A Scary Moment in Shanghai
In a brief update on stock markets around the world, the AP informs us:
“Chinese stocks plunged 7 percent Friday as fears spread that a yearlong bull rally there had gotten overheated. The market is still up more than 100 percent over the past year.”
Overheated is the understatement of the still fairly young century in this case. Millions of retail traders have opened new stock trading accounts in recent months, most of whom reportedly know between nothing and less than nothing about the stock market. Two thirds of the new traders entering the market apprently didn’t even finish high school (see chart further below). Margin debt has soared into the stratosphere along with the number of trading accounts and stock prices.
Chinese grannies day-trading during lunch
Photo credit: Reuters
However, it appears as if the market may really be in trouble now:
The Shanghai Composite Index, daily – this is beginning to look serious – click to enlarge.
The chart pattern above actually looks like the beginning stages of a crash. The decisive level is probably the early May low. This may provide support in the short term, but if/when it breaks, a wave of panic selling is likely to develop very quickly.
From Bloomberg: education level of China’s new breed of traders compared to the previously existing stock of households investing in stocks.
It is to be expected that China’s authorities will take steps to prop up confidence, possibly before any important chart points have a chance to break. This has been a pattern that could be observed on occasion of previous corrections. However, one must be careful not to fall prey to the potent directors fallacy. Once the herd begins to stampede in the other direction, nothing is likely to stop it.
Conclusion
Due to China’s closed capital account, what happens in its stock market rarely has an effect elsewhere. However, if this bubble should actually implode, it may well once again turn out to be a leading indicator – it wouldn’t be the first time that China’s market was the last one to rally and the first one to plummet back to earth.
China’s real estate market has also been tottering on the brink for a while already, and the stock market has taken on the role of “Ersatz” bubble over the past year. If it keeps declining it will likely have a negative impact on economic confidence. We are not quite sure what it will take to tip the economy over the edge, but China definitely has a big debt and malinvestment problem that is likely to magnify any potential economic downturn considerably.
Charts by: BigCharts, Bloomberg
5.8% not literate, 25.1% elementary school education WTF. More than 30% of the newbies to the market are barely literate or less and they are duped into thinking this is the way to get rich. Man does not change even after hundreds of years of similar ponzi schemes. There will be riots in China, but there is nothing these suckers can do, the oligarchs have played them like a fiddle and will milk them dry. Too bad so sad.
Bob.
China has no problems that a good war wouldn’t solve.
For that matter neither do we.
A close Chinese friend who is extremely well-connected recently told me that China in general is a house of cards, utterly corrupt, totally amoral and teetering on the brink of disaster. He said he would not invest in ANY Chinese enterprise outside of Hong Kong (still run under British law for the most part). It is interesting to note that he blamed the 1960’s Cultural Revolution for this situation. The Communist fanatics succeeded in totally erasing 5,000 years of traditional Chinese morality, customs and principles and replaced them with nothing but Communist gibberish, which nobody believes any more. The result is a society where everybody is determined to make money anyway they can and get the hell out before it blows up, the devil take the hindmost. China’s leaders are well aware of all of this and are desperate to maintain a calm, detached image for the world. In the meantime the country is turning into – pardon the phrase – a massive Chinese fire drill. Jesus is the shit going to hit the fan!
Anonymous says:
“China has no problems that a good war wouldn’t solve.”
Define “good war” and use it in a sentence that includes your children fighting in it.
It’s a LONG time between now (5:44 PM central) and tomorrow’s market open, but last I looked, the S&P futures were down over 1.5%.
Boy, do I wish I’d have gone MORE short than the pittance I ponied up on Friday.