Roubini and Rogers spar on asset bubble issue

A war of words erupted between New York University economist Nouriel Roubini and commodities bull Jim Rogers on the issue of whether bubbles are building in asset classes like emerging market equities and gold. Emerging market stocks or commodities have rallied too far, too fast and the global economy will experience an anemic recovery rather than the hoped-for V-shaped recovery, Roubini said. Investors worldwide are fueling huge bubbles that may spark another financial crisis by borrowing dollars in the mother of all carry trades, Roubini said. A forecast by billionaire investor Rogers that gold will double to at least US$2,000 an ounce is utter nonsense, Roubini said. There is no inflation or near-depression to drive gold prices that high, he said at the Inside Commodities Conference in New York. "Maybe it will reach US$1,100 or so but US$1,500 or US$2,000 is nonsense," Roubini said.

But, Rogers, the investor who predicted the start of the commodities rally in 1999, said that Roubini is wrong about the threat of bubbles in gold and emerging-market stocks. "What bubble?" Rogers said. "It’s clear Mr. Roubini hasn’t done his homework, yet again." Many commodities are still down from record highs and equity markets are not on the brink of collapse, Rogers, chairman of Singapore-based Rogers Holdings, countered Roubini. Gold rose to a record US$1,098.50 in New York on speculation that central banks and investors will buy more of the precious metal to hedge against a declining dollar. Gold, up 24% this year, has outperformed US stocks and bonds.

Separately, Arnab Das of Roubini Global Economics said that emerging markets are poised to extend their biggest rally in a decade as investors borrow dollars to buy stocks, bonds and currencies in the world’s fastest growing economies. Richard C. Kang, chief investment officer with Emerging Global Advisors LLC, said that Gold will climb to US$1,350 an ounce and oil will top US$100 a barrel in the next six months, driven by a "herd mentality" fueling an investment boom.

Asset Bubbles- The Unilateral Bet

Any deviation from fundamentals cannot sustain forever. Although liquidity may distort asset prices in the short run, the winner is inevitably the fundamentals in the long term.

I happened to have a chat with a stock broker friend of mine. He was euphoric about stock markets crossing 18,000 levels. I asked him wether he was worried; he replied, "The lesser you understand Indian markets, the more money you will make." He added that" you got to be a good jockey. If you jump off the horse in midst of the derby race, a few of your bones will be broken, but the horse will always move on (to 25,000)". This is the story of SENSEX or is it ‘X’ SENSE, where X stands for may be ‘NO’. As I was leaving, I heard him saying on the phone that the next 1,000 points would be a matter of next 5 trading days. Only one-way bets on stock markets!!!

I also called up the local jeweler and asked him, where he saw the Gold price going. In his opinion, it was Rs 20,000 per 10 gms, if dollar continued to depreciate. The real estate agent also jumps on and says, "Sell all your stocks and buy land on outskirts of Nagpur. Boeing will buy it from you at double the price after a year". I opined that prices have already doubled. He counters "So what??? Do Real estate prices ever come down? No supply & huge demand."

I quickly opened my old faithful Webster’s dictionary to look out for the correct interpretations of words like "Utopia" and "Asset Bubbles". I asked myself how all prices are going up together. When all asset classes move in the same direction, diversification is rendered redundant. And what about on the way down?

The Indian stock market index broke all time high records almost everyday over the last few weeks on route to crossing the 18,000 mark and coming perilously close to the 19,000 levels. Other asset classes such as crude oil, the U.S. stock markets, Indian Rupee, other emerging markets stocks (MSCI EM Index), commodities are also at record or multiple year highs.

Right from onions to pulses to real estate to stocks to commodities, everything is on a synchronized rising trend. And wages have also been sky rocketing.

Are Asset bubbles being created in India and the world?

What exactly has happened in India?
The roots are not in India, but thousands of miles away in the USA. Losing sleep over the housing and credit crisis, the Federal Reserve (the RBI of the USA) cut interest rates in mid September. Generally, lower interest rates are regarded as positive for the stock markets, since it lowers the cost of funds and enhances corporate investments & profitability. So when US house prices fall, go and buy Indian stocks. Read on to know why.

