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World View: China’s Bubble Stock Market Plunges 13% in One Week

This morning’s key headlines from GenerationalDynamics.com

  • China’s bubble stock market plunges 13% in one week
  • Wall Street stock market bubble continues its surge
  • Tick-tock tick-tock, Greece’s clock is running down

China’s bubble stock market plunges 13% in one week

Shanghai stock market composite index for five years until June 19 (Bloomberg)
Shanghai stock market composite index for five years until June 19 (Bloomberg)

The Shanghai stock market has been fairly steady for years, but last year it suddenly started surging into bubble territory, increasing by 250% in the last year.

Then, after reaching a peak of 5166 on Friday, June 12, it suddenly started plunging all of the last week, falling 13% to 4478 by Friday, June 19, including a 6.4% fall on Friday alone. This is the worst run in China’s stock market since the 2008/09 financial crisis.

Chinese analysts are giving four reasons for the plunge:

  • A flurry of brand new listings of large new companies are drawing investors away from other stocks.
  • A new regulation bans margin trading outside the brokerage system.
  • Companies need to pay off their bank loans at mid-year, and sell stocks to get cash.
  • The biggest threat to the market is the rapid rise, indicating a bubble that may be bursting.

However, Western analysts point to the explosive greater-than-exponential growth in “retail investor” stock trading accounts, especially in the last few months, for people who are investing their life savings over the internet. Many Chinese have been using the stock market bubble to make a living. According to one report, retail investors are prone to herding patterns of behavior when markets become stressed, which could lead to “periods of mass fund exodus.”

ZeroHedge has done an analysis and discovered that Chinese officials are so worried about this situation that they have stopped releasing data about the number of new stock trading accounts. They had been providing this data for 8 years, but suddenly stopped on May 29. At that time, the number of retail stock trading accounts spiked to 4.3 million, but there’s been no released data since then. Global Times (Beijing) and CNBC and ZeroHedge

Wall Street stock market bubble continues its surge

S&P 500 Price/Earnings ratio at astronomically high 21.73 on June 19 (WSJ)
S&P 500 Price/Earnings ratio at astronomically high 21.73 on June 19 (WSJ)

Wall Street stocks have surged further into bubble territory as well during the last year, just like Shanghai stocks, though they have not yet taken any serious plunge like the Shanghai stock exchange.

It has been a month since I reported that the S&P 500 Price/Earnings ratio (stock valuation index) was at an astronomically high 21.47 on May 15, indicating a huge stock market bubble. Since then, it has shot up further to the ever more astronomical level of 21.73, according to the Wall Street Journal on Friday, June 19.

21.73 is far above the historical average of 14. Furthermore, it was 18 just a year ago, and has been increasing rapidly since then, indicating that the Wall Street stock market bubble is accelerating, just as the Shanghai stock market bubble has been accelerating during the last year. Generational Dynamics predicts that a panic will occur, and that the P/E ratio will fall to the 5-6 range or lower, which is where it was as recently as 1982, resulting in a Dow Jones Industrial Average of 3000 or lower.

Tick-tock tick-tock, Greece’s clock is running down

Thousands of protesters gathered in Syntagma (Constitution) Square in Athens on Sunday to demand that Greece’s government not give in to the demands of the lending institutions. Those demands are to increase taxes and reduce pension benefits by increasing the retirement age.

The protests were organized by left-wing parties and trade unions. According to polls, the Greek people want Greece to remain in the euro, but also want more benefits such as an increase in the minimum wage. In other words, the Greek protestors are demanding to return to the old days, when they could spend all they want with no care or worry.

That is the crux of the problem. A lot of people are recommending that the lending institutions just give in to the Greek government, and forgive their current debt. Unfortunately, everyone knows what would happen next. Greece would increase the minimum wage, increase pension benefits, hire more public employees, and soon end up owing just as much as before. That situation is politically untenable for the rest of Europe.

I have been saying for years that there is no solution to the Greek fiscal crisis. And by that I am not saying that that the Greeks and the lending institutions have not yet been clever enough to think up a solution. I am saying that no solution exists. When no solution exists, then the Law of Unintended Consequences kicks in, and we may now be close to that time.

On Monday, there is going to be another Eurogroup meeting in Brussels. Usually, the Eurogroup meetings are attended by each eurozone country’s finance minister. But Monday’s meeting will be extraordinary in that eurozone heads of governments will be in attendance.

According to reports, Greece’s government will be presented with two options: to either accept the reforms proposed by Greece’s lending institutions, potentially with some Greek amendments, or to prepare his country for a default.

Others have mentioned a third option: Kick the can down the road by providing a loan for just enough money to get through to the end of the year. In January there was a compromise that kicked the can down the road to June, so a new compromise would do the same until December, and then we would start all over again.

In 8 days, Greece has to pay 1.5 billion euros to the International Monetary Fund (IMF), or go into default. Tick-tock, tick-tock. Kathimerini and Irish Times and CNN

KEYS: Generational Dynamics, China, Shanghai, Greece, Athens, International Monetary Fund, IMF
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