30 Jun 2015

Chinese Stock Market Crashing

Business cycle 24 Comments

Details here. It’s down about 25% in the last two weeks, and 11% in the last two days.

Meanwhile, Scott Sumner is running victory laps, over those broken records who called it a “bubble” but didn’t give the precise timing. (See the P.P.S. in his post.)

24 Responses to “Chinese Stock Market Crashing”

  1. E. Harding says:

    Aw, the Chinese stock market is 20% above what it was in February. I didn’t know China was in recession five months ago!

    • Scott D says:

      Apples and oranges, my friend. A stock market crash is not the same thing as a recession, though there are often correlations. It is simply a sudden decline in the aggregate, and Murphy is absolutely correct in calling it a crash. Now, if things crash further, or the volatility continues, it might be an indication that things are starting to unravel, but we’ll have to see.

  2. Tel says:

    The funniest thing I read was on ZeroHedge, with the Chinese government demanding traders to “act rationally”.

    They are kind of new at this aren’t they?

  3. Dan says:

    You can’t win with some people. No matter how many Austrians correctly predicted how the housing bubble would unravel, there were always going to be those guys yelling about how you didn’t predict the day it would top out.

    • Tel says:

      It is kind of interesting that crash in Chinese stocks coincides with Greece finally defaulting to the IMF. I wouldn’t have predicted that… could be coincidence, could be some unexpected linkage there. Could be just news of one bad event triggers the bears and people try to realize their gains.

    • E. Harding says:

      What of those Canadian and Australian housing bubbles which never popped?

      • Dan says:

        Do you have an Austrian in mind that predicted that those countries had a housing bubble?

      • Tel says:

        As someone with almost all my nett wealth invested in the Sydney property market I’d appreciate a little bit of “mum’s the word” on that particular topic for at least the next few years… if that’s OK with you. Don’t spook the horses.


        Seriously though, we had a bad dip around 2009, and the governments (both state and Commonwealth) stepped in to prevent a crash. The states reduced taxes in various ways, while the Commonwealth reduced interest rates (and the banks passed on about half of that reduction to the variable rate mortgage market).

        I’ll note that Australia went into the “Global Financial Crisis” with official “Reserve Bank” interest rates at around 7% (i.e. the rates that no normal person gets to borrow at) and the RBA had been steadily raising rates in the years leading up to the GFC (which turned out in hindsight to be exactly the right thing to do… why Glenn Stevens get’s a lot more respect than either Greenspan or Bernanke, but I digress). This gave a big scope for rate cutting and there was a sudden drop right down to 3% as an immediate response to the crisis, which really helped at the time.

        Problem is, these sort of rate cuts are a short term solution, we had some appallingly stupid governance by the Australian Labor Party between 2008 and 2013, I could talk at length, but it’s all documented elsewhere. Now we are sitting with official “Reserve Bank” interest rates at 2% and nowhere to go. The resilience that was available in 2009 just isn’t available right now. Worse, the Sydney housing market has been driven by inflow of Chinese money… some of whom are recent immigrants and buying for themselves to live in, others are foreign investors looking for a place to park said Chinese money. With the recent Chinese stock crash you can absolutely bet it will at least somewhat dent the Sydney property prices… just a question of how much, I cannot say for sure.

        Also, there’s a chance our government might slightly tighten the spigot on immigrant quotas (they make a serious effort to block illegals around here, but they do allow a largish quota of legitimate migration which results in at least some degree of political back pressure, there’s all sorts of politics happening around that, but I digress again).

        Last point: the Australian government works very closely with our major banks, very closely indeed, and those banks are primarily sitting on mortgage debt backing. A housing crash would ruin the country, so government *SHALL* do anything and everything (and I mean “whatever it takes”) to make sure that housing prices do not crash. They can restrict building permits, regulate the construction industry, tweak the immigration spigot, jigger interest rates, offer tax incentives… they have a very large number of heavy duty tools at their disposal. Don’t think for one second it is anything remotely resembling a free market.

        Steve Keen had to walk from Canberra to the top of Kosciusko wearing a T-Shirt saying, “I was hopelessly wrong on house prices! Ask me how,” after he lost a bet by trying to apply some sensible upper limits to debt spending.

  4. Yancey Ward says:

    The Chinese stock market is like Schroedinger’s Cat. If you don’t look at it, it won’t die.

  5. Major.Freedom says:

    It doesn’t take a whole lot of thinking in order to refute the Sumnerian view, because all you have to do is use his own “logic” against his own view.

