The bubble, part 2

When Greenspan talks, markets listen. Still.

Chinese shares have fallen after former US Federal Reserve head Alan Greenspan said its stock market was overvalued and due for a “dramatic contraction”. His remarks had an impact on markets in the US , Europe and Asia, fanning already prevalent fears of a slowdown in China ‘s booming economy.

Signs that Beijing was trying to rein in its startling growth earlier this year led to a temporary fall in shares. But markets have since risen to levels Mr Greenspan said were “unsustainable”.

Market bubble?

The Shanghai Composite Index dropped as much as 1.5% following Mr Greenspan’s comments before closing down 22.58 points, or 0.5%, at 4151.13. He said Chinese markets had risen by 50% since the start of the year and that this trend could not continue for much longer.

Can the irrational exuberance continue indefinitely? If you think the answer is yes, drop me an email – I have some tulips I’d like to sell you.

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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: 9 Comments

yes. What is happening in china is something compeletely new and without any historical precedent. the shares will soon reach a permanently high plateau.

May 25, 2007 @ 8:49 pm | Comment

If the foreign investors are smart, they’ll start selling off constantly in small amounts. If Beijing detects a market bust, the markets will simply be shut down or not allowed to open “for IT/technical issues” (worst case scenario) OR, Beijing will inject some of its reserves into the market to buy up the shares up for sale, that way Beijing keeps the market afloat while buying more control of Chinese companies and the SOE system is reborn (least worst case scenario).

I’ll bet that foreign investors/companies will be warned behind closed doors about selling their Shanghai and/or HK shares.
“If you bail out you may not be allowed back in”.

May 26, 2007 @ 12:52 am | Comment

“”If you bail out you may not be allowed back in”.”

To be honest though, if the correction is anything like as severe as many are predicting, they may not care.

May 26, 2007 @ 12:58 am | Comment

Yeah, investors would care because they’d want to “buy low”.

May 26, 2007 @ 4:32 am | Comment

Greed and bubble fever
gets the better of too many investors – an old & repeating scenario.

Some want to blame the messenger, the old Fed chief Greenspan!….

From Times Online:

“… the China Securities Regulatory Commission again told brokerages to focus on educating investors about risks – the latest in a series of official statements that analysts believe are aimed at cooling speculation in the market.

However, neither the government statements nor Mr Greenspan’s warning had any real impact on investors eager to profit from the market’s bull run. Most investors view as absurd the idea that the Government, which still wields huge influence over fund flows through administrative steps, would allow a crash. Analysts said that the market might consolidate gains for a few days before resuming its climb.

Mr Greenspan’s remarks triggered a surge of angry responses at his interference in China’s markets. “Imperialists and their running dogs don’t want to see a strong China – don’t be fooled by foreigners,” read one anonymous but typical posting on eastmoney.com, a popular online forum for investors.”
http://tinyurl.com/2dolv7

May 26, 2007 @ 10:44 am | Comment

Mr. Greenspan will be such an interesting character to study for the time to come. From an Ayn Rand follower who advocated gold standard to the first fiat money central banker who reached a rock star-like status, what had changed inside of him in the process? His upcoming memoir is a must-read, but doubtful it will reveal much what had gone in that peanuts-loving mind of his.

After Big Al first made the “irrational exuberance” comment, in 39 months Nasdaq Composite had managed to almost quadrupled. Only after his line far less known but likely far more quoted by the posterity, “it has certainly become increasingly clear that this business cycle differs in a very profound way from the many other cycles that have characterized post-World War II America,” the market started its sickening decline.

This game is so great and so humbling, even our Mr. Greenspan during the whole blow-off top and the subsequent crash of the 90s bull-run, was mostly a contrarian indicator. It seems to me that if even this site with most bloggers and commentators probably can’t read a corporate balance sheet, is talking about the Chinese market being a bubble, the Chinese market itself, is far from a top.

May 28, 2007 @ 9:16 am | Comment

Irrational exuberance cannot go on forever. However, one cannot also predict when the end has arrived. Of course, when the correction does happen, all the other world markets will also get hurt.

Now, I recently read an argument that the upcoming Chinese correction/crash will be similar to the 1987 US correct and not the 2000 US correction. If true, the investment stratedgy after the crash will be different.

May 28, 2007 @ 11:12 am | Comment

I hope (’cause as an investor I’m betting against the Asian mkt., among others) JXie is wrong about there currently being too much investor scepticism about the sustainability of the Chinese rally, for a top to be imminent (tops typically form when bullishness is the overwhelming sentiment).
…But I’m not sure there isn’t irrational exuberance in Mainland China , which could be the set up for a top to be close (Greenspan’s comments caused the briefest of drops).
I wonder how many sceptical commenters here , besides Richard, live in Mainland China.
And I wonder how many Chinese investors there access mkt. analyst opinions from outside China. They may not be aware of the technical analysts and economists I read who are urging caution.

Some economy watchers blame Greenspan’s policies for the ’99 -’00 bubble, as well as for setting the U.S. on its current course, which even Greenspan says has a fair (1/3) chance of ending in recession this year. Assuming he’s being
cautious, I think it’s likely the chances of a U.S. recession are in fact greater. One economic model that estimates likelihood of recession, Wright’s Model, currently has it at a 44% chance. And some say even that model may tend to underestimate given the conditions we have now.
I saw this quote about Greenspan’s culpability:
“Alan Greenspan was recommending adjustable-rate mortgages in February 2004 — just as short-term rates were making their lows. Then, in a speech on April 8, 2005, he extolled subprime lending…”

And A.R.M.s and sub prime lending woes have been a main catalyst for the bursting of the U.S. housing bubble, the negative ramifications of which may just be beginning to unfold in the U.S. economy.

…If and when recession does manifest, some will say “Congrats Al!”
And since world economies/mkts. are now so interdependent, if the U.S. mkt. fails, so too will Asian mkts., and vice versa.

May 28, 2007 @ 11:57 pm | Comment

I just saw a short article which made me think of LA’s comment.
A chart watcher, Robert McHugh,
demonstrates eerie parallels between the DJIA chart/mkt. action leading up to the 2000 peak…and the chart/action of the DJIA leading up to June ’07.
http://www.marketoracle.co.uk/Article1100.html
More red flags?

May 29, 2007 @ 12:17 am | Comment

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