Why did the conclusion of "Justifying the Shanghai Composite Index", which has taken a correct position, sparked public outrage?

Executive Summary:

"Justifying the Shanghai Composite Index" is written from the right standpoint, but why does the conclusion sparked public outrage? Because of the incomparability of different historical periods: the economic contribution of the technology dividend contained in the Dow Jones in 127 and the Shanghai Stock Exchange in 33 years to the compound growth rate of stock prices is completely different. We have released 240 years of debt dividends in the United States in 40 years, and debt has different effects on investment and demand. The future of China's economy is undoubtedly bright, and the stock market will pay off in the long run, but the courage to admit cycles and difficulties is the foundation for winning a bright future.

1. "Justifying the Shanghai Composite Index" is something written from the right standpoint, why did the conclusions reached spark public outrage?

On December 23, the Securities Times published an article "Valuation Comparison between China and the United States: The Irrational Prosperity of American Technology Stocks", using the current market value of Tesla is almost 6 times that of BYD, and the profit is only 2.34 times that of BYD, but the valuation is 4 times that of BYD, to demonstrate that Chinese technology stocks are very rational and low-key, while American technology stocks are irrationally prosperous, hoping that Chinese investors are full of confidence in the stock market.

For example, on Saturday, the Securities Times also published an article entitled "Justifying the Shanghai Composite Index", which cited historical data to point out that the Dow Jones Industrial Index has grown at a compound annual growth rate (CAGR) of 5.5% in the 127 years since 1896. The Shanghai Composite Index has enjoyed a CAGR of 10.8% over the past 33 years since December 19, 1990. As a result, it can be concluded that the growth rate of the Shanghai Composite Index of A-shares is good, which is better than that of the Dow Jones Index, which has just hit a record high.

I don't know exactly what the authors of these two articles are, the level of statistics and economic theory, but I know two things:

One is that the author's position must be right.

Its position is to sing the theory of China's economic brightness, Hu Xijin has closed the coffin, saying that this post said that the compound annual growth rate of the Shanghai Composite Index is higher than that of the Dow Jones Index, and the author must be well-intentioned and wants to inspire confidence from a different angle. But such a justification is meaningless, because it is too far from the actual feelings of shareholders.

Second, the author's analytical method and internal logic are definitely wrong.

Why does Hu Xijin accuse "Justifying the Name of the Shanghai Stock Exchange Index" as meaningless and too far from the actual feelings of stockholders? Hu Xijin summed up with simple and objective feelings, because no one can live for 127 years, and everyone does not live in the statistical average, what everyone wants is their sense of gain in the real investment cycle, and such an investment cycle of more than ten years or even five or six years is long enough. During this period, the underperformance of the Shanghai Composite Index was evident.

As a statistician and economic researcher, Saburo believes that articles such as "Justifying the Shanghai Composite Index" and "Valuation Comparison between China and the United States: The Irrational Boom in U.S. Tech Stocks" have sparked public outrage and are purely well-intentioned and bad. Its professional errors and logical loopholes are manifested in the following four aspects.

2. Incomparability of different historical periods: The economic contribution of the technology dividend contained in the 127-year Dow and the 33-year Shanghai Stock Exchange to the compound growth rate of stock prices is completely different.

In China, changes in the Shanghai Composite Index have always touched the hearts of countless investors. In the world, people have always been Xi to use the Dow Jones Industrial Average in the United States as a reference point for talking about economic trends. Therefore, the two authors of these two articles, consciously or unconsciously, compare A-shares with U.S. stocks, and there is nothing wrong in the object of comparison.

However, when comparing the average growth rate over different durations, it is necessary to pay attention to comparability. It is more important to compare the average of the same length of time. This is the basic principle of comparative analysis by statisticians and economists.

For example, with the development of the economy and the improvement of living conditions, the average height of people will increase relatively high. But if we take the average annual growth rate of a 10-year-old boy in Pingdingshan Township, Henan Province and a 40-year-old uncle in Beijing, we can analyze which place has a higher economic level. A 10-year-old boy grows from 70 cm to 150 cm in 10 years, with an average annual height of 8 cm, and a 40-year-old uncle grows from 75 cm to 180 cm in 40 years, with an average annual height of 2.625 cm, which is 77.2% lower than that of a Pingdingshan boy. Can we conclude that Pingdingshan's economy is better than Beijing's, and its living standards are higher than Beijing's?

