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  • Alan who?

    Greenspan's lame China warning

    May 25, 2007 (The Independent)

    The former Federal Reserve chairman Alan Greenspan says China's stock market is heading for a crash, threatening to ruin millions of middle-class investors. By Clifford Coonan

    In old-style Communist China, the stock market was a potent symbol of evil capitalism and the rise to power of Mao Zedong's hard-line Communists in 1949 brought an end to share-owning capitalism in China. Stock ownership was a capital offence.

    These days, the middle class in the world's fourth-largest economy has gone equities-crazy. First-time investors, ranging from taxi drivers to Buddhist monks, pensioners to students to cash-rich entrepreneurs, are engaged in a frenzy of share buying that has seen prices rise 50 per cent this year and prompted fears of a speculative bubble. The former US Federal Reserve chairman Alan Greenspan's warning on Tuesday that the bubble might burst was therefore a potential disaster for millions of Chinese - particularly as market setbacks following his speech suggest the prophecy could be self-fulfilling.

    AntiSpin: Alan Who? asked Chinese investors when they heard ex-Fed Chairman Alan Greenspan's warning that stocks in China face a "dramatic contraction.' The CSI 300 Index closed down only 0.5 percent. Yawn.

    Maybe the shrugging off of Greenspan's warning was not caused by lack of recognition of the great man by Chinese investors but because they remember him too well, and recall his stock market bubble about which he said in testimony before the U.S. Congress Joint Economic Committee in June 1999, "But bubbles generally are perceptible only after the fact. To spot a bubble in advance requires a judgment that hundreds of thousands of informed investors have it all wrong." In so doing, he echoed the words of Professor Lawrence of Princeton University who in September 1929, a month before the great crash, said, "The consensus of judgment of millions whose valuations function on that admirable market... is that stocks are not at present over-valued. Where is that group of men with the all-embracing wisdom which will entitle them to veto the judgment of this intelligent multitude?" Chinese speaker and reader Mrs. iTulip is looking through the Chinese language newspapers now and will let us know if we find People's Bank of China President Zhou Xiaochuan uttering a similar sentiment. Keep in mind, he only started to raise interest rates this month, for the first time in 10 years; in the case of the US stock market bubble, it didn't turn turtle until six months after a series of rate hikes began, which lag time places a Chinese market crash on the calender around the market's favorite time for such events, October 2007.

    How else to consider the warnings of the man who oversaw the development and collapse of the US stock market bubble, resulting in the evaporation of $5 trillion in fictitious market value that developed between 1994 and 2000. That performance was followed by a housing bubble which, by our recent as yet unpublished calculations (we've been off cranking the numbers for the next installment of our iTulip Select Fueling the FIRE Economy series) produced between 1997 and 2006 approximately $12 trillion in fictitious market value. We go into our methods of calculation for the first time tomorrow or next week, depending on certain factors I won't go into here, using them to estimate total fictitious value of Bubbles in Everything, the likely resulting disinflationary impact of their demise, and possible trajectories for new bubbles. (Sample chart, stage left.)

    We won't give away the punch line here, but it's a big number, and if Greenspan wants to be constructive as a bubble warner, he needs to make a few subtle comments about the bubble in foreign investment in US financial assets, as indicated by the fact of 85% of them going into the US, way out of whack relative to the 27% of global GDP that the US contributes to the world economy.
    Last edited by FRED; 05-26-07, 11:25 PM.

  • #2
    Re: Alan who?

    As various commentators have noted, when Greenspan was running the Fed, he was often less than forthcoming in his statements; but now they are loud and clear. I have to wonder, is it that he no longer feels encumbered and can speak freely about the markets, or is there a hidden agenda behind his cautionary remarks? After reading somewhere that he is advising Pimco, and recalling from a previous Antispin that Bill Gross seems to be a little worried his own recession predictions aren't coming to fruition, one could conclude that Greenspan is out there drumming up business for the bond market.

    Looking forward to the Bubbles in Everything chart. I'm going to take a wild stab in the dark and say the total fictitious value number is around $500 trillion.:p


    • #3
      Re: Alan who?

      Originally posted by zoog View Post
      Looking forward to the Bubbles in Everything chart. I'm going to take a wild stab in the dark and say the total fictitious value number is around $500 trillion.:p
      Chinese market has only just gotten started, Greenspams warning of the NASDAQ came in 1998 if I remember correctly had two more years to run, I'd bet his timing is about the same for the Chinese market. Bail on the Chinese market in 2009.
      "Men, it has been well said, think in herds; it will be seen that they go mad in herds, while they only recover their senses slowly, and one by one."
      - Charles Mackay


      • #4
        Re: Alan who?

        Looking forward to the Number! I'm going with something in the 70 to 80 trillion range. Can we buy a ticket for $1 to guess the number of trillion in asset price inflation. Proceeds to go to the sorry sap who lost the most fictitious value, but the least actual losses.

        Wait a sec?! Asset price inflation... that sounds familiar... hmm... While the media was yawning through yet another Greenspam's (to quote Tet) obtuse speeches, the words irration exuberance got picked up. But in truth, the entire speech was Greenspam's (h/t Tet) suggestion that the Fed's responsability ought to be asset price inflation instead of consumer price inflation.

        Nobody noticed.

        Remove the title and he's no longer obtuse, but nobody listens. How ironic.


        • #5
          Re: Alan who?

          I'd be surprised if this goes on for a couple of years. A few months, I'd guess - less if heavy-handed attempts by the Chinese authorities to rein in the mania precipitate a collapse.


          • #6
            Re: Alan who?

            In 1988 when I was in Hong Kong strolling threw central district I noticed a large crowd gathered around this building it looked like a happy hour pub. I was so curious as to what all the fuss was I went to take a look. The crowd was so wild and out of control no one would even give me notice and I could not speak Cantonese so I was left with no answer. When arriving back at my hotel I asked the door man what the heck was going on over there, he replied it was a off site betting building for the Happy Valley Horse Racing Track. The next few day’s in Hong Kong I noticed these off site betting houses all over the city and at race time the crowds went mad.
            It is very obviously the Chinese have gone from horse betting to stock betting and the madness remains the same.

            So who opened and promoted all these new stock gambling houses in China ? Lets take a look back in 2005 when the US Investment Banks recruited the right players for entry into the Chinese market. This article gives you a idea of the power players involved.



            As the “A” shares scream who has the license?

            When will the China stock market correct? Maybe if Bill Tung was still with us he could calm the mania. I believe it will be only between races.

            Alan Who,,,did you say Alan Wu, who's he

            Last edited by bill; 05-25-07, 01:34 PM.


            • #7
              Re: Alan who?

              Originally posted by Darin View Post
              Looking forward to the Number! I'm going with something in the 70 to 80 trillion range.
              I think that's a pretty good estimate in terms of fictitious "ordinary" financial value.

              Derivatives and leverage make things even more erm... interesting. Not only will a lot of people/companies/nations lose a lot of asset value, but many parties will lose more than they "have." If this is widespread, the end result would be not just loss, but chaos.