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Bubble-Mode Survival After Total Market Cap Surpasses GDP

2007/8/20 8:22:59

In this ID's article written on March 19, "The Divine Land Has Its Own Zenith Sun, Ten Thousand Nations Dance in Ceremonial Splendor", a fundamental judgment for the current great bull market was given: it will continue for at least another 20 years and rise to 30,000 points. This view remains valid, with no need for any modification. In that same article, the basic characteristics of the first-phase movement of this bull run were also laid out. I quote as follows:

"The first-phase movement, accompanied by the systemic and structural improvement of China's stock market itself. Only afterward will China's stock market truly possess the qualifications to participate in the feast of globalization. Full circulation, overall listing, the functional reorganization of the two major exchanges, the gradual convertibility of the RMB—all these are merely inevitable steps in this systemic and structural improvement. In this phase, the market action is primarily manifested in component stocks represented by heavyweight stocks. Talking about stock market bubbles before total market capitalization surpasses GDP is laughable. Before China's stock market total capitalization surpasses its GDP, the first phase of the bull will not end."

Obviously, this judgment that "Before China's stock market total capitalization surpasses its GDP, the first phase of the bull will not end" has been proven by today's facts, because China's total stock market capitalization has already surpassed GDP, yet the first-round component stock rally is still ongoing. If anyone still had doubts about what the first-phase component stock rally means, then the spectacle of elephants dancing wildly in China's stock market recently should provide the best annotation.

At this historic moment when market capitalization surpassing GDP has arrived on schedule, the future direction of the market must be properly defined. After market cap surpasses GDP, China's capital market will enter the bubble-mode phase of the first-stage component stock rally, and participants in China's capital market will enter a state of bubble-mode survival after total market cap exceeds GDP.

As stated in the quotation above, "Talking about stock market bubbles before total market capitalization surpasses GDP is laughable," but after total market capitalization surpasses GDP, discussing stock market bubbles becomes quite necessary. If GDP is treated as the pivot around which total market capitalization oscillates, then below it, the market can be said to be structurally undervalued, and above it, a structural bubble has appeared.

Obviously, GDP is dynamic. With China's rapid economic growth, the oscillation pivot for total market cap will also continuously shift upward. Today's bubble may become tomorrow's undervaluation—all this must be viewed dynamically. The appearance of a structural bubble doesn't mean the market has no reason to rise; rather, it means this rise faces the pressure of being pulled back toward the oscillation pivot. Once the medium-to-short-term reasons for the market's rise are insufficient to resist this pull-back, then regardless of whether the rise pushes total market cap 30% or 300% above GDP, the eventual pull-back will lead to a corresponding level of adjustment.

If around 4,500 points corresponds to the relatively certain pivot of current GDP, then China's rapid economic development will push GDP in 20 years to at least the current level of the United States—meaning a GDP of 100 trillion RMB is perfectly normal. The corresponding capital market pivot would shift upward to around at least 23,000 points, and at that time, short-to-medium-term fluctuations pushing the index to 30,000+ or even 50,000 points are entirely conceivable. Markets must fluctuate; they can oscillate around the pivot, but the possibility that market fluctuations greatly deviate from the pivot is never excluded—it's just that such deviation inevitably leads to a corrective pull-back.

Let's not discuss long-term targets for now. Returning to this bubble-mode survival state in the first phase, the only thing that can resist the bubble from a long-term perspective is the upward shift of the pivot driven by growth. Once growth is insufficient to support this pivot shift, a large-scale bursting of the bubble is perfectly natural. Moreover, the bursting of such a bubble often pushes medium-to-short-term movements below the pivot, forming a new undervaluation, which in turn constitutes an excellent medium-to-long-term entry opportunity.

The reason China's capital market's current bubble-mode survival doesn't yet constitute large-scale pressure is that even China's largest component stocks, viewed against the historical development of global capital markets, still qualify as high-growth stocks. Therefore, as long as this state persists, a moderate bubble-mode survival is actually reasonable and perfectly justified.

However, market movements always begin in irrationality and end in irrationality. Without insane undervaluation, there would be no insane bull markets; similarly, without insane bubbles, there would be no insane bear markets creating new historically undervalued entry points. The first-stage component stock rally will inevitably end in an insane bubble, and during the process of creating this insane bubble, exceptionally high profits can actually be extracted. If the return from undervaluation to the pivot can make stocks rise 10-fold, then an insane bubble has even greater power. For any market participant, patiently waiting for the market's insanity and waiting within that insanity for the final selling point is the most important and most worthwhile skill to cultivate.

Obviously, the market's most insane state has yet to appear. External factors creating short-term fluctuations actually help accumulate market energy. Before the bubble-creating capacity has been fully unleashed, the market will not ultimately reverse, and the first-stage component stock rally will not end. No longer buying strategically—only holding strategically—while waiting for market insanity and the appearance of the first-stage long-term selling point is the most appropriate strategy under bubble-mode survival conditions.