Lower interest rates and cheap money also encourages global investors to borrow & invest to generate higher returns. With lower cost of money, investors can afford to leverage, take more risk and invest into risky asset classes globally like stock markets in India. It is like a large bucket which, when filled with water beyond its capacity, will spill over the excess water into the neighboring smaller buckets, irrespective of the risk of drying up (losses) during the peak summer.

As Indian fundamentals continues to be attractive to global investors and as its markets integrate globally, more money comes in from the U.S. & other countries into Indian stocks and real estate, expecting higher returns. As the external liquidity rises, demand exceeds supply and asset prices move up rapidly. Real estate prices in India have risen significantly in the last 15 years.

Ever since the US Fed cut the rates (18th September), USD 6 Bn. (Around Rs 24,000 Crs.) have come into Indian stock markets, pushing the Sensex up by more than 3,100 pts (around 20%). From January this year, the Indian stock markets have got flows of more than USD 16 Bn. (around Rs 64,000crs). All this foreign money chases the index stocks, which move up rapidly. As can be noted from the table below, only the top 5 stocks have contributed to more than 56% of the Sensex rise, making it a little skewed and top heavy.

Is the prevailing liquidity and foreign cheap money undermining fundamentals & risks and in turn creating Asset Bubbles?
An Asset Price Bubble usually is a sharp rise in the prices of an asset or a range of assets; with the initial rise generating expectations of further rises and attracting new buyers, who generally are speculators interested in short term profits from trading in the asset, rather than its use or earning capacity (fundamental value).

In a typical asset bubble, the prices of the assets deviate from their underlying "fundamental or intrinsic values". An asset bubble is usually self fulfilling. Buying sends the prices up which causes other people to buy more. In a typical asset bubble scenario, experts often try to find a rationale for the overpriced markets (say structural changes or new economy) so as to not be against the crowd and everyone invests with the intent of finding a ‘greater fool’.

The world & India has a long history of asset bubbles bursting and an adverse impact on the financial markets & the economic system. India also has a precedence of scams & market dislocations erupting at the peak of the stock markets.

Any deviation from fundamentals cannot sustain forever. Although liquidity may distort asset prices in the short run, the winner is inevitably the fundamentals in the long term.

As globalization increases, the regulatory walls between countries crumble and capital flows move in & out of the countries with ease and with lot of speed, sometimes creating instability in financial markets & the economy.

A piece of advice to the retail investor in this euphoria:

ä	It’s a myth that Indian markets are insulated from global developments. Our markets are exposed to the global vagaries. And FII flows are not necessarily driven only by fundamentals.
ä	Don’t get overwhelmed by the short term movements of the SENSEX, it’s only an index with 30 stocks. You may not own stocks in the index. There are very good chances that you might find more value beyond the Sensex stocks in a frothy market.
ä	Ask yourself a question. Have the underlying fundamentals changed? If PE ratio, a measure of valuation of stocks rises, earnings have to catch up or there will be risks of mismatched expectations.
ä	Focus on the long term investment horizon, underlying fundamentals of the stocks & the economy. Buy & Hold Strategy has outperformed the trading one in long term.
ä	Start early; invest regularly in a disciplined manner irrespective of the market levels.
ä	If you devote 1% of your day on investments, invest 1% of your net worth on your own. The rest can be managed by professional fund managers, viz mutual funds with disciplined research driven processes.
ä	Historical profits or higher cash positions should not drive buying decisions or increase your appetite for risk.
ä	Visible returns are accompanied sometimes by invisible risks. There are no free lunches; abnormal returns and higher risk are like Siamese twins.
ä	And remember; only profits are publicly discussed.
ä	Markets may not forever return 40-50% as it has been doing for sometime now. Expect rational returns.

The Author is CEO & CIO, Quantum Asset Management Co.

