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31-08-2014, 06:58 AM
The tricky business of spotting bubbles
PUBLISHED: 30 AUG 2014 02:49:00 | UPDATED: 30 AUG 2014 05:18:01
The tricky business of spotting bubbles
The hunt for yield is pushing investors and asset prices into uncharted waters. But are these bubbles? And would you recognise a bubble if you were caught inside one?
MARK MULLIGAN
Ask any parent: kids love bubbles. The heaven-sent air-filled soapy wonders provide hours of cheap entertainment and nobody ever gets hurt.
Put the word “asset” or “financial” before it, however, and the harmless bubble becomes a malevolent force. And these ferocious froth balls appear to be everywhere.
In London, the humble terrace has become an impossible dream for most, while Sydney semis are soaring beyond the reach of a generation. From tech shares and Italian bonds to postmodern art and antique toys, wherever someone can make a bid there’s a new record price.
The first Superman comic recently changed hands for $US3.2 million ($3.4 million), while Snapchat, an app made for libidinous teenagers, has just been valued at $US10 billion.
Finding themselves in the same room at the same time, the chief economists of Australia’s big four banks disagreed on many topics but they chimed in unison: there’s no property bubble here.
Years of cheap credit explain the latest bonanza, most agree, while the hunt for yield is pushing investors and asset prices into uncharted waters. But are these bubbles? And would you recognise a bubble if you were caught inside one?
“I would define a bubble as something that is unsustainable in the long run,” Deutsche Bank’s chief economist for Australia Adam Boyton says.
“If we’re in a world where income growth is 4 or 5 per cent for a decade while house price growth is 10 per cent, then that’s potentially unsustainable.”
PHENOMENON QUANTIFIED
Jeremy Grantham, chief investment strategist of fund manager GMO and renowned bubble-spotter, has quantified the phenomenon, proposing that once prices hit two standard deviations over the long term, it’s time to bail.
When the US housing bubble burst in 2007 it was at 3.5 standard deviations, he argues. But by then almost the whole world had been inflated by relatively cheap credit and an unhealthy universal optimism about the value of everything from formaldehyde-injected sharks in fish tanks and telecoms companies to Spanish villas and Miami condos.
“From Indian antiquities to Chinese modern art; from land in Panama to Mayfair; from forestry, infrastructure and the junkiest bonds to mundane blue chips; it’s bubble time,” Grantham portentously observed in an April 2007 newsletter.
The rest, of course, is history. The United States housing bubble popped when financing for low-quality, or subprime, mortgages collapsed as arrears and foreclosures mounted.
The aggressive debt-peddling was tastelessly typified in US reality shows such as Flip This House and Flip That House, which celebrated the ease of turning a quick profit with little if any equity outlay.
The property crash triggered panic selling of mortgage-backed securities and related derivatives. Credit markets froze, banks failed, governments went broke and asset prices tanked.
The “global financial crisis” led to the “great recession”, which has become the “painful recovery” and now the “next global bubble”.
DANGEROUS IMBALANCES
In July the US Federal Reserve chair Janet Yellen said she’s unsettled by “stretched valuations” of some sector stocks and “pockets of increased risk taking”.
The Bank for International Settlements says loose monetary policy is building dangerous imbalances in the financial system. A massive property overhang in China and a torrent of emerging market inflows have a range of economic luminaries biting their nails.
Calling when a bubble’s skin is pulled too thin, however, is the most imprecise of inexact sciences. Former Fed chairman Alan Greenspan’s now-immortal “irrational exuberance” line was uttered three years and three months before the dotcom castle crumbled. The Economist magazine, an august organ by the highest of standards, has been warning of an Australian property crash for a decade.
Even the world’s most adamant of doomsayers admit picking when a bubble will burst, and identifying the trigger, is tricky. “Bubbles have their own momentum,” Harry Dent, best-selling author of such titles as The Great Crash Ahead and The Great Depression Ahead says. “The more prices go up, the more people say: ‘Gosh, how am I going to miss out on this?’ .”
Therein lies the conundrum.
As millions of would-be property owners around the world can attest, the only thing worse than being trapped inside a bubble when it bursts is not being in it while it’s expanding.
But be warned: bubbles are not kids’ play. “Every bubble bursts,” Dent says. “There are no exceptions in history.”
