China Stock Market: Bubble, bubble, toil and trouble

This alarming and lengthy article is from a newsletter called Tedbits, sent out by a financial services professional with a dedicated readership, mostly contrarians who don’t buy much of what they read in the mass media or see on CNBC. He outlines just how scary the current Shenzhen/Shanghai stock market bubble is and how it could well generate painful reverberations that will affect all of our lives, whether we’re in China or the US. If you were worried about the state of the US dollar before, just wait until you read this. Sorry for the fearfully long quote, but it’s good.

The Chinese public is in a full blown mania, enormous amounts of their money in at the top, at unbelievably stretched valuations and a rickety banking system with the authorities trying to reign in the mania. Make no mistake in viewing this: this is the recipe that caused the great depression in the United States. A condition the Chinese government will wish to avoid at all costs, just as Bernanke and the US treasury must now avoid a collapse in US asset markets at any cost.

It is now “inflate or die”, and the club has just admitted a new member, and it resides in a place called “BEIJING, CHINA”. The Chinese government’s ability to manage markets and capitalism is going to get a severe test RIGHT NOW, and based on today’s report in the FT they are totally unprepared to understand the enormity of the unintended consequences that can occur if the choose the wrong path to dealing with this. US dollar based Fiat money and credit creation is now moving into the arteries of the Chinese economy and has trickled down to the citizens. What do you think might unfold if the emerging Chinese consumer and the US consumer are knocked out at the same time? It is not a pretty thought. If this happens the Chinese consumer will never emerge as everyone in Beijing and the world hopes for. The great depression of the US repeated in China, exacerbated by an antique banking system that is unable to properly transmit and provide liquidity. You can expect them to handle it the same way Greenspan did, the Hu Jintao put is about to be born. Moral hazards pasted one on top of another….

POP, Goes the Bubble?

This week Steven Roach wrote a missive about Trade Relations with China, that politically they are past the “point of no return” outlining dangerous protectionist plans, rhetoric and actions coming out of Washington DC. And that this rhetoric no longer was limited to China, as Japan has emerged as an additional poster child of irresponsible Trade and currency behavior. America’s two biggest creditors are having spitballs lobbed directly in their eyes (try spitting in your bankers face sometime, see where it gets you), US politicians behaving locally in a global world. It appears that if the Chinese don’t prick the bubble themselves the US congress will! It is a disaster, and a pop that will be heard around the world. It threatens to make the problem in China’s stock markets much more unmanageable as if fundamental expectations for future business are punctured by these “Public Servants”, the mis-pricing that the big money is currently resting at, in the US and in China will become even wider to the fair value of the holdings. Since business prospects will be severely diminished.

Do you realize what could materialize if these idiots light a fuse while the broad Chinese public is out on the limb of the previous Tedbit? It will be like sawing it off, do you think the Chinese government will see this as anything but an act of brutal aggression? The US consumer will be also be hit hard as the price they pay for everything Chinese will skyrocket.

Nothing fails to amaze me more than the economic ignorance that is Washington DC, they are oblivious to history, fundamentally sound accounting and fiscal policies, and fiduciary responsible behavior. They encourage the American people to spend beyond their means, save nothing and punish personal initiative and wealth creation with high taxes and mind bending micro management through overregulation. Then they pick a fight with the someone’s (China, Russia, Japan, etc.), that can in a heartbeat pull the rug out from underneath the economy and their spending plans. Daring them to do so, a giant game of chicken with our financial livelihoods and futures as the wager they are placing. Our asset based economy where systemic deflationary problems await any appreciable pullback in asset prices, as billions of dollars of loans inch towards diminished expectations. Asset prices that are dependant on 3 billion dollars a day being imported from abroad and foreign lenders. I hope Washington has recently added a number of new printing presses for all the money they will be forced to print as they are forced to become the lender of last resort.

Time to buy gold. Time to short the dollar, and the Shanghai stock market. Irrational exuberance hasn’t ben this excessive since 1999.

