We All Know How This Story Ends

Chinese United by Common Goal: A Hot Stock Tip —The New York Times

Anybody else remember the impact of Alan Greenspan’s “Irrational Exuberance” speech ten years ago last December?

I do: I was in a hotel room, back from a breakfast meeting, calling into a trading desk to find out what was going on pre-open.

What was going on, the trader told me, was the market was freaking out following remarks by Federal Reserve Chairman Alan Greenspan, who had given a speech the night before in which he used the somehow irresistible term “irrational exuberance” to describe a stock market still several years away from its ultimate peak.

Actually, the trader didn’t say the market was “freaking out.” Nor did he call Greenspan “Federal Reserve Chairman Alan Greenspan”: he used far more colorful words. He used the kind of words guys use when a driver cuts them off without looking—only angrier, and with more “Fs.”

In any event, I had a flashback to that morning while reading yesterday’s excellent New York Times story on the current state of so-called “investing” in China. The headline, shown above, only hints at the riches of this-must-be-a-top anecdotal evidence the reporter uncovered.

BEIJING, Jan. 29 — “Irrational exuberance” has no exact Chinese translation, but no explanation seemed necessary in the bustling lobby of GF Securities. Grungy-looking college students, office workers, retirees and even a pregnant woman in suede boots all jostled into the brokerage on a recent morning, eager to buy stocks and buy them now.

Wang Yu, 20, slouching on a black sofa in the lobby, said he had already doubled his initial investment of 100,000 yuan, or about $12,900, after jumping into the Chinese stock market barely a year ago. His parents had lent him the start-up money, but now he was feeling confident and mulling over a new investment. Commercial shipping containers, he predicted, could bring big profits. “A lot of the older investors lost a lot of money, so they are not as optimistic,” Mr. Wang said. “I think it is going just fine.” Less than two years after share prices collapsed, China’s stock markets are almost going mad, actually, with the leading Shanghai Composite Index approaching 3,000 and Chinese investors flocking to buy shares in record numbers. The bull market is so powerful — the Shanghai market hit a record high last week and was among the best performing in the world last year — that one senior Chinese official has warned against “blind optimism.”

That phrase, “blind optimism,” has reminded more than one observer of Greenspan’s “irrational exuberance” speech, with skeptics latching onto it as an indicator that the hour is late for the Great China Bull Market.

Of course, non-skeptics can point out that Greenspan was three years too early in his warning of impending disaster—if that is indeed what the famously opaque economist was trying to get across at the time.

I recall a widely-reprinted New Yorker cartoon of the era with the erudite, double-speaking Greenspan announcing interest rate policy as follows:

“’Twas brillig, and the slithy toves Did gyre and gimble in the wabe; All mimsy were the borogoves, and the mome raths outgrabe fifty basis points.” Now, it is a fact that “irrational exuberance” did not peak in this country until roughly three years after Greenspan’s supposed warning, and “blind optimism” may indeed carry things ahead in China longer than that.

But the signs are not good, at least if the anecdotal evidence in the Times is any indication:

College students, young professionals, retirees and others are buying individual shares or investing in China’s swelling mutual funds. One mutual fund raised $5 billion in a single day. Day trading, meanwhile, is becoming popular with investors, many of whom monitor the market from home on personal computers.

Everyone seems to want a stock tip. “When I go to the beauty salon, even the girls who give me a manicure are talking about stocks!” said Shirley Lei, a consultant in Shanghai who worries that inexperienced buyers could be cheated. “They ask me, ‘What should I invest in?’ They say they are doing research.”… “Of course, the market in China is not as regulated as in America or Britain,” Mr. Lu said. “The Chinese market is much younger, so you are going to have risk. But I think the government is trying to straighten things out so that the market will become stronger.” His goal was simple. “I want to get rich,” he said.

Don’t we all?

Jeff Matthews I Am Not Making This Up

© 2007 Jeff Matthews

The content contained in this blog represents the opinions of Mr. Matthews. Mr. Matthews also acts as an advisor and clients advised by Mr. Matthews may hold either long or short positions in securities of various companies discussed in the blog based upon Mr. Matthews’ recommendations. This commentary in no way constitutes a solicitation of business or investment advice. It is intended solely for the entertainment of the reader, and the author.