    To wit, if what the bubble predictors (he calls them bubble “mongers” as if they are selling the bubbles that others created; he may want to check the definition of the word monger in the dictionary) say is to be dismissed on the basis that it hinges on a dubious “just you wait, at some point we’ll be proved right” heads we win, tails you lose type argument, then his own claims which have consisted of “Aha,we just needed to wait to observe that what you bubble mongers have called a bubble, has since been eclipsed by new historical high prices” can be dismissed on the same exact grounds.

    Over the last couple of weeks the Chinese stock market has “crashed”, but according to the Sumnerian view, the story is “Just you wait you bubble mongers, for at some point in the future the Chinese stock market will rise back up and eclipse the current low, and I’ll be there to “refute” all of you once again as what you guys called a bubble, which requires a bust, is ancient history, as the index is now at a higher peak than the one that just passed.”

    That’s the thing about irrationalists. They rarely if ever engage in self-reflective reasoning. They rarely practise what they preach about the logic and method they use to critique other people’s views.

  6. Andrew_FL says:

    I’ve been thinking, isn’t the unsustainable boom in the ABCT kind of the opposite of the conventional idea of a “price bubble”?

    I think when most people talk about a “bubble” they mean an irrational, self reinforcing process which is prone to some external event disrupting it and causing a sudden crash.

    But the unsustainable boom is a rational, self reversing process, the unwinding of which is actually time consuming, but comes about due to *internal* inconsistencies between the plans of different parties.

    I’m not sure that’s particularly helpful in dealing with Scott’s claim. But I’ll tell you where I think his error really is: he sees people seeing booms and busts in stock market data as just seeing patterns that may or may not (and he assumes not) actually be there: he points out that people would see similar patterns in data generated by a random walk. But the stock market, and other economic data, is not due to a random process, they are the products of human action. This is why you can’t arrive at the existence of “bubbles”-actually booms-from econometrics. You must arrive at them deductively from reasoning about human action.

    Now, Scott is not wrong to say that we shouldn’t be terribly impressed by people who call bubbles and then eventually we see what looks kind of like a bubble popping. By itself the eventually down turn doesn’t prove the previous upturn was a bubble-any more than an eventual upturn again disproves the bvubble. Again, that can’t be proved or disproved by the presence of ups and downs in the data. We can’t escape the need to reason from human action, and to do so deductively, to determine whether a particular person was right in their reasoning about a “bubble”.

    • Tel says:

      Reasoning about human action should deliver some consistent conclusions about the data, or at least how to interpret whatever data we do have. If the best reasoning you can achieve is “what happens is what happens” you haven’t really made any step towards useful analysis.

      Seems to me that if a market price swings significantly and rapidly in any direction, and this is not attached to a change in physical world conditions, this by definition must imply (in hindsight) there was an error in price calculation. For example, a natural disaster would be a physical change, and market prices should react to that, a war breaking out would be a physical change, etc.

      A crash that “just happens” or perhaps happens as a reaction to a small trigger but is way out of proportion to the size of the trigger, would be a sign that a bubble was popping. This of course could be somewhat subjective in interpretation, but anyway, you can’t just skip right past the data with an all-purpose “caused by human action” explanation.

      • Majorr.Freedom says:

        “Reasoning about human action should deliver some consistent conclusions about the data, or at least how to interpret whatever data we do have. If the best reasoning you can achieve is “what happens is what happens” you haven’t really made any step towards useful analysis.”

        What is with these references to an idea’s “usefulness” without explicit mention of the goal being sought after that makes the idea allegedly not useful or useful?

        The science of human action was never intended to be, and could not even if people tried to make it, a science of how predict what actions people will take if such and such other events take place.

        If your goal is to predict what actions will be taken, then you are entitled to say that praxeology is not useful.

        But if your goal is not to predict what actions will be taken, but to learn how everyone, even the most vehement anti-praxeologists, come to know anything about economics, of human action as such, of the logical categories such as profit and loss, marginal utility, time preference and interest rates, and concepts sucasas money, prices, goods, and exchanges, then praxeology is IMO the most useful science ever devised.

        If you believe, truly, that the goal of predicting what actions I will take, or any number of other people will take, is the task of science, rather than of entrepreneurship, then I will honestly say that you are on a useless quest, because there are no constants in human action, and without constants, predictive science is an impossibility.

        I really don’t understand why so many people are speaking and writing as if praxeology needs to have this sort of perpetual halo of surprise or finger wagging at just how little praxeologists are claiming to know about the world. Like everyone needs to always be warned that praxeology does not make empirical predictions and thus is “useless” to the goal of predicting what people are going to do.

