The Next Bubble

Everyone loves to speculate about the next stock market bubble. Will it be the bio-tech industry? Will Greece lead the Euro zone economy down the toilet? Will the U.S. Federal Reserve Bank kick the stilts out from under the market when it raises interest rates this autumn? I think I may have the answer ... the Shanghai stock market seems the next possible tsunami that washes over our world's financial markets.

Shanghai Composite Index

As can be seen from the above chart, the Shanghai bourse has soared up over 59% on a year-to date basis and, over the last year, it is up a very frothy 153%. It is now sitting on its high of 5147 (up 2.2% today alone) with a current price-earnings ratio (P/E) of 22.9 and zero yield. Very recently it did suffer a one-day swoon of over 5% when the Chinese authorities raised margin requirements on stock-trading accounts. It has since recovered all this drop and then some.

Why is this market so bubbly? Given the very high P/E ratio and zero yield one can only conclude that this stock market has become a casino for the nouveau riche of China. I have heard that many brokerage firms' trading areas resemble horse-racing betting parlors ... with traders throwing all caution to the wind when following the latest hot tout.

When this market crashes ... and it eventually will ... will this affect other world stock markets? One can only speculate on this outcome ... but the U.S. stock-market crash of 1929 certainly did the same for other markets around the world. And I suspect that a Shanghai swan-dive might well do the same.

Afterward: An alert reader sent the following comment and chart relating to my above observations: "Your graph is a bit lame, I'd set the zero base on the chart and look back 10 years -- the run up to the global reset and what followed -- and volume. Like this one [below], excerpted from Google finance." 

I'm not sure that I am any more comfortable as a result of this wider vision ... does this mean that we're in for another "global reset" like in 2008?