The China Bubble

I often tell investors that true stock bubbles are relatively rare. That runs counter to what we often hear, but I stand by it.

Of course, just because the market goes down doesn’t mean it was a bubble beforehand. Sometimes the fundamentals deteriorate. What I call a bubble is when prices soar way, way beyond fundamentals, and that doesn’t happen very often — at least not in the U.S. market.

But looking at China, we can see a highly chaotic market. The Shanghai Composite has nearly doubled in nine months. As crazy as that is, it doesn’t come close to the incredible rally of just a few years ago. From late 2005 to October 2007, the Shanghai Composite rallied 460% in less than two years. Soon afterwards, it lost nearly all of it.

This is why I’m suspicious of the Chinese market. Healthy markets simply shouldn’t move like that.

Posted by Eddy Elfenbein on April 8th, 2015 at 12:56 pm

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