’m not going to ask the barber if I need a haircut.
Bill: Well, they also happen to be experts in their field.
Tobias: It’s always a good time to buy.
Bill: Yeah, well, some would argue the same for value guys.
Tobias: That’s true. It supposed to get– [crosstalk]
Bill: I know. It’s coming back.
Bill: Yeah, if you can ask anybody about anything they do–
Jake: In fairness, this group has not always been the ones pounding the table that value is the best value at different points, right?
Bill: Yeah. I think we all see the world a little differently, which is a good thing.
Tobias: That chart is just as not clear to me, because if you look at that chart from the Alfred website, there are these very distinct sawtooth patterns where we get up to some big boom, and we are making way too many houses, like 1.6 million or whatever it is, 1600, I don’t know how to interpret the numbers. But at the bottom, it collapses to like a quarter of that, and then it spends another decade or so kind of going back, and you can clearly see that the most recent ramp, it’s just much flatter, much slower trajectory, and [crosstalk] at the long run average of what we need to.
Bill: What are real estate inventory days? I bet they’re super tight right now. Call realtors and see how easy it is to put deals together. The real estate market– [crosstalk]
Tobias: But that would lend more an argument to his, because they would say, it’s red hot at the moment, wouldn’t they? It’s white hot.
Bill: Yeah, but the question is not whether or not that’s like– [crosstalk]
Jake: The sell or buy?
Bill: But the question isn’t whether or not that in and of itself is a sufficient indicator. The question is why is it that way? What I’m saying is when you have consumers whose balance sheets are as good as they’ve been, and loan to value ratios are not crazy, and you don’t have liar loan documents like we did in 2007, and you’re not just going out and just buying real estate because you can sign your name to something and you actually have to have supported documentation to do the deal, that’s different. That sounds to me like there’s a shortage. That sounds to me like when desirable assets hit the market, they go quick. But maybe I’m wrong. I’m fine being wrong.
Tobias: That’s what the peak of a bubble looks like too. That’s always the argument at the very top of the bubble. I’m saying that I don’t think that it is, but then that behavior makes me think that maybe we’re closer to it then.
Jake: Yeah, remember that this second day after peak, it’s just a tiny bit less amazing than it was the day before, right?
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