By Edward Lawrence Emerson
Yes, over the past week we watched Chinese stocks undergo one of the biggest pullbacks (13%) on record.
And yes, a fair few market scribblers will sell their Armageddonist navel-gazing view of the future because of it.
And no, there isn’t anyone who can see what’s next for Shanghai’s A shares; from weaker to bleaker or a rebound to higher levels after shaking lose the weak hands.
Remember what Warren Buffett said: “The (market’s) giddy participants all plan to leave just seconds before midnight…akin to that of Cinderella at the ball. They know that overstaying the festivities…will eventually bring on pumpkins and mice….There’s a problem, though: They are dancing in a room in which the clocks have no hands.”
Vertigo is Contagious
The Chinese stockmarket has exploded over the last year by something approaching 80%, and that type of growth tends to bring with it the equivalent of “investor vertigo”; folks start to get dizzy and afraid when they look down.
Add in an ailing housing market and the fact that 60% of China’s new stockholders have the equivalent of a junior high school education (6% of them can’t even read), and you have to assume that type of inexperienced market fuel will make for some shaky trajectories.
And, in perspective (which is a wonderful place to visit), that market’s price earnings are miles lower than was the case during the acceleration towards the crash of 2008/09. See Josh Brown for the embiggenable charts here.
Living in the Land of Lately (LoL)
I’ll hand over to Alan Steel, Chairman of Linlithgow-based Alan Steel Asset Management, who says investors for the most part live in the Land of Lately (LoL), saying: “It’s what investment folks call “recency bias” – a frenetic little place that changes faster than patches for the latest version of Microsoft.
“…our brains naturally default to habit – usually bad ones. And when that default mechanism inside your head kicks in, it’s just like the natural response to something scary coming at you.
“You want to run in the other direction.
“Well, it made a lot more sense in almost every situation…when we all still lived in caves. while the world has evolved from bearskin coats to Tim Berners Lee, unfortunately our brains have remained far more hard-wired to the Jurassic era than Generation Z.”
And our natural instinct is to cut and run.
But just one more thing before you do.
It’s Sentiment O’Clock
Similar to the sentiment levels towards the US markets just now, a survey released this week showed market sentiment toward the local Chinese equity market fell to a new 20-month low, as investors took cues from recent volatility in local share prices.
According to Cathay Financial Holding Co., 39.4% said they expect share prices there to fall over the next six months, while only 23.4% anticipate that the stock index will rise over that period.
In general terms, markets don’t fall over when sentiment is low. They crash when everyone is feeling like everything is fine.
Like A Junior High School Dance
So, has the Chinese bubble burst?
No one has a watch that measures market crashes.
And when you’re dancing in a room where the clocks have no hands, there’s little point in asking everyone for the time.
You’ll have to read the other signs to know when, if at all, to make an exit.
And you’ll know because everyone around you will be euphorically pissed on things like 125% loan to value mortgages, secret investment strategies that work for weeks and even months at a time, and the headline writes will jolt you with statements like “The markets are quite a good investment idea now, folks….”
But for now, it’s like early doors at the junior high school prom.
No one has really plucked up the courage yet to ask the other side to dance.