This is only a tiny snippet from an immense article. I suggest you read it all.

______________

Richard Burger is the author of Behind the Red Door: Sex in China, an exploration of China's sexual revolution and its clash with traditional Chinese values.

The Discussion: 21 Comments

I have been watching this situation with amazement for some time. It’s staggering to see. I wonder how long this can go on. As I understand it all the invertors are caring about is what actions the government is taking. So as long as the government is not moving and there is fresh money flowing into the market it can go on for a while. Everybody peers at the government, not so much at the market.

But as the article also makes clear the amount of money in the market is allready huge. So how long will the government sit there and watch the situation becomming worse every day? Will it wait till the Olympics are over as many Chinese think or will it soon take action so that things can calm down till the start of the Olympics? And how long will there be money pushing the market further and further. Let’s hope for the best and that the end of this will not be too cruel.

May 19, 2007 @ 7:56 pm | Comment

I think the CCP is scrambling to correct it; hardly doing nothing.

I don’t know how competent they are though; they haven’t been very good in the past with finances and banking.

May 19, 2007 @ 9:04 pm | Comment

Honestly, I hope they do fix it before the house of cards collapses. My future, at least for now, is tied to China’s success, as is the future of many, many, many people I know and love. The situation today is literally frightening, especially at a time when the US is waging a two-front war, a battered housing and auto market, not to mention its own stock market bubble. All of this is made exponentially worse by Bush’s generous tax cuts. The US is rich and powerful, but there is only so much it can do to fend off the tidal wave – like print lots of money. Like Iraq, therw\e are no good solutions, and the dollar has no choice but to fall further.

May 19, 2007 @ 10:40 pm | Comment

That was a good article . I already read it at one of my fave, if semi-obscure, financial sites.
I thought about bringing it to the attention of P.D.
Glad to see someone found it already!
…As someone who has been “short” (via short selling) a number of Asian stocks for 2 months – and losing money – I keep waiting for the “inevitable”
bursting of the bubble.

Meanwhile, my blood pressure, while waiting,]must be getting about as elevated as the markets!

May 19, 2007 @ 11:20 pm | Comment

FWIW, I just think this piece is a rather mediocre one. Safe Haven sometimes has some fantastic pieces, but this one surely isn’t one in my opinion. If you want overall bearish opinions, read Bill Gross or Steve Roach. They may have the opinions that later are proven to be wrong, but their facts are always solid.

The author seems to have very poor grasp on the American stock market history. He described some phenomenon that happened in the past, but had them all mixed up in terms of time. The industrialization happened mostly after the Civil War and before the turn of the century. At the turn of the century, the US was already the largest industrialized nations in the world. Most of the “robber barons” (most of whom personally admire) lived long before 1929. There were always booms and busts, but none of the down-cycle went much longer than 1 year and took much longer than 2 years to recover. If you see fast industrialization, “robber barons” and wait for a 1929 crash, you can spend the rest of your life waiting for one.

The 1929 crash happened much later. What is extraordinary about the 1929 crash is that it marked a multi-decade high, much like Nikkei in 1989 or Nasdaq in 2000. I can spend days talking about those tops and how to spot them, but will try to keep it short. What are common in those tops and the subsequent crashes:

* They were the end of extremely long bull runs, with few short and shallow pullbacks in between. On the other hand, the Chinese stock market bottomed out of a 4-year bear market in 2005.

* In those tops, bears were all “killed” due to the long bull runs. (Roach was a “permabear” before 2000 and everytime he spoke, people laughed. The good news to him was that he was an economist not someone who actually managed money.) People genuinely believed they were in the dawns of new eras. On the other hand, everywhere you turn, people are talking about the Chinese stock market being a bubble. If you take a contrarian view, if that many call it a bubble, it’s unlikely actually a bubble. Because, there are still too many potential buyers at the sideline or shorting.

