The Reign of Bubbles
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     holycow
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Username: holycow
Post Number: 490
Registered: 08-2004Rating: N/A
Votes: 0
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| | Monday, December 06, 2004 - 02:56 pm: |  
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*** Stephen Roach is out to scare the world witless again... this time, he is telling everyone after the equity bubble, the property bubble is on its way. If you feel like laughing this off, take a look at Japan's fragile economy and the flimsy recovery - they are still paying the price of the bubble economy back in the 80/90 - after 14 years(?)
Take a look at the attached 10-year NK225
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Global: Bubble Day
Stephen Roach (New York)
December 1, 2004 could well go down in history as yet another important milestone for America’s bubble-prone economy. No, I am not referring to the 162-point surge in the Dow Jones Industrial average that occurred on that day. Instead, my focus is on two widely overlooked statistical reports put out by US government statisticians -- the latest tallies on home prices and personal income. Collectively, these reports paint a worrisome picture of an asset economy that has now truly gone to excess. As was the case in early 2000 when Nasdaq was lurching toward 5000, denial is deep over the potential downside of yet another post-bubble shakeout. That’s what worries me the most.
The just-released report on US house prices for the third quarter of 2004 was a shocker -- an 18.5% annualized surge from the second quarter and a 13.0% increase from year-earlier levels, according to the tabulation of the Office of Federal Housing Enterprise Oversight (OFHEO). That represents a stunning acceleration from the 9.8% Y-o-Y increase of the second quarter and pushes nationwide house price appreciation to a 25-year high. It’s an even larger rise in real, or inflation-adjusted, terms. The surge over the past year is now running nearly five times the 2.7% annualized increase of the non-housing components of the CPI.
Housing analysts and central bankers often chide those of us who draw macro conclusions from a highly fragmented US real estate market. In the housing business, where “location” matters, concerns over nationwide trends are often dismissed out of hand. In a recent speech, Federal Reserve Chairman Alan Greenspan noted while discussing housing prices, “Overall while local economies may experience significant speculative price imbalances, a national severe price distortion seems most unlikely in the United States, given its size and diversity” (see his October 19, 2004 speech, The Mortgage Market and Consumer Debt, at America’s Community Bankers Annual Convention, Washington DC). It’s a nice theory, but the risk is that it may now be wrong. According to the latest OFHEO tally, house-price inflation over the past year has run at double-digit rates in 25 out of 50 states plus the District of Columbia. In six states -- Nevada, Hawaii, California, Rhode Island, Maryland, and Florida --- home prices increased by 20%, or more, over the past year. Housing is an asset class that is just as prone to excess as are stocks, bonds, currencies, or commodities. If it feels like a bubble, acts like a bubble, and looks like a bubble, it probably is one.
Meanwhile, also on December 1, the Bureau of Economic Analysis of the US Department of Commerce released its regular monthly update on personal income. The stock market loved the October numbers -- stronger-than expected gains in both income (+0.6%) and consumption (+0.7%) that were perceived as signs of ongoing resilience of the indefatigable American consumer. I found the report appalling. What caught my eye was a further reduction in the already sharply depressed personal saving rate -- down to 0.2% in October from 0.3% in September. The September numbers were widely thought to have been distorted by temporary hurricane-related losses to personal income. Most expected personal saving would rebound from this artificially-depressed reading. There was no such bounce in October. The consumer saving rate has now basically gone to zero.
Nor is the profligate American consumer the only source of the US saving shortfall. A day earlier -- November 30, to be precise -- the government also released its third-quarter report on national saving. This broad measure of saving -- the combined saving of households, businesses, and the government sector -- is most meaningful when expressed on a “net” basis by taking out the depreciation that goes toward replacement of worn-out, or obsolete, capacity. The resulting concept of net national saving measures the saving left over to fund the net growth in productive capacity -- the sustenance of any economy’s long-term productivity and growth potential. On this basis, America’s net national saving rate fell to just 1.2% in the third quarter of 2004 -- down 0.9 percentage point from the already depressed second quarter reading and nearly back to the record low of 0.4% recorded in the first quarter of 2003. The rest of the story is all too familiar: Lacking in domestic saving, the US must then import surplus saving from abroad in order to grow -- and to run massive current-account and trade deficits to attract that capital. In other words, a further sharp reduction in national saving is not exactly a desirable outcome for an already unbalanced US economy.
