Global fears of another bubble

bY: C. P. Chandrasekhar


When on the eve of President Obama’s visit to China, that country’s banking regulator, Liu Mingkang, criticised the US Federal Reserve for fuelling global speculation by adopting a loose money policy, it was dismissed as just another public display of difference. But when soon thereafter, Germany’s new Finance Minister Wolfgang Schauble also criticised the Fed’s role in fuelling the “dollar carry-trade”, which involved borrowing dollars at low interest rates to invest in higher yielding assets outside the US, it became clear that the fears of a global speculative boom were more generalised. This was corroborated by the recent revival of interest in capital controls in emerging, especially after Brazil imposed a 2 per cent tax on foreign investment in equities and bonds to dampen excess capital inflows that were threatening an appreciation of its currency. Some Asian economies too are contemplating similar measures to stall a speculative rush of capital into their financial and real estate markets.

Fears of a new speculative boom have been spurred by signs of a bubble similar to the one which generated the high profits and the credit financed housing and consumer spending boom that preceded the 2008 downturn. These include the huge profits being recorded by some major banking firms, the surge in capital flows to emerging markets, new buoyancy in oil and other commodity markets, the speculative rise in stock markets values worldwide and the property boom in much of Asia. Potential victims of the reversal of this boom complain that the source of it all is a return in the US to a policy of easy money-involving huge liquidity infusions and extremely low interest rates—to save the financial system and real economy from collapse, while resorting to a fiscal stimulus to trigger a recovery.

Banks, especially investments banks like Goldman Sachs, have chosen to exploit access to this cheap money to speculate in stock, commodity and property markets, wherever they appeared profitable. Though this is risky, the bets were likely to pay off for four reasons. First, even within the US the stock market was at a low, with much-fallen price earnings ratios. Any improvement in corporate profits as a result of the fiscal stimulus would improve stock prices, so investing in the market was seen as safer than it was in a long time. Second, this was true even of commodity markets like oil and food and there were always commodities which had not been through that cycle and were ripe for a boom, including gold which would only rise if the dollar weakens because of the excess dollar liquidity that was being pumped into the global economy. Third, many emerging markets were affected less by the recession, making their stock, bond and property markets attractive destinations for investors with access to cheap money. Finally, the rush of capital to these markets in itself fuels a boom that attracts more capital inflows and fuels a speculative spiral.

The consequence of these moves has been some financial and real economy recovery, besides stunning profits for some financial firms, especially Goldman Sachs. But fears are being expressed because of the intensity of the financial turnaround when compared to trends in the real economy. This is visible in many areas. One of course is evidence of a so-called “correction” in developed country stock markets since March this year: the S&P 500 index has risen more than 60 per cent, while the FTSE Eurofirst 300 has recorded a similar rise. But this is small compared to what is happening in emerging markets. Brazil’s benchmark Bovespa index has gained 76 per cent this year. That is in terms of the real, the domestic currency. Those who converted dollars into real and returned to dollars after booking profits gained 139 per cent as the US currency has depreciated significantly. Such opportunities have resulted in net inflows of a record $60 billion-plus into emerging market equity funds, which only serves to amplify returns by driving prices further upwards. The second sign of an actual or potential speculative boom is the reversal of price declines in commodity markets, which though yet not alarming, revives memories of the fuel and food price spiral of a couple of years back, which is seen by many as having been partly driven by financial speculation. Oil for example is already trading at around $80 to the barrel in US markets. The third is evidence of a real estate bubble in emerging markets, especially in Asia. Thus, for example, the Financial Times (November 5, 2009) reports that in Hong Kong, prices of apartments costing more than US$1.3m, which fell 6.2 per cent in the third quarter of last year, and were expected to fall by a further 40-45 per cent by the end of this year, are now 30 per cent more expensive that at their low point in the fourth quarter of 2008. Prices for private homes in Singapore reportedly rose 15.8 per cent in the third quarter relative to the second, and 37 per cent year-on-year in China. Finally, there is the global surge in gold prices as investors rush into the metal because of fears of a dollar decline. Gold is trading at around $1170 an ounce.

Put all this together and an emerging story of a new speculative boom and a fresh bubble driven by finance capital cannot be dismissed. As a result, there are growing fears of a second collapse.