Next Bubble in Emerging Markets ?

Now that the great housing bubble in the US is bursting, attention has already shifted to where the next bubble will be. A large number of stock market strategists believe that it will be in emerging markets.
Why should we have another bubble? That’s an easy one—with the US Federal Reserve cutting rates by 50 basis points on Tuesday, Ben Bernanke has sent a powerful signal that he is willing to inject liquidity into the markets, brushing aside arguments that those who had lent imprudently should be left to stew in their own juice and that helping them out would create moral hazard, which would encourage further irresponsible risk-taking.
It’s a clear admission that the notion that markets have to go through periodic purges to get rid of their excesses is a non-starter in an age when financial markets are so large that they’re the tail that wags the economy dog.
There’s a school of thought which says that the markets have been having one long serial bubble for decades. It all started with the oil price rise of the 1970s, with the Gulf oil producers accumulating vast surpluses, most of which were funnelled to US banks. That led to a big rise in money supply in the US, setting the stage for a heady bout of lending by mortgage companies, which culminated in the Savings & Loan disaster of the 1980s.
Also at the same time, oil surpluses were lent by the banks to governments in Latin America. Later on in the 1980s, when interest rates rose and the dollar appreciated, these loans turned bad and led these countries into a debt trap.
The 1980s are often spoken of as a “lost decade” in terms of development for Latin America. In the US, the rise in interest rates led to the bust in the savings and loan associations and the biggest rescue operation by the US government in history. That was when, worried by the continuous rise in the value of the dollar and the loss of competitiveness to Japan, the US forced the Plaza Accord down Japan’s throat, forcing it to let the yen appreciate. That led to a fall in the value of the dollar, capital repatriation to Japan and a lowering of interest rates there to rock bottom to keep exports going. It created the mother of all bubbles in Japan, with the Nikkei going up to a stratospheric 39,000 and real estate values going through the roof.
But all bubbles have a nasty habit of popping, and when the Japanese bubble burst, it sent the country into a prolonged depression from which it is yet to recover.
After the bust in Japan, the Asian tigers became the next bubble, with capital flowing like water to these emerging markets. When that huge bubble burst during the Asian crisis, the money hotfooted back to the US, where the tech bubble was waiting to happen.
We all know how that ended and how Alan Greenspan’s rate cuts set the stage for the housing bubble in the US and, in keeping with the spirit of globalization, led to the first truly global bubble.
Coming back to the present, there are two arguments why emerging markets will be the next bubble. One of them, long supported by Michael Hartnett, global emerging markets equity strategist for Merrill Lynch, is that the rate cuts will lead to additional liquidity which will flow into emerging markets with their fast-growing economies.
Their argument is the familiar one of the current credit crisis being 1998 in reverse: while Fed easing in 1998, when there were massive credit problems in Asia, led to a flood of liquidity flowing into largely US tech stocks, this time the credit crunch is in the US and so the money will go to emerging markets.
The other, related view is the one advocated by research firm CLSA’s Russell Napier, who writes: “A new world order is emerging, where Asia and probably Europe lead global economic growth. The future increasingly looks like one where foreign private capital will seek non-US dollar exposure, forcing foreign central bankers to step up support for the US dollar and domestic liquidity creation. Such a seismic shift in global financial markets augurs the birth of a new world order.”
In other words, the weak dollar will force central banks to intervene in the foreign exchange markets to mop up dollars and that will release a flood of liquidity into their markets, creating a bubble.
Where’s the catch?
The catch is that the US economy must avoid a recession. Says Hartnett: “Financial crises followed by recession have resulted in bear markets (e.g., US/S&L 1990, Japan/land bubble 1990, US/tech collapse 2000). In contrast, financial crises not followed by recession have resulted in great buying opportunities (e.g., 1987 crash, Mexico 1995, Russia/LTCM 1998). We believe the latter will prove the case this time around for emerging markets.”
But won’t the US slowdown affect other economies as well? It will, but it’s all a question of relative performance. And a country like India, not very dependent on export demand, should do well.
What about the fact that the price-earnings multiples of markets such as China and India are already very high? It’s in the nature of bubbles and manias to forget about valuations. Remember the valuations of tech stocks at the height of the so-called “New Economy” bubble? If Merrill Lynch and CLSA are right, the blowout phase of the bubble could be just beginning.

