Best of the Week
Most Popular
1. US Housing Market Real Estate Crash The Next Shoe To Drop – Part II - Chris_Vermeulen
2.The Coronavirus Greatest Economic Depression in History? - Nadeem_Walayat
3.US Real Estate Housing Market Crash Is The Next Shoe To Drop - Chris_Vermeulen
4.Coronavirus Stock Market Trend Implications and AI Mega-trend Stocks Buying Levels - Nadeem_Walayat
5. Are Coronavirus Death Statistics Exaggerated? Worse than Seasonal Flu or Not?- Nadeem_Walayat
6.Coronavirus Stock Market Trend Implications, Global Recession and AI Stocks Buying Levels - Nadeem_Walayat
7.US Fourth Turning Accelerating Towards Debt Climax - James_Quinn
8.Dow Stock Market Trend Analysis and Forecast - Nadeem_Walayat
9.Britain's FAKE Coronavirus Death Statistics Exposed - Nadeem_Walayat
10.Commodity Markets Crash Catastrophe Charts - Rambus_Chartology
Last 7 days
Stock Market Dow 30k before End of 2020? - 13th Jul 20
Credit Market Investments Turned Into End-User Risk Again - 13th Jul 20
Investors Are Going All-In on This Coronavirus Proof Industry - 13th Jul 20
5 Vital Insights That You Can Gain From Instagram Trackers - 13th Jul 20
Stop Believing The 'Economy' Is The Same As The Stock Market - 12th Jul 20
Spotify Recealed as The “Next Netflix” - 12th Jul 20
Getting Ahead of the Game: What Determines the Prices of Oil? - 12th Jul 20
The Big Short 2020 – World Pushes Credit/Investments Into Risk Again - 11th Jul 20
The Bearish Combination of Soaring Silver and Lagging GDX Miners - 11th Jul 20
Stock Market: "Relevant Waves Vs. Irrelevant News" - 10th Jul 20
Prepare for the global impact of US COVID-19 resurgence - 10th Jul 20
Golds quick price move increases the odds of a correction - 10th Jul 20
Declaring Your Independence from Currency Debasement - 10th Jul 20
Tech Stocks Trending Towards the Quantum AI EXPLOSION! - 9th Jul 20
Gold and Silver Seasonal Trend Analysis - 9th Jul 20
Facebook and IBM Tech Stocks for Machine Learning Mega-Trend Investing 2020 - 9th Jul 20
LandRover Discovery Sport Service Blues, How Long Before Oil Change is Actually Due? - 9th Jul 20
Following the Gold Stock Leaders as the Fed Prints - 9th Jul 20
Gold RESET Breakout on 10 Reasons - 9th Jul 20
Fintech facilitating huge growth in online gambling - 9th Jul 20
Online Creative Software Development Service Conceptual Approach - 9th Jul 20
Coronavirus Pandemic UK and US Second Waves, and the Influenza Doomsday Scenario - 8th Jul 20
States “On the Cusp of Losing Control” and the Impact on the Economy - 8th Jul 20
Gold During Covid-19 Pandemic and Beyond - 8th Jul 20
UK Holidays 2020 - Driving on Cornwall's Narrow Roads to Bude Caravan Holiday Resort - 8th Jul 20
Five Reasons Covid Will Change SEO - 8th Jul 20
What Makes Internet Packages Different? - 8th Jul 20
Saudi Arabia Eyes Total Dominance In Oil And Gas Markets - 7th Jul 20
These Are the Times That Call for Gold - 7th Jul 20
A Reason to be "Extra-Attentive" to Stock Market Sentiment Measures - 7th Jul 20
The Beatings Will Continue Until the Economy Improves - 6th Jul 20
The Corona Economic Depression Is Here - 6th Jul 20
Stock Market Short-term Peaking - 6th Jul 20
Gold’s Major Reversal to Create the “Handle” - 5th July 20
Gold Market Manipulation And The Federal Reserve - 5th July 20
Overclockers UK Custom Build PC Review - 1. Ordering / Stock Issues - 5th July 20
How to Bond With Your Budgie / Parakeet With Morning Song and Dance - 5th July 20
Silver Price Trend Forecast Summer 2020 - 3rd Jul 20
Silver Market Is at a Critical Juncture - 3rd Jul 20
Gold Stocks Breakout Not Confirmed Yet - 3rd Jul 20
Coronavirus Strikes Back. But Force Is Strong With Gold - 3rd Jul 20
Stock Market Russell 2000 Gaps Present Real Targets - 3rd Jul 20
Johnson & Johnson (JNJ) Big Pharma Stock for Machine Learning Life Extension Investing - 2nd Jul 20
All Eyes on Markets to Get a Refreshed Outlook - 2nd Jul 20
The Darkening Clouds on the Stock Market S&P 500 Horizon - 2nd Jul 20
US Fourth Turning Reaches Boiling Point as America Bends its Knee - 2nd Jul 20
After 2nd Quarter Economic Carnage, the Quest for Philippine Recovery - 2nd Jul 20
Gold Completes Another Washout Rotation – Here We Go - 2nd Jul 20
Roosevelt 2.0 and ‘here, hold my beer' - 2nd Jul 20
U.S. Dollar: When Almost Everyone Is Bearish... - 1st Jul 20
Politicians Prepare New Money Drops as US Dollar Weakens - 1st Jul 20
Gold Stocks Still Undervalued - 1st Jul 20
High Premiums in Physical Gold Market: Scam or Supply Crisis? - 1st Jul 20
US Stock Markets Enter Parabolic Price Move - 1st Jul 20
In The Year 2025 If Fiat Currency Can Survive - 30th Jun 20
Gold Likes the IMF Predicting a Deeper Recession - 30th Jun 20
Silver Is Still Cheap For Now - 30th Jun 20
More Stock Market Selling Ahead - 30th Jun 20
Trending Ecommerce Sites in 2020 - 30th Jun 20
Stock Market S&P 500 Approaching the Precipice - 29th Jun 20
APPLE Tech Stock for Investing to Profit from the Machine Learning Mega trend - 29th Jun 20
Student / Gamer Custom System Build June 2020 Proving Impossible - Overclockers UK - 29th Jun 20
US Dollar with Ney and Gann Angles - 29th Jun 20
Europe's Banking Sector: When (and Why) the Rout Really Began - 29th Jun 20
Will People Accept Rampant Inflation? Hell, No! - 29th Jun 20
Gold & Silver Begin The Move To New All-Time Highs - 29th Jun 20
US Stock Market Enters Parabolic Price Move – Be Prepared - 29th Jun 20
Meet BlackRock, the New Great Vampire Squid - 28th Jun 20
Stock Market S&P 500 Approaching a Defining Moment - 28th Jun 20