The key to this puzzle is to recognize that the housing bubble and the saving shortfall go hand in hand. The “asset economy” is a conceptual framework that brings these two seemingly disparate trends together. As seen through this lens, “rational” consumers take their income-based saving rates to zero only if asset-based saving provides an offset. As long as asset markets keep rising, that makes perfect sense. However, when asset markets correct, this decision can backfire. That was the case when the equity bubble popped in 2000 and could well be the case following the bursting of today’s rapidly expanding US housing bubble. That’s why the latest trends in house prices and saving are so disturbing. In my view, they underscore the distinct possibility that America’s asset economy is in the midst of yet another bubble-induced blow-off.
Not surprisingly, these circumstances put the Fed in an especially difficult position. That’s because the US monetary authority used up most of its basis points in order to contain the damage from the equity bubble. Unfortunately, in doing so, the Fed kept interest rates at extraordinarily low levels for far too long -- setting the stage for the housing bubble that was to follow. The risk all along is that the Fed had only a one-bubble damage containment strategy -- leaving itself with little ammunition to deploy in the event of another serious problem. While the US central bank has tightened to the tune of 100 basis points over the past four months, a federal funds rate of 2% hardly offers much leeway for easing should conditions take a turn for the worse. Yet there’s an added complication to all this: The housing bubble-induced saving shortfall has pushed America’s current account deficit into uncharted territory -- raising the risks of a sharp correction in the dollar and a related back-up in longer-term interest rates. The last thing America’s housing bubble needs is an interest rate shock. That is a classic recipe for a sharp decline in US housing prices -- an outcome that might spell curtains for an overly-indebted American consumer.
Ironically, there have been a number of positive developments that have fallen into place recently -- an orderly depreciation in the dollar, sharply declining oil prices, and grounds for encouragement on the prospects for a soft landing in China. But America’s imbalances have taken a turn for the worse, and the housing bubble could well be the final straw. Income-short consumers are playing this bubble for all it’s worth -- enjoying the psychological benefits of the so-called wealth effect and utilizing the technology of refinancing and second mortgages to extract purchasing power from this over-valued asset. Unfortunately, these trends have led to the virtual elimination of US saving -- triggering a classic current-account-adjustment dynamic with attendant risks to the dollar and interest rates. That makes the downside of this bubble potentially far worse than that of the equity bubble. That would be an especially worrisome development for the US economy, since household real estate holdings of some $14 trillion currently are almost double the aggregate size of equity portfolios.
While it has only been four and a half years since the bursting of the equity bubble, memories have already dimmed of that extraordinary speculative excess. Yet in retrospect, that may have only been the warm-up for the main event. Bubbles have a way of feeding on each other -- ultimately compounding the problem and leading to an even more treacherous shakeout. That’s certainly the lesson from Japan and could well be the case in the United States. America’s housing bubble is now in the danger zone. So is its saving rate, current account deficit, and overhang of consumer indebtedness. It’s been a US-centric world for so long, that everyone takes it for granted. Yet global rebalancing poses challenges for all major countries in the world. Saving-short America will not be spared -- especially if it must now come to grips with the biggest asset bubble of them all.
HC
"... if you've got a chart, I have an opinion!"
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peterloh
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Username: peterloh
Post Number: 864
Registered: 03-2003Rating: N/A
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| | Monday, December 06, 2004 - 03:07 pm: |
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HC,
Japan has a different culture. It is "don't rock the boat" Whereas the western approach is write it all off, we will have a fresh start. Japan let time takes its course, until something happens to change things.In this way Japan maintain a lot of its old ways and of course the old guards.Initiated changes are less likely. We can look back to the 90s, the Bond and Christopher's period, the Westpacs and what it is now, how times have changed things in a western approach.
PL
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Disclaimer: Please note that comments made in this column is mainly for the interpretation of charts in technical analysis. It is not made in my professional capacity and should not be taken as advice.In my professional capacity I am only allowed to give advice on certain managed funds authorised by my license dealer.Any share discuss is for general interest and should not be relied on to make an investment decision.It is likely that I may own the shares that we discussed as a trade or as an investment. Please consult your stock broker or financial adviser in regard to your personal situation.
