Best of the Week
Most Popular
1. Stock Markets and the History Chart of the End of the World (With Presidential Cycles) - 28th Aug 20
2.Google, Apple, Amazon, Facebook... AI Tech Stocks Buying Levels and Valuations Q3 2020 - 31st Aug 20
3.The Inflation Mega-trend is Going Hyper! - 11th Sep 20
4.Is this the End of Capitalism? - 13th Sep 20
5.What's Driving Gold, Silver and What's Next? - 3rd Sep 20
6.QE4EVER! - 9th Sep 20
7.Gold Price Trend Forecast Analysis - Part1 - 7th Sep 20
8.The Fed May “Cause” The Next Stock Market Crash - 3rd Sep 20
9.Bitcoin Price Crash - You Will be Suprised What Happens Next - 7th Sep 20
10.NVIDIA Stock Price Soars on RTX 3000 Cornering the GPU Market for next 2 years! - 3rd Sep 20
Last 7 days
Silver Market - 22nd Oct 20
Goldman Sachs Likes Silver; Trump Wants Even More Stimulus - 22nd Oct 20
Hacking Wall Street to Close the Wealth Gap - 22nd Oct 20
Natural Gas/UNG Stepping GAP Patterns Suggest Pending Upside Breakout - 22nd Oct 20 -
NVIDIA CANCELS RTX 3070 16b RTX 3080 20gb GPU's Due to GDDR6X Memory Supply Issues - 22nd Oct 20
Zafira B Leaking Water Under Car - 22nd Oct 20
The Copper/Gold Ratio Would Change the Macro - 21st Oct 20
Are We Entering Stagflation That Will Boost Gold Price - 21st Oct 20
Crude Oil Price Stalls In Resistance Zone - 21st Oct 20
High-Profile Billionaire Gives Urgent Message to Stock Investors - 21st Oct 20
What's it Like to be a Budgie - Unique in a Cage 4K VR 360 - 21st Oct 20
Auto Trading: A Beginner Guide to Automation in Forex - 21st Oct 20
Gold Price Trend Forecast into 2021, Is Intel Dying?, Can Trump Win 2020? - 20th Oct 20
Gold Asks Where Is The Inflation - 20th Oct 20
Last Chance for this FREE Online Trading Course Worth $129 value - 20th Oct 20
More Short-term Stock Market Weakness Ahead - 20th Oct 20
Dell S3220DGF 32 Inch Curved Gaming Monitor Unboxing and Stand Assembly and Range of Movement - 20th Oct 20
Best Retail POS Software In Australia - 20th Oct 20
From Recession to an Ever-Deeper One - 19th Oct 20
Wales Closes Border With England, Stranded Motorists on Severn Bridge? Covid-19 Police Road Blocks - 19th Oct 20
Commodity Bull Market Cycle Starts with Euro and Dollar Trend Changes - 19th Oct 20
Stock Market Melt-Up Triggered a Short Squeeze In The NASDAQ and a Utilities Breakout - 19th Oct 20
Silver is Like Gold on Steroids - 19th Oct 20
Countdown to Election Mediocrity: Why Gold and Silver Can Protect Your Wealth - 19th Oct 20
“Hypergrowth” Is Spilling Into the Stock Market Like Never Before - 19th Oct 20
Is Oculus Quest 2 Good Upgrade for Samsung Gear VR Users? - 19th Oct 20
Low US Dollar Risky for Gold - 17th Oct 20
US 2020 Election: Are American's ready for Trump 2nd Term Twilight Zone Presidency? - 17th Oct 20
Custom Ryzen 5950x, 5900x, 5800x , RTX 3080, 3070 64gb DDR4 Gaming PC System Build Specs - 17th Oct 20
Gold Jumps above $1,900 Again - 16th Oct 20
US Economic Recovery Is in Need of Some Rescue - 16th Oct 20
Why You Should Focus on Growth Stocks Today - 16th Oct 20
Why Now is BEST Time to Upgrade Your PC System for Years - Ryzen 5000 CPUs, Nvidia RTX 3000 GPU's - 16th Oct 20
Beware of Trump’s October (November?) Election Surprise - 15th Oct 20
Stock Market SPY Retesting Critical Resistance From Fibonacci Price Amplitude Arc - 15th Oct 20
Fed Chairman Begs Congress to Stimulate Beleaguered US Economy - 15th Oct 20
Is Gold Market Going Back Into the 1970s? - 15th Oct 20
Things you Should know before Trade Cryptos - 15th Oct 20
Gold and Silver Price Ready For Another Rally Attempt - 14th Oct 20
Do Low Interest Rates Mean Higher Stocks? Not so Fast… - 14th Oct 20
US Debt Is Going Up but Leaving GDP Behind - 14th Oct 20
Dell S3220DGF 31.5 Inch VA Gaming Monitor Amazon Prime Day Bargain Price! But WIll it Get Delivered? - 14th Oct 20
Karcher K7 Pressure Washer Amazon Prime Day Bargain 51% Discount! - 14th Oct 20
Top Strategies Day Traders Adopt - 14th Oct 20
AMD is KILLING Intel as Ryzen Zen 3 Takes Gaming Crown, AMD Set to Achieve CPU Market Dominance - 13th Oct 20
Amazon Prime Day Real or Fake Sales to Get Rid of Dead Stock? - 13th Oct 20
Stock Market Short-term Top Expected - 13th Oct 20
Fun Stuff to Do with a Budgie or Parakeet, a Child's Best Pet Bird Friend - 13th Oct 20
Who Will Win the Race to Open a Casino in Japan? - 13th Oct 20
Fear Grips Stock Market Short-Sellers -- What to Make of It - 12th Oct 20
For Some Remote Workers, It Pays to Stay Home… If Home Stays Local - 12th Oct 20
A Big Move In Silver: Watch The Currency Markets - 12th Oct 20
Precious Metals and Commodities Comprehensive - 11th Oct 20
The Election Does Not Matter, Stick With Stock Winners Like Clean Energy - 11th Oct 20
Gold Stocks Are Cheap, But Not for Long - 11th Oct 20
Gold Miners Ready to Fall Further - 10th Oct 29
What Happens When the Stumble-Through Economy Stalls - 10th Oct 29
This Is What The Stock Market Is Saying About Trump’s Re-Election - 10th Oct 29
Here Is Everything You Must Know About Insolvency - 10th Oct 29
Sheffield Coronavirus Warning - UK Heading for Higher Covid-19 Infections than April Peak! - 10th Oct 29
Q2 Was Disastrous. But What’s Next for the US Economy – and Gold? - 9th Oct 20
Q4 Market Forecast: How to Invest in a World Awash in Debt - 9th Oct 20
A complete paradigm shift will make gold the generational trade - 9th Oct 20
Why You Should Look for Stocks Climbing Out of a “Big Base” - 9th Oct 20
UK Coronavirus Pandemic Wave 2 - Daily Covid-19 Positive Test Cases Forecast - 9th Oct 20
Ryzen ZEN 3: The Final Nail in Intel's Coffin! Cinebench Scores 5300x, 5600x, 5800x, 5900x 5950x - 9th Oct 20

