Greed

What better way to describe greed than looking at the psychology of the stock market? Here in Shanghai, the Shanghai Composite Index has risen to record highs day after day. On 1/1/06 this index stood at 1161 and in just 20 months the index is currently at 4980. This a staggering 328% gain in 20 months!! If you want to take a look at the data here it is:

http://finance.yahoo.com/q/hp?s=000001.SS

It seems like everybody, their parents and their grandparents are in the stock market. Everybody is talking about the stock market, people are quitting their jobs to day trade, and brokerages are popping up everywhere. At current levels the Shanghai Composite is trading at 55 times last year's earning as an aggregate. Does this sound familiar? I feel like I have traveled back in time and were back in the late 90's again when the NASDAQ rose to similar heights only to crash back to reality.

The problem with the bubble in China is that it has risen even faster than the NASDAQ bubble and it probably has more room to go up. Currently, citizens of China cannot invest abroad. Their only options are to put their money in the bank, real estate or domestic stocks. They cannot go abroad in search of better investments. On the flip side, foreigners cannot invest in the Chinese stock market either. This is creating a situation where in the short term, there will probably be a continuing rise in the Shanghai stock market. But when it drops, look out. The PE's might be in triple digits before that happens.

What drives all of this? Greed of course. Everybody knows that there are normal ways that things operate, but when greed takes over rational goes down the toilet. People are rationalizing that China's booming economy will sustain these prices and because there is so much saving in China that it needs to find a place go. Well we heard some of same arguments to justify the prices of the NASDAQ and where did that lead us?

I am not smart enough to say what the catalyst will be that will burst this bubble, all I know that it will happen in the near to intermediate future. And then greed will turn into fear and panic.