Commentary on global economic theatre
Given its centrally administered economy, who knows. But the latest real estate market statistics suggest a bust cannot be too far off. According to NPR:
Of course, “not everyone is convinced there is a property bubble”.
From Bloomberg:
The Federal Reserve repeated it will keep interest rates near zero for “an extended period” and specified for the first time that policy will stay unchanged as long as inflation expectations are stable and unemployment fails to decline.
It would be a reasonable policy if it were coupled with capital controls to keep the easy money from wreaking havoc around the world. No such luck, of course.
The Next Bubble appears to be expanding more quickly than I expected. From Roubini’s comment “Mother of all carry trades faces an inevitable bust” in the Financial Times:
… the combined effect of the Fed policy of a zero Fed funds rate, quantitative easing and massive purchase of long-term debt instruments is seemingly making the world safe – for now – for the mother of all carry trades and mother of all highly leveraged global asset bubbles.
… the longer and bigger the carry trades and the larger the asset bubble, the bigger will be the ensuing asset bubble crash. The Fed and other policymakers seem unaware of the monster bubble they are creating. The longer they remain blind, the harder the markets will fall.
Of course the carry trade to which Roubini refers is the dollar carry trade. Rhetorical question: why can’t the Fed and other policy-makers see this? You’d think they’d be pretty familiar with how bubbles work by now!
The Wall Street Journal has more color in an article today entitled “Fears of a New Bubble as Cash Pours In“. A few tidbits:
The World Bank warned Tuesday that the sudden reappearance of billions of dollars in investment capital in East Asia is “raising concerns about asset price bubbles” in equity markets across Asia and in real estate in China, Hong Kong, Singapore and Vietnam. Also Tuesday, the International Monetary Fund cited “a risk” that surging Hong Kong asset prices are being driven by a flood of capital “divorced from fundamental forces of supply and demand.”
As far as I’m aware, the World Bank and the IMF aren’t given to hyperbole. The facts appear to back them up:
Singapore home prices rose 15.8% in the third quarter, the fastest rate in 28 years. …
The Australian dollar has jumped about 35% over the past 12 months as investors borrow in U.S. dollars to purchase Australian currency. …
Through Monday’s trading, the broad MSCI Barra Emerging Markets Index this year was up 60.7%. Brazil was up 100%, and Indonesia had gains of 102.7%.
I doubted–and still doubt–whether the Fed could rescue the U.S. economy with another massive bubble. The housing bubble was so large and put so much money directly into the pockets of mainstream American that it’s hard to imagine a replacement. It looks like the Fed is going to try anyway, creating asset bubble around the world.
Massive fiscal stimulus and the dollar carry trade, perhaps among other factors, appear to be inflating bubbles in China and elsewhere.
This was buried deep in Michael Pettis’s latest post at China Financial Markets:
I spend a lot of time talking to large hedge funds and institutional investors – with at least three or four one-on-one meetings a week – on China and market conditions. It worries me that recently I have heard investors say many times, generally very sophisticated investors, that we are clearly in a bubble and the best strategy is to ride it out as long as we can. This has almost become one of the mantras of sophisticated investors – the less sophisticated, I guess, assuming that the crisis is safely behind us.
Certainly the dramatic recovery in emerging market equities seems consistent with the new global bubble hypothesis.
From Bloomberg:
Investors worldwide are borrowing dollars to buy assets including equities and commodities, fueling “huge” bubbles that may spark another financial crisis, said New York University professor Nouriel Roubini. “We have the mother of all carry trades” … “Everybody’s playing the same game and this game is becoming dangerous.”
Yet more reason to be concerned about this trend. Unfortunately, policy makers appear to be behind the curve (as usual), and they don’t even have the data they need to make good decisions. Needless to say, without the data to make good decisions, we should probably expect bad ones.