There’s a lot of talk, predictions, warnings about asset bubbles after so many market gurus, analysts and the like missed the one in American housing (and housing in Spain, the UK and Ireland).
So now at every sign of a surge in asset prices, there’s Greek chorus-like wail of "Bubble", its become a sort of sport for under employed analysts and others.
But the AMP’s Dr Shane Oliver says that while bubbles are a fact of life, the next one is not apparent, although there are some early candidates.
Benjamin Franklin once said: “In this world there is nothing certain except death and taxes.”
I would add a third certainty, and that is: asset bubbles.
Despite numerous attempts to prevent them or regulate them away, usually after one bursts, they are part and parcel of free capital markets.
Just as fads are a big part of the worlds of fashion, music, cars and toys (I still have my Russell yoyo from 1970 but the hula hoop broke), the same applies to investing.
When combined with human nature to back something that has done well in the recent past, the outcome is a bubble in this asset or that.
It’s also the case bubbles often form in the ashes of the last bubble.
With this in mind it is likely a new asset bubble is forming right now.
With another huge round of liquidity about to hit markets on the back of global reflation Mark II, this is virtually inevitable.
But where will it be?
Recent bubbles
There is a long history of asset bubbles forming from the ashes of the last bubble.
Looking at the last two decades:
- The collapse of the Japanese asset bubble in the early 1990s and associated easing in Japanese monetary conditions set the scene for the Asian equity bubble into the mid-1990s;
- The burst of which in 1997-98 led to a bout of easy money in the US and elsewhere and helped inflate the tech bubble of 1999-early 2000;
- Which then burst resulting in another round of easy monetary policy setting the scene for the US housing bubble and associated credit boom.
Of course, housing bubbles tend to be a bit more constrained compared to those in financial markets.
But as we know, housing bubbles and their bursting can have much bigger economic & financial consequences. (See next chart).
This phenomenon of bubbles seemingly begetting bubbles likely reflects a combination of the monetary easing following a bubble burst which provides the fuel for the next bubble and the desire of investors to jump into something seen as safe and offering good return potential far away from the asset which collapsed in value.
Conditions for another asset bubble are in place
Following this pattern it would seem reasonable to assume the easy money flowing in response to the bursting of the US housing/credit bubble will have set the seen for the next global asset bubble.
Late last year ago there was much talk of a bubble forming on the back of easy monetary policy in the US flowing into Asia and some were arguing the US needed to tighten to head it off.
Just as well it didn’t or else the US economy would be in even worse shape.
In fact, with growth in developed countries now slowing below levels necessary to stop unemployment from rising, further monetary easing is now on the way.
The US Fed is talking about another round of quantitative easing, or using printed money to buy government bonds.
Japan is already doing the same – using printed money to buy US dollars and Japanese bonds and private securities.
The Bank of England is considering more quantitative easing.
While Europe is resisting, this is unlikely to continue next year as European growth will likely slow in response to fiscal tightening and a stronger euro.
This additional round of monetary easing will likely see more downwards pressure on the US dollar, Yen, British pound and ultimately the euro, but will see upwards pressure on the emerging country currencies, gold and commodity prices and commodity currencies such as the Australian dollar.
Despite the Reserve Bank of Australia’s surprise decision to leave rates on hold this month, it has signalled a clear intention to raise rates ahead unless the economic outlook changes dramatically.
As such, more upside in the $A seems likely, ultimately taking it through parity against the $US.
To the extent countries maintain fixed currency pegs to the US (such as Hong Kong) or resist upward pressure in their currencies by buying US dollars or keeping their own interest rates artificially low, they will be importing easy US monetary policy and adding to the increase in global liquidity.
The end result will be very easy global monetary conditions for some time to come.
And – unless the US double dips back into recession, which is not our base case – this provides an ideal condition for the inflation of the next asset bubble.
Bubblexicon
Bubbles are normally thought to exist when a combination of conditions are present.
These include easy money, a displacement exciting popular interest in the asset, overvaluation and speculators piling into the asset on the expectation that past price gains will be repeated.
Prime bubble candidates
As the US has had a monopoly on asset bubbles over the last decade and given its debt problems, it’s unlikely it will host the next major asset bubble.
Similarly debt problems in Japan and Europe suggest they won&rsqu
