Comparing Bubbles: China vs. Nasdaq and Homebuilders

On Monday we compared the rises and crashes of the Nasdaq and the Homebuilders during their respective bubbles. A Bespoke reader asked if we could overlay the current rise in China's Shanghai Composite on the chart to see where its bull run currently stands in comparison.

The Nasdaq and Homebuilders rallied for around 2,000 calendar days, while the Shanghai has currently only been in rally mode for 560 days. However, the gains in China of 488% are fast approaching the max gains that the Nasdaq saw of 639% at its peak.

The most interesting data points here are the starting dates of the bubbles. The Homebuilders began their enormous rise on March 14, 2000, just four days after the Nasdaq peaked. Interestingly, the Shanghai started its meteoric rise on July 11, 2005 -- just nine days before the Homebuilders peaked. Investors have seemingly flocked from one bubble to the next.

click to enlarge

Comments

[MeanGene:]

How about a more historical approach?
The Shanghai Index "A" share index started Dec 19, 1990 with a base of 100. It's a cap weighted index.

History lesson:
In 17 years, Shanghai has gone from 100 to 6000 - 60X

In 19 years, Japan went from 2000 to 39000 - 19.5X

In 20 years, the Nasdaq Comp went from 250 to 5000 - 20X

In 10 years, gold went from 35 to 850 - 24X
Note that gold only traded over 20X for a few days.

An even longer term perspective.. the South Sea Bubble was only a 10X move.

The history lesson is that once you hit 20X, it's over. Except for China. I would expect the price payed to be even more extreme than any of the other bubbles.

Long term charts here: www.chartsrus.com

2007 Nov 01 04:05 PM

[jimhsu:]

Depending on whether or not you actually believe that bubbles are log-periodic (see any reputable academic financial journal for those endless debates), you might or might not agree that Shanghai's bubble is reaching a climax. But when graphed ... several things are apparent:

www.diyeconomist.com/w.../

1. China IS a bubble
2. Bubbles will eventually stop, but can "remain irrational longer than you can remain solvent",
and 3. If China wants to crash, Q1-Q2 2008 is the most likely date.

Again log-periodicity is just an academic theory, but nevertheless it is interesting.

2007 Nov 01 05:12 PM

[Gerald:]

An interesting article. An important question is given that the RMB has exchange controls and the PRC stockmarkets presently allow very little foreign investment, one needs come up with a theory as to how global investment money gets into these PRC equity markets to initiate the bubble. Otherwise examing the history of open market activity may only provide limited guidance.

2007 Nov 01 11:16 PM

[eltigre:]

the 3:10 to YUMA is right on schedule. YUMA may be further than you think. this is not the nasdaq bubble. the BRIC countries have been on a fast train to no where for a long time. exciting, very exciting. these people ( all 3 bil ) are not going to let this potential for a new exciting life get away without a sincere fight.

2007 Nov 02 08:41 PM

[sofla100:]

China is only a bubble now if you negate to look at how her companies and economy operate. The country maintains a staggering +11% GDP. It has over 1.5 billion people. And, it remains under the control and domination of the Communist Party. A bubble only occurs when you have a free, open and competitive society and supply/demand economics become severely out of sync. China's comapnies are semi-state monopolies, a supply/demand economy does not yet exist in a meaningful operational form. The country has also shown it can put some brakes on the market and as her currency rises (With decreasing state control), this will gradually work to stabalize the markets. There are other reasons why it's an apples/oranges game to try to compare Shangai with NASDAQ or the Homebuilders, not the least of which is a balance of payments issue that keeps a trillion US dollars in China's banks, and a strong motivation by China not to see the value of those dollars go down the tubes.

2007 Nov 03 12:25 AM

[pprimo:]

looks like the grandaddy of them all. for sure. any chance you could overlay gold and oil on these charts (and the baltic dry index).

Looking for a trading pair that may help.

2007 Nov 03 07:14 PM