Wall Street Journal wonders if Shanghai stocks are in a bubble - 17-Oct-07 - Generational Dynamics

Generational Dynamics Web Log for 17-Oct-07

Wall Street Journal wonders if Shanghai stocks are in a bubble

But it's OK if they are, because stock market crashes are GOOD for you!

Shanghai stock market has been skyrocketing for the last year. <font face=Arial size=-2>(Source: wsj.com)</font>

Shanghai stock market has been skyrocketing for the last year. (Source: wsj.com)

I just can't stop laughing at this. There's this big page one Wall Street Journal article on Tuesday.

It says: "Big unknowns loom over the market, starting with whether China is in a bubble that's in danger of popping."

What does it take to get WSJ to declare something a bubble?

But it gets much, much worse:

"But there is strong evidence that even if the boom ends with a crash, China's investing frenzy will also leave behind much lasting good, because it is helping build a modern, market-driven financial system. ...

The Issue: China's booming stock market has raised concerns it is a bubble that could burst.

Silver Lining: China is seeing development of a class of investors that is helping make the economy more market driven.

Stateside Perspective: While Wall Street investors are concerned about how a reversal in stocks might dent China's economy, some American firms are benefiting in the boom. ...

After the 1929 stock-market crash helped plunge the U.S. into the Great Depression, economist John Maynard Keynes chided those who said the downturn was a just outcome for excesses in prior years. "While some part of the investment which was going on in the world at large was doubtless ill judged and unfruitful, there can, I think, be no doubt that the world was enormously enriched," he wrote."

You know, Dear Reader, I often quote some politician who says something that's so unbelievably stupid that you can't help but laugh. But these are the world's "most respected" financial journalists, writing on page one of WSJ, telling us that they can't tell us if it's a bubble, but if it is, then the crash will be good for us.

These journalists are children who have no idea what they're talking about.

Of course the Shanghai stock market is in a bubble -- a HUGE bubble. Anyone can see that from the above graph. Of course it's going to crash. Bubbles always do. And of course crashes inflict an enormous amount of horror, in the form of mass starvation and homelessness.

Here's a graph from my article, "How to compute the 'real value' of the stock market"

S&P 500 Price/Earnings Ratio (P/E1) 1871-2007

S&P 500 Price/Earnings Ratio (P/E1) 1871-2007

And of course Wall Street is also in a bubble, as anyone can see from the above graph. And of course it's going to crash. Bubbles always do.

But don't worry, folks. A crash is GOOD for you!

The WSJ argument is a little more subtle than that. They argue that major advances occur during stock market bubbles that wouldn't occur otherwise. It's kind of vague what advances the article is referring to, but let's take some guesses.

Let's imagine what someone might argue was the benefit of the most recent bubble, that began in 1995. We can talk about all sorts of advances in the computer field -- the Internet, the iPod, and so forth.

Would those have occurred without the bubble? Of course they would have.

Look at the advances that occurred since the 1950s. There were mainframe computers, minicomputers, desktop computers, local area networks, wide area networks, and .... the Internet, which was actually invented in the 1960s.

The article says that you need a crash to have a "modern market-driven financial system." But what good is that if you're still going to have crashes anyway?

A bubble and crash aren't good for anyone, and they don't produce anything that wouldn't have been produced otherwise.

Just read my article, "The bubble that broke the world," to get the idea.

But it's nice to know that WSJ is good for a hearty laugh every now and then.

Well, here's a little more comedy for your viewing enjoyment, The Bubble Man:

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Generational Dynamics Web Log for 17-Oct-07 Wall Street Journal wonders if Shanghai stocks are in a bubble

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Generational Dynamics Web Log for 17-Oct-07
Wall Street Journal wonders if Shanghai stocks are in a bubble