The bubble that was

This recurring theme continues to bear fruit. Who can resist talking about money? The Shanghai Stock Exchange Composite sits today 9/5/08 at 2202, a 64% drop from its high of 6124 on 10/16/07. This is also a 22% drop from my last blog entry (6/11/08 - 2856) about this historic collapse.

I no longer consider this a bubble anymore. By conventional measures, this index is probably close to its fair value (but still a bit on the high side). Of course this does not mean that the decline will halt because during a panic, stock market values tend to overshoot fair value to settle at below value. This could mean another several hundred points of decline in store for this market. To their credit, the Chinese government for the most part have not made any dramatic policy changes to placate the investors who have lost a considerable amount of their investment. Accountability should rest on the investors in order for capital markets to reach maturity.

The retail investors have really taken it on the chin. A cross section of society have been affected by this, and that is a pattern when a market is in a bubble. It can only get to that point when all kinds of people start to invest in it. Where I work there are people who are mail room clerks, landscapers and chauffeurs all investing in the stock market. Our maid have also dabble in it. This correction was necessary and imperative in order for this stock market to mature.

The latest development in the real estate market in China is that it is following the stock market in a correction. Sales volume have really slowed to a trickle for the past year and the prices are dropping throughout the country. We will see where all of this end soon enough.