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smegel

> reviving the specter of a full-blown market crash

Or a full-blown market correction even.

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Indeed. Is it really a crash if share prices fall to fair, economically justifiable valuation levels?

Spot on! Exactly..

Your answer to this probably depends on your own financial exposure to the Chinese market : P

Looking back, "share prices fell to a fair level" is a perfect description for every crash in history.

From what I can see, share prices often overshoot "fair" levels and become too cheap in a crash. Not that I'm complaining, necessarily; it can create an excellent buying opportunity.

Exactly. "Animal spirits."

Well there are logical reasons not just animal spirits, under "normal" conditions some amount of demand lifts market prices a measurable amount because:

1) Workers buy into "it always goes up over a long period" so retirement money gets tossed into the market. However they're likely (temporarily?) unemployed or underemployed.

2) There normally exists a small but lively trading on margins market, day trading market, etc. However the margin / daytraders have been wiped out in the crash and it'll take awhile to grow a new crop of suckers.

3) Stable prices mean stable financial market means stable income for capex means stable growth. Collapsing prices make it hard to raise funds for capex. So you can't make more profit next quarter off a refinery expansion today if you can't raise the dough to do a refinery expansion today due to collapsing prices.

When things stabilize you'll pop back up to normal growth and prices. That might take weeks to decades based on past bubble experiences. DJIA only took from 1929 to sometime in the 50s to break even, inflation adjusted, so it could be 20+ years. Or maybe just a couple months. This being an epic 1929 scale bubble it could very well be 20 years.

I do acknowledge the stereotypical retail investor thing of always selling at bottoms and buying at tops due to animal spirits or whatever, but there are rationalizations beyond the future must be the same as the very short term past.

Its also called "catching falling knifes"

Also. watch out for the dead cat bounce.

Assigning a catch phrase to a certain activity doesn't make it any more or less of a good idea, but if you're buying "because it went down" you are probably just gambling.

Technically, if you are buying for short term gain without insider information, you are probably gambling (unless you see something others have missed, but does that count as outside information?). Otherwise, you want market growth over the long term, or are just hedging.

Buying opportunity where you have some faith in the company, and it's financials? Too many NQ mobile's in that country. And the amount of fraud is appalling? Whatever system of government you have--cut down on graft, and fraud. Then, and only then will I gamble in your country.(NQ mobile can be bought here? What does that say about our stock market?).

Janet--raise the interest rate! The poor, and middle class are hurting! Enough is enough! Get CD's back to 5 %? The big boys are just playing at this point. Banks are not giving back?

Aren't the poor wildly more likely to pay interest than to collect interest and the rich the opposite?

If so, it would seem that raising interest rates would differentially harm the poor.

zero f*cks given.

It is if enough people have bought on margin.

Once again, the problem is determining a 'fair, economically justifiable valuation' that a majority can agree on... generally a definition of this is the current stock price.

Not at all. If the stock price is primarily driven by speculators buying the stock simply because it's price is going up and they intend to profit thereby, then the stock's value has become independent of the economics of the business. This is why I specificaly mentioned economic justifiability. Speculators of that kind have no interest in the actual business or it's economics or even it's justifiability, only the short term stock price.

If it happened in housing we'd call it a crash, LOL

I love it when people call this a correction, as if unsophisticated Chinese investors are unlike the rest of humanity and will behave perfectly rational when they see all the value the gained disappear in a couple of months.

Here's what will actually happen in the coming months, China will keep on intervening in the stock market causing it to stop falling (because selling will be impossible). Investors will see their money become valueless because it's held up in worthless Chinese stocks killing whatever trust they had in the Chinese government. Then China will reach a period of 10 to 30 years where its market will not grow (because of lack of trust in the Chinese government).

If Chinese investors can get hyped enough to drive up valuations to 3000 p/e then they can also have a market panic.

There's no way you can predict the next five years let alone 30.

In a casino, when someone breaks the bank: do we call that a `market correction event' ?

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