Via Mint

Of bubbles and troubles

In the wake of the discount rate cut by the Federal Reserve on 17 August, Asian stock markets staged an impressive recovery last week. Just as drug addicts deprived of their daily shot when they run out of money treat themselves with more than one shot when they find some money, investors have grabbed Asian stocks with both hands and more. This hunger for Asian stocks will result in indigestion, eventually. Some historical perspective would help investors.

In the 1990s, China exported deflation to the rest of the world by becoming the centre for global manufacturing. The West, trying to opportunistically lower inflation, welcomed it. Import prices came down dramatically everywhere. The declining price of crude oil added its own deflationary weight to this mix. That is why, when the technology, media and telecom bubble melted in the US and Europe, central bankers’ fears were about deflation. They eased aggressively—some early, some late—and they kept rates low for long. They were willing to take the risk of allowing some inflation back into the system. Soon, the pendulum began to swing the other way.

Crude oil prices began to rise from a combination of war, political tensions in West Asia, rising demand and supply discipline. Strong global growth revived prices of industrial metals, which boomed. With each year of strong growth, capacity utilization edged up globally and all raw material prices began to climb. China thus began to export inflation, indirectly. It is about to do so more directly now that its inflation rate has climbed to nearly 6% from around 1% a year ago.

The US, which had put monetary policy on hold in 2006 but was keeping its finger on the trigger for another rate hike, has been forced to take its hand off the trigger because Wall Street has just sent a bill to the Main Street and policymakers are paying up. Politicians would see to it that they pay a lot more. In America, capitalists have rigged the system effectively in their favour. David Walker, the comptroller general of the country, warns darkly of the threat of the US going the way of the Roman Empire. Perhaps I am digressing.

Even as the central bank is busy providing liquidity and cutting interest rates, inflation ghosts are not about to disappear soon. Commodity prices have resumed their uptrend. Wheat prices are at a 20-year high and crude oil is firmly ensconced above $70 per barrel. Monetary policy contradictions might soon reappear in the US. That is what happened in 1987. After the infamous October 1987 crash, the federal funds rate was lowered from 7.25% to 6.5% by February 1988. Soon, within six months, the rate was rising. In the middle of the super-bull market between 1982 and 1999, the S&P 500 delivered a princely annual return of just over 4% from September 1987 to end-1994. Adjusted for inflation, the real returns were actually negative.
Asia fared little better. Between October 1987 and December 1990, the Hang Seng index returned -30.0%, the Singapore Straits Times index, -15.0% and Taiwan weighted index, -33.0%. Only Korea’s KOSPI gave positive 40.0% returns. With the exception of Japan, Asian stocks began to rally in 1991, up to end-1993. But, that was because it was preceded by a three-year drought. After a five-year feast of returns, famine awaits Asian investors, as not just the US but China, too, will be complicating matters for them.

In China, monetary policymakers had to put on hold even token attempts at tightening on seeing the inflation rate climb to 5.6% because the US had successfully exported its structured finance and alphabetical viruses all over the globe. Initially, we were told that Chinese banks were not infected. Mea culpa followed reluctantly last week. It is just the first instalment of confessions.

So, China held back from tightening monetary policy and came up with a clever plan to export its stock price bubble. It allowed its residents to buy foreign shares, including H-shares in Hong Kong. The Hang Seng index, at one stage, had surged 3,000 points from the intraday low on 17 August to an intraday high on Tuesday (21 August) morning. This was insanity at its best (or, worst?).