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holycow
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Username: holycow
Post Number: 492
Registered: 08-2004Rating: N/A
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| | Monday, December 06, 2004 - 04:48 pm: |
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Peter,
The issue is not Japan but the USA. Japan is just a reflection. Assuming Greenspanner has learned all he needs to learn from the Japanese experiment, like Stephen said - he has only one cure, not two. He reminds me of the guy who got stuck in the quicksand - at first it only reaches his knees, now it has almost reached his navel. And very soon he won't be able to carry on his navel gazing...
I just hope all these stresses won't put him into hospital considering his advanced age, but if it really does (touch wood), I shudder to think about the chaotic scenario the world finance would be in. Anyway, this just my imagination and should not warrant our unnecessary worry.
There is a need to (re)think paradigm shift again in the leadership in the world economy and finance into the future - this time it's WITHOUT the USA calling the shot.
... for a while.
Cheers.
HC
"... if you've got a chart, I have an opinion!"
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peterloh
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Username: peterloh
Post Number: 871
Registered: 03-2003Rating: N/A
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| | Monday, December 06, 2004 - 05:02 pm: |
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HC,
Our alignment is more towards the Pacific at the moment. My concern is more of the depreciating US $ , the volatility of oil prices and also company's profit for the US economy.I am probably an optimist.If the US economy gives way, we are looking at a depression in US which I doubt it will happen.
I was watching Roache's comment in Bloomberg one night and I thought US treatment on properties is different from us. They allowed a deduction on owner residence's interest but tax on the net proceeds.
PL
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Disclaimer: Please note that comments made in this column is mainly for the interpretation of charts in technical analysis. It is not made in my professional capacity and should not be taken as advice.In my professional capacity I am only allowed to give advice on certain managed funds authorised by my license dealer.Any share discuss is for general interest and should not be relied on to make an investment decision.It is likely that I may own the shares that we discussed as a trade or as an investment. Please consult your stock broker or financial adviser in regard to your personal situation.
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peterloh
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Username: peterloh
Post Number: 872
Registered: 03-2003Rating: N/A
Votes: 0
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| | Monday, December 06, 2004 - 05:10 pm: |
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Sometimes I think economist are too superficial in their analysis. In a depressed equity market, and if you are a growth investor , where do you put your money? There is only one other class of growth asset and that is properties. This is not unusual, we have seen it happening all over the world.The only thing of any concern is like the property market in Japan, Hong Kong and Singapore, where it was hit so bad that it will take some time to recover.
PL
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Disclaimer: Please note that comments made in this column is mainly for the interpretation of charts in technical analysis. It is not made in my professional capacity and should not be taken as advice.In my professional capacity I am only allowed to give advice on certain managed funds authorised by my license dealer.Any share discuss is for general interest and should not be relied on to make an investment decision.It is likely that I may own the shares that we discussed as a trade or as an investment. Please consult your stock broker or financial adviser in regard to your personal situation.
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holycow
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Username: holycow
Post Number: 494
Registered: 08-2004Rating: N/A
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| | Monday, December 06, 2004 - 05:56 pm: |
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Peter,
I think the US situation should not be treated lightly. I think they are into such a big shit that they probably don't even want to think about it. Everything boils down to timing in my view - when the time comes, we will know but probably will be too late.
In a depressed market, big $$$ won't be looking for growth, they will be looking for safe haven to preserve their worth, hence the gold rally. The gold bugs are crowing all over of their foresight and fortune - just look around and you will see.
Last year when the Aussie market was near its peak, almost every of my friends were rushing into property "investing" or some kind of renovation. In almost every dinner party, I was the lone voice telling them the US has no choice but to raise rate and the RBA would have no choice but to follow and there is this adage that says "three strikes and you're out" where three consecutive interest rate hikes would kill off most equity or property bubble... it only took RBA two consecutive rate hikes to get the job done.
In the USA, I believe their property bubble has been the main reason for the equity rally they have last year. Anyway there were some early signs that the mortgage/refinancing sector over there are not very healthy where I believe Freddie Mac and Fannie Mae were investigated. You can check these out at here,here ,here and here.
As usual, all these may take a long time to manifest themselves into actual visible troubles that we can all see. All I can tell you is this - nowaday, no one in the dinner party I go to utters a sound on their property or their venture in real estate. I guess they have all become wiser now that it is "official" that the property is into a corrective phase.