A large stock market run-up doesn’t automatically mean a 1929-like crash is pending, especially after a very long bear market. Case in point, the US stock market in 1943 to 1946, 1953 to 1956, & 1982 to 1984. You can find even more example in emerging markets. The subsequent pullbacks after those bull runs became the buying opportunities of the lifetimes.

The comment is getting too long already so I will skip what I view where the Chinese market is at some other time.

May 20, 2007 @ 1:11 am | Comment

Ooh. Never try to pick the tops of bubbles: They get really crazy. Sorry to hear about the shorts–I did the same thing in the Nasdaq bubble, but plenty of stocks tripled after that before finally losing steam.

One sign of a bubble is definitely happening: “when you’re getting stock tips from elevator boys”, paraphrasing an old US wag. The $2,000 yuan/month staff at my office is now all glued to their screens watching their speculative purchases. I didn’t read the whole article, but the excerpt omits that there is vastly more money in real estate, and real estate prices have gone even crazier than stocks.

Richard, I think you’ll be hard-pressed to show how tax cuts make “all of this” worse.

May 20, 2007 @ 2:00 am | Comment

Bobb999,

Been trying to hold back & not say a word, since I am in no position to advise you anything… But here it comes, my gratuitous 2 cents:

The market can remain irrational longer than you can remain solvent. A stock can go up or go down much longer than you anticipate. If a stock has many naysayers but keeps going up, don’t short it because somebody else probably knows more than you. An “expensive” stock can get much more expensive because the majority doesn’t see its true growth potential. P/E is useless without factoring in growth. Google has been seemingly expensive ever since its IPO…

Good luck.

May 20, 2007 @ 2:01 am | Comment

Jxie’s last point is valid. A stock has a much better chance of going from 50 to 100 than from 1 to 2.

Sam, I alway thought that durng a time of war, which is unbelievable expensive, the government encourages sacrifice – they urge people to buy war bonds, not to go shopping. They tighten the belt so they can fund their war. I’ve never heard of tax cuts as a strategy for paying for a war. Bush’s government is spending money at insane proportions, and while the tax cuts may keep some more money pumping, they also give the government less with which to pay its bills. So more money is printed. I’m no economist and I can be pretty dim, but tax cuts during the most costly war in our nation’s history seem to be reckless and foolhardy.

May 20, 2007 @ 10:43 am | Comment

JXie:
Thanks for your input.

There were some good and compelling reasons in early March to go short: historical (a Bull mkt entering a 5th year is very rare), technical (chart and cycle patterns), and economic (signs of slowing).

I searched out as many technical analysts’ opinions as I could find then , and a large majority of the ones I read believed the plunge that started the end of Feb. was just the start of a long overdue multi-month correction or Bear mkt When mkts started rallying again , few t.a.s thought the rally would last…but here we are in an improbable situation, and many chart watchers are less certain now of the imminence of a renewed plunge!

That’s a wise old investor’s maxim you quote:
“The market can remain irrational longer than you can remain solvent”.
To try to apply some rationality, I’ve been exiting short positions when stocks have made particularly bullish patterns, such as breaking out to new highs – a very bad sign technically (for shorts).

I shorted mainly emerging markets ’cause they appear to be the most overheated and likely have a steeper correction coming. A wise economist ,Dr. Marc Faber, is of this opinion (he lives in Thailand, and his investment business is based in Hong Kong)
He’s big on gold (as are many others), as I’ve been for several years (I see Richard suggests holding gold),although a serious mkt plunge will take ALL stocks down at least for a while. So, buillion or a buillion ETF may be safest for at least a while.

I’m not sure I agree with you Richard when you write:
” A stock has a much better chance of going from 50 to 100 than from 1 to 2.”

The attraction of small cap (low priced)stocks for many is that overall, small cos. have a better chance returning the hugest returns. My best ever performers have been junior miners
( including two 1,500% and 1,000%) returning stocks, not blue chips.
There’s also more risk that your stock will go to zero if it’s a small cap!

