In a recent research note Edward Chancellor of GMO gives us 10 ways to know if you’re in a bubble. He says China just so happens to fit the mold:
1. A growth story that is uncritically accepted.
2. Overconfidence in authorities.
3. Easy money and credit expansion are precursors to a financial crisis, according to Chancellor, who cited data similar to that published by Reinhart and Rogoff showing that debt-to-GDP invariably rises rapidly before a crisis.
4. An investment boom and a misallocation of capital.
5. Troubling "agency" issues. At the peak of the dot-com era, Chancellor said it was common for investment banks to hire brokers and analysts not based on their ability to understand businesses or their competitive strategies, but based on how well they understood the "game" of underwriting and how fees were allocated among, for example, trading, new issues and corporate finance.
6. Collective irrationality and herd behavior.
7. & 8. Fraud and Ponzi financing.
9. Conspicuous consumption, which in China has been most obvious in excess investment.
10. Valuations.
You can read the details at Advisor Perspectives.
Some people will say those qualities describe the US treasury market
You might want to read this: http://pragcap.com/the-myth-of-the-great-bond-bubble
And then this: http://pragcap.com/i-want-to-come-back-as-the-federal-reserve-you-can-intimidate-everybody
Are you f’ing kidding me? Exactly bubblemania!!!
Bond market is the biggest bubble of all, EVER.
Let’s see how that ends up, shall we…
Stephen Roach : Fears of hard landings are overblown, especially regarding China.
http://www.project-syndicate.org/commentary/roach12/English
EM growth is still the biggest uncertitude in 2012, not Europe
You can set your watch by how consistently wrong Roach has been time and time again. It’s a mystery why he’s listened to anymore. I suppose he spins a good yarn.
Roach is the head of Morgan Stanley Asia. His job requires him to avoid offending both the Chinese and anyone wanting to invest in China. Though he is more or less right. China can and will move very swiftly to stop any decline in growth. Unlike the west, there is no powerful rentier class in China which benefits from stagnation and deflation. China is still run by the communist central committee, whose primary goal is to make China economically strong. If there has been misallocation of capital, so what? Just allocate some more capital, correctly this time. As long as China is running a trade surplus, they will have plenty of capital to deploy correctly or incorrectly.
I don’t know who is better at gross misallocation of resources China or US. China with their ghost cities, empty high rises and malls & bridges to knowwhere. Or the US banks with their derivatives trades in commodities & equities fades using funny money
Yeah, who says the 10 signs are valid truths anyway!?
Im sure I can come up with 10 warning signs a federation is about to fail and apply it to Europe.. Perhaps using Roman, Turkish or British empires as examples
Does that make it true?
China has the biggest wallet..
Data mining and hindsight bias on a giant scale. How does one quantify things like “overconfidence in authorities”? If China crashes, is that proof it was in a bubble? And I sure glad to know gold isn’t in a bubble.
Does China fit the bill?
1. A growth story that is uncritically accepted.
2. Overconfidence in authorities.
For example is this true? and how is it quantified?
Also how is miss allocation of capital calculated, I’ve seen a lot of anecdotes, but very little in the way of hard figures.
China has a big economy, its so big that you see what you want to see when you look at it. China watching seems to be mostly guess work and wish fulfillment.
In Europe and America there are rafts of indicators and statistics to pour over, and we still get it wrong.
Not sure whether classic bubble-ology applies to China. The real bubble is the political economy … need different criteria (e.g. Soviet Union, post-war).
Funny how we hear all about bubble in China, which most people know very little about, but we completely ignore education bubble right here at home.
China has one massive advantage over the US & Europe – fiscal policy.
They dictate fiscal policy and can alter those directives very quickly in response to conditions in the real economy.
The US has a CONgress that is totally ineffective on fiscal policy to the point of nearly complete incompetence.
Right now if major fiscal policy response is necessary – ONLY the Chinese have the ability to get it done.
It is odd to me how so many Americans are all over Obama for his mis-allocated stimulus projects, but so few see that China, even with their big wallet, have been even worse with their stimulus. They have built ghost cities, the gov’t has encouraged a huge amount of bad loans. Their whole economy is built on construction and exports. If exports slow and construction collapses due to oversupply of housing, then China, despite their big wallet, could be in for rough times, and possibly social unrest.
Agreed. The popular narrative is that the U.S. government is inept at using intervention in the economy, but China is infallible. And Old Dog above “confirms” for us that only a room full of bureaucrats behind closed doors, who will suffer no repercussions from gross misallocation of capital or possess proven avenues to burying massive losses will “successfully” steer an economy.
We may have enormous problems (misunderstanding of the operational realities of the monetary system on the part of both officials and the public, for instance), but painting the comparison black-and-white is wildly off the mark. I would say that over the full cycle, the Chinese approach to market intervention may easily inflict MORE harm on the economy than ours, not less.
Oh I forget. Despite the obvious fact that almost all these factors apply to the bond market, of course the only bubble we can see is the one we want to see.
china is by far the lazy man’s bubble call… keep crying to mama about it, and the rest of us can continue on the right side of the trade.
when china pays is when we all pay.
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