George Soros Is Wrong About This 'Rude Awakening'

George Soros is wrong about this 'rude awakening'... The billionaire nonagenarian takes aim at China... Tackling the flaws in Soros' takedown... A deeper lesson... The world is not constrained by your pet political theories... The only permanent feature of global politics and economics... How to go against Soros right now...

Editor's note: The U.S. markets and our offices will be closed on Monday in observance of Labor Day. After this weekend's Masters Series, we'll resume our normal coverage on Tuesday, September 7. Enjoy the long holiday weekend with your family and friends.

If you buy Chinese stocks today, George Soros says you're in for a 'rude awakening'...

But is he right?

In a recent opinion piece in the Financial Times, the 91-year-old billionaire investor took aim at the leader of the world's largest communist state – Chinese President Xi Jinping.

Specifically, to start the essay, Soros said Xi "has collided with economic reality."

Soros then wrote that China's recent "crackdown on private enterprise has been a significant drag on the economy"... and that it caused Chinese stocks to plummet this year. The iShares MSCI China Fund (MCHI) fell 32% from mid-February through mid-August.

Since bottoming on August 20, MCHI is up about 9%. According to Soros, that's because the Chinese government went out of its way to reassure foreign investors amid the six-month drop, leading to a "powerful" reversal. But as he warned in the Financial Times...

That is a deception. Xi regards all Chinese companies as instruments of a one-party state. Investors buying into the rally are facing a rude awakening.

In today's Digest, I (Dan Ferris) want to dive further into Soros' takedown of Xi...

We'll discuss the flaws in his thinking, as well as a deeper lesson for investors. We'll go further than just communist China, expanding to "socialist wastelands" as well. And finally, we'll wrap up with some simple advice on how you can profit from this idea right now...

In the piece, Soros points out that foreign investors have hundreds of billions of dollars in Chinese stocks...

That massive amount of money is tied up in funds that replicate or closely resemble the MSCI All Country World Index... The index is "the benchmark most widely followed by global equity asset allocators," according to Soros.

Frankly, it's refreshing to see a famous investor – even one as politically polarizing as Soros – criticize China for its anti-free-market policies and predict that it'll achieve the result you might logically expect... a market crash.

I also must admit that China's great economic success rankles me a bit. However, I understand that it's the result of policies that pointed the country toward freer markets... so in that regard, it's deserved.

A successful market economy is impossible to fake. And if you've ever visited or seen pictures, you know that the biggest Chinese cities look like giant paeans to capitalism...

Visitors are immersed in a futuristic, sci-fi world of gleaming metal and glass towers, as well as spotlessly clean streets. The logos of every big Western brand are plastered all over – from Apple and Nike to any luxury brand or fast-food franchise you can name.

These places simply ooze wealth creation.

And yet, Soros' comments still seem to make sense... Of course a communist country like China would serve up a "rude awakening" for investors.

Everybody knows that communism is bad for business, right?

That single word is precisely the problem with Soros' comments – everybody already knows that...

It's widely known that China has been a communist country since October 1949.

This "news" is as deeply priced into market prices as anything that has happened since World War II.

It's like Soros is the Rip Van Winkle of global macro investing. He has been asleep about China for decades. But now, here in 2021, he has awakened... and he's determined to warn us all about the Great Chinese Menace!

Even Soros' short-term timing as a speculator seems pretty bad, too...

Xi's crackdown has been in the news for months. (We've written about it in the Digest more than once, including on July 28.)

And yes, Chinese stocks have been crushed. Chinese tech stocks really got hammered... The Invesco China Technology Fund (CQQQ) fell 41% from February 16 to August 19.

But the thing is... That just tells me Xi's crackdown is already priced into the market.

No matter how we slice and dice it, Soros' warning about Chinese stocks seems out of step...

Should we attribute it to his advanced age? He just turned 91 on August 12.