Take gold for instance:the very best performing gold stocks of the last 5 years started out as small caps 5 years ago, not large mining cos.

May 20, 2007 @ 11:37 am | Comment

Bobb999. I love Marc Faber’s book “Tomorrow’s Gold: Asia’s Age of Discovery”, and highly value his opinions. Dr. Doom and Jim Rogers are 2 of the contrarians whom I really like. Rogers recently stated that he believed RMB would appreciated 3 to 5 times against USD in the next 2 decades, and likely replaced USD as the world currency. Nuts? He called the commodity bull market before everybody else did. I can’t wait for his upcoming book A Bull in China.

Another old saying is that no chartist has gotten super rich. To me the TA stuffs are useful to the extent of knowing what others are looking at.

May 20, 2007 @ 1:55 pm | Comment

BTW, if RMB becomes the dominant world currency, Richard will go banana. On every RMB note, there is a Mao portrait.

To me though, I’d like to see RMB notes with faces like Confucius, Li Bai, etc. instead of Mao.

May 20, 2007 @ 1:58 pm | Comment

I haven’t read Faber’s book and I don’t subscribe to his (likely pricey) newsletter, but he’s quite generous with his opinions in the financial press, writes a monthly column at ameinfo.com, does in depth interviews, etc. I just search his name at google news frequently to find his opinions.

I only use technicals as one approach. I certainly don’t ignore fundamentals when I pick stocks or look at the big picture. T.A has come a long way, aided by the computer age, since know-it-all buy and hold “experts” pronounced 40 years ago “you can’t time the market!” and “technical analysis doesn’t work!”
I’ve done well the last few years trading in and out of gold stocks, buying when the gold price corrects to major support levels: fine buying opps. – just as the chart watchers would claim.

I’ve notice Marc Faber occasionally dropping technical indicators into the conversation, as relevant to evaluating the mkt. He obviously considers technical indicators as well as economic #s.

Funny you should mention Rogers. I don’t follow him closely , though I’m aware of him.
But I just came across an article about China quoting him. I notice he views the coming correction in China as a coming buying opp., ’cause he’s long term bullish on China. I am too (It seems to be a general consensus). I’m only betting against Asia short term.

…I vote for Lao Tzu’s visage for the currency.

The article might hearten Richard, ’cause it is
long term bullish on China:
http://financialsense.com/fsu/editorials/2007/0520.html
*****************************************
I like this prescient quote it gives from Will Durant written in the 1920s!

“This nation, after three thousand years of grandeur and decay, of repeated deaths and resurrections exhibits today all the physical and mental vitality that we find in its most creative periods.

There are no people in the world more vigorous or more intelligent. No other people so adaptable to circumstance, so resistant to disease, so resilient after disaster and suffering, so trained by history to calm endurance and patient recovery. Imagination cannot describe the possibilities of a civilization mingling the physical, labor and mental resources of such a people with the technological equipment of modern industry. Very probably such wealth will be produced in China as even American has never known and once again, as so often in the past, China will lead the world in luxury and the art of life.

No victory of arms or tyranny of alien finance can long suppress a nation so rich in resources and vitality…… Within a century China will have absorbed and civilised its conquerors and will have learnt all the techniques of … industry..

Roads and communications will give her unity, economy and thrift will give her funds and a strong government will give her order and peace. Every chaos is a transition. In the end disorder cures and balances itself with dictatorship. Old obstacles are roughly cleared away and fresh growth is freed. Revolution, like death and style, is the removal of rubbish, the surgery of the superfluous; it comes only when there are many things ready to die. China has died many times before and many times she has been reborn.”

May 21, 2007 @ 6:28 am | Comment

Bobb999, thanks for the link. Durant’s 1920s passages make my heart full of sadness. After he wrote this, China went through the second Sino-Japanese war that eventually became a part of the War World II, the civil war, which essentially was a proxy war between the two superpowers, and a disastrous experience called communism. Maybe the last 3 decades have been a trend reversal, but what a detour China had taken since Durant wrote that.

