2015-04-08

China's Stock Market Is A Bubble Or Hyperinflation Is Coming

When the Weimar Republic's hyperinflation began, nobody thought it was hyperinflation. They thought it was a booming economy. When the gold price surged to $1900 in 2011, I viewed it as either an overextended move or the start of hyperinflation because parabolic trends due not continue in the absence of extreme conditions.

The chart of the Hang Seng versus the Shanghai Composite shows the move to date may be the Shanghai Composite playing catch-up following its post-2008 collapse. On the other hand, today the Chinese froth spilled into Hong Kong. Look at how Guggenheim China Small Cap (HAO) has been behaving over the past few days. The explanation for now is that with China allowing more investment in Hong Kong, Chinese investors will pour through the Stock Connect and bid up shares to nosebleed levels. My HK and A-Share watchlist gained 7% today alone, with a lot of stocks up more than 10% and some up more than 30% on the day.

FTAlphaville adds some color commentary: This is nuts. When’s the crash?
The world-beating surge in Chinese technology stocks is making the heady days of the dot-com bubble look tame by comparison.

The industry is leading gains in China’s $6.9 trillion stock market, sending valuations to an average 220 times reported profits, the most expensive level among global peers. When the Nasdaq Composite Index peaked in March 2000, technology companies in the U.S. had a mean price-to-earnings ratio of 156…

Valuations in China are now higher than those in the U.S. at the height of the dot-com bubble just about any way you slice them. The average Chinese technology stock has a price-to-earnings ratio 41 percent above that of U.S. peers in 2000, while the median valuation is twice as expensive and the market capitalization-weighted average is 12 percent higher, according to data compiled by Bloomberg…

...Finally, the liquidity trade remains China. Fascinating to see the Shanghai index surge in recent months as commodity prices collapse (Chart 4). The last time the Shanghai Index surged in 2007, commodity prices soared. The bull base for China is now liquidity not growth. The market has already rallied hard and our local analysts fear “too much, too soon”. But in a world now programmed to “front-run” policy easing, conditioned to play “bad news is good news”, and willing to reward economic “reform”. China remains a compelling trade for both “fast” and “slow” money.
It should be called the hyperinflation trade because there will need to be a mountain of money printing to backfill the air between stock prices and reality in many individual cases. The market does very much resemble the tech boom though, because blue chip stocks are lagging.

I didn't think the gold run-up to $1900 was the prelude to hyperinflation and I doubt this is hyperinflation/currency devaluation expectations playing out consciously (subconsciously is more likely, though still doubtful).

Shanghai and Shenzhen have a combined market capitalization that puts them on par with London, Tokyo and the Nasdaq. Add in Hong Kong and the three give China the second largest stock market after the United States. For good or ill, what's happening right now has major global implications.

No comments:

Post a Comment