Chinese policymakers are in the midst of a very delicate maneuver. With a hyped housing market and an unloved stock market, China’s policymakers want the “hot money” from real estate investment to be funneled away from housing and into the stock market. The problem? It won’t be easy and may require sacrificing economic growth, just at the point when growth has begun to stabilize.
The Bubble Returns
For some time now, Beijing has been well aware of the bubbly housing market. In fact, China has experienced two housing slumps in past decade, back in 2011-2012 and in 2014-2015, in both cases, the slump was largely due to the government’s efforts to curb prices in the preceding years. Those efforts were primarily through the implementation of new housing regulations and by clamping down on shadow lending. More importantly, the Chinese government put to good use its main monetary tool, the Yuan. By allowing the Yuan to strengthen, credit became more expensive and, as a result, the hype ended. But the price tag was dear because tightening efforts also resulted in a sharp slowdown in the Chinese economy and a meltdown in the Chinese stock market.
In 2015, the crisis was so severe, in fact, that Chinese policymakers had no choice but to drastically reverse policy by cutting lending rates, intervening in the stock market and, yes, as you might have surmised, devaluing the Yuan. But ironically, just when the easing measures have started to make a real impact, the housing market has once again become overheated and has turned bubbly. Continue reading "Will China Drop The Ball?"
By Doug French, Contributing Editor
How important is housing to the American economy?
If a 2011 SMU paper entitled "Housing's Contribution to Gross Domestic Product (GDP)" is right, nothing moves the economic needle like housing. It accounts for 17% to 18% of GDP.
And don't forget that home buyers fill their homes with all manner of stuff—and that homeowners have more skin in insurance on what's likely to be their family's most important asset.
All claims to the contrary, the disappointing first-quarter housing numbers expose the Federal Reserve as impotent at influencing GDP's most important component.
The Fed: Housing's Best Friend
No wonder every modern Fed chairman has lowered rates to try to crank up housing activity, rationalizing that low rates make mortgage payments more affordable. Back when he was chair, Ben Bernanke wrote in the Washington Post, "Easier financial conditions will promote economic growth. For example, lower mortgage rates will make housing more affordable and allow more homeowners to refinance."
In her first public speech, new Fed Chair Janet Yellen said one of the benefits to keeping interest rates low is to "make homes more affordable and revive the housing market." Continue reading "Yellen's Wand Is Running Low on Magic"
By Doug French
No wonder investors don't take economists seriously. Or if they do, they shouldn't. Since Richard Nixon interrupted Hoss and Little Joe on a Sunday night in August 1971, it's been one boom and bust after another. But don't tell that to the latest Nobel Prize co-winner, Eugene Fama, the founder of the efficient-market hypothesis.
The efficient-market hypothesis asserts that financial markets are "informationally efficient," claiming one cannot consistently achieve returns in excess of average market returns on a risk-adjusted basis.
"Fama's research at the end of the 1960s and the beginning of the 1970s showed how incredibly difficult it is to beat the market, and how incredibly difficult it is to predict how share prices will develop in a day's or a week's time," said Peter Englund, secretary of the committee that awards the Nobel Prize in Economic Sciences. "That shows that there is no point for the common person to get involved in share analysis. It's much better to invest in a broadly composed portfolio of shares." Continue reading "Nobel Prize Winner: Bubbles Don't Exist"
The most devastating market events are those that no one sees coming.
Take what happened to the Lehman Brothers in 2008, for example. Up until the last minute, virtually no one could have imagined one of the country's leading investment banks would file for bankruptcy. The housing market crash was the same way. The Street believed housing prices would never go down.
With the market totally blind to the growing risk in each investment, anyone who had investments in housing or with Lehman Brothers suffered huge losses.
Despite these tough lessons, there is now another epic bubble developing and the market is ignoring this one too.
In fact, this bubble is so big, the 2006 housing bubble and the 2000 bubble pale in comparison. And when it pops, it will hit the most conservative portfolios the hardest. Continue reading "A Bubble Bigger than Housing Is About to Pop"
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