Taoyuan Nights

Everyone (on TV) seems to have gone bonkers yesterday, as the Shanghai stockmarket dropped 8% during 1 day’s trading. Hong Kong, Asia, America, London, Europe dropped too, in knee-jerk reaction as people freaked out… all the talking heads on TV shows started murmuring about doom and gloom, how this could be the end…. time to buy bonds instead of shares (conveniently ignoring the record-settingly high prices on bonds world-wide, of course)…

So let’s have a quick dose of reality. Shanghai is a crazy market in a country with at best ‘interesting’ financial regulation. If you’re investing there, then bluntly you’re a gambler who is taking a big risk to begin with – and an 8% smack on the bottom is a very small punishment for a gambler.

The PRC is still a developing economy, and the present asset bubbles there are very obvious. These bubbles, incidentally, are due to several different factors: an extended period of artificially low interest rates… yawn… lax lending policy… zzz…. combined with a trade surplus, high savings rate, and the widespread belief that for some reason, the PRC deserves success because, it, well…. err…. well, it just does, right! And chances of financial mishap be damned.

Anyhoo, here are some pictures that put yesterday into perspective, based on Hong Kong’s Hang Seng index (which is the world-class index most likely to be affected by price changes in Shanghai). These graphs were provided by Yahoo Finance.

The last 5 days in Hong Kong. It looks like the stockmarket is just grinding lower, and lower, and lower, every day! And yesterday is the nail in the coffin! Oh noez! How terriblez!

On this graph, showing the three month view, you can see, the market is in fact much higher than it was in December, or in January when everyone felt optimistic. You can also see there have been lots of 1 day drops like this in the last couple of months, and hardly anybody cared about it then….

And here’s the 5 year view. See how unimportant yesterday was?

A big perk of all this is that you get to see all the witchdoctors and horoscopists crawling out of the woodwork. Here’s one of them. Guess what: if you have 10,000 snake oil salesmen, each predicting different ‘horrible days’ in the market for each year based on their own feverish interpretations of the Da Vinci Code – and if you combine that with a search engine that allows you to pick out the ‘winners’ when something interesting does happen – guess what! You are likely to find some ‘winners’.

Coming up next: I predict it will be a terrible turning point for a major world market, on… emmm… July 19th, 2011, because on that day, there will be a conflict between overlapping MooCow Market Cycles!

Now all I need to do is cross my fingers and wait for people to start Googling for me if something actually happens on that day. And then I’ll be a famous financial pundit, and everyone will want me to explain exactly how MooCow Market Cycles work. Oh, and I’d better remember to use FTSE, NYSE, NASDAQ, NIKKEI and HANG SENG somewhere in this article so that they can find me more easily.

Oh well… even though I have most of my money in the market, I would be delighted to see some further falls – I’m young, so I expect to be buying far more shares than I sell over the next 10 years. And with bubbles in every asset class all around the world, further falls seem very likely indeed…