Shanghai Melt-Up

I can't help thinking the Shanghai index is what Randall Forsyth had in mind when he used the term "moonshot" in a new Barron's article entitled Bubble 2.0.

The image is provocative, but some might argue that the performance of the Shanghai stock market is justified given the scorching 11% GDP growth that China is currently experiencing combined with a recent bear market. Note a previous high of 2242.42 six long years ago. Maybe 3841.27 is fundamentally justifiable.

I won't argue whether the fundamentals justify the price or not -- I haven't done the analysis. But I think to focus on the fundamentals is to miss a more significant point (I understand how ironic and misguided this sounds in the current environment):

Mechanically this type of behavior may be unsound. If a market is rocketing upward due to unsophisticated speculators and an extreme use of leverage, then the fundamentals may hardly matter in the short-term. Recall the 1987 U.S. stock market crash that occurred, in part, because the economy was too strong and the Fed felt compelled to raise interest rates. Also recall that in 1987 stocks were quite cheap by today's standards. Did the fundamentals justify a crash here? It seems harder to make that argument today.

With that out of the way, here's a link to another Randall Forsyth article that suggests maybe even the fundamentals aren't so great. At least for those shares available to U.S. investors:

Amid this frenzy for all markets foreign, some not surprisingly have become very expense. Based on their equity risk premium -- stocks' earnings yield relative to risk-free bond yields...

China's 2.8% earnings yield compares with a 3.6% bond yield, for a negative equity risk premium of minus 0.8%...

There's some admittedly contradictory data here, but one bit of useful and unambiguous information does stands out: we can safely add Randall "Moonshot" Forsyth to our growing list of stopped-clock permabear commentators and move on with life.

There seem to be a disturbing number of these types around nowadays.