Economic theory has taught us that developed countries would export technology and capital while developing countries would export raw material and consumer goods. Instead, the US exported its housing bubble and consequent troubles to the other (China) and the other is now exporting its bubble to Hong Kong and, through that, to the rest of Asia and the world. It would be soon exporting its inflation as well.
When economic policy in two of the world’s biggest economies is geared towards propping up asset prices and ponzi schemes, the end result would likely be disastrous. It would not hurt investors to be afraid.

Real Estate Bubble - Interest Strong in Asia Property market

It’s a decade since an asset bubble fed the Asian economic crisis and fears swirl over the US housing market and interest rates, but investors still believe the only way for Asia’s soaring property markets is up—at least for a couple of years.
Asian economies are booming, and property is once again the hot subject of dinner conversations from Tokyo to Mumbai, fuelled by cheap credit, cross-border investment and rising incomes.

Policy makers fear a boom-and-bust cycle, where rising real estate prices fuel inflation and force interest rates higher, leaving households and companies loaded with debt and dragging on economic activity.

But at the Reuters Real Estate Summit this week in Singapore, where some residents are seeing their rents jump 50% overnight, property executives effused about India, despite a doubling in urban land prices since foreign property investment was ushered in two years ago.

Japan also appears to be still hugely popular, although average Tokyo office prices have leapt 25% in the last two years.

And investors believe government cooling measures will bring order to China’s market, while failing to stem a hunger for homes among the expanding and increasingly affluent middle class.

Justin Chiu, executive director of Hong Kong property giant Cheung Kong (Holdings) Ltd, said the prospect of ever higher prices was driving Asia’s notoriously sentiment-driven markets. “If there are no bubbles, you don’t drink beer. It’s just plain water and there’s no incentive to invest,” he said. “Of course, if you see too many bubbles, you stop pouring.”

Cheung Kong expects mainland China to account for a third of its property earnings by 2010 from about 18% now.

The Asian continent saw some $94 billion (Rs4.32 trillion then) of property investment in 2006, up 43% on the previous year, but barely one- seventh of the global total. And investors show no sign they will stop the flow.

Morgan Stanley said last week it had earmarked for 60% of a new $8 billion fund for Asia and The Goldman Sachs Group, Inc. has raised about the same amount in a couple of funds, according to a person familiar with the matter.

ING Real Estate is raising two $1 billion funds for Asia, and private equity (PE) firm Blackstone Group is raising $10 billion to spend globally.

But some market watchers wonder where all the money will be spent, and if rising values will curb investment returns. Asian commercial property is tightly held by families and private companies, so Peter Barge, Asia chief executive of property consultants Jones Lang LaSalle, believes many investors will have to take on risky development projects.

“There’s a lot of money on the books, but people are scratching their heads about what to do with it,” Barge said.

Japan is a perennial favourite in Asia because its $1.27 trillion of investment-grade property offers huge choice. Kurt Roeloffs, Asia head for Deutsche Bank’s property unit RREEF, put it at the top of his list followed by China, India.
RREEF, one of the world’s biggest property fund managers, plans to spend around 30% of its future PE funds in Asia, said Roeloffs. “Office is still interesting in Japan, rental growth should continue to be strong because the supply rate is low,” he said.

“We also like retail. We’ve done some and we’ll do more.”

China is drawing Hong Kong developers such as Cheung Kong as well as funds run by ING Real Estate, AETOS Capital and Invesco.

But the new flavours of the month are India and Vietnam that both rank among the most opaque property markets in the world, but promise internal rates of return of 25-30%.

Forecasts that Indian property prices have surged too fast and could drop anywhere between 10% to 40% are brushed aside on the grounds that an outsourcing boom is enrichening a middle class couped up in crumbling homes built decades ago. “India has huge potential,” said Seek Ngee Huat, head of GIC Real Estate. An investment company of the Singapore government and one of the world’s top property investors, the Government of Singapore Investment Corporation Pte Ltd. (GIC) is eyeing developing markets, including Russia and Turkey, while cautious about London offices because of steep price rises.

