Surge in Chinese tech stocks is making the dot-com bubble look tame
bloomberg.com
bloomberg.com
"Bubble watchers point out median earnings multiples for Chinese technology stocks are twice US peer valuations at their dot.com peak. More worrying perhaps is a health-goods-from-deer-antlers producer on 70 times, the seamless underwear manufacturer on 90 times or those school uniform and ketchup makers on 330 times"
That money has redirected into equities. China saw three million new stock trading accounts opened in just the first two weeks of April.
China has been flooding their economy with truly massive sums of liquidity and debt the last five years. It will continue to redirect into available assets until it gets destroyed in a crash (which will be in the form of a huge stock market crash, soon).
This is end of the line for China's boom phase. They're almost perfectly repeating what Japan went through as their growth boom came to a halt, including the mistakes (extreme debt, asset bubbles in real estate and stocks, etc), and other signals such as demographic decline and 'deflation.'
I've been following Michael Pettis quite closely. Great analyst, understands and explains the global balance of payments very well, lives in China, etc. His opinion has moved from 'China needs to rebalance' to wording that sounds like he's not sure there is going to be much growth for a long time.
China's growth for some time has been the result of malinvestment on a massive scale. At minimum since 2008, possibly even before that. The factories that we think could be productive and producing things people really want at the right price could be in that position because of very negative inputs (unaccounted for pollution, interest rates being subsidized by someone else, etc.) Fundamentally, when you have an economy growing at a rate above the interest rate, many companies can just overgrow their debt while taking on new debt. Unprofitable operations can be hidden for decades.
It is now within the realm of possibility that China could see 1-2% growth for decades ahead. In short term, I would expect negative GDP growth. Based on what has happened to the price of oil (and other raw materials), and the drop in high end consumption due to a 'corruption crackdown' this could already be underway.
In general this should be a good thing. Certainly it is for the environment and climate change.
This is one of the biggest misconceptions. What we think of as "shills" do not and would not speak in broken English. It would run completely contrary to their ultimate goal of "swaying public opinion". Being unable to communicate efficiently would not be effective propaganda. It would be so obvious and that's precisely what they're trying to avoid.
Hell, A country could (and some probably do) outsource the work to 'reputation management' companies who employ people that are native speakers of a particular language. Subcontracting the work out would also provide a layer of separation if they get caught. The government has plausible deniability, "We didn't know that's what they were doing! We thought they were doing this other thing!".
Digg.com had to send a cease and desist letter to one Chinese propaganda wing to get them to stop mucking up their website. Those individuals were not speaking in broken English. They may not have even been Chinese according to a couple people I knew that worked at digg at the time. One of my friends believed them to be an Australian company (shilling for China for a paycheck). Source on the Digg issue here: http://en.wikipedia.org/wiki/Internet_Water_Army#Legal_probl...
As the saying goes, nobody's perfect. It could easily be that they hired someone to do this and they did an imperfect job of it before being replaced.
Say anything critical of the Chinese government's policy towards Tibet and/or the Dalai Lama, and watch the broken English "rebuttals" pouring in like the flood.
I think it'll be a massive hit that will level them out when it happens, but I don't think it'll be a "New Japan" with deflationary problems and a truly stagnant economy. They'll probably end up more like the US with a steady growth rate over a long time horizon that will fix things in 10 years or so. Which, if we are being honest, is really not that much longer than its taking the US to fully recover from the Great Recession.
US at dot.com peak was already very competitive market. Chinese technology sector and markets are still undeveloped. Even decreasing GDP growth is almost double what US growth was during the bubble. This increases profit potential.
It was only a year ago that the Shanghai stock market was thought toxic given so much insider trading (you couldn't make money on it without guanxi).
Please note that this is not an endorsement of Bitcoin or encouragement to use Bitcoin. I'm more interested to hear what the realworld situation of ecurrencies such as Bitcoin are in China and whether it is a feasibel to buy/sell Bitcoins in China.
Economists have been crying out "bubble bubble !" on china for 10 years. The science of capital as applied to western countries do not apply to a system like china where there are so many SOE. Imagine if economists applied the same type of thinking during WW2 and the space race.
China seems to be in a similar "war" mode, with there economy. This is a good thing since their goal seem to be allow billions of asians to have the same level of living standard as western countries.
