Thursday, Aug 06, 2009
Where will the next bubble develop?
Daily Telegraph: Excess liquidity thesis gains traction as financial markets soar
Many countries have suffered their worst GDP declines in generations. Consumer prices are still falling in the US, Japan, the eurozone and China. But stock prices are once again hitting crisis highs, the oil price has almost doubled, distressed debt is selling at 90pc of face value and credit spreads are steadily narrowing. This financial mini-boom cohabits oddly with deflation.
Money might solve this puzzle. More precisely, in their anti-deflationary fervour, central banks may be creating more money than depressed economies require. The surplus creates "excess liquidity" - which may be feeding a new series of stock, commodity, property and bond bubbles.
Posted by drk @ 01:49 PM (1411 views) Add Comment
27 Comments
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1. paul said...
Yep, kicking the problem into the long grass again and sowing the seeds of the next financial crisis in the process. The Bank of England does not have a good track record of facing up to problems with tough measures.
Again, this is why history will not judge Mervyn King's stewardship of Bank policy kindly.
2. alan_540 said...
Paul, I think you're being a bit unkind to Mervyn King. It wasn't long ago that he wasn't going to be replaced as governor. This wasn't because he was incompetent more that he was unwilling to do the bidding of his political masters.
3. kruador said...
There may actually be the right amount of liquidity, but the unreformed capital, commodity and derivatives markets - and gains on those markets not being taxed as income - give the banks, and those who can get leverage, far more reward from gambling it all away than in investing in anything that's actually productive.
4. letthemfall said...
This is a serious worry. One wouldn't have thought it possible following the near-collapse of the banking system. But I suppose it is possible to blow up fresh bubbles to postpone once again the payback day. What would the consequences be? Horrendous.
5. paul said...
2. @alan_540
I am well aware of that. Unfortunately he also failed there.
6. icarus said...
The difference between English elitist academic analyses and the American ones. The English say "central banks may be creating more liquidity than depressed economies require (leading to) excess liquidity which may be leading to a new series of stock, commodity, property and bond bubbles".
The Americans say "Bernanke is deliberately using QE to mainline money into the stock market to bolster the equity position of banks, who can then use the windfall to buy US Treasuries that China doesn't want (or to boost bank profits by gambling in the stocks, bonds and commodities that are driven up by this money).
7. Vacuouspolitician said...
alan_540 @2
Penfold had the chance to correct an overbloated housing market years ago...he chose to do nothing to correct it. In 2005 he decided to bring down IR which inflated the housing bubble further. Penfold is totally incompetent. He is also a dinosaur who has been given the runaround by the spivs in the city...he hasn't got a clue about modern practices and has just bumbled his way from week to week.
8. bellwether said...
Agree with Icarus, the corollary of this is that the excess liquidity is not going into the real economy because the only way in is via credit money, and credit mechanism (ie people borrowing and being able to borrow) is broken and cannot truly restart until savings increase and house prices drop.
So we are blowing bubbles in assets and stocks with no supporting income, and if the income doesn't fill in soon (and it won't ) then asset and stock prices will plunge again.
Beyond corruption there are 2 hopes (1) animal spirits with engender confidence and kick start the economy - this is utterly naive as we broke on credit saturation and bad debt because of excess exuberance, not lack of confidence ie confidence isn't the issue but solvency and hope (2) that the banks will become super capitalised and start lending ,only problem is that for this to happen there needs to be a market and by hoarding bad/non perforning assets a market cannot fall ie we want volume and activity but we don't want to bear the price drops entailed in this. Cake and eat it.
9. bellwether said...
meant market cannot form rather than fall, always the same point tho we need to contract before we can start again
10. paul said...
I hope you're right, bellweather.
"You can't eat your cake and have it".
11. mander said...
Alan Greenspan is my man here. He is the master of the universe. But if americans do something we have to folow them otherwise we may not be allowed to create money...
12. letthemfall said...
Mind you, the problem of excess credit and bad debt was around for some time before the collapse. Although it seems almost impossible to countenance, could QE just possibly set off another bubble in some asset or other, which will be interpreted as boom time again, feeding into freer credit, etc etc. The two views icarus quotes are, after all, two sides of the same coin.
13. mdmick said...
People have mentioned before here that risk is determined by credit ratings agencies and that they do not seem all that great at determining risk. So, it seems feasible to me that fresh bubbles will happen, even with 'taxpayer's money' banks, because some asset is considered to be low risk - bubble in the sense that people eventually say, "Oh no! It's not worth anywhere near as much as we thought!"
14. flashman said...
It’s fashionable to talk about lethal debt levels and the various collapses that this debt will cause. Consequently, many people seem to have got the impression that we need to pay down all our debt and experience total ruin, before we can grow again. This is a fallacy. We don’t need total pay-down of debt before a recovery can start. We just need to pay off a bit of it (if we reduced it by 20% we’d be in clover). There are many options open to us to pay down debt and I’m sure everyone knows them, so I’ll only list a few; reduced spending, inflation, rebalancing of trade deficits, profit etc etc. We are far from out of the woods but we certainly don’t need total pay-down and economic destruction to grow again.
