The global asset bubble will burst – the only question is when, and how bad it will be
Andy Xie says we are seeing little concern about the swollen asset bubble, even though stock prices are higher than just before other crises and China is looking to slow the credit expansion that has propelled growth. It’s time to watch for signs of a coming contraction
The unusual longevity and resilience of high asset prices are largely because government actions, not herd behaviour in the market, are force-feeding the bubble. Government actions will lose their grip only when growth expectations crash or inflation flares up. Neither is a major risk for 2018. Hence, 2018 won’t kill the speculators of the world.
What does the Fed interest rate rise means for Hongkongers?
The asset bubble demands that the excess liquidity-money supply rises faster than GDP to sustain it. This year may see global money supply line up with GDP. The Fed is likely to raise interest rates from the current 1-1.25 per cent and take the level to 2.5 per cent in 2018. This is still low compared with the 4.5-5 per cent nominal GDP growth rate. But the US stock market is more expensive than in 1929 or 2000. When the interest rate surpasses inflation, it will become wobbly.
Today’s world is full of speculators. The incredible monetary expansion of the past three decades has richly rewarded speculators. Every crash along the way was bailed out quickly by governments. The world has not experienced a genuine cleansing. Hence, three generations of speculators are stacked on top of each other. It doesn’t take much to get them going. Furthermore, today’s speculators are mostly gainfully employed as money managers and bet with other people’s money. Their incentive is overwhelmingly for staying in the game. This is why the dance between policymakers and speculators has been so effective and smooth in propping up defective economies.
While 2018 may not be the end, it will happen some day. A likely trigger is inflation. Central bankers have found the excuse to support asset inflation by citing the lack of inflation in the real economy. This is due to China joining the World Trade Organisation. Some 800 million Chinese workers joined and become gravity for the global labour market. Even when China reached full employment, it started asset bubbles to tax the household sector and turned the revenue into subsidising investment and production. China has since been trapped in the equilibrium of goods deflation and asset inflation. While China does this, global inflation is unlikely to flare up.
Global inflation will finally arrive when China stops funding overinvestment and revalues its currency to empower consumers. When we see China appreciate its currency by 20-30 per cent quickly, the global asset bubble will pop.
If China keeps doing what it is doing, capital efficiency will keep falling at home and all over the world. Global growth will slow further from the anaemic levels since 2008. When the fear of stagnation takes hold, enough speculators may want to cash out while they can still fill their wallets, and the bubble will pop.
The current world is a kind of make-believe. People gain their faith in the fantasy from the last trend. When they wake up, it will be ugly.
Andy Xie is an independent economist