Is it so unreasonable to assume the guy is enjoying a slower pace of life? Or beyond that, is it wrong to assume that such a pace might catch him flat-footed on a big market call?

Soros is known for making big, profitable market bets... After all, he's the guy who "broke the Bank of England" by shorting the British pound back in the early 1990s.

So with that in mind, it's more than a little weird to see him seemingly "calling a top" in Chinese stocks at what looks like a bottom... And even worse, his thoughts seem to be based on knowledge almost as old as he is – and he was born during the Great Depression.

Yet here Soros is... He's expressing a strong bearish view on a market that's already down significantly this year, based on the 72-year-old insight that China is a communist country.

I'm left asking the classic question often posed by investor and author Howard Marks...

Who doesn't know this?

If the answer is "nobody"... even if your viewpoint makes all the sense in the world – like Soros' China warning – it's a lousy basis for a securities trade because it's already priced in.

One important point I must mention while I'm criticizing Soros...

He's much more likely than most investors to turn on a dime and change an erroneous view.

In fact, Soros attributes this ability to admit when he's wrong as the "secret" to his success. I've quoted him before in this regard. Soros isn't afraid to say that...

I'm always wrong. I'm always wrong, and I try to correct my mistakes. That is the secret of my success.

So by the time anybody like me criticizes Soros for having a particular view on a topic, he has probably changed it completely... bet the other way... and made a ton of money.

This opinion piece was published in the Financial Times on Monday... Let's see how long it takes Soros to change his mind and start buying Chinese stocks again. (Or heck, maybe he's right... and I'm the one who doesn't get it yet. We'll see what happens.)

Besides the issue of timing, investors can learn a deeper lesson from Soros' comments...

To find success, avoid making sweeping assumptions about political regimes.

Global macro analyst and author Marko Papic discussed this idea with me on the current episode of the Stansberry Investor Hour podcast...

As Papic put it, if you want to make money investing in global markets, just "walk into your office and don't be a human being." (It sounds so simple.) He also noted that we live in a "hyper-partisan, hyper-political age," making it difficult to be objective about politics.

To succeed as an investor in global equities, you must start by forgetting about your personal prejudices for or against a particular political system or ideology. So, for example, the idea that "communism is bad so you should never buy stocks in a communist country" is just not a serious investment proposition.

I know how awful it feels to have to entertain the idea that anything good can happen under a political regime you consider evil...

I lean hard toward libertarian sentiments. And I'm old enough to remember when the Berlin Wall fell, showing us just how awful life behind the "Iron Curtain" was for millions of folks who suffered there. That's what the static label "communist" conjures up in my mind.

But I also recognize that markets, nature, and the universe don't care about my ideological preferences... That might seem obvious, but it's an important insight to remember.

In Papic's 2020 book, Geopolitical Alpha, he writes...

Investors... should focus on material constraints, not policymaker preferences. Preferences are optional and subject to constraints, whereas constraints are neither optional nor subject to preferences.

The world is not constrained by your pet political theories...

It's messy and constantly changing. And weird things can happen – like an opportunity to make a ton of money by investing in an idea within a socialist or communist country.

But investors are absolutely constrained by political, economic, and financial reality... The world is what it is. If you believe it's anything else, you'll invest poorly and lose money... or at least fail to exploit some potentially huge opportunities.

You must be realistic about what it means to "believe in" a certain ideology or hold a certain political view. It probably means less than you think... and it can lose you money.

Lately, I've begun to ask myself what my belief in free-market principles has done for me...

No matter what I believe, living in the U.S. is a material constraint on my behavior.

I need to stay out of jail to have a good life... and that means following the law.

If I were truly a libertarian, committed to living by libertarian principles, could I really avoid going to jail fairly often? I don't know.

But none of it matters anyway, because if I don't abide by the U.S. political system – which is nowhere near libertarian – I will have a much worse life than if I do abide by it.

Now that's a material constraint.