Another fallacy is that liquidity is not working its way into the real economy. Large companies are in fact, finding it relatively easy to borrow money at the moment and some quite big infrastructure projects are being funded. Many smaller, often outdated, entities are struggling to get credit but that is probably a good thing. Narrowing credit spreads tell this story quite well. The fact is, that, lending levels are slowly increasing and they are unlikely to shrink any time soon.
5 months ago, imagine the scoffing, if someone said that house prices would hold up like they have, the stock market and pound would soar and Barclays/HSBC would make billions in profit. Being wrong is always difficult but just waving it away by labelling it as trickery or fraud is a little naive. We shouldn’t react to being wrong by belligerently claiming that it is all an aberration and that we will imminently be proved right. At the very least it should tell us that reading a few hundred economic articles is not a passport to true understanding.
15. uncle tom said...
Flashman,
The fundamental issue is the way that increasing debt funded the economy. Just moving to zero debt growth has an immense impact on the economy, one we have barely begun to appreciate; as government sets out to borrow at the incredible rate of £7,000 per household per year..
I think you are taking a very short term view; there is a little misplaced euphoria at the moment - the real pain has yet to come..
16. techieman said...
actually i think at least some of this move - i would argue that the first leg from march - was predictable . I agree with tom - more pain - just a matter of when .
17. alan_540 said...
@13 Flashman ... What concerns me is whether the engineered "recovery" is sustainable. Will it provide a firm foundation to build upon or is it just storing up more problems that will become apparent further down the line after the next election?
18. alan_540 said...
uncle tom & techieman : Agreed - worst is yet to come, this is a temporary situation built on mountains of debt which surely cannot be sustainable.
19. flashman said...
uncle tom: I am not taking any view. My post was not meant to be taken as a prediction or a bullish statement. I was pointing out, that anyone who badly cocked up their predictions for the first half of 2009, should not be so confident in their ability to predict the next six months... let alone the next few years. I am suggesting that people factor in the possibility that they have very little knowledge of the economy or its infinitely complex systems. That is not meant as an insult. I do this for a living and I do not have half the certainty exhibited on this website
20. alan_540 said...
flashman - isn't it more like them giving the bad news out in small chunks rather than giving us both barrels at once?
21. techieman said...
actually i think at least some of this move - i would argue that the first leg from march - was predictable . I agree with tom - more pain - just a matter of when .
22. flashman said...
techie:You have decades of experience looking at sqiggly lines and you therefore know that it is a racing certainty that there will be some sort of counter-trend at some stage. I don't think that Nostradamus has much to worry about :)
23. techieman said...
evidence flash ? Well stocks to higher above ft se 3950; cable low around 1.35; and a dead act bounce in hpc. Some good some bad - but since the contrains have no time limit
24. flashman said...
some almost right, some wrong. 50:50 chance
25. techieman said...
who me or nostradamus? Well there have been a few more on here before you graced us with your presence flash :-). Gold -@ 1,000 ish in March 2008 (when everyone on this site was telling me what a d1ck i was), Cable @2.03 on the way down (high 2.11) almost right has been much more almost then the french sage. Who could forget the call for the end of the world or the death of the pope at the two rivers.
Perhaps one day he will be right but anyway lets not talk ill of the dead - even if they are french! Not fair since they cant defend themselves can they? You can trawl through the posts if you want - god i am sounding over defensive...and i dont ever remark on softs or non financials the point is that these HP falls have got further to go, but when they do is the crux - i certainly wouldn't want to do any sort of manufactured short on the market without expecting anticipating some short term pain. Incidentially how are your 55% falls looking - what instrument are you trading on?
You knew i couldnt resist! Have a good one - hope you dream of cycling around the adriatic!
However re timing you are quite right - if i were that clever then i would have retired "proper" trading long ago and just done it for the hobby aspect - in the blood and all that..
26. techieman said...
...and i believe we are still waiting for you to call one turn..... thats the difficult part innit?!??!? Eg do you think that 1.70 was ze top and the the greenback will start to appreciate. A while back i said 1.65/66 and then if it breaks that 1.70, the other day i said 1.73 ( a quick move up from the breakout of .... yes the 4th wave triangle - i know you HATE that!). But it looks like the quick move may have been quicker and shorter than i thought?
I must say that Bellwether speaks alot of sense - but perhaps thats only because his fundamental view resonates with my technical reading.... we all see what we want to see, and what supports our own potentially prejudiced view.
27. clockslinger said...
Flashman @ 13 & 18, very timely and quite correct. If the likes of George Soros can't always get it right then what hope for the likes of m who know very little about the complex interplay of factors at work. It is too easy to just read this site to get a warm feeling that others share your position...and, honestly, the title alone tells you what that position is. Self selecting group therapy or cool analysis?