Thursday, May 10, 2007

Send In The Meds

As I wrote in another posting, I am always on the lookout for excess - be it on the upside or the downside. I define excess as the extreme overshoot of speculator exuberance above what is warranted by fundamentals (and vice versa for the downside).

China's stock market is my current case in point: I have been looking at it for several months, but an article in the NYT titled "Share Prices in China Hit Record High" got my antennae buzzing as it summarized all indicators of excess in just a few sentences. Share speculation in China has left the sphere of mere bubble-ness and has become one of history's rare occurrences: a bona fide mania.

Shenzhen A Index

...The Shenzhen A Index is up 100% this year, in just over 4 months; it was up another 100% last year, for a total of 300% in 16 months.

...People are waiting in long lines outside banks and brokerages to open new accounts.

...College students are taking loans and homeowners sell their apartments to buy hot stocks.

...Listed companies are raising money from the stock market and plow it back by buying stocks.

These signs point to lack of market experience by the vast number of new speculators, a shallow and opaque market and a regulatory bureaucracy that apparently does not have the knowledge and experience to cool the runaway market. It has now become too late to save the hapless maniacs from injuring themselves.

The lunatics have taken over the asylum: being off their meds, they are convinced they can soar like cranes, China's beloved bird of myth and longevity. Shrieking with delight and glee they are running up the stairs to the roof, from which they will ultimately launch themselves onto the pure, thin air. They will smile contently as they spread their wings out to flap in furious, yet graceful, strokes seeking to capture the ether and soar to the boundless azure sky.

The doctors will soon realize that they have to send in the white-clad muscled orderlies to force-feed proper meds to the loonies, before they all end up in a pile outside the asylum. To wit: expect a yuan revaluation, an interest rate hike or another move up in bank reserve requirements - or, more likely, any combination thereof.

If you have any doubt as to how such manias end, I provide a chart of the sudden rise and grinding fall of another, lesser known, stock mania that gripped the naive Greek public in 1999. Notice the similarities: up 160% in one year, then a leap of another 45% within just a few weeks for a total of 270%. All the manic elements visible in China today were also apparent all over Greece: hundreds of thousands of new accounts opened in a few months, farmers and shepherds selling their land and flocks to buy stocks, a sense of triumphal entitlement to becoming rich within days. The resulting drop took longer, but went all the way back and even lower.

They should have kept their sheep.

Athens SE, General Index

Oh, and in case you did not know: The most rabid gamblers in the world are Chinese, closely followed by the Greeks. Ask any casino or sports- betting executive.


  1. It doesn't seem likely that this mania can continue into the 2008 Olympics at least not at the same frenetic pace. The authorities certainly must be concerned with the possibility of a stock market crash and economic downturn occuring prior to the Olympics. I can't imagine China will be a fun place to be if all the taxi drivers and other locals have lost their life savings in the stock market.

  2. Don't discount the influence of Chinese Astrology. The Chinese are not only some mighty gamblers, but astrology and other beliefs (Feng shui) have great influence over their decisions. The year of the pig was predicted as a great year for prosperity and the stock market. This may be a self-reinforcing and self-fulfilling prophesy. As I understand it, the prediction continues to say get out before the year of the rat in 2008.

    Jason B

  3. Re: pig/rat years

    So far the names are extremely apt... but maybe we will get a two-fer in 2007. The year when the pigs get fat and eventually get slaughtered and when the rats jump ship.

  4. But this time it will be different; different than all the other times it was supposed to be different. Ah hell, double or nothing.

  5. We all know that the Chinese housewives and students can't be right.

    The question is - when will they be proven wrong? Eg if Chinese stocks go rising for another six months before the inevitable crash, well, investors who get in today and get out in 5 months' time are still going to be smiling.

    I started bailing out of Chinese stocks in Dec 2006, by which time I had already made a bundle.

    Chinese stocks fell in Feb 2007, and I thought "Aha, here comes the crash. Lucky I'm out." Well, they fell 9% in a single day, but they bounced all the way back in March and April. And are still charging towards new highs.

    I started getting back in, in March 2006. So I got to enjoy the sharp ride up. Last week, nerves (or wisdom) got the better of me, and I started bailing out again. Once again I have made a lot of money, but once again the market goes charging on. For ... how ... long?

    Another month? Six months? A year? Two?

  6. When will it end?

    When everyone is long, wildly happy and hoping for "just another 10% and I'm out".

  7. The Chinese authorities have just announced (last Friday actually) a new way to cool their markets. They're allowing, for the 1st time, PRC nationals to invest in overseas markets (starting with HK, and perhaps other markets later). I guess this is an attempt to divert money away from the Shanghai / Shenzhen bourses, to other markets.