Some extremely misleading stock market data

Here are the performances of some of the major stock markets over the past year (actually since August 27, 2014):

China (Shanghai):  2209.47 –> 2964.97  Up 34.2%

Japan:  15534.82 –> 17806.70   Up 14.6%

Germany:   9569.71 –> 10,074.66  Up 5.3%

S&P 500:  2000.12 –> 1932.34   Down 3.4%

Hong Kong:  24,918.75 –> 21,404.96  Down 14.1%

Update:  This post was written before the late day selloff.

Regarding the China numbers, I am reminded of the news report, “man drowns in lake that has an average depth of 3 feet.”  But I still think there is some food for thought here.

The Japanese and German numbers are affected by their recent currency depreciation. But Hong Kong is pegged to the dollar, while China has only depreciated about 4%.  I find those numbers to be kind of surprising.  For instance, the Hong Kong market has recently tracked China fairly closely, but has fallen by a smaller percentage.  Today it actually rose slightly, while China fell another 7%. But over 12 months Hong Kong has done far worse.  Why?

Tyler Cowen says he believes “China is in for a very bad recession.”  That’s certainly possible, and the recent data out of China is certainly consistent with that claim.  But the recent data out of China is also consistent with the claim that they will not have any recession, indeed they’ll have strong growth by the standards of almost any country other than China.

Suppose the Chinese stock market had not fallen from about 5000 to about 3000. Suppose it had fallen from about 6000 to about 2000.  That is, suppose that instead of losing a bit over 40% of its value, the Chinese stock market had lost two thirds of its value.  And suppose that while this was occurring all the production data out of China was looking horrific. Suppose international trade was in free fall, and the global financial system was imploding.

Actually you don’t have to suppose, that’s what things looked like in China at the beginning of 2009.  And China’s actual GDP growth rate in 2009?


Now of course that was below trend growth, and China’s trend rate has slowed considerably in recent years, as almost everyone expected.

My guess is that there is a 20% chance that Tyler is right, and an 80% chance that 2015-16 will be another 2009, with China growing at below trend, but enough to avoid recession.

Unfortunately we lack a China RGDP growth prediction market.  That would tell us whether I got my probabilities right.  (Of course the actual outcome won’t tell us, unless we make many repeated predictions, and look at many different outcomes.)

There is one other odd thing worth mentioning.  Let’s suppose that China is in a recession, or clearly entering one.  In that case why would the Chinese market be 34% higher than a year ago, when most experts did not forecast a recession?  But there’s a good counterargument to this. The Chinese market has always seemed disengaged from the Chinese economy, often doing very poorly when RGDP boomed.  So this would be nothing new.  Bottom line, the Chinese market tells little about their macroeconomy, and if it is telling us something, it’s not clear if we should look at 3 month or 12 returns. Or maybe the Hong Kong market is the best indicator of China, as the mainland market is distorted by government intervention. Given this uncertainty, I’d recommend focusing more on the Chinese macro data, with the caveat that that data also looked horrible in early 2009, and the economy still did pretty well.  We should probably have an answer by mid-January, when the Q4 data comes in.

Over at Econlog I have another post on the Chinese stock market, comparing it to 1987.




30 Responses to “Some extremely misleading stock market data”

  1. Gravatar of Sam Sam
    25. August 2015 at 14:20

    Scott, what the heck is up with GDP seasonality in China? See for example, which I think is derived from Is it possible that “true” seasonal factors for China should vary by more than order of magnitude more than the seasonal factors for a developed country?

    If you have some data sources you trust, I’d be happy to make some play-money prediction markets for Chinese RGDP.

  2. Gravatar of Brian Donohue Brian Donohue
    25. August 2015 at 14:49

    China is an obvious bubble, as I’ve been insisting for at least 12 years now.

  3. Gravatar of E. Harding E. Harding
    25. August 2015 at 15:01

    -How big is the bubble as compared with sustainable growth?

