First with Financial Comment from Arabia

Asian leaders blame Fed for asset bubbles not poor official data

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2009-11-15T080733Z_01_NOOTR_RTRMDNP_2_India-439526-1-pic0Asia Pacific leaders have expressed mounting concerns about a bubble in stock markets and local property being inflated by the dollar carry-trade financed by ultra-low US interest rates. They see this as a repeat of the 2003-4 Fed policy error that resulted in the US housing boom and bust.

The danger is that the bubble will be concentrated in Asia this time. The region is widely perceived to have escaped the impact of the global financial crisis, although there are many economists who doubt official statistics show the true position.

Lies and statistics

Therein lies the real danger. Asian officials are lying about their economic situation, or perhaps being genuinely misled by their own statistics, and so the world is rushing to invest on a false prospectus.

Greater transparency would help to alleviate the problem of asset bubbles. How can the Chinese auto market be experiencing wild growth and yet consumption of gas is falling?

China could clearly put its own house in order before swinging all the blame onto the Fed. At the very least an adjustment of official data to the downside would take some of the wind out of the bubble.

There are always two sides to an asset price bubble: liquidity and unrealistic expectations about an asset class.

By the mid-2000s Americans came to believe that house prices only moved in one direction and that borrowing any amount of money on any terms would always work to the advantage of the buyer.

Bubble trouble

And what are you buying in Asia if you pile into assets now? Companies whose profits are no doubt rising strongly because they are putting all their spare cash into a rising stock market. Everybody thinks they can time the exit just right, and they all generally get it just wrong.

The question always is then when to jump out. Market timing might be a horrible science among investors but we all have to buy and sell at some point, and so by default are all market timers.

The argument for staying invested in Asia is that the bubble has further to inflate. However, usually by the time that argument appears in the press and leaders start to warn of signs of a bubble that means that the bubble is almost done.

Heading for the exit too early is a tried and tested strategy for survival, and nobody ever really lost money by booking a profit.


Written by Peter Cooper

November 16, 2009 at 9:28 am

One Response

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  1. Over the past 18 months, all governments, ALL OF THEM are printing currency; in general, western countries are printing a lot more, and the USA is “king” when it comes to the printing press.

    Yes, and they’re all lying about their own economies (including China, according to my Chinese wife!), yet stock markets are shrugging off the truth, in the hope that somehow, the global economy and global trade will come back to where it was in 2007. This is wishful thinking, and “hope” is never a good strategy.

    BOTTOM LINE: if you’re holding onto an 8% to 10% gain, it’s better to take your profit and run. The hedge funds and other large institutions are trying to squeeze out more gains from the government’s continued support of the stock markets; that may be OK for them; their sophisticated models will tell them when it’s time to “head for the exits”. But for the individual investor, caution should be the byword.


    November 17, 2009 at 12:38 am

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