China Bubbles

by Eddy Elfenbein, Crossing Wall Street

I often tell investors that true stock bubbles are relatively rare. That runs counter to what we often hear, but I stand by it.

Of course, just because the market goes down doesn’t mean it was a bubble beforehand. Sometimes the fundamentals deteriorate. What I call a bubble is when prices soar way, way beyond fundamentals, and that doesn’t happen very often — at least not in the U.S. market.

But looking at China, we can see a highly chaotic market. The Shanghai Composite has nearly doubled in nine months. As crazy as that is, it doesn’t come close to the incredible rally of just a few years ago. From late 2005 to October 2007, the Shanghai Composite rallied 460% in less than two years. Soon afterwards, it lost nearly all of it.

This is why I’m suspicious of the Chinese market. Healthy markets simply shouldn’t move like that.

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