“But how do we know when
irrational exuberance has unduly escalated asset values?”
Alan Greenspan
This week’s episode come from the small but delightful Green Tea Cake which, strictly speaking, isn’t really a café at all but more a bakery with the possibility of having a green tea thrown in if customers should so desire. They do a rather scrumptious red bean loaf here for a very reasonable 7 yuan. Probably not the healthiest thing in the World, but a very pleasant indulgence nevertheless. The wifi connection is relatively strong and, for the most part, it feels like a little haven of peace in the day to day madness of this manic metropolis.
Life in China is intense, perhaps a little too intense for some tastes. People’s attitudes are often very direct which does, I have to admit, take a bit of getting used to. In the city centres, they often seem to live in an almost constant state of agitation, an ongoing struggle to get ahead in whatever terms ‘getting ahead’ is meaningful to any particular person: getting in front of the car in front, getting over the zebra crossing first, getting to the front of the queue, any queue, by fair means or foul. It is quite routine here for the person behind in line to demand whatever they want even as the shop assistant is dealing with the person at the head of the queue. In almost any other country that I have visited over the years this would be considered ill-mannered at best, here it is so normal that the locals scarcely bat an eyelid.
This manic freneticism is perhaps nowhere more desperately expressed than in the Chinese Stock Markets. China has two main markets, the Shanghai Securities Exchange, which has been in existence some four decades now, and the much more recently founded Shenzhen Stock Exchange in Guangdong Province. Since being in China, I have kept a weathered eye on these two and have been somewhat amazed at just how drastic the daily gyrations are. Vertiginous price movements in a given share are nothing unusual in these markets. Such drastic movements in an upward direction are looked upon very positively by the authorities here. On the other hand, a ten per cent move downwards can lead to further selling being suspended for the day. It’s a free market, but with Chinese characteristics...
Originally, I had been tempted to examine the possibilities of investing here but, after a few weeks of investigating just how the system ‘works’, I have come to realize that any semblance of a relationship between the price of a given share and the underlying reality of the business in question is purely coincidental.
Many moons ago, in the dot com boom at the turn of the century, I found myself caught up in much of the ‘irrational exuberance’ referred to by Alan Greenspan. Fortunately, by nature, I tend to have a very strong sense of caution and often display more than average skepticism when it comes to such mass indulgences. I remember being criticized at the time by a friend who explained to me that I ‘failed to understand the new paradigm’. What he meant was that the old rules relating to valuations of companies no longer applied. Caught up in the spirit of the times, so many people actually believed this to be the case. Personally, I did indulge a couple of times, but was fortunate to have been taught the value of stops (prices at which you automatically sell if a position is going against you) by another friend who shared my skepticism. This allowed me to walk away with a very decent profit. Others were not so fortunate and found it hard to let go when the bubble finally burst.
Much the same sort of situation, at least as far as the psychology goes, applies to the Chinese markets of today. I examined multiple shares, looking at their earnings, or more often the lack of them, their PE ratios (price/earnings), their debt, their growth and the actual nature of the industry or business they were involved in. A normal PE would be in the region of 10 to 20, much above that and the price begins to look a little frothy. British shares tend to the lower end, American towards the higher, but the range isn’t huge, at least not when compared with China.
What I found is that some of the ratios in China would be in the 30’as or 40’s, with some reaching into the several hundreds. I looked into the nature of the underlying securities to try to understand how such prices could be justified and found... car manufacturers, travel agents and electric plug makers. Such companies as these may grow, but the possibility of them justifying such huge PE ratios is more or less zero.
One of the problems for China is that the average investor here tends to have little experience and even less knowledge. The market is commonly viewed as simply another form of gambling, an activity much beloved in China (even if technically illegal), rather than a means to invest in a business. In Europe, the UK and the US, the biggest influences on prices are the major institutions and hedge funds, professional investors all. In China, it is Joe Bloggs on the street.
To put it simply, the market reflects a tidal wave of irrational speculators but very, very few informed investors.
In light of these investigations, any temptation to find a means of investing in such madness quickly disappeared. This bubble is so huge that when it bursts, as indeed it must, the sound of the explosion is going to reverberate around the globe.
Back in the Green Tea Cake, I find myself struggling to resist the temptation of some of the gorgeous dangao (cakes) on offer. China has grown much in recent years and there is a general sense of prosperity about this part of the World. Beneath the surface though, the threat of the investment bubble, the real estate bubble and, perhaps the biggest of all, the credit bubble that supports the whole house of cards lies simmering away in the background (Just how many metaphors can a lazy flaneur mix in one sentence?...). With these things one never knows just when lightning will strike, but strike it will. Given the vast amounts of capital involved in each of these situations, this is likely to be bigger than the dot com catastrophe or even the 2008 financial crisis. At times, tis a scary old World…
Alan Greenspan
This week’s episode come from the small but delightful Green Tea Cake which, strictly speaking, isn’t really a café at all but more a bakery with the possibility of having a green tea thrown in if customers should so desire. They do a rather scrumptious red bean loaf here for a very reasonable 7 yuan. Probably not the healthiest thing in the World, but a very pleasant indulgence nevertheless. The wifi connection is relatively strong and, for the most part, it feels like a little haven of peace in the day to day madness of this manic metropolis.