Market Oracle FREE Newsletter

AI Stocks 2020-2035 15 Year Trend Forecast

Shanghai’s Stock Market Not A Bubble, SSE Targets 4000

Stock-Markets / Chinese Stock Market Dec 08, 2009 - 02:19 PM GMT

By: Andrew_Butter

Stock-Markets

Best Financial Markets Analysis ArticleThe talk about a bubble in China that was all over the place in July and August appears to be subsiding. I confess I know practically nothing about China. But what I know has always made me wary, it still does.

What I bring to the debate is simply that I claim to know something about bubbles, and although many people think I am a simple minded village idiot, my initial attempts at applying my models to the real world did at least give the right answer (the model predicted in January that the S&P 500 would bottom at 675 and that the rally would go up at least until the DOW hit 10,000).


OK two out of two on stock markets could be nothing more than luck, and my view that gold was (is) a bubble and that it would at some point head down to $600 looks right now about as dumb as Nouriel Roubini’s quip about a dead-cat-sucker-rally on 14th March.

The other day I noticed a paper flagged up by Zero Hedge about China and the possibility of a bubble:

http://zerohedge.blogspot.com/2009/07/chinese-stock-bubble-watch-for-critical.html

The paper is about the work of Diddier Sornette which as far as I gould understand is something about Chaos Theory and attempts to model the inflection point of bubbles based on the characteristics of the patterns of daily stock movements. Apparently the methodology was used successfully to predict the inflection point of the US housing bubble and the recent oil bubble although I have so far been unable to find a reference to that.

Their prediction made on 19th July was that the Shanghai Index would reverse, suddenly between July 17-27 and from looking at their chart go down to between 2,400 and 2,800.

I must say that they were bold; one of the first things I learnt from my recent initiation into the “predictions” business is that you never put both a number and a date.

This is what Zero Hedge had to say about that at the time:

Expanding on Cornelius' early piece on China, here is an analysis out of some BNP quants who for one reason or another are convinced the end's in sight. For those who are forgot where they put their Ritalin, here is the punchline:

This is what happened:

I’d say that regardless of where the analysts put their Ritalin, that was a pretty good result; I’d be interested to see where they say it’s going to go next.

