Much has been said here about the relentless Chinese stock market bubble, where the Shanghai Composite closed just shy of fresh multi-year highs, and with a market cap of $10 trillion, or about 2.5x higher than where it was about one year ago, is well on its way to catching up to total US stock market capitalization; in volume terms, China has already surpassed the US.
A few days ago, we showed why the market in China is sucking in millions in new, inexperienced traders every week when we showed the case of one middle-aged rural Chinese "trader" who explained that "it's easier to make money from stocks than farmwork."
In short: a bubble which is sucking in millions by the week, and which will end not only in tears but likely in riots and civil disobedience when the tens of millions of inexperienced traders, farmers, housewives, and unemployed lose everything once the bubble burst as it always does.
Oh, and senior citizens.
In a amusing (if not so much for the participants) anecdote, the FP's Warner Brown decided to take the advice of Li Chaoli and participate in a stock-trading class.
21-year-old Chaoli arrived in Shanghai from Yunnan province less than a month ago and knowing nothing about stocks or finance, took a job promoting Homily Stone, a software package that promises to help investors achieve easy profits by choosing fast-rising stocks. “We also offer classes to teach stock trading tips,” Li explained while trying to register the phone numbers of passersby on a notepad. “So it’s no problem if you don’t know much about stocks.” Everyone, she noted, is starting out the same way.
Brown went to one of the free lectures in an aging Shanghai office tower on a morning in mid-May, when nearly 500 pupils filed to hear a lecture from Chen Haisheng, one of Homily Stone’s purported in-house stock experts. "An entry fee of $320 lent an air of exclusivity, but the ubiquitous fee waivers that Li and other staff members handed to virtually everyone — this writer included — suggested that Homily Stone may have had another, bigger pot of money in its sights."
This is how China's army of nouveau traders is preparing for war with the upcoming market crash, but enjoying every day of the mania phase in the meantime:
Attendees registered and found their assigned seats in a multipurpose room lined with posters showing cartoon bulls, rising trend lines, and slogans such as “Homily Stone: simple and straightforward, happy stock-trading.” The number of graying heads was conspicuous, and most of the students appeared 50 or older. Some students set up camcorders on tripods and readied binoculars before Chen took the stage. As Chen projected Homily Stone’s software on a screen and began by reviewing the basics of “buy low, sell high,” the students alternated between scribbling notes and stealing bites of steamed buns and swigs from milk cartons and thermoses of tea.
The promises of untold riches if you just BTFATH were apparently not exciting enough for some of the senior citizens present:
After more than two hours of Chen’s lecture, a few older people in chairs nodded off, including an elderly gentleman who took a nap on my shoulder. For the most part, though, Chen kept people’s attention, peppering his Beijing-accented talk with laugh lines, requests for the audience to repeat pithy slogans, and demonstrations of forecasting that aroused murmurs of approval.
As for said promises, they were not exactly untold: they amount to "guaranteed" returns of 300%, but there is a catch: all these soon-to-be-millionaires need to pay $490 for a trial, not even the full version, of the company's trading software.
As the morning session neared its close, Chen promised more detailed stock-picking tips to those who gained admission to an afternoon class by paying $490 for a trial of Homily Stone’s software. A hush fell over the room when Chen predicted the Shanghai Composite’s 2015 bull market could reach a high of nearly 5,700 — about 33 percent above its then-level of 4,300. And when he guaranteed a 300 percent return for people who buy the program and follow his methods with recommended “dragon head” — or hot — stocks, the room erupted in applause.
Well, considering the SHCOMP is already half way to his 5700 target, it seems to be money well spent. If, of course, the senior citizens remember to convert paper profits into real ones before one day, the bottom falls off from under the market.
Why is Homily Stone focusing on China's senior citizens?
After the class, Homily Stone staff set off explosions of confetti as a group of silver and gray-haired students formed a line to sign up for the software. When asked about the audience’s age, an employee conjectured, “Older folks tend to have more free time, and their level of trust tends to be higher.” Meanwhile, Li, dressed in a pant suit, had stood by a wall watching attentively all morning. I asked her if she planned to try to get a piece of China’s bull market for herself. She seemed embarrassed. “I don’t know much about buying stocks,” she replied. “I’d like to learn some more at this company before doing any trades myself.”
What happens next? Well, the Politburo mandated bubble will keep growing and growing and suckering in more 60 year olds with promises of untold riches, until one it all ends and most of the people in the Homily Stone conference lose their life savings... as happened in 2008 when in April 2008 the NYT wrote articles like "To See a Stock Market Bubble Bursting, Look at Shanghai." Here are some excerpts:
When experts periodically warned about the possibility of a bubble, prices would dip temporarily then soar even higher, breaking records and inciting another mad dash to snap up equities.
The Shanghai composite index has plunged 45 percent from its high, reached last October. The first quarter of this year, which ended Monday with a huge sell-off, was the worst ever for the market.
Suddenly, millions of small investors who were crowding into brokerage houses, spending the entire day there playing cards, trading stocks, eating noodles and cheering on the markets with other day traders and retirees, are feeling depressed and angry.
Si Dansu, 68, and a retired engineer, is even more distraught, but she blames the government.
“I devoted my whole life to the country. I went to the countryside after graduation, and worked as an engineer in a Shanghai factory until retirement. I invested almost all my savings and retirement fund in the market 10 years ago. But now I’m totally penniless. All my stocks went down.”
The sequel is just a matter of time.
But not everyone will lose all their money: Chen Haisheng and his Homily Stone "stock tip expert" coworkers, who will disappear shortly never to be heard from again, will be millionaires having risked nothing and simply taken advantage of people's gullibility.
They will be some of the very few whose life savings won't disappear overnight.
As for everyone else, while it is easy to feel bad for them in light of what is coming, the fact that not one person had the common sense to ask of the stock trading company why, if it is so good, does it not merely trade out of its own capital and make orders of magnitude more, sadly suggests that they all have it coming. Because while central bankers may be wrong about everything else, they are right about one thing: when it comes to greed, humans always fall for the promise of a quick buck.