China Marches To 1929 Beat

By: Murray Nickel

Sep 18, 2007. What Drop? Markets around the world dropped in unison when key US market indexes dropped 11 - 14% recently. Except China. China was the sole exception to the rule.

During that same period China's SSEC Index roared higher by almost 20%!

Follow the address below to view a chart of the SSEC.

The vertical dotted lines on this chart highlight the start and end of the recent slide in US, and most other, markets. The market in China was one of the few that felt no pain during this volatile time.

Soaring High: Yes, your eyes are not deceiving you - SSEC has gained nearly 450% in a little over two years. That's near enough to a gain of 200% per annum! No wonder Chinese investors (gamblers?) are so enamored with their market. It's easy to make money (lots of it) when the only way is up.

Jumping In: I've read many comments from folk based in Asia regarding junior office staff, laborers, hairdressers etc giving up their day-jobs to play the market full-time. To retain staff, some companies have moved to giving extended breaks to enable staff to both trade and work. Some retired folk have even put all their life savings into the market. Everyone is jumping in, and it doesn't seem to matter what method you use - lucky numbers, lucky company names, new IPO's, anything - so long as you bet on the market going up it seems you're guaranteed to win. What a fun ride!

The First Bubble Is The Worst Bubble: In the US in 1929, things were similar - everyone who could be in the market was. Most had little in-depth knowledge of investing or the risks involved. Indeed most were simply gambling, although they wouldn't have said so. They would have claimed to be simply following the strident urgings of their favorite advisers. For the US, this was their first real, personal experience of a stock-market bubble.

Now it's the turn of the Chinese investor/gambler to experience their first bubble, and the consequences when it bursts may be very similar to the Great Depression in the US.

It's probably fair to say the vast majority of Chinese now playing their local stock market are as naive as American investors were back in the 1920's. And sadly they'll (eventually) get hurt as badly too. Eventually this market bubble will burst too, and wipe away 80-90% of its value, just like the DJI did all those years ago.

How High Can It Fly? If the ultimate high-point for the SSEC is comparable to that of the DJI at its peak, then it could climb a lot higher yet. It is currently trading in the 5100 - 5500 band, but could push to 6500 - 8000 if it is to mimic the Dow's 1920's rise.

Mind you, given the SSEC index has already gained over 2000 points so far this year, the next 1500 or so could easily be chalked up by early 2008. So it's likely we're much closer to the end of this awesome ride than the beginning.

This Is Not 1929: Left to their own devices, it's likely the Chinese would buy their market all the way up to the 6500-8000 range. But this is not 1929 and China, like all other countries, is part of the global village with huge dependencies on the rest of the world - and certainly not the least on USA. So the one thing that might throw a spanner in the works, is events unfolding elsewhere in the world.

The Last Puff: Bubbles get bigger and bigger with each puff of air blown into them. While we can't say for sure how big China's market bubble will get before it bursts, we can be certain we're much closer to the final puff that bursts the bubble than we are to the first puff that launched this crazy, fun ride to the stratosphere.

Shock Waves: Back in Feb/Mar of this year, when global markets fell in response to a down-day in the SSEC of over 9% market commentators published dire warnings regarding the bubble in China. Then a strange thing happened. When the markets re-gained their composure and headed north again, comment on China's bubble dried up and eventually got replaced by a chorus of economists and analysts trumpeting that western markets would withstand a collapse in China's market without much impact - after all western investment in the China market only accounts for about 5% (as at 2005) of the value of that market.

I wonder if they'd be so confident now that we have this emerging mortgage/credit/liquidity/capital crisis swirling all around us? The ramifications of a market collapse in China will be far more far-reaching than just the stock market. OK, "ramifications" is a very generic term - so you'd like something more specific? This is just one example scenario of many I could list: loss of savings and jobs rapidly escalates with the collapse and the local Chinese economy tanks. Civil unrest and anger threatens civil war. To try to save the crumbling economy the Chinese government has no option but to repatriate most of those trillions of USD they hold - in order to invest in the local economy with a huge program of public works that keeps employment humming and minimizes (or at least "limits") the fallout from the crash. What would that do to the USD?

The time to think about these issues is NOW! It may take a while for the shock waves to reach all of us, but reach us they will.

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View the complete version of this article, including the chart of the SSEC Index here: Murray Nickel is a mathematician, statistician, and professional trend trader. He offers a free trial of trading signals for global market indexes and index ETFs, spot Forex, and spot Gold. He also mentors trend traders aiming to succeed at trading global markets.

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