Market Oracle FREE Newsletter

How to Get Rich Investing in Stocks by Riding the Electron Wave

China Stock Market Crash Echoes of 1929

Stock-Markets / Chinese Stock Market Jul 09, 2015 - 03:16 PM GMT

By: ...

Stock-Markets

MoneyMorning.com Shah Gilani writes: You've heard the stories about the 1929 stock market crash, how investors should have figured out that, when taxi drivers and shoe-shine boys hawked stock tips, the end was near.

The lesson we're supposed to have learned was that cheap margin – the debt that investors can use to finance stock purchases, when wielded by uneducated, blindly optimistic "plungers," can drive stocks up and up over a cliff into an abyss.


Too bad the Chinese never got that memo.

China is now facing a 1929-style stock market crash thanks to rampant margin buying by millions of new investors who believe the market is the road to riches.

But it's not just Chinese plungers or the Chinese economy that's going to suffer.

A 1929-style crash in China will send shock waves around the globe and to your door.

Here's what's really happening and what you can do to protect yourself and even profit from the fallout…

Up, Up, and Away

There are three principal Chinese stock markets: the Shanghai Stock Exchange, where most big company "blue-chip" stocks are traded; the Shenzhen Stock Exchange, where some big and mostly middle-market company stocks are traded; and "China's Nasdaq," known as ChiNext, where mostly small, speculative companies trade.

Stocks on those exchanges, after running up wildly over the past 12 months, are now all selling off.

The Shanghai Composite was up over 100% in the past 52 weeks. It's still up 83% according to optimists, who prefer not to admit it plunged 26% in the last three weeks. The Shenzhen is down almost 30% in the same few weeks after being up 150% in the past 52 weeks and up 60% just since January 1 of this year. The ChiNext is now down 40% from its June highs.

New "investors" are mostly to blame for the run-up and the sell-off as they get hit with margin calls as prices topped out and began falling.