Brokers, analysts, professional investors, and folks in our business all hear clients and customers say things every four years like, "If so-and-so is elected, I'm selling all my stocks and leaving the country." Think about it... How many folks said those exact words last fall?

However, I would bet real money that virtually none of them actually do it... I would also bet that most of those folks who do sell it all and leave the country in a politically motivated huff live to regret it.

That extreme viewpoint is obviously a huge mistake.

If you live in the U.S., politics likely play into your daily life less than you might think... Our political system – horrendously and increasingly flawed though it is – is still more robust and beneficial for most of those living under it than your average political zealot might want to admit.

So the best thing you can do when thinking about global equities or other investments is to forget what you believe... Instead, focus on understanding what's happening in the world – and if possible, why it's happening.

Rather than putting a static label like "capitalist" or "communist" on a country's political system, investors need to understand which way the system is moving...

Is it moving toward a more pro-market economy or away from it?

Is it moving rapidly or slowly?

Will the changes last a long time or a short time?

To be fair to Soros, maybe he's only criticizing Xi's recent moves...

Maybe he believes China is heading in the wrong direction after years of heading in the right one. Maybe he sees Xi too rapidly and dramatically moving the country away from the market-based reforms that raised its general standard of living over the past several years.

We'll see.

While talking with Papic, I mentioned another 'socialist wasteland' for investors...

France.

In the past, I've rarely considered looking at France as a source of equity ideas. The country always has been a socialist country, and socialism is bad for business... right?

Papic took my stereotypical characterization of France as a challenge... He pointed out that the country has been moving toward more conservative, free-market policies since voters elected former banker Emmanuel Macron as president in a landslide victory in 2017.

Papic admitted France's pro-market policy changes have progressed haltingly, taking "three steps forward, 2.75 steps back"... But he thinks France will continue moving toward pro-market policies over the next decade.

Perhaps I should start looking for equity ideas in France?

Meanwhile, Papic pointed out that the U.S. is moving swiftly in the other direction...

It's shifting away from a conservative, pro-market view... and toward extremely heavy government spending and so-called "progressive" social policy.

You can't help but wonder how that move will play out over the next decade – and more important, when it'll get priced into U.S. stocks.

It's certainly not priced into U.S. stocks today. The benchmark S&P 500 Index is hitting new highs almost daily.

In fact, we're not just in an epic bull market... We're in an epic bull market of new highs. According to Charlie Bilello, founder and CEO of Compound Capital Advisors, the S&P 500 has made 328 new highs since 2013... That's one more than it made from 1989 to 2000.

That's what optimism about everything looks like in the stock market...

It suggests nobody believes the U.S. economy could perform poorly over the next several years – and even more, that it's almost 100% certain to outperform all other economies, too. Maybe the U.S. economy really is the best... but does it deserve that kind of a bet?

Will the trend in U.S. politics continue, and will U.S. equity prices suffer as a result? Will the trend be priced in suddenly or gradually?

We'll see what the future brings...

By now, you know I don't do predictions.

But I do believe in asking a lot of questions. And beyond that, I believe in entertaining and preparing for various future scenarios – especially the ones that seem likely to occur but aren't priced into the current environment... Today, three of the biggest ones would be inflation, higher bond yields, and the underperformance of U.S. stocks.

It seems insane to think France could wind up being a better place to invest over the next decade than the U.S., but crazier things have happened... If impoverished, backward, insular, communist China can grow into a global economic superpower in just a few decades, maybe you should maintain an open mind about other countries undergoing similarly dramatic changes.

Who knows? Maybe the U.S. will look more like a backward, insular, communist country than China 10 years from now. I'm not saying it will happen... You don't have to predict that it will happen... But I believe you must at least entertain the likelihood that it will happen.

During our conversation, Papic discussed another example of political and economic change...

The United Kingdom.

The U.K. was the most socialist country in Europe when Margaret Thatcher took office as prime minister in 1979. It had a greater amount of wealth redistribution than France. As Papic said...