        This dead horse has been beaten so many times I sometimes feel like I am on a carasel of madness.

        Have we not all the literature we need on what praxeology is used for and what it isn’t used for?

        Have we not already had these discussions?

        • Tel says:

          Sorry for the late answer, just never got a chance to sit and think it over this week.

          The stuff about prediction is irrelevant in this instance, because that’s not the question at hand. I remind you that Scott Sumner’s comment, under the heading “Please, do buy. You won’t regret it,” was:

          Oh, and remember that house price “bubble”? Yup, just another false claim by the bubble-mongers:

          Then followed by a chart showing a price spike before 2008 followed by massive price crash after 2008. The implication being that even in hindsight with almost a decade of additional data available, we cannot call 2008 a “bubble”, so in effect we can’t call anything a bubble.

          The question being whether there’s any structured analysis of past data that can reveal a feature in the data with confidence.

          As far as I can see, Andrew’s point is that how you get to the answer is more important than what answer you get. That might be fine with “new math” type stuff, by personally I don’t find that approach useful.

          OK, now you want to know what is “useful”.

          Well, why bother using a hammer? Because it works better than trying to push a nail in with your hand, right? That’s useful… but wait, why do you want to push the nail in? Why even have a nail in the first place? Because the nail joins together two bits of wood, that’s useful. But wait, why bother joining wood at all? Because it makes furniture and houses and stuff like that, which is useful. But wait, what if you want to sit your backside on a hollow log and sleep in a gully?

          Sure, you could ask those questions all day, by all means do so, but the purpose of a tool is to help get the job done. Thus, if you have data, and you want to be able to provide meaningful analysis of that data you need some tools that tell you something about that data which is something you would not know if you just approached the same data without the tool. You may of course just decide to pronounce “This is a wiggly line” and that’s all there is to it. In which case you don’t need any tools. Speaking for myself, I don’t find that particular conclusion to be useful.

          What I want is to be able to make some consistent and verifiable claim that something happened, and there’s some evidence in the data to back that up. If house prices in Dubai rose steeply up to 2008 and then collapsed rapidly, I’d see that as some sort of feature in the data which requires some explanation specifically relevant to that feature. If your explanations is “caused by human action” this could apply to anything equally well, it’s no better than saying “wiggly line”.

          If “human action” actually leads you to a way of being able to come to some conclusion about a piece of data that doesn’t apply to just any data, and which cannot be found by other styles of analysis, then it’s a useful tool… it does a job. Andrew wasn’t demonstrating that.

          I’m still stuck with what seems like a bleating obvious price bubble in Dubai in 2008, and Sumner saying “false claim”, for reasons that make no sense at all.

      • Andrew_FL says:

        Tel, I’ve watched enough reporting on the stock market to realize by now that every slight up or down movement is interpreted as “caused” by something external by someone.

        But my whole point was that reasoning about human action would lead one to predict the existence of booms and busts, under certain conditions, but the reason the explanation we arrive at is more believable than the “random walk” explanation of price movements has nothing to do with the way the data looks. It is more believable because we arrived at the prediction in the correct way.

        I was making a methodological point.

        • Matt M says:

          Indeed. CNBC (and every similar media outlet) is completely and entirely dedicated to coming on the air at 9 AM and telling you *why* the Dow is currently up or down 100 points, and “we’re not entirely sure” is never considered an acceptable answer.

        • Tel says:

          Sure, lots of things have a “cause” in as much as to say that the universe is not just arbitrary. However, I guess I could narrow down what I’m talking about here.

          Consider cyclone Larry smashed a lot of the banana crops in Australia during 2011, and soon after we saw banana prices going up fairly sharply. Was that a “banana bubble”? I mean prices came down again not so long afterwards, certainly those high prices were not sustainable. I don’t think they have been as high since, come to think of it.

          In that case we have a fairly plausible and easily recognised physical change to supply, which was reflected in the rising price. The crops slowly regrew, and some entrepreneurs probably make profits finding ways to pull in shipments during the price spike, but eventually it settled down again.

          However, compare to the Dubai situation where the house price was rising rapidly, and then afterwards the house price was falling rapidly. What was the change in supply there? Did they suddenly invent a new way to build houses faster? Did a whole lot more land suddenly appear? Maybe it was a demand change: perhaps before 2008 the population was growing but due to a new government policy they decided to start decimating the population.