The growth of tech outside of silicon valley is good news for everyone. It creates an alternate market for competition, rather than the current monoculture.
However it's really not good news if it is a bubble. My take from the article, while companies may be pulling a profit, given the average valuations they are still extremely overvalued. If this is the case absolute profit means diddly without income to value ratio and there will be a rude awaking when people realise this as we have seen repeatedly in history. Unfortunately finance world errors like this flow heavily into day to day life of everyone else.
And as for people crying out "bubble bubble !" on china for 10 years. In my life typically people make these claims for years pre-implosion (see dot-com bubble) almost to the point you get skeptical and think they are naysayers, and then it happens. And if this market pops, people wont trust the sector for some time after a bust forcing people out of the tech industry, general flow on repercussions to the economy, let alone the international repercussions for an economy the size of China.
Having lived through both the first dot-com bubble and the recent real-estate bubble, I've noticed a pattern:
1. Natural cynics think things are looking a bit bubbly.
2. Years pass.
3. Society as whole becomes heavily invested in the bubble. I can't go to a cocktail party or family reunion without people buttonholing me to talk about tech stocks or real estate.
4. An ideology is invested explaining why assets of category X will undergo very long-term exponential growth. During the dotcom boom, it was "Dow 36,000". During the real estate boom, it was "If you don't buy a house now, you'll never be able to afford one." (If you're cynical, you might assume this kind of delusional hype is an effort to find one last fool to buy in before the party's over.)
5. The whole thing explodes messily.
So for me, those are the warning signs: Society-wide buy-in, and new ideologies that explain why "X will always go up." Oddly, this means I'm not too worried by a near-term tech bubble, despite the hype and money in San Francisco: I'm not seeing the widespread public buy-in and rampant wishful thinking I've seen before. Of course, this may be because few companies are undergoing IPOs, and the bubble is limited strictly to private capital.
I am not sure, but it does not strike me that there is another example of the current type of scenario in all of humanity's history. It's not like the lead up to the 1929 market crash because there are no margin calls since the government just gave away free money and even paid the wealthy and their shell organizations, aka, corporations to steal even more money. It's just unimaginable amounts of money sloshing around in the global market without anything productive to apply itself to. It doesn't want to construct residential in the US because that would depress prices and rents, it keeps being pumped into land and real assets and maintaining artificial housing and rent prices, ....
Although I think there is a great storage of inflation just barely being held back by a policy dam, if that dam doesn't break, I think the outcome, the effect will be a social one. Desperate regimes of the wealthy paranoid about losing the wealth they looted will resort to ever increasing repression to assure their Precious remains with them and their heirs for generation after generation.
Progress is made when there are constraints and problems need solving and things need improving. But what happens when we are all essentially trust fund babies that have no parameters, no limitations, losses are meaningless because it's not money we earned, and "success" is easily seen as such because it is measured by state rather than delta. By all current measures, if you have a successful business / economy no one really cares that you essentially bought the facade of success with your undeserved trust fund / made up money. We can see the effects on the poor, where the impact of our policies are being felt in silent suffering. I suspect the result of at least the last 10 years of policy will be an era of impoverishment not seen in 100 years in the USA in the short term, and another era in human history of stagnation and eventual oppression as humanity turns in on itself if the unearned, and unwarranted wealth is not recalled. Ultimately, what wealth, i.e., money is, is a relative measure of power and especially the US government gave the crooks that defrauded us and almost destroyed America the keys to the vault.
The great irony is that at some point extra money can deflate prices rather than increase depending on where that money is applied. E.g. build enough solar panel factories in China and eventually everyone gets to flood the market with cheap solar panels. So it is not clear that more cheap money will increase prices for a very long time. The second irony is if the Fed and other central banks hit their goal of increase prices, the wealthy won't feel anything but it will hit the poor and middle classes very, very hard. As in choosing when to eat meals hard.
The thing most analysts miss is there is all of this 'new' money but we still have huge future liability holes. This is both with debt which requires future cashflows to pay off along with future promises which may not be able to be met. This is very apparent in underfunded pension funds. Despite many different metrics pointing to all time highs in US stock market valuations (many ways to cut this pie) we still have big pensions funds that are 50% funded or less (Illinois & Chicago for one.) That is with expected 7%+ returns year after year in to the future. If their future gains are a lot lower its even worse. Pension fund problems are visible, insurance, annuities, etc are opaque. There could be huge problems there still. Banks aren't even that well capitalized still.
