Every once in a while, deferring to a self-made promise to hold myself accountable, I dust off the archives and go over past calls, both beautiful and ugly. This is neither a masochistic endeavor in the case of failures, nor a narcissistic indulgence in the case of successes. The main purpose is to encourage myself and others to make such introspection a normal part of our schedule. And to learn from our previous decision making processes with an eye to improving and honing our skill set.
Here are the highlights of my past commentary on the Chinese stock market in chronological order:
May 9th, 2007: Want To See A Real Stock Market Bubble?
June 4th, 2007: Chinese Stamp Duty Increase: Death Knell For Mania
November 15th, 2007: Betting On A Bear Market In China
November 3rd, 2008: Time to Consider Chinese Stocks
April 14th, 2009: Coppock Curve Approves Of The Chinese Stock Market
July 28th, 2009: Chinese Market Sizzling Hot (Again), But Be Careful
August 5th, 2009: China’s Bubble 2.0 Threatens Global Recovery
Which brings us to the here and now. Since my last comment, the Shanghai stock exchange fell about 24% to its swing low, offering some juicy returns for those who were short or foregone losses for those that sold and stepped off the market stage for a breather.
A few lessons learned:
- a bubble top, true to form, is notoriously difficult to pinpoint
- a manic market will run faster and harder than you can ever imagine
- respect the tape, don’t automatically defer to it
- have the emotional fortitude to zig when others are zagging
- it pays to watch novel sentiment signals and important technical milestones
The future of the Chinese economy is murkier than it once was. Although it is still powering ahead, there are many variables to be cautious about.
Lou Jiwei, the head of China Investment Corp, China’s gargantuan sovereign wealth fund is cynically optimistic, saying:
It will not be too bad this year. Both China and America are addressing bubbles by creating more bubbles and we’re just taking advantage of that. So we can’t lose…
As well, the famed former Morgan Stanley Asian expert, Andy Xie is extremely pessimistic about China, calling it nothing short of a ponzi scheme:
I wrote my doctoral thesis arguing that Japan was a bubble in late 1980s; a long report at the World Bank in early 1990s arguing that Southeast Asia was a bubble; research notes at Morgan Stanley in 1999 calling dot-com boom a bubble, and numerous research notes from 2003 onwards arguing that the U.S. property market was a bubble. On the other hand, I have never called something a bubble that turned out not to be a bubble.
How far the bubble would go depends on the government’s liquidity policy. The current bubble wave is very much driven by the government encouraging banks to lend and the super low interbank interest rate. As the Fed’s interest rate is zero, the dollar is weak, China’s foreign exchange reserves are high, and the loan-deposit ratio is low, China could increase liquidity, which would expand the bubble further. However, other considerations may motivate the government to cool it off.
If so, China may engineer a soft landing for the economy — if the global economy recovers — but it would still mean a hard landing for asset markets. “However, if the global economy remains weak then, which is my view, both asset markets and the economy would have a hard landing
While that may be in the cards for the Chinese market, it is off in the near future. Between now and then, the guiding light of technical and sentiment analysis will offer much more actionable opportunities.
There are layers and layers between the economy and the stock market. But if you actually believe the statistics for the Chinese economy, you just might fall for ocean front property in Kansas.
So go ahead and enjoy the lucrative volatility proffered by a bubble built on top of a bubble, just keep a wary eye on the exit and don’t mistake the strength of the tape for the real deal.
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