  4. Gravatar of ssumner ssumner
    25. August 2015 at 15:26

    Thanks Sam, I’d be happy to have a prediction market for the official figures.

    That seasonality graph is funny. Looks like cumulative total for year to date. Why would Fred report such nonsense? Doesn’t someone there check the data before it’s posted.

    Brian, I quoted you over at Econlog.

  5. Gravatar of Ray Lopez Ray Lopez
    25. August 2015 at 15:31

    @BD – you’re not allowed to say “obvious bubble” on this site unless: (1) you’ve made money off this prediction, and, (2) you wait at least 100 years since bubbles are permanent, not temporary, says our resident genius with low IQ.

    @sumner – “And China’s actual GDP growth rate in 2009? 9.2%” – if you believe the numbers, and I suppose you also believe the official data from the Democratic Republic of Korea (North Korea).

    “Over at Econlog I have another post on the Chinese stock market, comparing it to 1987.” – hahaha! A technical glitch?

    Having had my daily dose of comedy, I now head to a better economics site, Marginal Revolution, followed by Seeking Alpha, then to peruse what Delong is saying, maybe even Krugman…

  6. Gravatar of Bababooey Bababooey
    25. August 2015 at 16:02

    Ray Lopez needs his own blog so it’s easier to ignore him.

  7. Gravatar of Mike Mike
    25. August 2015 at 16:16

    I’m assuming Brian is being sarcastic. (I hope).

  8. Gravatar of benjamin cole benjamin cole
    25. August 2015 at 16:22

    I wonder if in 2009 the People’s Bank of China felt OK to rev up the money presses. But now they are worried about the flight of “hot capital,” that lower interest rates would incur.

    So this go ’round the PBoC made a mistake that central bankers are so prone to make: they passively tightened when they should have been printing money hard and fast.

    Let us hope the CCP and PBoC get back on track.

  9. Gravatar of dtoh dtoh
    25. August 2015 at 17:49

    I thought I had just admonished you about talking about stock prices. :-).

    Seriously, you need to be looking at risk adjusted expected returns. Are they higher or lower than a year ago. That might tell you something about the future path of the economy.

    The data you posted are about as useful as sheep entrails.

  10. Gravatar of Walter Walter
    25. August 2015 at 18:59

    Comparing the Chinese market back in 2007 and today is night and day! Back in 2007, investors were allowed leverage to borrow on margin and one trading accounts.
    Today, investors can leverage meaning it just take a certain ‘%’ fall on a stock to wipe out an investor’s original investment. In some cases, people were left in debt because they borrowed bank loans to partake the market.

    The economy in 2009 because of China low private debt (around 100% of GDP) and all that economic growth came from a big stimulus.
    Today, private debt along with public debt is close to 300% of GDP. Also, any stimulus plan needs to be bigger than in 2009 to have any impact (think Greece).
    Also, the quality of China’s GDP today has worsened since 2007, where they need to borrow three to four times more in debt to produce one unit of GDP, unlike 1.3 times back then.

  11. Gravatar of Engineer Engineer
    26. August 2015 at 01:25

    My question is, now that you are offering market analysis: Should I take the 30 year fixed rate at 4% or the 7/1 adjustable at 3.3 for my financing on my new house. You have convinced me that low inflation and low rates are the new normal, so I am leaning toward the 7/1…

  12. Gravatar of Chuck Chuck
    26. August 2015 at 04:04

    If the Chinese resort to Keynesianism (a huge step up from communism), which they have done in the past, then GDP growth will improve while the real economy stagnates. If they liquidate, GDP growth will fall, but the erosion of capital will stop.

    I hope the Chinese ignore all the media blather and go for lower GDP growth.

  13. Gravatar of Nuno Nuno
    26. August 2015 at 04:43

    Edge has a n interesting course in superforecasting. You may want to watch it.

