Biggest Bubble Ever?  History has featured speculative frenzies in the past, with the most recent being the dot-com bubble, and they end badly for investors.

 

It is one thing for eggs on Twitter, or a permabear, or a short biased hedge fund (trying to save their returns) to state that China is the biggest bubble ever and it is another thing for Bloomberg News to do so.

Bloomberg News (and unlike most articles there is no byline for author  says that the current mania for commodities in China is the latest example. Bloomberg News joins a chorus of other commentators (and underwater short biased hedge funds) who believe that China is a massive bubble and possibly the biggest one yet. The commodities boom has seen daily turnover on Chinese futures markets increase by the equivalent of $183 billion, which is even higher than during the Chinese stock bubble of last year.

Biggest Bubble Ever? Commodities bubble a real problem

The thinking goes that China’s economic stimulus and industrial reforms would provoke a shortage of building materials. However this logical thinking quickly turned into a commodities frenzy.

Individual Chinese investors have piled into trades, but now authorities have introduced limits on trading in an attempt to stop surging commodities driving inflation. It could also prevent inefficient producers from being shut down, which is the aim of the reforms.

Investors are now abandoning commodities in the latest boom-bust cycle.

“You have far too much credit, money sloshing about, money looking for higher returns,” said Fraser Howie, the co-author of “Red Capitalism: The Fragile Financial Foundation of China’s Extraordinary Rise.” “Even in commodities where you could have argued there is some reason for prices to rise, that gets quickly swamped by a nascent bull market and becomes an uncontrollable bubble.”

 

Biggest Bubble ever
Biggest Bubble ever

Authorities take action to cool market

There were record levels of new credit in Q1, which meant that spare cash was looking for a home. Commodities became a popular choice as traditional investment options were performing badly.

Individual traders have been blamed for the huge leap in volume. Bourses in Dalian, Zhengzhou and Shanghai recorded a daily average of about $78 billion in February to a peak of $261 billion on April 22, By way of comparison, turnover on Nasdaq’s exchange peaked at around $150 billion in early 2000.

The frenzy slowed down after margin requirements were raised, trading fees were increased and rebar trading hours were cut. However some individual traders are determined to keep investing despite official attempts to cool the market.

It looks like authorities are worried about froth in the market, and the China Securities Regulatory Commission has promised to stop excessive speculation.

“They don’t want this to turn into a speculative market in commodities,’’ said Tiger Shi, managing partner at Bands Financial Ltd. in Hong Kong. It might be difficult to stop excessive speculation without making prices collapse, if the example of the equity bubble holds true.

“The worry is that as soon as the bubble bursts, it’s everyone out of the door at the same time,’’ said Paul Adkins, managing director of AZ China Ltd., a Beijing-based aluminum consultancy. “It’s the last guys out the door that have the most pain.”

As noted above many other experts are sounding the alarm on China.  Jim Chanos, a prominent short-seller, founder and president of Kynikos Associates said China’s economic slowdown is “worse than you think” during an interview on CNBC in August 2015.

When Jim Chanos called China “Dubai times 1,000” just a few years ago he was mocked by many pundits, now Chanos is part of the mainstream on China.