Asia Pacific: The Stir-Fried World
Andy Xie (Hong Kong)
‘It felt like Fujian province. Over the horizon, I saw many people uploading boxes from a riverboat and moving them into a nearby warehouse. I ran closer and could see the distinct sign of “LME Inventory-Copper” on each box. “I knew it, I knew it”, I jumped up and down screaming. A nasty-looking guy suddenly appeared before me and pointed a big gun at me. “Too bad, you can’t tell anyone about it”, he snarled.’
I woke up. Copper has been bothering me, you see.
Nickel seems to have cracked. It is down 23% this year. I wouldn’t feel sorry for the speculators though; it is still up 80% from 2002.
I was in London last month to visit investors and had never seen them so enthusiastic. Almost all investors I met with believe that the OECD economies have just begun a prolonged recovery. ‘The world is firing on every engine’ was the tight market consensus.
When I woke up at 3:00 am, I could watch house-hunting dramas on multiple TV channels. It seemed that serious efforts had been put into such shows, and they appeared to be good shows. When you hear that millions of pounds are being paid for this and that house, it sure beats ‘The Price Is Right’. The shows helped me to understand why my bed sank to the ground even though it cost me £200 per day.
A cabbie thought that Hong Kong people came to the UK to buy in 1997 and set off the chain reaction. He thought that the 3% increase in the UK house price last month was to be expected. “Everyone wants to live in London”, he explained.
I was visiting US investors in January. American investors are usually the most bullish in the world, but I was still shocked this time by their enthusiasm. I heard many stories on China that I couldn’t hear inside China. ‘Someone’s uncle very high up said no slowdown’ was a typical response to my slowdown call.
I turned bullish on May 12, 2003 (see my article, Money to Burn) when I saw that China had successfully contained the SARS epidemic. I showed the charts of surging dollar liquidity to investors, touting the picture of money spilling over into Asia from America. “You are trying to sell me the bigger-fool theory”, one investor succinctly summarized what I was saying. Yes, I was. The astonishing phenomenon is that so many investors who complained about the bigger-fool theory have become believers in ever-rising markets again. They point at the rising profits, rising trade, and rising economies to justify their optimism. Now, I have a hard time convincing anyone that the rising asset markets have caused the economic upturn and what’s going on is a party. Nothing changes the mind of an investor like a rising market.
Speculation plays a central role in the current global economic cycle. I often cite stimulus and the gain from trade as the two main forces powering the global economy in this cycle. But the multiplier on the stimulus, primarily low interest rate and tax cuts in the US, comes from rising asset markets. If property prices were not rising rapidly in the US, would the American consumer rush out to spend their tax cuts? Mr. Greenspan now works his magic mainly by manipulating the actions of speculators because consumers or companies cannot respond directly to interest rate change in a low inflation environment.
We are possibly in the biggest bubble in human history. Property appears to be at the core of this bubble. The high property prices in Los Angles, London, New York, Shanghai, or Sydney reflect the same phenomenon. They are focal points of speculation. In an environment of loose monetary policy and low CPI inflation, speculation can take off in a particular market that supports enthusiasm. When these markets become extremely expensive, the spillover then inflates other markets. The high degree of globalization in goods and capital has probably caused the first global property bubble in history.
The global economy is in a period of high productivity growth and the market barriers prevent the full realization of the growth potential. Hence, the right market equilibrium is for a growth rate below potential and some deflation. Monetary authorities, mainly the Fed, are making a tragic mistake trying to justify loose monetary policy on tame CPI inflation, in my view.
Bubbles are not necessarily bad. A good bubble fools rich people into investing more in a poor economy, which increases the capital and labor ratio and boosts labor pricing power. Most investment bubbles are eventually beneficial for economic development. Indeed, successful economic development is probably an investment bubble, in my view. Over-consumption makes a bubble dangerous. When the artificial worth of paper fools people into spending too much money, i.e., saving less and borrowing more from foreigners, it is likely to be followed by a prolonged period of low growth with high savings and a current account surplus. The US economy should follow this path.
But Mr. Greenspan disagrees with this diagnosis. He wants the US economy to grow out of its problem. Instead of consuming less to save more, he seems to believe that a weak dollar would allow the US to earn more from exports to make up for the savings shortfall. This strategy is possible only if other people play the game, i.e., Chinese, Europeans and Japanese should consume more to buy $500 billion more of goods from the US. However, a massive bubble has caused the US consumption excess. Other economies have to create bubbles equally big to consume as much. This is highly unlikely, in my view.
Europeans and Japanese don’t strike me as people who would create big bubbles. Bubbles happen when a society functions on extreme competitiveness, i.e., people try to get ahead of each other by some measure. A bubble is a redistribution game. People usually believe that they are smarter than others. Hence, a ‘bigger fool’ game could take hold in such societies. When people cannot have or don’t believe in rat races, bubbles become much less likely. Europeans are using public policies – mandating longer holidays and punishing people for working overtime, for examples – to prevent rat races. Japanese gamble but collectively. This makes bubbles less likely but very big when they happen. It seems that Japan has a very big bubble every 50 years. The next bubble in Japan seems to be four decades away.
The Chinese economy comes up with a bubble whenever it has a chance. China is still in an early stage of economic development, i.e., its stock of wealth is still low. Its bubbles are mostly in quantities rather than prices. This is quite similar to what occurred in the US during the nineteenth century.
As the Fed insists on growing out of the US problem, it makes the property bubbles bigger and bigger everywhere. The resulting extra debt becomes more and more dangerous for the global economy. Last year, the debt grew by three times as much as GDP in the US and 2.7 times in China. The ratios could rise further as the bubbles need an escalating amount of liquidity to stay alive.
China is doing the right thing to slow its economy before the US does, in my view. This should give China more options. The Bank of England and the Reserve Bank of Australia are trying to cool their property bubbles. These actions will decrease the multiplier effect from the low Fed interest rate on the global economy; ceteris paribus, more Fed stimulus would be required to sustain the momentum in the US economy.
Bubbles burst for different reasons. A bubble often crumbles under its own weight, as there is not enough liquidity to satisfy its exponential appetite. Sometimes, a small event (e.g., the devaluation of the Thai baht) could be a catalyst. I suspect that tumbling property prices in some peripheral market may cause the whole thing to go bang.
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