Fortress’ Michael Novagratz on Lessons from OWS, and China

February 24, 2012

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Even uber China bear Chanos was not, and still is not, speaking of social unrest as a potential outcome in China, likely because speaking of this probability, would serve no purpose, and only scare people off. But I responded that “Jim Chanos is either underestimating, like he did with Enron, or understating the problem,” pointing out the bubble is bigger, the fraud and corruption endemic, while financial repression is causing social tension to boil beneath the surface.

I pointed to a model showing China is the 11th most likely to experience an increase in violence against the government, without an economic crisis as a factor. ‘The party will be lucky escape with just a financial crisis. They may have a political one as well.’ It could end in an unexpected Soviet Union style collapse unless political and economic freedom is rapidly adopted.

Conversely, Chinese politicians could lead the country to take a more hostile nationalistic stance to deflect attention for their own blunders – a popular political maneuver. These “rally around the flag,” an “it’s us vs {insert fictitious foreign enemy}” spikes poll numbers.

Certainly, there is a wide cone of probabilities that will narrow as events unfold, but nothing should be priced out, except the status quo of a system with pervasive fraud that projects growth to infinity. 

People are waking up to this possibility, beginning with Henry Kissinger and Fareed Zakaria in a recent debate.  Bloomberg’s Betty Liu sat down with Jim Chanos, Jamie Zimmerman, and Steve Kuhn, and Michael Novagratz for an hour.

Jamie Zimmerman kicked off a discussion of social unrest, voicing concern that the Arab Spring would spread throughout the Middle East, while raising the specter of government instability in China.  Novagratz noted that during 2005-2007, no one had a problem with the wealthy. It was only after the crash, post bailouts, that OWS came to prominence.

The implication for China is obvious: cronyism is magnitudes worse; the government’s role in creating the coming economic problems more clear; and financial and political repression more deleterious in China than the United States.

Whether or not an uprising is successful is another matter; the people may need the support of the military, which seems unlikely given leaderships’ hawkish, nationalistic rhetoric. Entrenched special interests run the government and benefit from the current system; they will not go down quietly. Game theory specialist Bruce Bueno de Mesquita in his book the "Dictator’s Handbook,” noted, "leaders will do whatever it takes to stay in power." Predict accordingly.

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