Since 2009, the benchmarkShanghai Stock Exchange index has been in a deep funk. Last week, in fact, the index hit 4-year lows and dipped below the psychological 2,000 level.Further, a recent survey of 8,438 Chinese households published by China’s Southwestern University of Finance and Economics found that 77% of those who had invested in Chinese stocks lost money.This is huge. Chinese retail investors account for around 80% of the transactions on domestic exchanges. Famous for being active traders with investment behavior bordering on gambling, Chinese retail investors are now completely disillusioned with the market.According to JP Morgan, as of the end of October 2012, 44% of all Chinese stock trading accounts had been dormant (i.e. without activity) for at least a year. At the end of 2007, the comparable number was just 2%… an enormous difference.These are the sorts of data points that contrarians love. Whenever the retail crowd runs loses interest in investing, it generally suggests that the bottom is in. Today, China fits that bill.
And the rising tide compels people to make various attributions to market actions, such as economic growth or earnings or mergers and acquisitions, no matter how loosely correlated they are or how little relevance they are with the genuine market drivers. Most of this account for as popular dogmatic fables or widely held superstitions as evidences does not support the causality nexus from such premises.
During the acme of the bubble cycle in China in 2008, the onrush of retail punters into stocks, which included housemaids, signified the peak of frenzied activities.As Shujie Yao Dan Luo of The University of Nottingham wrote in their recent study, (emphasis added)``Most of these investors, which included farmers, cleaners, taxi drivers and house maids, knew little about stock markets and how share prices were determined. Many of these people started investing in the stock markets when prices had already risen rapidly to peak levels, just before the market bubble burst. The participation of these ‘envious’ investors artificially prolonged the bullish market and created a much larger market bubble than would have occurred had they not become involved.”In short, retail investors GOT SINGED and were left HOLDING THE EMPTY BAG. They accounted for as the FOOL in the Greater Fool Theory.
The only way fiscal and monetary stimulus could "work" is if the flow of real savings (i.e., real funding) is large enough to support (i.e., fund) government activities and activities that sprang up on the back of loose-monetary policy while still permitting a positive rate of growth in the activities of real-wealth generators. (Note that the overall increase in real economic activity is in this case erroneously attributed to the loose fiscal and monetary policies.)If however the flow of real savings is falling, then, regardless of any increase in government outlays and monetary pumping overall, real economic activity cannot be revived. In this case, the more the government spends and the more the central bank pumps, the more will be taken from wealth generators — thereby weakening any prospects for a recovery.