Life in China is intense, perhaps a little too intense for some tastes. People’s attitudes are often very direct which does, I have to admit, take a bit of getting used to. In the city centres, they often seem to live in an almost constant state of agitation, an ongoing struggle to get ahead in whatever terms ‘getting ahead’ is meaningful to any particular person: getting in front of the car in front, getting over the zebra crossing first, getting to the front of the queue, any queue, by fair means or foul. It is quite routine here for the person behind in line to demand whatever they want even as the shop assistant is dealing with the person at the head of the queue. In almost any other country that I have visited over the years this would be considered ill-mannered at best, here it is so normal that the locals scarcely bat an eyelid.
This manic freneticism is perhaps nowhere more desperately expressed than in the Chinese Stock Markets. China has two main markets, the Shanghai Securities Exchange, which has been in existence some four decades now, and the much more recently founded Shenzhen Stock Exchange in Guangdong Province. Since being in China, I have kept a weathered eye on these two and have been somewhat amazed at just how drastic the daily gyrations are. Vertiginous price movements in a given share are nothing unusual in these markets. Such drastic movements in an upward direction are looked upon very positively by the authorities here. On the other hand, a ten per cent move downwards can lead to further selling being suspended for the day. It’s a free market, but with Chinese characteristics...
Originally, I had been tempted to examine the possibilities of investing here but, after a few weeks of investigating just how the system ‘works’, I have come to realize that any semblance of a relationship between the price of a given share and the underlying reality of the business in question is purely coincidental.
Many moons ago, in the dot com boom at the turn of the century, I found myself caught up in much of the ‘irrational exuberance’ referred to by Alan Greenspan. Fortunately, by nature, I tend to have a very strong sense of caution and often display more than average skepticism when it comes to such mass indulgences. I remember being criticized at the time by a friend who explained to me that I ‘failed to understand the new paradigm’. What he meant was that the old rules relating to valuations of companies no longer applied. Caught up in the spirit of the times, so many people actually believed this to be the case. Personally, I did indulge a couple of times, but was fortunate to have been taught the value of stops (prices at which you automatically sell if a position is going against you) by another friend who shared my skepticism. This allowed me to walk away with a very decent profit. Others were not so fortunate and found it hard to let go when the bubble finally burst.
Much the same sort of situation, at least as far as the psychology goes, applies to the Chinese markets of today. I examined multiple shares, looking at their earnings, or more often the lack of them, their PE ratios (price/earnings), their debt, their growth and the actual nature of the industry or business they were involved in. A normal PE would be in the region of 10 to 20, much above that and the price begins to look a little frothy. British shares tend to the lower end, American towards the higher, but the range isn’t huge, at least not when compared with China.
What I found is that some of the ratios in China would be in the 30’as or 40’s, with some reaching into the several hundreds. I looked into the nature of the underlying securities to try to understand how such prices could be justified and found... car manufacturers, travel agents and electric plug makers. Such companies as these may grow, but the possibility of them justifying such huge PE ratios is more or less zero.
One of the problems for China is that the average investor here tends to have little experience and even less knowledge. The market is commonly viewed as simply another form of gambling, an activity much beloved in China (even if technically illegal), rather than a means to invest in a business. In Europe, the UK and the US, the biggest influences on prices are the major institutions and hedge funds, professional investors all. In China, it is Joe Bloggs on the street.
To put it simply, the market reflects a tidal wave of irrational speculators but very, very few informed investors.
In light of these investigations, any temptation to find a means of investing in such madness quickly disappeared. This bubble is so huge that when it bursts, as indeed it must, the sound of the explosion is going to reverberate around the globe.
Back in the Green Tea Cake, I find myself struggling to resist the temptation of some of the gorgeous dangao (cakes) on offer. China has grown much in recent years and there is a general sense of prosperity about this part of the World. Beneath the surface though, the threat of the investment bubble, the real estate bubble and, perhaps the biggest of all, the credit bubble that supports the whole house of cards lies simmering away in the background (Just how many metaphors can a lazy flaneur mix in one sentence?...). With these things one never knows just when lightning will strike, but strike it will. Given the vast amounts of capital involved in each of these situations, this is likely to be bigger than the dot com catastrophe or even the 2008 financial crisis. At times, tis a scary old World…
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