But I don’t think that was a bubble popping:

My simple minded idea about bubbles is that they happen when market participants lose sight of fundamental value.

That can be caused by too much credit which allows “early adopters” to borrow money at “X”, buy assets at “Y” and then when what they can sell the asset for (to someone dumber than them), is a lot more than “X+Y”, they make lots of money (assuming they dump before the pump starts cavitating).

Another reason is if market participants convince themselves that the object of their affections has magical powers (when in reality that is not true). The Dot.com bubble was an example of that (aided by cheap credit), at that time the accepted method of valuation of a start-up was the summation of the inside leg measurement of the CEO raised to the power of “X”, which in time was proved to be an unreliable approach to doing valuation.

But that process historically has been long term, over at least six months maybe six years, not six weeks.

Also typically you don’t get the object of the bubble, going back to about the level that it popped within three months, when a bubble pops that’s it for a while.

So while I think that analysis looks pretty interesting (and I know that in my lifetime I will never fully understand how it works any more than I understand how the General Theory of relativity works), I don’t think it’s about bubbles.

The importance of valuation in understanding bubbles:

The way I look at bubbles, is first to try and figure out what the “fundamental value” of whatever it is that is supposedly bubbling is. Some people (Smithers, Tobin, Shiller) call that “Fair Value”, International Valuation Standards calls it Other-Than-Market-Value (OMV).

If you know that then you at least know by how much the market got distorted by the whatever it was that caused the bubble, and you also know that the more the distortion, the harder the fall will be, when the thing pops.

One of the main things I think I figured out is that in many bubbles, particularly for assets that are fundamentally useful (housing and stocks rather than tulips), the dip below the “fundamental” (OMV) is typically predicated by how much the market was distorted in the bubble; also the period of time that the market takes to get back to the OMV after the pop, is pretty much predicated by the preceding period of time there was a bubble.

That idea is summarised in this sketch:

The analogy that I have is that a bubble is like a pebble thrown into a still pond, and the up-wave (the bubble) is reflected in the down-wave (the bust) that follows:

I talk about that in more detail in:

http://www.marketoracle.co.uk/Article12114.html
http://www.marketoracle.co.uk/Article15041.html

The problem with China

The problem with China is that I have no idea how to work out what the fundamental value (OMV) should be. 

The reason is that there just isn’t enough history, or perhaps there is.

Either way, in USA the stock market “fundamental” (i.e. the OMV) appears to track nominal GDP divided by long-term interest rates (LTIR), so perhaps it’s the same in China.

Not that I particularly believe the reported numbers for GDP and I have not clear idea about what long term interest rates are applicable, still that’s a start. Anyway assuming for the moment that perhaps LTIR (whatever they are), didn’t change much, the “fundamental “ought” to track nominal GDP if the Shanghai Index is a good proxy for what’s happening in China (and I have no opinion about that either – just a hypothesis).

(You can understand why I’m often called a village idiot; I basically don’t have much of an opinion on just about everything, a sort of Anti-Renaissance Man).

This is how it looks:

Based on that analysis my conclusion is:

1: If you believe the GDP numbers being put out by the Chinese government then the Shanghai Index is not a bubble right now, rather the reverse, it is a market in the process in recovering from a bubble that popped in late 2008.

2: Markets in recovery are the safest to invest in, there was one “after-shock” so far, expect two more before OMV is reached (a word of warning for the day-traders).

3: The opinion of this crystal-ball-peering village idiot is that the Index will go up to above 4,000 (could be 4,500) within six months.

4: Given that I don’t like gold (I think I must be allergic to it), I haven’t looked hard in a while by my impression is the S&P 500 will be lucky to drift sideways over the next six months, and I think long to medium term US Treasuries are a bubble (i.e. 10 Year and 30 year yields are set to go up, perhaps suddenly), putting something into the Shanghai Index would probably be a better bet than keeping money under the mattress.

By Andrew Butter

Twenty years doing market analysis and valuations for investors in the Middle East, USA, and Europe; currently writing a book about BubbleOmics. Andrew Butter is managing partner of ABMC, an investment advisory firm, based in Dubai ( hbutter@eim.ae ), that he setup in 1999, and is has been involved advising on large scale real estate investments, mainly in Dubai.

© 2009 Copyright Andrew Butter- All Rights Reserved
Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.

Andrew Butter Archive

© 2005-2019 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in

6 Critical Money Making Rules