  14. Gravatar of XVO XVO
    26. August 2015 at 04:45

    No wonder hyperminds ngdp prediction is off the wall, they don’t let people join their prediction market. And based on the survey you take when you join, they have a strong bias against self assured people, even self assured (“arrogant”) people can be right. Put me down for 2.5% ngdp growth, 2.4% growth and 0.1% inflation. The fed needs to multiply the money supply by 4 again to get 5% ngdp growth.

    This graph is scary if you look at the 10 year or max, is there a good post that explains why inflation isn’t up 300% for the last 7 years? Because we’re at the ZLB?

  15. Gravatar of collin collin
    26. August 2015 at 04:54

    My guess is that there is a 20% chance that Tyler is right, and an 80% chance that 2015-16 will be another 2009

    Why not a six month small recession with a lagging job market? Remember the S&L recession that helped put Clinton in the White House? Today it is an historical footnote but being a college graduate in 1992 near the bottom of the job market, I remember it well. Maybe, the recession will be closer to the 1957 recession which had a high increase in unemployment but is almost completely forgotten as a old Fed-induced Recession of yesteryear.

    I think China is functional enough not to go over the deep end but I don’t see them remaking a ‘consumer based economy’ either to control the recession.

  16. Gravatar of ssumner ssumner
    26. August 2015 at 05:22

    Ray, So how will those predicting recession prove they are right, if you don’t believe the numbers?

    dtoh, I can’t post numbers that cannot be derived.

    Walter, I agree that there are lots of differences, but many of those differences make a recession less likely today.

    For instance, in 2009 the US and Europe were imploding, and now they are growing. So it’s a much better international environment for trade. Again, I’m certainly not denying that a bad recession in China is possible, I just don’t see it as the most likely outcome. I see a slowdown in growth, nothing more.

    Engineer, I don’t really forecast asset prices, I argue that we should take market forecasts seriously. The markets are saying low rates for as far as the eye can see, so that’s my forecast. I won’t comment on anyone’s personal finance decisions, beyond perhaps that my personal opinion is that indexed mutual funds are better than managed funds.

    XVO, Inflation is low because of the Fed’s tight money policy.

    Collin, I see a growth slowdown, not a decline in GDP. But yes, that’s certainly a plausible outcome.

  17. Gravatar of dtoh dtoh
    26. August 2015 at 05:44


    I can’t post numbers that cannot be derived.

    Yes, but that’s no excuse for posting numbers that are easy to be had but have no meaning.

    Also, as I commented in response to another post, bond yields are a pretty good proxy for expected risk adjusted returns. (Caveat – I know nothing about Chinese bond markets. Last time I had any experience in that area, the only way to communicate with the BoC was via Telex, which only worked some of the time.)

  18. Gravatar of DF DF
    26. August 2015 at 08:06

    The stock market fluctuations are a side show at this point. As I see it there are 4 major bubbles in China at the moment

    1) non-tier1 property (as measured by prices to wages, vacancies, and percent of total wealth the asset class represents)

    2) provincial debt (as measured by rating agencies prior to the debt swap “clean up” this April)

    3) investment (as measured by deposit/lending rate spread, capacity utilization, NPL and the need for a state supported stock market “pump and dump”)

    4) stocks (as measured by P/Es relative to historical norms)

    The stock bubble (at this price) is the least of these. Scott, you are right that apparent overvaluation can persist for a long time. Indeed, real estate occupancy rates in China (and other parts of the world like the Freedom Tower) seem low but they always seem to fill up. Wow long term planning must me part of the culture! But things change with the emergence of other bubbles. Now we have 4 major ones, China has never dealt with this many simultaneously. Add some headwinds like persistent capital outflows and declining global growth and trade… then you start to wonder if Xi Dada and his small working groups are really up for the challenge. Suddenly all decisions are looking very short term focused. The entire world is watching this time too.

    BTW, many of your examples since 2008 of non-bubbles are really all the same argument: China never deleveraged. Why did Aussie and Canadian housing withstand 2008? Chinese buyers. Why did exporters like Australia and Germany fair relatively well? Chinese manufacturing. The bubbles were there, but China was a backstop. Now watch as everything from Brasil to Apple fall in the wake of the China factor disappearing.