          None of those supply/demand explanations make sense in Dubai, there just was no physical event that could explain the price shift. There was, however, a big financial event around that time related to the availability of credit, hence I’d be tempted to say that tighter money is what changed the prices… but that means those prices must have been decoupled from the physical world, and been floating on an ocean of easy finance… hence the “bubble” moniker.

  7. B Cole says:

    Well, the Shanghai Stock Exchange composite index is still up more than 100 percent year-over-year. So were we in a reverse China bubble 1 year ago? Should we have listened to reverse bubble mongers?

    Did Bob Murphy advised us to buy China stocks 1 year ago and double our money?

    • Brent says:

      Ummm that’s called a bubble.

      And, no, you can’t just buy Chinese atocks if you aren’t Chinese. A bit easier now if you live in Hong Kong, but still not easy or even possible at all for most people.

    • Scott D says:

      B Cole,

      1. The crash, by itself, has harmful effects, regardless of what the value was a year ago.

      2. Probably just my own opinion here, but if a statistically significant number of people could give credible predictions about when a bubble would burst (not if, but when), their predictions would cause the bubble to burst immediately. You can’t make meaningful and true observations about the market without affecting the market. Some people might get lucky, but analyzing their statements post hoc for some clue to help with the next bubble is a futile exercise.

      Again, predicting that the market is in a bubble is not the same thing as knowing when the downturn will occur.

    • Tel says:

      Well, the Shanghai Stock Exchange composite index is still up more than 100 percent year-over-year.

      Lost another 8% just yesterday.

      Did Bob Murphy advised us to buy China stocks 1 year ago and double our money?

      Well you might have doubled your money, if you sold at just the right time, but I think that window has passed now. See if they suddenly get “rational” on Monday, but I doubt it as this stage.

      So my question from above, what has physically changed in China that altered either supply or demand for these stocks?

    • Tel says:

      From a peak of over 5000, now down to 3500 … that’s a loss of about 30% still higher than a year ago but the time to sell is well and truly past now.

      I’d be reasonably confident that was just a bubble we saw.

  8. Bob Roddis says:

    MF has gone the distance trying to explain praxeology to Sumner. Sumner completely ignored him until that fateful day when Sumner’s head exploded all over the ceiling.

    Like all interventionists, Sumner refuses to explain when/how/why the market actually failed historically and empirically thereby justifying and requiring violent intervention to cure the non-existent market failure. Where exactly is the empirical evidence demonstrating that the NAP-based private property market requires “stimulus” or that it lacks “momentum”? What kind of “empiricism” is it to meticulously ignore such a fundamental issue?

    Further, like all interventionists, Sumner fails to differentiate between voluntary exchanges of goods and services properly owned and/or controlled by the parties as opposed to funny money loans/injections/gifts which are really nothing but a [temporary] form of welfare and wealth transfer (and that is also the fundamental problem with the garbage term “aggregate demand, BTW). Thus, prices for items may be bid up primarily by people having access to new funny money with subsequent price increases the result of the issuance of yet more new funny money. Those prices are not based upon the anticipation that there is a buyer down the road ready to exchange the equivalent price value in actual goods and services owned and controlled by the buyer. Instead, the price is based upon anticipating that the next buyer will have a source of new funny money that will be used to further bid up the price. At some point, the difference between the unadulterated price of goods and services vs. the bubble prices will become apparent and the bubble will collapse.

    There is no reason for the “stimulus” in the first place because markets do not lack or require “stimulus”. And such a bubble economy is not “capitalism”.

    • Major.Freedom says:

      To clarify, the proximate, straw that broke the camel’s back comment I made that was followed by Sumner’s meltdown, was my comment about an academic “competition” blogpost which Sumner congratulated a team of students from Bentley University.

      I said:

      “Serious question: What pride can there possibly be in getting a prize from a violence backed banking cartel? Maybe I’m old fashioned and thought something like this would be cause for shame and embarrassment. Guess the Bentley profs are doing a number on the impressionable students.”

      Looking back on that comment, one might believe it is one that perhaps should not have been made, but IMO, that comment is one of my favorites, it is aging like a fine wine. I think it engages a very deep emotion among socialist circles surrounding power and prestige. It is after all at root all they seek and what their arguments depend on. Take the power and prestige away, and the arguments are made bare, where they stand no chance to basic logic, and critique.

      I believe that is the reason for the meltdown.

      Socialism, even in money only, encourages and rewards passions and prejudices, and vehemently attacks against reason are required for it to be prolonged.

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