Bubbles in property, commodities and
stock markets are set to burst accross
much of the globe
Posted on 01/23/2008 9:51:51 PM PST by bruinbirdman
Triumphant bears have swept all before them at the World Economic Forum in Switzerland this year, growling down plaintive squeaks of optimism from the odd dazed bull.
The gathering kicked off with last rites for the theory of decoupling, that comforting belief that the global economy could sail briskly on, even as the US was engulfed by the sub-prime whirlpool.
Bubbles in property, commodities and
stock markets are set to burst accross
much of the globe
The nastier reality now appears to be that Europe and Asia face their own hard landings as synchronised bubbles burst across the globe in property, commodities and overheated stock markets, all victims of US-led credit implosion.
"Monday was the crucial day when people around the world realised that decoupling was not going to happen," said Nouriel Roubini, a professor at New York University and the star forecaster who predicted the sub-prime crisis in 2007 - that day Germany's MDAX fell 8pc, France's CAC fell 7pc, emerging market stocks went into meltdown, and Japan's Nikkei suffered the worst two-day drop in 17 years.
He accused the European Central Bank of making a serious policy error by waiting too long to cut interest rates, even though disruptions to the credit system in the eurozone had been just as bad as in America, if not worse.
"At least the Fed is cutting rates. The ECB has underestimated the threat to growth and is behind the curve. There is the risk of outright recession in Europe. There are significant housing bubbles, particularly in the UK, Spain and Ireland but also in Italy and Portugal."
Jean Claude-Trichet, the ECB's president, yesterday appeared in no mood to change tack or to follow the dramatic three-quarter point cut in rates by the Federal Reserve. He insisted that the ECB must remain "credible in guaranteeing price stability", an implicit criticism of US actions.
"Particularly in demanding times of significant market correction and turbulences, it is the responsibility of the central bank to solidly anchor inflation expectations to avoid additional volatility," he said.
Rising oil and food costs have pushed eurozone inflation to 3.1pc, the highest level since the creation of the single currency. The question is whether this is merely a lagging effect of the commodity spike, soon to subside.
The currency markets have issued their own verdict.
The euro has failed to gain traction against the dollar since the Fed's emergency action and has begun to slip back, despite the growing gulf between US and eurozone interest rates. It is a sure sign that investors now expect that the ECB will be forced to slash rates soon.
Hungary's premier, Ferenc Gyurcsany, said Europe seemed to be sleepwalking into trouble. "Most European analysts have been very optimistic about the effects of the US problem. Their only answer is to sit and wait. This is not a well-founded approach," he said.
Stephen Roach, chairman of Morgan Stanley Asia and long-time bear, said the decoupling theory was being exposed as "fantasy" as contagion spread across Europe, China, and Japan. "Europe is not going to get some special dispensation from a global slowdown," he said.
"I am bullish on Asia but let's not get ahead of ourselves. The US is a $9.5 trillion (£4.9 trillion) consumption economy: China is $1 trillion, and India is $650bn. They are not yet at the stage where they can fill the void left by an over-indebted US," he said.
Mr Roach said US consumption reached 72pc of GDP in 2007. "No country in the history of the world has ever consumed that much of its GDP.
"We've played the housing bubble, using homes as ATM machines," he said.
A return to normal levels of savings would amount an economic shock equal to 5pc of GDP.
He warned that the US could face "the mother of all recessions" if the (needed) adjustment happened fast.
Yu Yongding, director of China's Institute of World Economics, said his country would not be able to shrug off the effects of the US crunch.
"This will have a serious impact on the Chinese economy. We're very dependent on external demand, which makes up 8.6pc of GDP, and some say even 10pc. We're worried because we need to create 24m jobs each year and we created just 10m last year," he said.
Mr Yu warned that the fall-out from a collapse of the Shanghai equity boom could stir up political unrest. "There's an equity bubble. I don't think there are consequences for the banking system because people are using their own money to buy shares. But there are 150m of them.
''This is serious," he said.
Prof Roubini said Eastern Europe faced the biggest risk of a dramatic upset. "All the way from the Baltics down to Turkey there are countries with large current account deficits. People have been borrowing in foreign currencies, the euro or the Swiss franc, to buy houses, and so the situation could be like Argentina or Mexico where homeowners went belly-up. There is a severe risk of a crunch leading to a financial crisis," he said.
Fred Bergsten, from Washington's Peterson Institute, is sticking resolutely to his decoupling thesis. "I'll go further. This is going to be the first episode of reverse coupling. The rest of the world is going to prop up the US," he said.
A very good friend of mine, excellent with his stock picks, has sold off all tech stocks since last year and is in a mix of some cash, plus “fortress” large cap stocks.
yitbos
Well, you remember what happened the last time the bears had their way.
They didn’t come lookin’ for trouble,
They just came to do the Superbowl Shuffle
Who’d of thought euroweanies suck?
I knew... I knew... poor losers.... I wished I cared... but I don’t.
Meanwhile, the banks haven't missed an interest payment, the equity holdings haven't missed a dividend, Uncle Sam hasn't missed a payment on my bonds nor stopped sending my social security check on time.
I suspect he will be happy to receive my tax payment for capital gains, dividends, interest and pension income.
yitbos
This is an unusually kind article to the United States. Check out the IHT coverage (the main of which is linked on Drudge). From the sounds of it, we’re not teetering on the edge of the cliff, we are actually well into an air-ripping downward plummet into has-been status. That we may precipitate a global recession is only our last hurrah as an economic factor, as China and India rise and rise and the East continues to take massive chunks of power from the West. Why, just look at the banking issue. 3 years ago the consensus in Davos (as the IHT points out) was that no Chinese banks would crack the top 10 by market capitalization, and today they have 3. Just like Petrochina is now the world’s largest company. By market valuation. In Shanghai.
When the dust settles, the U.S.A will be the winner ten times over the ChiComs, India, Brazil and all the anti-capitalist socialists.
We sold them 90% of our bad debt!!! We "exported" our bad debt to these commies. Screw them. We win. Wait it out. If you made the wrong bet on the fer'ners, too bad.
yitbos
>They didn’t come lookin’ for trouble,
>They just came to do the Superbowl Shuffle
Shufflin’ on down,
And doin’ it for you!
Which is one of the key reasons we are in an economy-crushing liquidity crisis. US lenders don't want to lend to risky customers anymore, who may not pay their debts, while foreign banks WON'T GET FOOLED AGAIN buying the crap risky debt like we sold them the first time. They don't trust us anymore! When banks can't lend money, they can't make money and the investors US banks screwed over just don't trust us anymore.
We win? Hardly. We lose because investors and lenders we need to borrow and repay loans don't trust us anymore and don't want our toxic garbage. You don't make money screwing your trading partners and driving them away.
"They don't trust us anymore!"
Oh, I don't think so.
Look at what treasuries are doing. It was the foreign banks, half owned by socialist governments, who lose. Who cares about them.
The greenbacks will seek safety in the U.S.A. Especially after the Olympics if not before.
yitbos
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