The Chinese stock market has soared 146% in 12 months, even while the Chinese economy is slowing to the point where the hard-landing gurus are licking their chops, hoping they might finally be right, after all these frustrating years when China just kept on flying, fueled by monetary and credit propellants.
Steve Sjuggerud, editor at Daily Wealth, has recommended since sometime last year that Chinese stocks would defy gravity and offer terrific gains. People who followed his advice were in for a crazy profitable ride – and perhaps a few gray hairs.
So here is Sjuggerud with a stupendous story. It’s funny too, in its perverted way. He points out that this bubble is getting so insane, with people doing such ludicrous things to participate in it, that it must be a signal that the end is nigh. But when exactly is it time to pack up your marbles and go home?
He gets to that question in his conclusion, with a white-knuckle twist: the difference between investors, speculators, and folks who know that they are, as he says, “playing a game of chicken.”
Because in the end, it’s all about trying to make a buck without getting wiped out in the process – the latter being the tricky part.
By Steve Sjuggerud, editor at Daily Wealth:
You can’t make this stuff up…
“Stephen Qin, a 28-year-old office worker in northern China, traveled 1,000 miles and set up an account in Hong Kong… to trade Chinese stocks he could have bought at home,” Bloomberg news reported this week.
His logic? “I can make more money if I can borrow more.”
You see, Qin can borrow more money in Hong Kong to buy stocks than he can in China. (buying on margin.) He also gets a lower interest rate in Hong Kong on that borrowed money. Qin is not alone. Thousands of Chinese investors are making the same “pilgrimage” to Hong Kong to open up brokerage accounts for the same reasons as Qin.
The Hong Kong brokerage firms are loving the influx of new business from mainland-Chinese investors. They are offering all kinds of incentives, including covering up to HK$10,000 of the travel costs from China for people opening accounts. It’s like a bizarre form of Las Vegas – where “the house” makes you feel good by comping your room… as long you spend money in its casino.
The story gets even more ridiculous. Qin is excited about sitting at his computer in China and buying Chinese stocks through his Hong Kong brokerage online. For example, he recently bought Chinese shares of China Construction Bank. The thing is, the identical shares of China Construction Bank are 7% less expensive in Hong Kong than they are in China.
Qin drove 1,000 miles to Hong Kong… but instead of buying China Construction Bank shares that trade in Hong Kong, he bought the identical shares trading in China that were 7% more expensive!
As Qin’s story shows, individual investors in China have lost all sense of reality. The boom has finally reached the crazy stage.
Just like in the U.S. housing boom a few years ago (that ended so badly), investors like Qin believe “I can make more money if I can borrow more.” Qin – and tens of thousands of other investors – will likely face the same fate American investors did in the housing bust.
The craziest part is, I’m not selling Chinese stocks yet. The boom can (and likely will) get crazier before it’s all over. It will end – badly – at some point. A 50% fall would be nothing.
I just don’t think we’ve hit the peak yet.
The difference between us and Mr. Qin is, we know that we are playing a game of chicken. We know that it will end and that Qin, with his borrowed money, will be wiped out.
Qin’s story shows that Chinese stocks are reaching mania stage, but there could be much more fun ahead. So we’re not selling yet. By Steve Sjuggerud, editor at Daily Wealth
Update, June 8: It didn’t take long. This morning, Sjuggerud wrote, Why We’re Selling Half of China Today. Since the newsletter has entered the trade in October last year, its position is up 100%. Now the rationale is to take the original investment off the table and cut risk in half.
Pronouncements by short-seller Muddy Waters Research had epic impacts on Chinese companies and their stocks. Now it is targeting the entire Chinese stock market. Liquidity is “crammed into the system.” The government says, “buying stocks is patriotic.” Insiders go hog-wild. Read… Muddy Waters Warns on Chinese Stocks: “Largest Pump-and-Dump in History”
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I think we’ve reached peak stupidity.
I think our stupidity reserves have been vastly under estimated. A lot more to be pumped, even if it destroys the world as we know it. Call me a Peak Stupidity doubter.
no, you’ll know when we hit peak stupidity, because that is about the time you will be scared shitless and desperately pray it all just stops.
We will never reach Peak Stupidity.
Or it could be a ploy to suck in Western money and wipe them out as well.
The crazy part is Vanguard is going to be investing in China A shares in their emerging market ETF. Even stodgy Vanguard is getting desperate.
I am surprised that China has boomed for so long. The property market is in a massive bubble and the stock market has entered stupid territory. The problem is that you have a few generations of Chinese that have only ever seen the markets rise so their experience has yet to see a falling market…….yet!
Night Train has nailed it! ROFLMAO
That tickled me down to the core of my tinfoil hat, barbarous relic, industrial metal soul. Viva Hong Kong!
There’s only one guaranteed way to win a game of chicken. Pull the steering wheel off your steering column, hold it out the window so then other, oncoming guy can see it and throw it into the bushes. 100% sure he’ll swerve first. When the crunch comes either the Fed or China will try this stunt by creating “the facts on the ground”.
Traders in the US are just as bear-market naïve. Every 7 years the market wipes them out, transforming them into used car salesmen. This is followed by yet another fresh crop of youngsters who have never seen a crash…
At least the people who seek information and post at wolf street.com are critical thinkers. I see the news channels doing fluff reporting on the economy doing their best to keep the carp in the pool. Their comments on the daily economic news that they choose to report are as inane as their on-set inner-personal forced conversations. Hard rock mining for any nugget of good news they can find and deploy. I have seen magicians use less attention diversion than these corporate shills. If the consequences to real people weren’t so dire, they would be good comedy. Thanks to Wolf for providing some port of sanity in this tumultuous world.