We could imagine quantitative easing, money printing, and cheap money as something that could be shoveled in to huge holes of "negative" money. As long as those huge holes exist, the stimulus is not going to perform as expected. If the stimulus is through more debt its plausible these holes are staying the same or getting larger. Certainly it is possible that all of this money has done a great deal already including preventing wide spread bank failures.
My general thesis is we are in a period of time where technology and monetary policy are in direct and absolute conflict with each other. Monetary policy is totally reliant on inflation to pay off future debt and claims. On the other hand, technology is about delivering more at a much cheaper price. We want a market for $1000 iPhones, not $1 billion iPhones. We want software that delivers 1000x more value to a customer, not that costs 1000x more. Fuck, hn wouldn't be here and we would all be living in a bizarre universe if things were the other way around. May be there would be the global market for 10 supercomputers or whatever was once predicted.
Slightly off topic but I don't believe US interest rates can go up without creating a massive issue for the US economy. From the link below: "a 5% increase in interest payments for the federal government would cause the level of federal debt to rise to $85 trillion over the next 20 year". So should the Fed reserve return interest rates to a historically normal level before the government significantly reduces debt (which seems unlikely) they would likely crash the US economy.
So if interest rates suddenly rise to 5% and the US didn't make a single debt payment for twenty years, total debt would explode? What insight! Then again, if nobody cares that no debt payment was made for 20 years, who cares what the total debt is!
The article says at 5% the debt payment is $900BB annually, which is 5% of GDP. High, but hardly debilitating. First you need to explain what purpose the would be served by the Fed raising rates to 5% tomorrow, though.
I am... there is way too much funny money floating around into companies that have virtually no chance of ever becoming profitable. There's also a ton of institutional money being funneled into late-state companies (in much the same way that it funneled into real estate in 2007), trying to replicate the Yuri Millner/Facebook model -- but how many of those companies will become Facebook? If you need a laugh, check out the latest interview with the Slack CEO:
It’s pretty straightforward. I’ve been in this industry for 20 years. This is the best time to raise money ever. It might be the best time for any kind of business in any industry to raise money for all of history, like since the time of the ancient Egyptians. It’s certainly the best time for late-stage start-ups to raise money from venture capitalists since this dynamic has been around.
And as a board member and a C.E.O., I have a responsibility to our employees, to our customers. And as a fiduciary, I think it would be almost imprudent for me not to accept $160 million bucks for 5-ish percent of the company when it’s offered on favorable terms.
We don’t have an immediate use for that money. But it increases the value of our stock and can allow potential employees to take our offers, and it reinforces the perception for our larger customers that we’ll be around for the long haul. All of that stuff.
Not NQ Mobile.
Ah, there it is... the "this time it's different!" argument.
I fear that the different that the number of "State Owned Enterprises" will have is that where the bubble would "naturally" be popped by "natural" market forces, the incentives in China will cause it to inflate even farther, even faster, until it pops even harder.
Bubbles are not created by "capitalism". Bubbles are created by feedback loops feeding on themselves, which are unavoidable (where there is any form of negative feedback, there are oscillations). A State may well keep a bubble alive where capitalism would have popped it. That it hasn't popped yet could really be a sign that this time it's different; China does have greater capacity for growth on the same tech stack than the US does. But it could also mean that the malinvestment is getting even farther than the US tech bubble ever did. Bubbles being what they are, the greater capacity for growth could even be making it worse... if the economy could support X more growth but the bubble inflates that into 10X more investment, that could mean the greater capacity for growth is itself a participant in the inflation.
The "pop" isn't caused by "capitalism" either... bad investments that can't pay for themselves are bad investments that can't pay for themselves, regardless of the economic system in which they occur.
(I fear, because no one will escape this unscathed if it happens. The Western economies still haven't recovered from their last recession and are quite rickety themselves (since the West seems to have fallen in love with centralized management once again itself, and there is perhaps not a bit of book cooking here too). If a Chinese bubble does pop and it is that bad, it's not going to be any fun for anyone.)
Unfortunately, there aren't enough resources on Earth to allow all Chinese citizens to live at US standards; possibly EU standards if people cut back meat consumption, no longer need fossil fuels, etc.