Barge at Jones Lang LaSalle believes Asia has at least two or three years more to run on the upward swing of its property cycle, saying: “Mother gravity is always there.”
Derek Cheung, Asia executive director at fund manager Cohen and Steers believes

Asia lagged the global property rebound from around 1996 by about five years, so is nowhere near a peak. “We’re now in a similar situation to 1994-1995, before the Asian crisis, with economic growth strong,” Cheung said. “In three or four years from now I don’t know, but now we’re not at a dangerous level.”

With the Chinese and Indian economies growing at around 9% annually, and Japan tentatively emerging from more than a decade of stagnation, the main risks now appear to stem from the US.

GIC Real Estate’s Seek was wary that defaults on US subprime mortgages could infect the whole financial system. “There are certainly financial risks being built up,” he said.

Meanwhile, Liew Mun Leong, CEO of Southeast Asia’s biggest developer, CapitaLand Ltd, which is launching funds for China and India this year, acknowledged that property investors may not have the best crystal balls. “It’s funny, but we in the property industry can always predict when the market will turn up, but we can never say when it will turn down,” he said.

Via Mint

Will India's real estate bubble burst?

It seems destined to become one of the most ostentatious symbols of India's emerging wealth. Situated in the heart of Mumbai, the new $500m (£255m), 28-storey home of Mukesh Ambani, chairman of Reliance Industries and one of India's richest men, will tower above its surroundings: on one side, a view over the Arabian Sea; on the other, a panoramic perspective across Asia's biggest slum.

This juxtaposition of wealth and extreme poverty underlines the vast potential of India's burgeoning real estate industry, into which hundreds of millions of dollars are being poured every month.

This week, one of India's biggest property developers, DLF Universal, is undertaking the biggest domestic share offering to date, with a fundraising target of about $2.4bn.

Run by one of the country's wealthiest people, Kushal Pal Singh, DLF is expected to be valued at about $23bn once the listing, handled by banks including Citi and Merrill Lynch, is completed. The flotation on India's National Stock Exchange will not be DLF's first attempt, having aborted an effort to list last August amid concerns about its valuation.

DLF has ambitious plans to use proceeds of its IPO to accelerate its expansion by swallowing a larger chunk of the demand for new residential and commercial property.

India's economic growth last year was more than 9pc, its second-fastest level since the country gained independence from Britain in 1947.

India's young and increasingly wealthy middle-class are buying homes at an unprecedented rate. Property analysts expect demand for at least 20m new homes in five years. The overall real estate market is forecast to be seven times larger by 2015. Foreign investors, including 3i and Blackstone, the private-equity groups, have signalled an intention to grab a slice of the Indian economy with funds dedicated to infrastructure projects, which most analysts consider to be the most urgent requirement.

A property boom in India is potential good news for hordes of British retailers and leisure companies, such as Mothercare and Whitbread looking for development opportunities.

"India's real estate opportunity is genuine, large and will last a long while - a prospect not lost on developers and capital providers," said Ashish Jagnani, a Mumbai-based real estate analyst for Citi.

Since the beginning of last year, at least eight companies with an emphasis on the Indian property market have listed in London. Yesterday, seven of them were trading beneath the price at which they listed. In total, the companies have a market value of well over £1bn.

Among the glut of Aim-listed Indian property funds to have underperformed in share price terms is Trinity Capital, which raised £238m when it floated at 100p in April 2006. Despite being fully-invested in a range of commercial, hospitality and residential projects, the share price has continued to trail behind at around 90p.

Some analysts warn of the risk of a bubble in Indian real estate prices that could undermine growth prospects for the whole market.

Yesterday, a fund set up to invest in non-performing Indian assets, Dhir India Investments, announced plans to list on Aim and tap into a market for distressed assets estimated by PricewaterhouseCoopers to be worth $50bn.

But if bearish predictions of a real estate bubble are accurate, that pile of distressed assets could turn into a mountain as tall as Mr Ambani's new home.

Business Today - The Bubble in Real Estate

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