The Australian Financial Review
PUBLISHED: 30 AUG 2014 02:49:00 | UPDATED: 30 AUG 2014 05:18:01
The tricky business of spotting bubbles
The hunt for yield is pushing investors and asset prices into uncharted waters. But are these bubbles? And would you recognise a bubble if you were caught inside one?
MARK MULLIGAN
Ask any parent: kids love bubbles. The heaven-sent air-filled soapy wonders provide hours of cheap entertainment and nobody ever gets hurt.
Put the word “asset” or “financial” before it, however, and the harmless bubble becomes a malevolent force. And these ferocious froth balls appear to be everywhere.
In London, the humble terrace has become an impossible dream for most, while Sydney semis are soaring beyond the reach of a generation. From tech shares and Italian bonds to postmodern art and antique toys, wherever someone can make a bid there’s a new record price.
The first Superman comic recently changed hands for $US3.2 million ($3.4 million), while Snapchat, an app made for libidinous teenagers, has just been valued at $US10 billion.
Finding themselves in the same room at the same time, the chief economists of Australia’s big four banks disagreed on many topics but they chimed in unison: there’s no property bubble here.
Years of cheap credit explain the latest bonanza, most agree, while the hunt for yield is pushing investors and asset prices into uncharted waters. But are these bubbles? And would you recognise a bubble if you were caught inside one?
“I would define a bubble as something that is unsustainable in the long run,” Deutsche Bank’s chief economist for Australia Adam Boyton says.
“If we’re in a world where income growth is 4 or 5 per cent for a decade while house price growth is 10 per cent, then that’s potentially unsustainable.”
PHENOMENON QUANTIFIED
Jeremy Grantham, chief investment strategist of fund manager GMO and renowned bubble-spotter, has quantified the phenomenon, proposing that once prices hit two standard deviations over the long term, it’s time to bail.
When the US housing bubble burst in 2007 it was at 3.5 standard deviations, he argues. But by then almost the whole world had been inflated by relatively cheap credit and an unhealthy universal optimism about the value of everything from formaldehyde-injected sharks in fish tanks and telecoms companies to Spanish villas and Miami condos.
“From Indian antiquities to Chinese modern art; from land in Panama to Mayfair; from forestry, infrastructure and the junkiest bonds to mundane blue chips; it’s bubble time,” Grantham portentously observed in an April 2007 newsletter.
The rest, of course, is history. The United States housing bubble popped when financing for low-quality, or subprime, mortgages collapsed as arrears and foreclosures mounted.
The aggressive debt-peddling was tastelessly typified in US reality shows such as Flip This House and Flip That House, which celebrated the ease of turning a quick profit with little if any equity outlay.
The property crash triggered panic selling of mortgage-backed securities and related derivatives. Credit markets froze, banks failed, governments went broke and asset prices tanked.
The “global financial crisis” led to the “great recession”, which has become the “painful recovery” and now the “next global bubble”.
DANGEROUS IMBALANCES
In July the US Federal Reserve chair Janet Yellen said she’s unsettled by “stretched valuations” of some sector stocks and “pockets of increased risk taking”.
The Bank for International Settlements says loose monetary policy is building dangerous imbalances in the financial system. A massive property overhang in China and a torrent of emerging market inflows have a range of economic luminaries biting their nails.
Calling when a bubble’s skin is pulled too thin, however, is the most imprecise of inexact sciences. Former Fed chairman Alan Greenspan’s now-immortal “irrational exuberance” line was uttered three years and three months before the dotcom castle crumbled. The Economist magazine, an august organ by the highest of standards, has been warning of an Australian property crash for a decade.
Even the world’s most adamant of doomsayers admit picking when a bubble will burst, and identifying the trigger, is tricky. “Bubbles have their own momentum,” Harry Dent, best-selling author of such titles as The Great Crash Ahead and The Great Depression Ahead says. “The more prices go up, the more people say: ‘Gosh, how am I going to miss out on this?’ .”
Therein lies the conundrum.
As millions of would-be property owners around the world can attest, the only thing worse than being trapped inside a bubble when it bursts is not being in it while it’s expanding.
But be warned: bubbles are not kids’ play. “Every bubble bursts,” Dent says. “There are no exceptions in history.”
The Australian Financial Review