If you think stock market volatility is bad now, just wait for next year
Andy Xie says the current market volatility is the result of a battle between optimistic mobile internet-led investors and monetary policy. Liquidity tightening will, however, eventually burst the bubble
We live amid the greatest bubble in human history. This is the culmination of a series of successive bubbles over the past four decades, based on US dollar printing. People clearly never learn. After one bubble based on a wacky idea pops and wipes out a generation, another generation is sure to come along and embrace another bubble with a new wacky idea. Homo sapiens must be hard-wired to love bubbles.
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When a bubble peaks, it usually pops. But, sometimes, it fades away gradually. It took Japan’s Nikkei nine years to bottom out. The Japanese property market is still deflating 25 years after its peak.
The current sell-off points to another scenario that could burst this bubble. The ETF that bet on low volatility had a big impact on the sell-off. It suggests that there is tonnes of leverage in the market through structured products, especially ETFs. When the storm hits, they have to unwind, which could trigger waves of sell-offs. The 1987 market crash was due to something similar. The current one, however, is much bigger. When the real burst comes, a 50 per cent collapse would be kind.
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The current turbulence is not likely to lead to the immediate demise of this bubble, because the greed momentum is still strong. Any bubble, in addition to liquidity, needs something shiny to capture popular imagination.
Rather, every rebound is led by the internet. The mass hysteria is still intact. It will fight against tightening liquidity again and again. The battle between the two will cause several sell-offs this year such as the one we are now seeing.
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The popular infatuation with mobile internet will fade soon. The decline in Facebook usage is a sign of things to come. The internet-based model thrives on misinformation and deception. But the internet boom will burn itself out. People will eventually wake up to the reality that to get on the internet is to get ripped off. That will be a driver behind the bubble bursting.
Tightening liquidity will eventually kill greed. The US budget has sealed its fate. The ballooning fiscal deficit in a peaking economy means that the US bond yield will keep rising, even if the Fed drags its feet on raising the policy rate. The 10-year bond yield may reach 4 per cent in one year. That would be enough to pop the bubble.
The market wobbles in 2018 are just tremors. The big one will come in 2019.
Andy Xie is an independent economist