  19. Gravatar of TravisV TravisV
    26. August 2015 at 08:32

    The concern that a Chinese devaluation would trigger capital flight continues to be repeated on TV…..

  20. Gravatar of Brian Donohue Brian Donohue
    26. August 2015 at 09:38

    Thanks, Scott! I’m honored.

    Yes, I was being sarcastic. No credit for calling a bubble for 12 years. Lookin’ at you, Professor Shiller.

  21. Gravatar of TallDave TallDave
    26. August 2015 at 09:51

    The Shanghai Composite is up 10% over five years, while the S&P 500 is up 72%. But over a 10 year period, it’s 152% vs 55%.

    What’s really fascinating though is the relative variability — the major US indices are practically flattened into straight lines on the same graph. Even the NASDAQ’s “bubble” around 2000 looks pretty mild by comparison to the Chinese roller coaster.{“range”:”max”,”allowChartStacking”:true}

  22. Gravatar of TallDave TallDave
    26. August 2015 at 10:01

    XVO — Notice you don’t see The Great Inflation in there either. M0 by itself clearly doesn’t predict inflation very well.

  23. Gravatar of James Alexander James Alexander
    26. August 2015 at 10:07

    Off topic
    If Apple Pay becomes successful, will it reduce the monetary base?

  24. Gravatar of Amaury Perez Amaury Perez
    26. August 2015 at 13:54

    hmm.. I didn’t how badly made the Chinese stock market was.

  25. Gravatar of ssumner ssumner
    27. August 2015 at 06:05

    dtoh, In this post I’m not interested in expected returns, just actual returns.

    DF, I’m not a fan of bubble theories, and in any case your comment confuses bubbles with malinvestment. If you want to believe in soothsayers and ESP and tea leaves and asset price forecasts, more power to you.

    Travis, That argument never made sense to me. Wouldn’t an expected devaluation lead to capital flight? What would be the point of removing capital after a devaluation?

    Brian, Yes, I assumed you were joking.

    James, Not much impact, very little base money is used for transactions.

    Amaury, Clever.

  26. Gravatar of DF DF
    27. August 2015 at 12:07


    I know you are wed to the EMH. You are not fan of fundamental valuations, so I guess you prefer to offer ex post anlaysis to severe nominal price shifts when they occur.

    The 4 asset classes I mentioned are more than just malinvestment, they are gross anomalies in the valuation distributions I offered. I invite others to suggest other measures that show these Chinese asset classes appear in the bulk of their distributions, but they lie in the tails of mine.

    To each his own.

  27. Gravatar of ssumner ssumner
    27. August 2015 at 12:34

    DF, No, I’d prefer to predict asset prices, but since I see no evidence that anyone can do so, I don’t waste my time.

  28. Gravatar of James Alexander James Alexander
    27. August 2015 at 12:58

    Sorry to be probably wasting your time, but if we went back to pre-2008 99% of base money was notes and coins.

    If Apple Pay succeeded 100% (for the sake of argument) there would be no need for notes and coins. What would happen to base money?

  29. Gravatar of ssumner ssumner
    27. August 2015 at 13:10

    James, The base is about $4 trillion. You are right that if we ended IOR it would eventually fall to about 1.2 trillion, almost all cash. But only about $200 billion of that was used for transactions in the US. So either $200 billion out of $1.2 trillion or out of $4 trillion. Either way the impact is less than you might expect.

    On the other hand it might lead politicians to go to all electronic money, to smoke out the cash in the underground economy.

  30. Gravatar of Jack’s Links | The Zeitgeist Log Jack’s Links | The Zeitgeist Log
    18. October 2015 at 08:48

    […] Chinese Recession: This was from almost two months ago, and I don’t think it’s clear yet if Scott or Tyler is more correct. […]

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