The Basic Wisdom Required to View the Current Capital Market

Author: [Mu Zi]
Source: [Fund Analysis]
Article type: Regular article
Published: 2007-7-7 2:16:49
Column: Expert Perspectives

Whether administrators or investors, all should possess the following basic wisdom regarding the current capital market:

I. The capital market can not only serve as a barometer of the economy, but can also become the core driver of economic development

After reform and opening up, the great development of China's real economy achieved world-renowned accomplishments. The great transformation of the capital market, beginning with the share-structure reform, will lead to an even greater release of productive forces. The release of productive forces at the real economy level is a product of relatively low economic development. Once real economic development reaches a certain level, an even more far-reaching release of productive forces at the capital level will — and must — emerge. The capital market can not only serve as a barometer of the economy, but can also become the core driver of economic development.

II. Society's concept of wealth will be fundamentally transformed, bringing profound changes to social structure and thought

When social wealth accumulates to a certain stage, material conditions determine consciousness, inevitably leading to changes in the public's concept of wealth. The shattering of old concepts of tangible wealth built on the real economy, and the establishment of new concepts of intangible wealth based on the virtual economy, are historical trends that no one's will can reverse. A society composed of people with new wealth concepts will inevitably undergo profound changes in structure and thought. An economic system built around the capital market will gradually take shape, with the capital market becoming the critical node of the economic structure. The culture and concepts constructed by the capital market will gradually permeate social culture and concepts, profoundly affecting everyone's mode of existence. Capital-based survival will become the basic state of being for the Chinese people.

III. The virtual economy is inherently unregulable — it can only be effectively supervised

The virtual economy uses equity system design to manifest future wealth in current asset prices through securities and other virtual forms. The virtual economy, with expectations as its variable and oriented toward the future, is fundamentally different from the real economy, which relies on past accumulation. Securities asset prices necessarily reflect future economic expectations in advance. These expectations constantly change over time, which constitutes market volatility. In the virtual economy, rises overshoot and declines overshoot; prices deviating from so-called reasonable value is the norm.

Any individual buys stocks only because they expect them to rise, and sells only because they expect them to fall. The reasons for expectations are varied, but the essence of expectation is the same. Market movement is essentially the resultant of various expectations, reflecting the market's current aggregate expectation of the future. So-called regulation essentially just changes market expectations, but cannot change the fundamental nature that market movement is the resultant of various expectations. Humans are not God — human expectations can never be precise or uniform. All assumptions about rational expectations will be shattered by the market. A capital market dominated by regulation will see its regulators perpetually scrambling between suppression and rescue.

IV. Capital-based survival provides anyone with the possibility of leapfrog development

At the real economy level, to succeed and obtain commercial benefits, one must spend enormous amounts of time navigating various social relationships. In the virtual economy of capital-based survival, anyone is provided with the possibility of leapfrog development. The possibility of an individual relying solely on personal wisdom to independently conquer the market greatly increases. Under this mode of survival, whether a person succeeds can depend far more on personal cultivation and practice, without having to look at anyone's face, and even becoming largely independent of age, physical strength, and gender.

In the virtual economy of capital-based survival, the world is flatter, and anyone's distance from both success and failure is shorter. Success can turn into failure in an instant. No level of wealth is worth mentioning in the capital market. For the individual, it is a brand-new opportunity, a brand-new world, where everything will be redefined. Of course, there are so-called front-runners, but these people's distance from failure is no greater than any so-called laggard's distance from success. This distance is related to each person's greed, fear, and wisdom.

Finally, on market movement: June's market played out as discussed in this column's June 9 article, mainly oscillating between the 1/2 line and the monthly moving average. Since the Q2 K-line carries a 500-point upper shadow, it will suppress Q3 movement. In July, the 1/2 line will move up to 4159 points. Until the market stands firm above this line, no decent rally can unfold. The key in July remains the 5-month moving average. If it is not effectively broken, the market still has a chance for triangle consolidation; otherwise, a platform-type consolidation revisiting the June 5 low becomes unavoidable. Half a year into the correction, the best candidates for medium-term focus are stocks near the annual moving average in the categories of whole-listing restructuring, major reorganization, and small-to-mid-cap growth stocks.

(Special Senior Advisor to this publication, Mu Zi)