What happens when you think differently about something important? Something that can move markets, influence investor decisions or help sway policy?
If you said, “You make money,” you’re partially right. You may have identified the next big thing, but, unless other investors agree with you, a stock won’t move. Ask any of the protagonists of Michael Lewis’s “The Big Short” what it’s like to wait for everyone else to catch up to you.
Thinking different — and going unheard — was the situation Leland Miller found himself in this past winter. Miller is one of the founders of the China Beige Book, a unique economic research firm that uses survey data from industry sources inside the country to compile a more granular profile of economic conditions than the notoriously opaque Chinese government provides.
Miller’s pitch is that the details matter. Even if investors could believe the big narrative yarns that the Chinese government spins — and they can’t — those broad-brush ideas can’t guide investment theses or policy decisions.
But this winter tested his faith. It was just a few weeks after China’s National Party Congress, and Western investors were content that the country’s leaders had everything firmly in hand as they deftly steered the country from a manufacturing-intensive old economy to a 21st-century service-based one, all the while keeping a careful watch on overall growth so that it would downshift gradually, not in fits and starts.
“People are binary on China — either it’s the greatest country in the world, defies economic gravity, or it’s about to implode,” Miller said. “Now they’re back on the first one.”
Indeed, here’s how IHS Markit, an economic research firm, put it: “Recent economic growth in China has been remarkably stable — real GDP increased 6.8% year-on-year in the first quarter of 2018, the same rate as in the previous two quarters. IHS Markit predicts a mild slowdown in growth from 6.9% in 2017 to 6.7% this year and 6.4% in 2019, as the government continues to (gently) squeeze some of the excesses from the economy.”
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The trouble, for Miller, was that his data, specifically his data on steel production, said something different. Steel isn’t just any industry. If you could draw a Venn diagram with all the “reforms” China’s supposed to be making to its economy — de-emphasizing manufacturing and heavy industry in favor of a consumer-oriented service sector, cracking down on polluters, and letting market demand, not government subsidies, dictate supply — steel would sit smack in the middle.
The China Beige Book has tracked Chinese steel production, and the government’s oversight of the industry, for years, and it’s seen nine straight quarters of increasing capacity, in defiance of that “China pivot” narrative. Miller was worried that the party congress and the increasing unease over a possible trade spat with the U.S. would make steel firm sources reluctant to tell the truth about their activity — but even that didn’t happen. Steel producers kept pumping the stuff out, and they kept reporting on their increases.
“It was very politically sensitive, but firms were telling us right up and through the party congress that they were adding capacity,” Miller said.
So they published that in their research. But no one wanted to listen.
“People didn’t really care about it until it became a political issue with Trump. Until the middle of last year, the world wasn’t watching,” he said. “When they started watching, they said commodities prices are going up and China is claiming in their state-run press that they’re cracking down on production. We’re going to decide to blindly listen to the Chinese government argument. People bought into that.”
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Generally, Miller doesn’t mind being the underdog. “It is more fun when we’re saying something different than everyone else,” he told MarketWatch.
That’s allowed the company to rack up a list of good calls. In December 2015, they were telling their clients that the economy was “deteriorating dramatically,” allowing them to forecast the January 2016 market bloodbath that wiped away $8 trillion in a matter of days. In June 2013, a benchmark interest rate known as Shibor surged to record highs, taking many investors by surprise — but China Beige Book clients had been warned that spring that a credit shock was coming. Businesses they had surveyed kept saying they were having trouble getting loans.
And despite that, he understands groupthink. “My epiphany came in 2013 when I was talking with a CEO who said, ‘What you guys do looks fascinating. I have no reason to believe you’re not seeing the real economy before it’s announced anywhere else. But I don’t care. What I care about is what everyone else thinks is happening. We need to make sure we’re in lockstep with what everyone else is doing.’ ”
But it was disorienting to suddenly find everyone armchair-quarterbacking the data that his researchers had been diligently tracking for years.
Miller grew a beard and became morose. He describes going to client meetings and having to explain, over and over, the minute differences between capacity and production, the different grades of steel, in more detail than he ever thought possible.
This story has a happier ending.
First, the overwhelming amount of steel on the world stage has been hard to ignore. Figures from the World Steel Association confirmed the China Beige Book claim: China’s crude steel production for February 2018 was 5.9% higher than a year before; for March 2018 it was 4.5% higher than a year before; for April 2018 it was 4.8% higher than a year before, and so on.
So has the logic of the China Beige Book argument. This is the first time in years that steel producers have been able to turn a profit, and no government edict, especially one that’s not being enforced, is going to stand in their way of making money.
Now Miller is a bit more content.
Traders and investors in commodities and raw materials — metal producers, say — would have benefited from listening to his counsel last winter. But there were other trades built around this thesis.
“We kept hearing from clients that commodity prices were going up, that showed Chinese inflation was building steam, and was going to export inflation to the rest of the world,” Miller said. “People are backtracking now because they’re not seeing the numbers they wanted. China was a huge part of the inflation narrative. A lot of the work we’ve done has been punching holes in this argument.”
Now what? Miller doesn’t get to take much of a public victory lap. His thesis is too complicated for him to be neatly pigeonholed as a “bull” or a “bear” talking head on television. For now he’s happy to remind his current clients that his data was right all along — and to wait for the next inflection point in the messy China narrative.
“When times are good, everyone thinks they’ve got it figured out,” he said. “It’s no mystery why we’ve gotten most of our business in times of crisis. And going forward there will absolutely be a series of minicrises in China.”
He has shaved the beard.
