Another bubble is set to pop - The 5 Minute WrapUp by Equitymaster
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Another bubble is set to pop

Aug 4, 2009

In this issue:
» Building statues gets precedence over drought
» Infrastructure projects are behind schedule
» US economy has turned around, says Greenspan
» Where is the US dollar headed?
» ...and more!!

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Now, here is a guy who did his doctoral thesis arguing that Japan was a bubble in late 1980s and was proved right. He then wrote a long report at the World Bank in the early 90s that South East Asia is a bubble and was again proved right. Then came his research notes in 1999 calling the dotcom a bubble and still more notes in 2003 arguing that the US property market is a bubble. Phew! With that kind of a track record in detecting bubbles, you better listen to him whenever he talks of a future bubble. So, is he finding a bubble these days? Indeed. Andy Xie, one of the world's leading market analysts and the man we are referring to believes that the Chinese property and the stock markets could be the next big bubbles to pop.

According to him, both are being fueled by the excess liquidity that is being pumped into the Chinese economy and which instead of being diverted to producing goods and services is being invested in asset markets like real estate and stocks. To further strengthen his case he argues that China's average price per square meter nationwide is quite close to the average in the US despite the fact that the US per capita income is seven times that of China's urban per capita. China's property market, according to Xie, has stopped to make sense from an affordability point of view. While he does not know how long the frenzy will continue, he does believe that the bursting of the bubble may lead to a very hard landing for the Chinese economy.

 Chart of the day
Today's chart of the day shows how certain key assets like non-ferrous metals have witnessed a great run over the last four months. The rally is surprising given the fact that the problems that the global economy is facing are far from over and production capacities of these metals are still in surplus. Thus, as far as the situation on the ground is concerned, there is very little that has changed. Infact, there are growing doubts that the rally could be a reason of increased liquidity floating around. Could the rise in the Indian benchmark Sensex during the same period be due to the same reason? Well, the Indian markets may not have entered bubble territory just yet, few more months of such gains and we could be there.

Source: London Metal Exchange, CMIE

If you were disgusted with the shocking practice of bonus payments at some US banks that were being bailed out by taxpayers' money, wait until you hear this. As per a leading news portal, Mayawati, the Chief Minister of the northern state of UP has earmarked a whopping Rs 5.5 bn to build parks and statues in her and her mentor's name at a time when her state is begging to the center for more drought relief funds. Infact, opposition parties have put the figures close to Rs 20 bn, a sum that would easily cover the grant that the state has asked from the center, eight times over. And this isn't an isolated case. There are tales galore of the interests of the common man being sacrificed in order to accommodate the whims and fancies of the powers that be. Little wonder, movements like Naxalism are raising their heads.

The infrastructure sector in India has two extreme traits. On one side is the massive opportunity that the sector holds and on the other, serious concerns loom over execution. More often than not, the former casts a shadow on the latter and it is quite understandable considering the huge supply-demand mismatch and the fact that India lacks good quality infrastructure. However, we have always maintained our concerns over execution risks, especially in the infrastructure space. Delays persist on account of various reasons - implementation issues to delays in land acquisition, amongst others. All these are in turn leading to massive cost overruns - some even two to three times the costs of the original planned project. A recent article in a leading business daily reported that nearly half of the infrastructure projects are running behind schedule currently. This has resulted in cost overruns to the tune of Rs 400 bn, which is nearly about 15% of the original cost of all the projects put together.

President Barack Obama may have warned the Americans that it will take some time before the US economy is out of the recession, but Alan Greenspan seems to hold a different view. The former Federal Reserve Chairman, who has also been blamed for the eruption of the financial crisis is of the opinion that the US economy has already turned around. He believes that companies must restock quickly to be ahead of demand which according to him is likely to rise in the third quarter of 2009. What has probably bolstered his view is the GDP data released recently which showed the economic contraction slowing in the second quarter to 1% annualized; a far cry from the 6.4% drop in the first three months of the year. We wonder whether many would agree with him.

We believe that given the scale and depth of the financial crisis, a quick recovery does not really appear to be on the cards, despite there being many 'green shoots' erupting in various economies around the globe. Also, if Barack Obama is to be believed, job losses will continue to haunt Americans though the pace of these losses may have reduced. If that is the case, unless incomes of the people pick up, consumption, which is key to bolstering the economy, will remain subdued. So, who will have the last say? Will it be Greenspan who has been credited with the dubious distinction of creating the current mess in the first place or will it be Obama who has had his plate full trying to clear this mess with his big stimulus packages? One will have to wait and watch.

