Home » Posts tagged 'bubble' (Page 2)

Tag Archives: bubble

Search within blog:

Subscribe RSS feed

March 2024
S M T W T F S
 12
3456789
10111213141516
17181920212223
24252627282930
31  

John Mauldin: market opportunities and where’s the next bubble

China’s bubble pricking experiment

The latest news came in from China:

(China’s regulators) set a 30% minimum down-payment for purchases of first homes larger than 90 square meters, and raised the down-payment requirement for second homes for the second time this year, to 50% from 40%. Relatively few buyers now qualify for the minimum down payment of 20%.

In my view, China stands at the forefront of the policy experiment of pricking asset-bubbles.  Many economists and central bankers hold the view that bubble is impossible to detect; instead, policy makers should focus on minimizing the damage in the aftermath of bubble bursting. Former Fed Chairman, Alan Greenspan, is one of them.

The recent financial crisis taught us an important lesson, i.e., central bankers should take a pro-active role in containing the bubble – the damage left by bubble bursting is just too great to ignore, especially to the employment.

China’s case is especially interesting – unlike Western central bankers, so far Chinese policy makers have largely relied on administrative measures, instead of the traditional policy instruments, like interest rates.

I would think the new regulation on down-payment would be quite effective.  However, it’s an open question how strictly Chinese policy makers would want to implement such policy; and how long and how far the policy makers would allow the price to fall, without worrying about the stability of the system – yes, I am talking about the stability of political system.

If speculators know the government isn’t going to allow the price to fall (or fall too much), then this will eventually create a Moral Hazard problem – Next round, when new policy measures come about, real estate developers and speculators just hold up, accumulating housing inventories, anticipating the policy will soon reverse.  This will essentially render polices ineffective.

So all in all, we may never really get rid of bubble – as long as there is human greed and fear, and no matter which system you are living in – unregulated or heavily regulated.

Nikkei and Nasdaq: Is history going to repeat?

That America may enter a Japan-like very slow growth for quite some time is still not completely out of woods. The United States is not Japan, but the aftermath of a great asset bubble can never be underestimated.


(click to enlarge; h/t: Big Picture)

Greenspan on current state of economy

A few interesting points to note:

1. (this is not new in his thinking) It’s not only real economy that drives equity market: but also it’s the other way around: equity market also drives real economy. The channel is stock prices help ratings of corporate debt.

2. He is very worried about US fiscal situation;

3. China is a bubble waiting to burst. But the impact will be uncertain.

How to watch China bubble

Ed. Chancellor of GMO (in Boston) has put out an excellent piece on the Chinese market and the “red flags” for investors.

The paper addresses how to identify the proper “speculative manias” and associated financial crises in the country. Chancellor sums it into key points, breaking down the bare essentials:

1. Great investment debacles generally start out with a compelling growth story.

2. A blind faith in the competence of the authorities is another typical feature of a classic mania. In other words, you can’t always trust the numbers that a government is putting out.

3. A general increase in investment is another leading indicator of financial distress. Capital is generally misspent during periods of euphoria.

4. Great booms are invariably accompanied by a surge in corruption. Countrywide, anyone?

5. Strong growth in the money supply is another robust leading indicator of financial fragility. Easy money lies behind all great episodes of speculation from the Tulip Mania of the 1630s – which was funded with IOUs – onward.

6. Fixed currency regimes often produce inappropriately low interest rates, which are liable to feed booms and end in busts.

7. Crises generally follow a period of rampant credit growth. In the boom, liabilities are contracted that cannot subsequently be repaid. The U.S. will ultimately be a perfect example of this.

8. Moral hazard is another common feature of great speculative manias. Greed isn’t necessarily good and we tend to act irresponsible during intense periods of speculation.

9. A rising stock of debt is not the only cause for concern. Investments financed with borrowed money don’t generate enough income to either service or repay the loan (what Minsky called “Ponzi finance”).

10. Dodgy loans are generally secured against collateral, most commonly real estate. Thus, a combination of strong credit growth and rapidly rising property prices are a reliable leading indicator of very painful busts.

Jim Rogers on Chinese Yuan and Real Estate Bubble

Illusion of Chinese Bubble?

I have always been wondering whether governments, through regulation, can prevent bubbles. I tend to think this is not the case.  "Smart" people (frenzy investors, investment banks, etc.) can always find loopholes and circumvent the regulation. Also remember, in democratic societies, regulations are also the bargaining outcome of various interest groups.  If government can single-handedly kill the bubble, we wouldn't find any bubbles in tightly regulated economies.  In fact, what we actually observe proves otherwise.