The Perils of New Money

Millions of Chinese have been opening up brokerage accounts and taking the market plunge.

According to the China Securities Depository and Clearing Co., in the last week of April, nearly 1.7 million new brokerage accounts were opened across China. Over a two-week period earlier in April, 2.4 million new accounts were opened. On average, since the beginning of 2015, almost 170,000 brokerage accounts a week have been opened.

Most of the new accounts have been opened up by many of China's least-educated investors.

According to data compiled by Bloomberg, there's a big difference between "Existing Investor Households" and "New Investor Households."

The highest level of education for 7.7% of existing investors is elementary school. A total of 5.8% of new investor households are "not literate," and 25.1% only have an elementary school education. A total of 18% of existing investor households have a junior high school education, while 36.7% of new investor households have only a junior high school level education. High school percentages for existing households is 28.1%, while only 14.7% of new investor households finished high school. The numbers get a lot smaller all the way up the ladder for new investor households.

Are a lot of these new investors in the same category as taxi drivers and shoe-shine boys? Maybe. Although it doesn't matter if they are farmers or factory workers, it does matter that they probably aren't educated enough to understand how capital markets work and that stocks don't always go up.

Leverage, Leverage, Leverage

It's one thing to give an uneducated person a gun; it's quite another thing to give them bullets, too.

Almost every account that's been opened in China comes with a margin agreement and access to margin. Margin lending is big business in China, as it is here in the U.S.

But in China not all lending comes from brokerages. The shadow lending market all across China provides loans to almost anyone who has anything, even of questionable value, to put up as collateral. In the case of borrowing to buy shares of stock, borrowers put up their shares of stock as collateral for loans to buy more shares.

Shadow lenders include "trust" facilities, manufacturers with capital to lend, insurance companies, special-purpose vehicles set up by individuals, companies, brokerages, banks, local government entities, and others. There's plenty of money to borrow in China, because the central government wants growth at any price.

Institutionally, brokerages lend on margin, with purchased shares as collateral, against their own capital.

Last week the Peoples Bank of China quadrupled the capital of the state-owned China Securities Finance Corporation (CSFC), the entity that funnels margin money to brokerages for their customers. That wasn't to extend more margin to bleeding customers; that was to backstop the CSFC itself because its own capital had been exhausted lending to brokerages who desperately needed to pump more margin to new accounts bleeding money from falling stocks.

Plainly, when uneducated investors are allowed to leverage themselves to the hilt to chase momentum-driven shares higher and higher, they will reach the proverbial cliff.

In spite of everything Chinese authorities and regulators are doing to shore up the stock market, there's a better than 50% chance their efforts will fail and that a devastating crash could send global markets back into a 2008-era financial crisis.

The China Crash Play

That's where Chinese markets are now. We'll see soon enough if the authorities' efforts to stick their thumbs in the dam of swollen stock prices can stem a 1929-style crash.

If they can't, U.S. investors will face the tide of retreating stock prices on our shores as contagion will spread throughout the global, interlinked economy.

Investors here need to have stop-loss orders in place to exit their positions in the event of collateral damage to our markets.

And, if you want to make money on a potential contagion crash here, short the market by buying an inverse ETF like the ProShares Short Dow30 (ETF) (NYSE Arca: DOG).

Or, take your own plunge if you see a huge sell-off coming and buy a leveraged inverse ETF like the ProShares UltraShort S&P500 (NYSE Arca: SDS).

Just don't be under-educated and over-leveraged when it's time to take your plunge.

Source :http://moneymorning.com/2015/07/09/chinas-stock-market-echoes-of-the-1929-crash/

Money Morning/The Money Map Report

©2015 Monument Street Publishing. All Rights Reserved. Protected by copyright laws of the United States and international treaties. Any reproduction, copying, or redistribution (electronic or otherwise, including on the world wide web), of content from this website, in whole or in part, is strictly prohibited without the express written permission of Monument Street Publishing. 105 West Monument Street, Baltimore MD 21201, Email: customerservice@moneymorning.com

Disclaimer: Nothing published by Money Morning should be considered personalized investment advice. Although our employees may answer your general customer service questions, they are not licensed under securities laws to address your particular investment situation. No communication by our employees to you should be deemed as personalized investent advice. We expressly forbid our writers from having a financial interest in any security recommended to our readers. All of our employees and agents must wait 24 hours after on-line publication, or after the mailing of printed-only publication prior to following an initial recommendation. Any investments recommended by Money Morning should be made only after consulting with your investment advisor and only after reviewing the prospectus or financial statements of the company.


© 2005-2019 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in

6 Critical Money Making Rules