The movement of the US dollar in recent times has been paradoxical. Given the massive deficits that the US economy had piled up, the depth of the global financial crisis and the printing of money that the government had resorted to, it was only natural that the value of the dollar should plunge. However, what was observed was the opposite. After the eruption of the crisis which also burned the US badly, the dollar was preferred as it was perceived to be safer than other currencies whose economies also took a turn for the worse. Questioning the dollar's status as the world currency also began to pick up steam. But now, the US dollar seems to be losing some of its luster. As reported on Bloomberg, the US currency fell to the lowest versus the currencies of six of its major trading partners since the weeks after Lehman Brothers' September bankruptcy as signs of the recession easing reduced safety demand. Whether this weakness will sustain will depend a lot on how some of other major economies fare in the quarters ahead. As far as the dollar's status is concerned, a lot of experts have now observed that unless an economy emerges that challenges the US' economic size, the dollar would be difficult to remove from its pedestal, its trillion dollar deficits notwithstanding.

Breaking away from the shackles of the global financial crisis, global investors appear to have increased their appetite for risk. Otherwise what would explain the influx of over US$ 1 bn in equity funds focused on the Asian economies in the fourth week of July itself. And India made up for about 14% of that number at US$ 211 m. As reported in a leading business daily, a combination of rising risk appetite and rallying stockmarkets has meant that Asia equity funds (excluding Japan) have absorbed US$ 1.56 bn. Various factors seem to have contributed to this trend, namely a positive response to the just concluded earnings season and increased domestic consumption.

Having said that, we believe that investors should not invest in stocks based on the premise that the markets are rallying and global investors are pouring in money into Asian indices including India. The important thing for investors to do is to study companies, their growth prospects and managements and give due consideration to valuations before making investment decisions.

Though volatility reigned on the bourses, the BSE-Sensex largely languished in the red today at the time of writing. The forays that the index managed to make into the positive proved to be short-lived as selling pressure took toll. While losses were seen in IT and pharma indices, auto stocks managed to buck the trend. On the global front, while key Asian indices closed mixed, European indices are trading weak currently.

 Today's investing mantra
"It's true, of course, that, in the long run, the scoreboard for investment decisions is market price. But prices will be determined by future earnings. In investing, just as in baseball, to put runs on the scoreboard one must watch the playing field, not the scoreboard." - Warren Buffett

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12 Responses to "Another bubble is set to pop"

Edward Metcalfe

Nov 14, 2009

Is there a global financial crisis, or did the US and UK catch the flu while the rest of the world sneezed?



Aug 6, 2009

Thank you for the invaluable insight you are offering.


B N Goyal

Aug 6, 2009

Chief Minister of the northern state of UP has earmarked a whopping Rs 5.5 bn to build parks and statues - Over and above this she has already allegedly spent 6500 crore rupees on the already installed statues. The irony is the for the under development of the state she blames the Centre for not giving enough money to the state for development. She could have spent half of this money for giving education and proper medical facilities to the people. God Bless the State and the Country and save it from the sharks....bng


Jayant Lakhkar

Aug 4, 2009

Property bubble in India's metro cities (and now even in tier-2 cities) is even worse than China. Property valuations in India cannot be justified on any valuation parameter, but have been merrily increasing year on year without break.



Aug 4, 2009

China is a trade surplus nation and most of the industry is Govt run. They are leveraging the cash to pump activity within the country with massive infra investments. When will Mr. Andy Xie's prediction may come true will also depend on when will China run out of its cash. Hope their infra investments are not seeing same delays as Indian Govt. infra projects which has ongoing track record of going many times overbudget and also are bound to be long delays in implementation schedule.



Aug 4, 2009

The first two para of "Another bubble is set to pop", where extremely thrilling, sending a chill down the spine. What will happen if chinese economy is bubble. Remember last week Shanghai went down 7% and we followed? It would be most interesting to read the aftermath of such a collapse. i am liquidating 60% of my stocks tomorrow. Hope I am able to ahve peacful sleep.its 2300hrs. now. Amen



Aug 4, 2009

A good and interesting write ups



Aug 4, 2009

Notice very few commentators are honest and forthright with their views.Your views on new IPOs including Adani etc are commendable.Perceive these to be impartial.
Pl keep it up.



Aug 4, 2009




Aug 4, 2009

This Prophet Andy XIE IS REMARKABLE.

If the Chinese Market collapses what are the consequences for us in India , and to the world economy. Pl enlighten. Thanks

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