Cheers.
HC
"... if you've got a chart, I have an opinion!"
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holycow
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Username: holycow
Post Number: 736
Registered: 08-2004Rating: N/A
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| | Tuesday, January 25, 2005 - 04:48 pm: |
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China may raise banks' minimum reserves to curb money supply: analysts
Tuesday January 25, 2005, 3:02 pm
BEIJING (AFP) - China may crack down on soaring inflows of hard currency by raising the minimum amount of deposits commercial banks must hold in reserve, analysts said.
The move, which would be the third of its kind in the past 18 months, is creeping up on a list of likely policy responses to increasingly expensive weekly operations to soak up the excess money in the system, they said.
"It does make sense at the margin," said JPMorgan economist Grace Ng. "You have this run-up in reserves and have to absorb more liquidity so the costs increase."
The ongoing and seemingly unstoppable expansion of the Chinese economy is putting a growing strain on the country's central bank.
A humming export sector, massive inflow of foreign investment and speculative money betting on a currency appreciation all boost liquidity to levels where the central bank has problems coping.
This is because under China's US dollar peg, the central bank must issue around 8.27 yuan for every dollar which comes onshore in order to maintain the currency within its narrow trading band.
The excess yuan are then mopped up, or sterilized, in weekly open market operations in which the currency is bought up by the central bank in exchange for government paper.
But questions are cropping up about the cost of these operations, and Chinese financial officials have been complaining in recent months about the difficulties that they have been causing.
The latest warning came last week from Zhang Xiaohui, head of the monetary policy department under the central bank.
Foreign capital inflows have boosted money supply, and the central bank faces increasing pressure from the cost of weekly efforts to absorb them, Zhang told traders.
In the second week of January, the central bank drained a record net 95 billion yuan cash from circulation, but in a surprise move, the central bank added a net 30 billion yuan last week.
"This could be a signal that the central bank is about to raise the required deposit reserve ratio," Gao Zhanjun, an bond analyst at CITIC Securities said.
A rise in the funds banks must keep in reserve to 8.5 percent of total deposits from the current 7.5 percent would have a dramatic effect.
It would drain 100 billion yuan of cash from circulation, giving the central bank more breathing space, analysts said.
Inflows and outflows are being watched more keenly this year in the light of the strains brought on by capital inflows.
These were underlined by last year's massive 206.6 billion dollar increase in China's foreign reserves to 609.9 billion dollars. (can u see why the China story is so "convincing"?... when the bubble bursts, there will be blood everywhere. It's very hard to tell this early that there's a bubble on its way. Likewise back in 2000, no one believed there was a bubble either - especially the analysts and fund managers!)
A currency revaluation could reduce the capital inflows, but the government has said repeatedly that it will not reward speculators.(this is almost as good as saying that the Chinese government has failed in curbing the runaway growth... so expect the good times to continue rolling!)
And some analysts maintain that a move to appreciate the yuan could only invite even more inflows in a repeat of the pattern which helped sink Asia's currency pegs during the late-1990s financial crisis. Others strongly disagree.
"On the policy front, the government shouldn't delay any further adjustments, particularly with the exchange rate," said JPMorgan's Ng. "If it drags on too long, there is the risk of overheating further down the road."
HC
"... if you've got a chart, I have an opinion!"
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holycow
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Post Number: 748
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| | Thursday, January 27, 2005 - 07:23 pm: |
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Global: Of Bubbles, Complacency, and Liquidity
Joachim Fels (London)
“Bond Bubble?”
This was one of the three themes we chose for the workshop discussions with a distinguished group of clients at this year’s MacroVision conference, which took place in New York last Friday (for an overview of the whole conference, see Stephen Roach, MacroVision 2005: The Elastic World, January 24, 2005, on this Forum. Also, my colleagues Dick Berner and Andy Xie have written must-read overviews of the other two themes discussed -- After America and Demographic Dilemma -- on these pages). The two workshops on the bubble theme were heavily oversubscribed, and the discussion was animated from the start.