The U.K. was a basket case... riven with inefficiencies produced by high levels of unionization.

Then, Thatcher's government enacted pro-market policies... It cut taxes and government spending and raised interest rates to slow the growth of the money supply, which tamed inflation. As Thatcher famously said in a 1983 speech...

There is no such thing as public money; there is only taxpayers' money.

And throughout her tenure – which lasted until 1990 – Thatcher did her best to treat that money like it belonged to the taxpayers, not the government.

But again, the real lesson here is that you can't rely on simple labels...

Papic told me about academic and other research published in the 1980s that said England couldn't be reformed. That was the static view when Thatcher took over... and it was obviously wrong.

Once again, it was wrong to rely on labels to guide one's thinking. If you would've written the U.K. off as a socialist wasteland in the late 1970s, you would've missed out on an incredible investment opportunity...

If I can give you one general piece of advice to take away from today's Digest, it's this...

You must view economics and finance as dynamic realms. And related to that mindset, you must view the intersection of politics, economics, and investing as a complex arena.

Ancient Greek philosopher Heraclitus is famous for believing in ever-present change...

So if he were still alive today, he might say...

Change is the only permanent feature of global politics and economics.

Global politics and economics are always in motion. A static view of a particular country based on historical, political, or even ethnic prejudices might make you feel righteous... But it can make you financially stupid and vulnerable to losses as well.

It's easy to be too simple-minded about politics... But it's still fundamentally sound to assume that political developments that make markets freer are better for investors and political developments that make markets less free are worse for investors.

If you just went around the world looking for those two developments, you would probably find plenty of good speculations on both the long and short sides.

To do well as a global investor, you must first figure out which direction the political wind is blowing... Only then can you set your sails and plot a profitable course.

I realize it all seems a bit daunting, both technically and emotionally. And Papic has spent virtually his entire professional life focused on the economic and financial implications of global political developments.

If you're new to the idea of global investing, I encourage you to check out Papic's book, Geopolitical Alpha... It's an excellent introduction to the topic – as well as his thinking on it. He's a clear communicator, too, so it's a fun read.

To wrap up our chat, I asked Papic what potential trades he likes right now...

First, Papic said, "Right now, we're in the doldrums"... He brought up how negative real bond yields suggest we're in for a decade of stagnation. (We've covered the idea of many asset classes underperforming over the next decade many times before in the Digest.)

However, Papic then told me that he doesn't think the bond market is right about that. So he's looking for another dip in the "reflation trade"... At that point, you could buy hard assets and cyclical, hard-asset-based businesses – like miners, manufacturers, and other industrial firms – that should do well as inflation takes hold.

But he's not quite ready to reenter it just yet... maybe in another couple of months.

Papic mentioned "green tech" stocks as one possibility. He believes money will keep flooding into energy, transportation, and other technologies that are friendly to the environment.

And for now, Papic is going against Soros' warning from the outset of today's Digest...

He's long Chinese tech stocks.

Like me, Papic believes the negative political developments that Soros wrote about are thoroughly priced into the market already... He expects these stocks to rally from here.

So this week, I'll leave you with this advice...

Don't let your personal biases get in the way of being a successful investor. If you're against communism or socialism or any other "-ism" out there... that's perfectly reasonable. We're not saying you should endorse the political regimes or policies from countries like China.

But you shouldn't ignore the incredible investment opportunities in these places either...

Consider taking advantage of this year's pullback in Chinese stocks. The two exchange-traded funds I mentioned earlier – MCHI and CQQQ – recently turned higher once again... However, they're still down between 25% and 35% from their February 2021 peaks.

That sounds like a great time to buy to me. And I'll go one step further...

Look, no one is better at uncovering opportunities in China than my colleague Dr. Steve Sjuggerud and his True Wealth Opportunities: China team. He has three open triple-digit winners in his model portfolio – including one position that's up an incredible 468%.

And remember, that's despite the pullback across Chinese stocks since earlier this year.

