Saturday, September 1, 2007

The growing bubble in the Shanghai Index

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I just found an interesting website, that probably says it all

BubbleXchange

I wonder if the formation of such websites signals a near term top, much like the infamous "magazine cover" indicator i.e. when you start seeing "How to Retire by Owning Real Estate" in 2006 or "It's Really Different This Time - How Dot Com Companies are Changing the World" in 2001 - on the cover of Time or Newsweek.

Again, this index (mainland A shares) trade in their own twilight zone as foreign investment is nearly impossible, and most mainland Chinese are only allowed to invest in this 1 index. 1 year ago the index stood at 1700, 1 MONTH ago it stood around 4000. Now it 5200.

1 year chart is here

Did I mentioned that a large portion of the "E" (earnings) in the P/E (of >50) are from investment gains and not operations?
Now bubbles can continue for much longer than we anticipate and the same arguements people are making now could of been made 2000 points ago. (and probably were) But these things never end well. It does not mean the Chinese economy is going to go south, as an economy and a market don't necessarily go hand in hand especially in such extremes. But at some point this will be very ugly for the actual market.

So keep speculating if you wish; but make sure you exit stage right or find one of the very few chairs that will be available when the music stops.

As an aside, the China economy is now suffering from both food inflation and impending wage inflation. Somehow 10% GDP growth is not so easy to manage (imagine that). How long before China becomes too expensive and capital moves to cheaper pastures like Vietnam. 2012? 2015? Remember in the mid 90s when Mexico was where all the factories were moving? How quickly they can turn on you....

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