2009-08-20

谢国忠 New Bubble Threatens a V-Shaped Rebound

Another great article from Andy Xie. Read the whole thing, but I've excerpted a view good parts.

This bubble will be short lived:
What we are seeing now in the global economy is a pure liquidity bubble. It's been manifested in several asset classes. The most prominent are commodities, stocks and government bonds. The story that supports this bubble is that fiscal stimulus would lead to quick economic recovery, and the output gap could keep inflation down. Hence, central banks can keep interest rates low for a couple more years. And following this story line, investors can look forward to strong corporate earnings and low interest rates at the same time, a sort of a goldilocks scenario for the stock market.

What occurred in China in the second quarter and started happening in the United States in the third quarter seems to lend support to this view. I think the market is being misled. The driving forces for the current bounce are inventory cycle and government stimulus. The follow-through from corporate capex and consumption are severely constrained by structural challenges. These challenges have origins in the bubble that led to a misallocation of resources. After the bubble burst, a mismatch of supply and demand limited the effectiveness of either stimulus or a bubble in creating demand.
Changing patterns of savings and consumption, i.e. socionomic factors:
Some argue that, if low interest rates revive the property market, American households may be willing to borrow and spend again. This scenario is possible but not likely. The United States has not experienced serious property bubbles in the past because land is privately owned and plentiful. A supply overhang from one bubble takes a long time to digest. And American culture tends to swing to frugality after a bubble. One's outlook either for a normal recovery or a bubble-inspired boom depends on the outlook for the U.S. household savings rate. Unless the U.S. household sector is willing to borrow and spend again, emerging economies will not be able to revive the export-led growth model.
Advice for China, in addition to his calls for distributing the shares of publicly owned companies to the citizens (one of the single best strategies since it can reduce the wealth gap as an added bonus):
Second, China can decrease its savings rate substantially through structural reforms. Half of China's gross savings are in the public sector. The government and state-owned enterprises should decrease revenue-raising and increase borrowing to finance investments. For example, China's high property prices are based on the investment-fund revenue needs of local governments. If China's property prices were cut by one-third, the national savings rate could decrease by two to three percentage points.
He thinks the market will fall. China leads the world now, but it popped two weeks ago. He sees a possible 4th quarter drop for the U.S. when people see that consumption and employment are not increasing. The result:
Instead of a V-shaped recovery, we may instead get a W curve. A dip next year, although perhaps not statistically deep, could deliver a profound psychological shock. Financial markets are buoyant now because they believe in the government. The second dip would demonstrate the limits of government power. The second dip could send asset prices down -- and keep them down for a long time.
I don't agree with everything Andy Xie writes, as I still lean towards deflation first. Where he sees high oil in the 4th quarter, I expect much lower prices first before inflation kicks in.

I think the psychological hit from another crash is something to anticipate. A lot of people believe the governments and central banks have power, when in reality it is the people who hold the power. It is the herd behavior of the society that drives the economy, in addition to the reality of massive structural imbalances in the economy. There's nothing any President or central banker could do to accelerate the process. The best strategy would be to allow the process to move as quickly as possible, i.e. allow asset prices to plummet so that they reach a bottom, rather than draw out the decline over the course of several years.

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