What is the problem of this? The reason is that people grow taller at different ages, and after the age of 40, they basically stop, and after the age of 60, they may shrink. Therefore, when comparing different age groups, the comparability is lost.

This is true for people, and so is the economy. The economy is different from people in that the older a person gets, the slower the growth rate. However, with the accumulation of human knowledge and science and technology, the economy can develop faster and faster. There is another important law: science and technology are driving the economy more and more, and population is driving the economy less and less.

On March 7, I talked about it in the article "From Starlink to ChatPGT, Why Do We Always Misjudge the Development of American Technology and Economy?", that 100 years ago, it may take 100 years to produce an epoch-making science and technology, and it may take 10 years to produce a product with a functional update and iteration, but now, this pace has accelerated to 10 years and 1 year.

From the steam engine to the telephone, how many years?

Watt built the world's first practical steam engine in 1776, which promoted the Industrial Revolution and set off a round of economic growth.

On March 10, 1876, American inventor Bell invented the world's first corded telephone, and was granted a telephone patent by the United States Patent Office, which promoted the communication revolution and brought about the second wave of economic growth.

From the steam engine to the wired telephone, it took 100 years.

From a corded phone to a computer, how many years?

The world's first general-purpose computer was developed in 1946 by two scientists from the United States, Moakley and Eckert. The emergence of computers marks the beginning of the computer era and the germ of the era of industrial automation, bringing about the third wave of economic growth.

From corded telephones to computers, it took 70 years.

How many years did it take to go from computer to network?

In 1969, researchers from the U.S. Defense Advanced Research Projects Agency (DARPA) successfully built the first computer network, ARPANET, that connected the computer systems of four universities, marking the birth of the Internet. The emergence of the Internet has promoted the integration of the world economy and supply chain, marking the transformation from the computer age to the Internet age, and the foundation for the germination of the e-commerce era and the self-media era, bringing about the fourth wave of economic growth climax.

From computers to the Internet, it took 23 years.

How many years did it take from the Internet era to the AI era?

At the 2006 Search Engine Conference, Eric Schmidt, former CEO of Google, proposed the concept of "cloud computing". In March of the same year, Amazon was the first company in the world to launch elastic computing cloud services, which was a pioneer in the field of cloud computing, marking the emergence of cloud computing with the birth of AI. He will reform the mode of economic growth in a more in-depth manner, bringing about a fifth wave of economic growth for mankind.

From the Internet era to the intelligent era, it only took 37 years.

So, we can compare the correlation between different stock market indices and the pace of scientific and technological development.

Since 1896, the Dow Jones index has increased by 913 times from 40.94 points to 37,400 points. The compound annual growth rate (CAGR) of 127 years is 5.5%.

Since 1928, the S&P 500 has risen 474 times in 96 years, with a CAGR of 6.6%.

Since 1971, the NASDAQ has risen 149 times in 53 years, with a CAGR of 9.9%.

The Shanghai Composite Index started from 100 points on December 19, 1990 to 2,918 points on December 21, 2023, with a cumulative increase of 28 times in 33 years and a CAGR of 10.8%.

Why is it that the younger the stock market index, the higher the compound annual growth rate? Because the more the scientific and technological revolution promotes the economy in the future, the more scientific and technological dividends in the stock market. Compare the compound growth rate of A-shares, which have grown entirely in the Internet era in the past 33 years, with the compound growth rate of the Dow Jones Industrial Index, which has been in the era of steam engines and wired telephones for at least half of the 127 years?

If we compare the Dow Jones index in the 33 years since December 1990, what will be the result?

On December 19, 1990, the Dow Jones index closed at 2,626 points, and by December 19, 2023, it was 37,560 points, a cumulative increase of 14.3 times. The 33-year annual CAGR was 8.7%. But the Dow only has 30 established industrials and financials stocks. U.S. tech stocks are concentrated on the NASDAQ.