May 21, 2007 @ 9:20 am | Comment

Hi, Richard;

Since the tax cuts, government revenues have surged enormously, contrary to what a “Static” analysis would predict. That’s because it’s not a static economy, and tax cuts stimulate more income-producing activity, which leads to higher tax revenues. But that’s a bit abstruse and off-topic. If you need facts and figures, I’ll be happy to provide them, but the bottom line is that since the tax cuts, government revenues have gone WAY up.

May 21, 2007 @ 12:08 pm | Comment

Sam, I’m willing to believe that. We enjoyed extraordinary budget surpluses under our last real president – have those surpluses also continued to soar along with the soaring government revenues you cite, or have we had to borrow and been thrown deeper into debt because of Bush’s wars and infamous love of government spending?

May 21, 2007 @ 1:02 pm | Comment

Li Kai Xing has been quoted in numerous friday newpapers regarding his concern over a China wide bubble that includes the HK stock market (and if HK blows, down comes Asia).

May 21, 2007 @ 3:01 pm | Comment

Richard, the much-touted budget deficit ballooned in the first few years of Bushitis, and is now coming down; presently to about the long-term average, and debt is a bit lower than during the Clinton years. There are other, better sources of alarm.

May 21, 2007 @ 5:57 pm | Comment

There certainly are, almost all of them brought on us by the Bush administration. Budget deficits are the least of our worries right now. The Middle East is disintegrating before our eyes, mainly because of our meddling. And that’s related to the draining of the Treasury and the need to print money, which will in turn be exacerbated by the collapse of the China stock bubble, which in turn…. Too scary to think about.

May 21, 2007 @ 7:51 pm | Comment

The Taipei Times had an editorial on this topic the other day, and over at the excellent blog Taoyuan Nights

http://www.taoyuan-nights.com/

There’s a discussion of the whole China nightmare.
This kind of speculative boom fucked the economy here a couple of times in the 1980s and 1990s.

Michael

May 22, 2007 @ 1:33 pm | Comment

Oh, oh. One of my adopted gurus, economist Marc Faber, who was calling for the Asian bubble to burst immanently, in the weeks leading up to the Feb. plunge – which made him appear a true Oracle – at the time,
- now says:

May 21 (Bloomberg) — U.S. stocks are more “reasonably priced” than other markets following the dollar’s decline, according to Marc Faber, who oversees $300 million at Hong Kong- based Marc Faber Ltd.

“U.S. stocks are not the biggest bubble,” Faber said in an interview. Emerging markets and the Spanish property market reflect larger bubbles, he said.

Faber predicted on March 29 that the U.S. Standard & Poor’s 500 Index was more likely to fall than rise above a six-year high reached the previous month, citing prospects for slowing economic growth. The index has climbed more than 7 percent since then amid a record run of takeovers.

There are bubbles across asset classes, but it’s difficult to predict when they will deflate, Faber said.

“We’re in the final stages, but the bubble can be very steep,” the investor said.
CHINA’S EQUITY MARKET COULD STILL DOUBLE AGAIN FROM THIS LEVEL, he said.

Faber recommended investing in “depressed assets,” citing the Middle East market and the Detroit property market. He also said farmland in Argentina and Brazil is a good value and property in New Zealand and Australia may be a sound investment because of their proximity to China.

Link

I hope this guy’s right: a technical analyst I follow, Frank Barberra (who correctly predicted the post plunge rally would have some legs), now says Asian and US mkts will peak within 2 – 3 weeks,and it will be downhill after that for a long while.

May 24, 2007 @ 12:39 am | Comment

…And then there’s an argument about:

“WHY A CHINESE MONETARY TIGHTENING COULD BE FOLLOWED BY A GLOBAL DEPRESSION”,
by Thomas P. Au, CFA
http://www.financialsense.com/editorials/au/2007/0523.html

May 24, 2007 @ 9:01 am | Comment

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