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Chanos: Don't Fret Unwind, Beware China, Eye Debt

By CNBC.com
Thursday, 13 Nov 2008 | 9:29 AM ET

Don't sweat hedge funds unwinding, avoid China plays, and take a look at debt ... that's what one legendary investor and short-seller is telling investors.

On Hedge Funds ...

"The net effect (of the hedge funds unwinding) to the markets is not as great as people think," said James Chanos, president and founder of Kynikos Associates, said on CNBC Thursday morning. (See his full comments in the videos)

Hedge Funds on the Hot Seat
Some of the biggest names in the hedge fund industry, with Jim Chanos, Kynikos Associates founder

On BRIC Investments ...

Chanos warned that the worst in slowing emerging markets, particularly China, hasn't arrived yet.

"I don't think things are that stable. I think it's worse, and I think it's going to get worse. Depending on your estimate, 35 to 50 percent of China's GDP is construction, and that's a very important thing to remember, and if we are still building things that we don't need in China, like factories, are you really adding wealth to the country? Like any capital project has a rate of return associated with it, and in China, I'm afraid, a lot of projects, as well as in south Asia and the Middle East, do not have economic returns associated with them, yet, during their construction, they contribute to growth.

"Remember our telecom boom, when people were building out things, left, right and center? Then the building stopped. It was the Wile E. Coyote moment. All of a sudden, we looked down, and there was no there there."

On Housing ...

Chanos said recent moves by the government might bring relief. But he worries about the long term.

"One of the problems we now see in hindsight regarding stimulating housing and what that might do for the economy is that when we had housing appreciation over the past five years, people went out and spent it, so it didn't become part of the stock of savings, it bolstered consumption, and so, a housing boom that fed on a consumption boom was sort of what got us here in the first place, and going back to try to kick-start that worries me longer-term. Over the short term, it might be exactly the tonic we need."

Hedge Fund Regulation
Discussing regulation for hedge funds and bailing out autos, with Jim Chanos, Kynikos Associates founder

Nevertheless, there will be pain, Chanos said.

"These valuations were completely fictitious to begin with. They were inflated by ridiculous amounts of credit that people never should have gotten...will the $750,000 tract home that cost $100,000 to put up, maybe is worth $150-200,000, is that going to come back? That's not going to come back, and there is true capital loss there, no matter what we want to say, no matter how we want to account for it, mark-to-market or otherwise, it's gone."

On Debt Plays ...

"There are opportunities out there. They're just not in the equity markets, they're in the credit markets. True value players would be looking at debt."

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