Bubbleology
The main reason for the lively start was that, somewhat unsurprisingly, many clients took issue with the characterization of the currently low government bond yields as a ‘bubble’. One participant pointed out that a key characteristic of a bubble was that investors were buying an asset even though they believed it was overvalued, in the expectation that they could sell it at an even higher price to somebody else. This “greater fool” theory was not presently at work, according to this client, and others chimed in, citing recent investor surveys that suggested fixed-income investors were generally short-duration these days. Also, bubbles were seen as being followed by major, extended bear markets, which was definitely not the consensus view in the room of what lies ahead. Yet another participant pointed out that if there had ever been a bubble in US bonds, it had long burst, as foreign investors in US assets had already had to digest a major capital loss due to the fall of the dollar. Expressed in Polish zloty, he said, the US bonds had lost 19% last year. You get the point!
Client view #1: No bubble in government bonds
As suggested by the discussion above, clients had a fairly benign view on government bonds. The consensus thought yields would rise somewhat this year but saw no major bear market for bonds ahead. A majority expected further flattening of the yield curve, despite the flattening that had already occurred. The main reason for the relatively benign outlook was that most expect inflation to remain well behaved, with a large majority looking for core inflation in the 2–3% range over the next two years (in line with the most recent reading of 2.2%Y for the core CPI). Also, many pointed to long-duration buying from pension funds and to Asian central banks’ forced buying of Treasuries as reasons why a big sell-off in bonds was unlikely. Supply/demand arguments such as these were hugely popular, which reminded one of my colleagues from the equity side of the bubbly equity market sentiment of the late 1990s. We also couldn’t help having the déjà vu feeling when some clients went to great lengths explaining why a near-zero short-term interest rate was the appropriate equilibrium rate.
Client view #2: Risky assets are overpriced
On riskier fixed-income assets, clients’ views were less benign, though not massively bearish. Many thought risky assets such as investment-grade corporate bonds, high-yield and emerging-market debt were overpriced. Also, even though this is slightly away from the bond bubble theme, several clients voiced concerns about the explosive growth in credit derivatives, hedge funds, and private equity -- concerns that had also featured in the internal discussions of Morgan Stanley’s macro team a day earlier. But the majority of participants thought that the US Federal Reserve would tread cautiously and that a monetary policy-induced sharp correction of excesses was unlikely. Most worried more about potential blow-ups in the corporate sector or geopolitical events that might burst any such bubbles via a general increase in risk aversion.
Client view #3: Disconnect between government bonds and risky assets
Last but not least, there was a view that what government bonds, on the one hand, and risky assets, on the other, seemed to imply about US economic growth was not consistent. Low government bond yields and the flattening of the curve were seen as signaling slower economic growth ahead, while narrow high-yield and emerging market spreads seemed to reflect a belief in the continuation of strong economic expansion in the global growth engine. Yet others argued that with long bond yields depressed by Asian central bank and pension fund buying, we should not read low yields as signaling a specific view on economic growth. I have another suggestion for how the circle can be squared -- excess liquidity -- but I’ll come back to this later.
My reaction #1: Inflation complacency
Listening to the discussion among our clients, I was struck by the degree of complacency that prevailed about the inflation outlook in the US. As I’ve argued before, I think inflation risks are skewed on the upside due to 1) slowing productivity growth in the US, 2) a weaker dollar and higher commodity prices, and 3) expansionary monetary policy. This strikes me as the perfect recipe for stagflation (see my Stagflation, October 4, 2004). If I’m right, bond yields should rise as inflation keeps surprising on the upside, and the yield curve should steepen because the Fed won’t hike rates aggressively — instead endorsing higher inflation as a means to keep a leveraged economy afloat. Stagflation is a mixed bag for riskier assets: Slower US economic growth is bad for stocks, credit, and EM. On the other hand, moderately higher inflation and a tame Fed should help. Note that the outcome I envision is more benign for risky assets than the endgame that Morgan Stanley Chief Economist Steve Roach has in mind (again, see his write-up of the conference), as he expects the Fed to tighten monetary policy aggressively. If Steve is right on the Fed, the yield curve would likely flatten, not steepen, and risky assets would likely sell off massively.
