The Global Bubble: Liquidity Bubbles Are About to Pop All Over Asia & Europe

“Bubbles Brewing in Shanghai, Tokyo, and London,” writes Gary Dorsch, editor of the Global Money Trends newsletter.

We will hear the evidence in a moment, but first we will render judgment: too much liquidity.

“There is a bubble growing. Investors should be concerned about the risks,” said Cheng Siwei, vice-chairman of China’s National People’s Congress in a February 1st interview with the Financial Times. “But in a bull market, people will invest relatively irrationally. Every investor thinks they can win. But many will end up losing. But that is their risk and their choice,” Cheng warned.

The Shanghai Composite “A” share Index has gone up over 200% in the last 16 months. The market is limited to Chinese nationals, which just goes to show that the Chinese can be as silly as Americans.

“On the smaller Shenzhen market,” Dorsh continues, “three new IPOs soared into orbit, suggesting that the Chinese stampede into stocks hasn’t run its course. Non-ferrous metals maker Yunnan Luoping Zinc soared to 30.94 yuan, triple its IPO price of 10.08 yuan. Zhejiang Sunwave Communications jumped to 19.65 yuan, double its IPO price of 9.15 yuan. And China Haisun Engineering 002116.SZ surged 178% to 19.16 yuan.

“Investors opened 50,000 retail brokerage accounts a day in December and mutual funds raised a record 389 billion yuan (USD $50 billion) last year, quadruple the 2005 amount. January turnover was five times early 2006 levels. Beijing is now ordering banks to prevent retail borrowing for stock investments.”

What is the source of this bubbly activity? It is the same ‘tide of liquidity’ that is washing over the rest of the world. As the Chinese sell more and more goods to U.S. consumers, Chinese firms end up with more and more U.S. dollars. These are turned in to the Chinese central bank, which now has foreign currency reserves of more than USD $1 trillion – the biggest pile ever built up – most of it in U.S. dollars. In return, the bank of China gives out local currency, the yuan. What are the gambling-mad Chinese to do with all that money? Play the stock market!

Meanwhile, in neighbouring Japan, the Topix stock market index is at a 15 year high. The much-despised yen has been driven down to such low levels that it has made Japanese exports cheap. Japanese exporters – notably Toyota Motor Company – are having a great time of it.

Dorsch: “Since the BOJ dropped its overnight loan rate to zero percent in March 2001, the Euro has advanced from around 105 yen to as high as 158.70-yen today. Aided by the euro’s strength against the yen, Japanese exports to the European Union nearly doubled to 1.06 trillion yen in December. But on the flip side, European exports to Japan have waffled between stagnation and deterioration.

“Last year, Japan racked up a 18.6 trillion yen (USD $160 billion) current account surplus, while the Euro zone suffered a 16.8 billion Euro (USD $21.5 billion) deficit. Yet the power of the ‘yen carry’ trade was able to swim against the tide of these trade imbalances, by pushing the Euro 12% higher against the yen last year.”

Just last week, Japan began to ‘normalise’ its interest rates. But it did so in such a weak and waffly way that it merely served to convince speculators that the ‘yen carry trade’ would last a long time.

Dorsh again: “Japan’s interest rates remain abnormally low and far out of alignment with the rest of the world, and the ‘yen carry’ trade lives on.”

Finally, Dorsch looks to another island nation:

“The Bank of England (BOE) delivered a nasty New Year surprise on January 11th, its third quarter-point rise in interest rates in six months…

“But London’s FTSE-100 all but shrugged off the rate hike. It suffered a 30-point fall to as low as 6,140 just after the announcement, but then closed the day 70 points higher. After stabilising above the 6,200 level, the Footsie-100 tacked on another 5% gain to 6,450 last week.”

While the Bank of England raises rates, it keeps the money flowing. Money supply figures show available liquidity increasing as much as four times faster than the economy last year. As a consequence, house prices in Britain went up more than 10% in 2006 and the stock market reached its highest level in six years.

On Tuesday, the BOE not only read the past, but predicted the future:

“Investors are likely to take advantage of this ample liquidity and the associated easy credit to purchase other assets, driving risk premiums down and asset prices up…In due course, those higher asset prices may be expected to feed through into higher demand for goods and prices, putting upward pressure on the general price level.”

Yes…and then what?

We’ve given up guessing. This liquidity bubble should have blown up a long time ago. That it has not yet doesn’t mean it won’t. It just means that when it does many more people in many more places will hear the loud crashing noise…and feel the walls shake.

Bill Bonner
Markets and Money

Bill Bonner

Bill Bonner

Since founding Agora Inc. in 1979, Bill Bonner has found success and garnered camaraderie in numerous communities and industries. A man of many talents, his entrepreneurial savvy, unique writings, philanthropic undertakings, and preservationist activities have all been recognized and awarded by some of America’s most respected authorities. Along with Addison Wiggin, his friend and colleague, Bill has written two New York Times best-selling books, Financial Reckoning Day and Empire of Debt. Both works have been critically acclaimed internationally. With political journalist Lila Rajiva, he wrote his third New York Times best-selling book, Mobs, Messiahs and Markets, which offers concrete advice on how to avoid the public spectacle of modern finance. Since 1999, Bill has been a daily contributor and the driving force behind Markets and Money.

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2 Comments on "The Global Bubble: Liquidity Bubbles Are About to Pop All Over Asia & Europe"

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allen jacobsen

Dear Bill Bonner,

For the lst 18 months I’ve been reading and hearing from gurus like youself how the liquidity , real estate ,commodity and equity bubbles are going to burst — but they never [expletive removed by editors.. but it started with an F] well seem to ! They go on and on to higher and higher levels . I’m coming to the conclusions that you bunch of wankers dont know anymore than the Pricks that create the bubbles.

happy Pot smoking ,
Allen J.

John J. Xenakis
To Allen Jacobsen and others: It has been possible, for several years, to prove that a major 1930s style Great Depression is coming, simply by noting that the stock market is overpriced by a factor of over 200%. Price/earnings ratios have now averaged 20 or more since 1995, and this alone shows that a crash is coming, since P/E ratios always fall close to 5 every decade or two, the last time in 1982. Today, you can look at various variables — public debt, trade balances, hedge fund market — and note that these variables have been growing exponentially, with… Read more »
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