by Cato 6/21/15
The steel blue line in the graphic is the source of the “Chinese stock market is in a bubble” meme. Rolled over this week. Everyone is focused on Greece, and not without reason … but for ‘trigger events’ the Shanghai market, if it rejoins its peers in the 0 to +15% range, is the more worrisome for investors.
Why? Simply because of the internal damage it would inflict on the Chinese economy. Retail sales would plummet, especially on luxury goods. Also because of the likely response of Beijing to the likely riots that would result, and the reaction of other markets to those repressions and interventions.
The Chinese masses … maids to goat herds to pensioners to millionaires … are investment virgins, having only lately jumped into their stock markets. None have never experienced anything but up. In a selling panic buyer’s bids disappear; selling becomes impossible because there are no committed market makers in the Chinese system as there are in western markets. It’s a long way down to 0% on this graphic. Stay tuned this week. Expect a dead cat bounce and a resumption of the drop … that’s what naïve investors do … try to buy the bottom then panic and unload.
Graphic by Doug Short at dshort.com
Michael Booth, often posting and commenting as Cato, lectured in finance and economics at the Univ. of Texas, and worked for 20 years as an independent contractor and managerial trainer on financial topics in the technology industry.
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