My reaction #2: Liquidity springs eternal
My second reaction to our clients’ views was that many seem to underestimate the importance of excess liquidity created by the central banks for the low level of yields and the tightness of risk spreads. The massive monetary stimulus of the last few years has lifted all the boats: It has helped corporates to repair their balance sheets; aided many emerging markets via a liquidity-induced rally in commodity prices, and increased the present value of pension funds’ long-term liabilities by depressing interest rates. So, duration buying by these institutions is at least partly due to excessive monetary stimulus. Similarly, Asian central banks’ buying of US bonds has been caused by the Fed’s expansionary policy stance, which has put downward pressure on the dollar and forced these central banks to accumulate dollar assets in order to keep their exchange rates pegged. However you look at it, there is no denying the impact of a record low Fed Funds rate in recent years on asset prices: To keep the economy going after the equity bubble burst in 2000, the Fed pumped a bubble in fixed-income assets. Liquidity is key.
Whither liquidity?
As explained above, I expect the Fed to be cautious in raising interest rates, as it will want to keep a slowing, leveraged economy afloat by allowing inflation to creep higher. Thus, a monetary overkill in the US is unlikely -- a point where I agree with our clients. Moreover, as I pointed out elsewhere (Liquidity Springs Eternal, January 17, 2004), the European Central Bank and the Bank of Japan will likely step in as the marginal providers of liquidity. And so the party in risky assets could go on for a while before the music stops (does it mean Gold will be in limbo until the risky business is over?).
HC
"... if you've got a chart, I have an opinion!"
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holycow
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Post Number: 938
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| | Sunday, March 13, 2005 - 01:03 pm: |
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*** this is a "seriously bad" news. Prior to the Asian Financial Meltdown back in 1997, many South East Asian countries lost control of their financial/monetary system when the market were flushing with huge influx of foreign money. Due to the lack of monitoring and control system, many corporations and government agencies embarked in long term projects (10-20years) by taking on short term funding, many of which were "hot money" - the result was disastrous when these hot monies were pulled from the projects, laden the banks with huge number of bad loans (we are talking about billions here).
The collapse of the Asian financial system and the subsequent "Asian contagion" spread worldwide and for a while everyone was paying the price (and sharing the pain).
As of today, many banks in Malaysia/Thailand/Phillipine/Korea/Indonesia are still suffering from these non-performing loans (NPL), and you can still read about them being sold or going through huge write down in their assets...
This is my take - if China were to fail in curbing this menace, brace for a bigger meltdown - because of the concentration of funds in a single nation this time.
The bubble is growing...
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China debt-reduction push undermined by local governments
Saturday March 12, 2005, 4:02 pm
BEIJING (AFP) - China's efforts to reduce its public debt are being undermined by local governments flouting the rules to borrow large sums of money, state media reported.
The inability by many local governments to service their heavy debts is posing a menace to the country's fiscal system, Xinhua news agency reported Saturday, citing delegates at the ongoing National People's Congress, or parliament.
Official data showing that debt owed by local governments now amounts to 400 billion yuan (48 billion dollars), or 15 percent of the country's aggregate fiscal revenues in 2004, may be an underestimate, they warned.
"The real figure could be even bigger," said Xie Liqun, director of the audit department of eastern Zhejiang province, told Xinhua.
The bad news comes as the finance ministry seeks to implement a new "prudent fiscal policy" which is meant to cut this year's budget deficit to two percent of the economy from 2.5 percent last year.
Chinese law bans local governments from borrowing money from banks, but many of them get around that rule by setting up investment firms which access bank financing for items such as infrastructure projects, he said.
If local governments' debts go on snowballing, they will sabotage the country's treasury, Xie warned.
The ballooning debts will be turned into non-performing loans in the bank industry, which already suffers from weak financial fundamentals, he said.
"The government budget, definitely a state affair, should be brought under the most rigid, detailed supervision," lawmaker Li Xiaofang said in a proposal to the legislature.
Local people's congresses, or legislatures, should do more to supervise the administration's use of public money, according to Huang Ping, who heads budget supervision at the lawmaking body of southern Guangdong province.
"Only when the people's congress prioritizes the work of supervision, especially that over the budget, in its day-to-day work, can it exercise supervision over the government more effectively," he said.
Lawmakers also say heavy borrowing may not be needed as local governments are in better financial shape than their published budgets suggest.
Local governments at all levels earn sizeable revenues from land leasing each year and, as it is extra-budgetary revenue, these governments can spend the money in line with their own decisions, said legislator Guo Shuyan.
HC
"... if you've got a chart, I have an opinion!"
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holycow
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