So if you want to go beyond just investing in exchange-traded funds like MCHI and CQQQ, I encourage you to learn more about Steve's True Wealth Opportunities: China service...

It's an ideal time to do that. Right now, you can get two full years of Steve's China-related research for half off what a single year would normally cost. Get started right here.

New 52-week highs (as of 9/2/21): Apple (AAPL), American Homes 4 Rent (AMH), American Tower (AMT), Asana (ASAN), Brown & Brown (BRO), Comcast (CMCSA), CoreSite Realty (COR), Costco Wholesale (COST), Cintas (CTAS), Quest Diagnostics (DGX), Digital Realty Trust (DLR), Eagle Materials (EXP), Formula One Group (FWONA), Innovative Industrial Properties (IIPR), Invitation Homes (INVH), IQVIA (IQV), Ingersoll Rand (IR), James Hardie Industries (JHX), Cheniere Energy (LNG), Liberty SiriusXM Group (LSXMA), Motorola Solutions (MSI), Cloudflare (NET), Intellia Therapeutics (NTLA), OptimizeRx (OPRX), Palo Alto Networks (PANW), ResMed (RMD), VanEck Vectors Russia Fund (RSX), ProShares Ultra Health Care Fund (RXL), S&P Global (SPGI), ProShares Ultra S&P 500 Fund (SSO), Thermo Fisher Scientific (TMO), ProShares Ultra Utilities Fund (UPW), Vanguard S&P 500 Fund (VOO), Utilities Select Sector SPDR Fund (XLU), and Zebra Technologies (ZBRA).

In today's mailbag, your feedback on the "wealth gap" and yesterday's Digest... What's your opinion? Keep your notes coming to feedback@stansberryresearch.com, and we'll share more next week.

"The 'Wealth Gap' is just another symptom of what is wrong with our country... the government. From the open border to the Afghan debacle to the COVID scam to the theft of our civil rights to the societal division by race, creed & gender, to our crippling debt, all of this is the design of those we put in Washington. There is, therefore, only one thing to do... get them out.

"To do this, we must focus on one issue – a constitutional amendment enforcing single term limits for Congress and the White House. There is nothing else that will work, so there is nothing more important for us to do. I defy anyone to identify a problem we are facing that is not completely, or at least substantially, resolved by turning Washington into the revolving door our founders envisioned. Trump exposed the monster... this will kill it. Doing anything else is a waste of time." – Stansberry Alliance member Michael M.

"I hear about the rich getting richer and the poor getting poorer. What I don't hear about is how much the people making the rules suck from the rest of us. We produce all the goods. They produce the ever-growing list of rules and restrictions.

"If the total GDP for all governments in the U.S. was around 20% in the '80s and is now 32%, how should that be figured into the 'rich vs. poor' question? I don't think that increase was absorbed by the rich.

"I notice your numbers don't illuminate the middle class, but they are shrinking. Maybe we need to have numbers showing the Poor, Middle Class, Rich, and Government Workers. Then we would really know who has been benefitting from all government manipulation of finance and business.

"Thanks for all you do." – Paid-up subscriber Don W.

"[The wealth disparity] is obviously there. My impression is that motivation is the strongest human economic force and this giving money away is hurting the poor or non- rich by reducing their motivation to negotiate and constantly improve themselves and better their position.

"It also simply is not working! But it sure is buying votes. The big lie is that it helps these people who are losing. It's also obvious the left doesn't really care about these people, otherwise they absolutely must question its validity.

"This is exactly why private property is so important. Without it, there is simply no reason to invest or save or develop one's position in the social order. Once again, it is all about motivation! This is also exactly what the books and documents written by socialists say they must do to destroy American prosperity and destroy capitalism to allow socialism to take over." – Paid-up subscriber Al M.

"No problem has ever been resolved by throwing money at it." – Paid-up subscriber Mark W.

Good investing,

Dan Ferris
Eagle Point, Oregon
September 3, 2021