On December 19, 1990, the NASDAQ index closed at 586 points, and by 14,900 points on December 19, 2023, a cumulative increase of 25.43 times. The CAGR over 33 years was 10.3%.

The S&P 500 index rose from 350.55 points on December 19, 1990 to 4768.37 points on December 19, 2023, a cumulative increase of 13.6 times. The CAGR over 33 years is 8.5%.

3. Debt has a different effect on investment and demand: We have released 240 years of debt dividends in the United States in 40 years.

Before the reform and opening up, China was a planned economy, there was no market, and the government did not have the awareness of using debt to promote residents' consumption demand. However, since the founding of the United States, it has been a market economy, and it has a money market and a capital market.

In the 247 years since the founding of the United States, the macro leverage ratio has increased from 0% to 259% now, and the debt-to-income ratio has increased from 0 to 113% now. Due to the inclusive epidemic subsidies in the United States and the Federal Reserve's interest rate hikes and balance sheet reduction in the past two years, the macro leverage ratio and household debt-to-income ratio in the United States have decreased significantly compared with before the epidemic, and the balance sheet has been moderately repaired, which is conducive to promoting economic growth by increasing debt leverage in the next interest rate reduction cycle.

However, our macro leverage ratio is now 298 percent, 39 percentage points higher than that of the United States, and household debt income is 144 percent, 31 percentage points higher than that of the United States. In the past few years of the epidemic, we have continued to loosen monetary money, cut the reserve requirement ratio and interest rates in the past two years, the macro leverage ratio and the household debt-to-income ratio have increased significantly compared with before the epidemic, and the balance sheet has continued to expand.

40 years of debt that surpassed others for more than 240 years is the secret of our double-digit rapid economic growth from 1990 to 2010, and the secret of the Shanghai Composite Index rising from 100 points to 6,124 points in 2007, when GDP also set a record of 14.2%.

In 2008, the Shanghai Composite Index fell by almost two-thirds from 5,261.56 points at the close of 2007 to 1,820.81. GDP growth also fell by a third in the same year, to 9.7%.

After the debt is running and the physical strength needs to rest and adjust, the debt growth rate has fallen after 2010, which has also led to a decline in the growth rate of investment in demand, which is the secret of our economic growth after 2010 from double digits to single digits, from 8%-10% to 6%-8% medium and low growth, and then to 5%-6% medium and low growth, and it is also the core of the expected valuation of the stock market from 6,000 points to 3,000 points.

So after 2010, the U.S. stock market continued to rise, but our stock market faltered.

From the end of 2010 to December 19, 2023, the Shanghai Composite Index has risen by 3.9% and a CAGR of 0.3% in 13 years, while the Dow Jones Index has risen by 324% and has a CAGR of 9.5%.

The S&P 500 is up 379.2% with a CAGR of 10.8%, while the Nasdaq is up 561.8% with a CAGR of 14.2%.

Fourth, the prospects of China's economy are undoubtedly bright, and the stock market will certainly be rewarding in the long run, but the courage to admit the cycle and difficulties is the basis for winning a bright future.

Promoting the health of China's stock market while recovering the economy is destined to be a huge systematic project, and seeking truth from facts and having the courage to face problems is the first priority. I agree with what Hu Xijin said.

Although the median S&P 500 latest static P/E ratio is 24.2x, it is 10% lower than the median static P/E ratio of the CSI 300 at 22x. However, the overall dividend yield of U.S. stocks is 1.54%, which is 10% higher than the 1.40% of A-shares.

Looking at the more critical ROE, the median S&P 500 is 13.18%, while the median CSI 300 is 6.6%, which is twice as high as ours.

Director Zhou of the Bull Riding Institute told me that stock prices are never a measure of past prices, but rather a price of expectations. This is the main reason why Truss's P/E ratio is higher than Ford's, and Moutai's P/E ratio is higher than ICBC's.

On the whole, the performance of our stock market in the past ten years has not been as good as that of the United States, but the future of our stock market will develop healthily, and the US stock market still has a lot of room for growth.

[Author: Xu Sanlang]