Fan Gang, a well-known economist in China, argues Chinese government has learned the lesson from Japanese bubble 20 years ago, and Chinese bubble is an illusion. (source: Project Syndicate):

BEIJING – On the eve of Chinese New Year, the People’s Bank of China (PBC) surprised the market by announcing – for the second consecutive time in a month – an increase in banks’ mandatory-reserve ratio by 50 basis points, bringing it to 16.5%. Shortly before that, China’s government acted to stop over-borrowing by local governments (through local state investment corporations), and to cool feverish regional housing markets by raising the down-payment ratio for second house buyers and the capital-adequacy ratio for developers.

This latest round of monetary tightening in China reflects the authorities’ growing concern over liquidity. In 2009, M2 money supply (a key indicator used to forecast inflation) increased by 27% year on year, and credit expanded by 34%. In January 2010, despite strict “administrative control” of financial credit lines (the PBC actually imposed credit ceilings on commercial banks), bank lending grew at an annual rate of 29%, on top of already strong expansion in the same period a year earlier. While inflation remains low, at 1.5%, it has been rising in recent months. Housing prices have also soared in most major cities.

These factors have inspired some China watchers to regard the country’s economy as a bubble, if not to predict a hard landing in 2010. But that judgment seems premature, at best.

To be sure, China may have a strong tendency to create bubbles, partly because people in a fast-growing economy become less risk-averse. Thirty years of stable growth without serious crises have made people less aware of the negative consequences of overheating and bubbles. Instead, they are so confident that they often blame the government for not allowing the economy to grow even faster.

There are also several special factors that may make China vulnerable to bubbles. China’s large state sector (which accounts for more than 30% of GDP) is usually careless about losses, owing to the soft budget constraints under which they operate. Local governments are equally careless, often failing to service their debts. In addition, various structural problems – including large and growing income disparities – are causing serious disequilibrium in the economy.

But a tendency toward a bubble need not become a reality. The good news is that Chinese policymakers are vigilant and prepared to bear down on incipient bubbles – sometimes with unpopular interventions such as the recent monetary moves.

Whatever one thinks of those measures, taking counter-cyclical policy action is almost always better than doing nothing when an economy is overheating. Whereas some policies may be criticized for being too “administrative” and failing to allow market forces to play a sufficient role, they may be the only effective way to deal with China’s “administrative entities.”

In any case, the new policies should reassure those who feared that China’s central government either would simply watch the bubble inflate or that it lacked a sufficiently independent macroeconomic policy to intervene. The consequences of burst bubbles in Japan in the 1980’s and in the United States last year are powerful reasons why China’s government has acted with such determination, while the legacy of a functioning centralized system may explain why it has proven capable of doing so decisively. After all, although modern market economics provides a sound framework for policymaking – as Chinese bureaucrats are eagerly learning – the idea of a planned economy emerged in the nineteenth century as a counter-orthodoxy to address market failures.

Some people would prefer China to move to a totally free market without regulation and management, but the recent crises have reminded everyone that free-market fundamentalism has its drawbacks, too. No one has proven able to eliminate bubbles in economies where markets are allowed to function. But if the fluctuations can be “ironed out,” as John Maynard Keynes put it, total economic efficiency can be improved.

Government investment, which represents the major part of China’s anti-crisis stimulus package, should help in this regard. Roughly 80% of the total is going to public infrastructure such as subways, railways, and urban projects, which to a great extent should be counted as long-term public goods. As such, they will not fuel a bubble by leading to immediate over-capacity in industry.

Moreover, roughly 40% of the increase in bank credit in 2009 accommodated the fiscal expansion, as projects were started prior to the budget allocations needed to finance them. Over-borrowing by local government did pose risks to the banking system and the economy as a whole, but, given China’s currently low public-debt/GDP ratio (just 24% even after the anti-crisis stimulus), non-performing loans are not a dangerous problem. Indeed, they may be easily absorbed as long as annual GDP growth remains at 8-9% and, most importantly, as long as local government borrowings are now contained.

Finally, the leverage of financial investments remains very low compared to other countries. Using bank credits to speculate in equity and housing markets is still mostly forbidden. There may be leaks and loopholes in these rules, but firewalls are in place – and are more stringently guarded than ever before.

So is a Chinese bubble still possible? Perhaps. But it has not appeared yet, and it may be adequately contained if it does.