A Global Bubble: Dick Cheney's Banker

The problem is that there seems to be no way of knowing when the bubble(s) will burst although it seems as if the US housing bubble is deflating at a high rate. The whole analysis is unfortunately based upon a metaphor. What seems reasonably certain is that there will be a downturn in stocks eventually and probably production in certain areas but it remains to be seen whether there is a crisis situation, but the growth (bubble) seems unsustainable. Misleading positive psychological factors such as the reinforcement mentioned in the article make the growth so high that the fall will probably be very steep and accompanied by crises.

Dick Cheney’s banker sees world bubble

Jeremy Grantham believes everything — art, infrastructure, land, forestry, junk bonds, mundane blue chips — is going through an exponential phase and will eventually burst dramatically

By William Pesek
Bloomberg.com

05/03/07 "Wall Street Journal" -- -- You’d expect someone whom the famously dour Dick Cheney entrusts with millions of his dollars might have a gloomy view of the world. Jeremy Grantham does indeed.

“From Indian antiquities to modern Chinese art; from land in Panama to Mayfair; from forestry, infrastructure and the junkiest bonds to mundane blue chips—it’s bubble time,” he writes in Grantham, Mayo, Van Otterloo & Co.’s latest quarterly letter titled “The First Truly Global Bubble”.
Grantham, 68, is chairman of the Boston-based company that, according to financial disclosure reports, in 2005 managed as much as $6.1 million (Rs2,501 crore) for US Vice-President Cheney. And if his own recent actions are any guide, he’s quite the multitasker.

The money manager is a critic of the US energy policies for which Cheney bears considerable responsibility. In February, Grantham donated $23.6 million to Imperial College London to establish an institute on climate change.

Perhaps these multitasking skills helped Grantham make one of the gutsiest market calls in recent memory: That pretty much every asset class, everywhere, is in the midst of a bubble.

It would be comforting if we could dismiss such negativity. After all, isn’t the Dow Jones Industrial Average climbing to all time highs at a time when Japan and Europe are growing, China, India and much of the rest of Asia boom and all’s well in the global financial system?

Sure, and that’s just what worries Grantham. He points to the US in the late 1990s and Japan in the late 1980s—periods when investors thought asset rallies would continue indefinitely. “Most bubbles, like Internet stocks and Japanese land, go through an exponential phase before breaking, usually short in time, but dramatic in extent,” Grantham argues, and he has a point

Bubbles generally require two dynamics: the perception of near-perfect economic conditions and an abundance of cheap credit. The Bank of Japan left its overnight lending rate at 0.5% last week, giving traders a green light to put on more “yen-carry trades.”

Borrowing cheaply in yen and moving those funds into higher-returning assets overseas has been a one-way bet and markets have little reason to think that’ll change. China’s unprecedented buildup of currency reserves—$1 trillion and counting—also may constitute a bubble of sorts.

The amount of liquidity zooming around the globe has Grantham wondering if risk is really as negligible as many investors seem to think. “Sustained strong fundamentals and sustained easy credit go one better: they allow for continued reinforcement,” Grantham argues.

Looked at from that perspective, perhaps China’s wacky stock rally isn’t so disconnected from the world after all. Modern history offers few better examples of a Ponzi scheme than Chinese shares. The CSI 300 Index, which tracks yuan-denominated A shares listed on the Shanghai and Shenzhen stock exchanges, gained 75% already this year and has tripled in the past 12 months.

In that time, China’s fundamentals changed little. It’s still growing faster than 10%; officials in Beijing still can’t figure out how to slow things down; a lack of transparency still makes it hard to know what’s going on in corporate boardrooms; and Asia’s No. 2 economy still faces risks of overheating, pollution, social unrest and trade wars.

All that’s changed is the amount of attention paid to Chinese stocks, creating a gold rush. It’s akin to the media attention lavished on dot-com day traders in the late 1990s. Newcomers armed with get-rich-quick dreams, not economic realities, are propelling shares higher.

A similar dynamic may be playing out across the global economy. Everyone, as Nouriel Roubini, chairman of Roubini Global Economics in New York, has been warning, is reading about how great things are and throwing caution to the wind.

It’s more titillating to read about hedge fund managers making over $1 billion a year than about global imbalances. What makes today’s global financial boom different is that it really is, well, different. Past bubbles came amid lofty claims of new eras. In the 1980s, the new era featured a Japanese business model many said couldn’t go wrong. In the 1990s, the US was awash with similar hubris.

“This time, everyone, everywhere is reinforcing one another,” Grantham argues. “Wherever you travel, you hear it confirmed that ‘they don’t make any more land,’ and that ‘with these growth rates and low interest rates, equity markets can keep rising,’ and ‘private equity will continue to drive the markets.’ To say the least, there has never been anything like the uniformity of this reinforcement.”

Markets’ success in withstanding September’s $6.6 billion implosion of Amaranth Advisors LLC and more recent turmoil among subprime mortgage lenders prompted talk of another new era. This latest one seems centered on China producing infinite amounts of cheap labour, US deficits being sustainable, major economies growing in sync and deep, diversified markets being able to multitask whatever comes their way.

The trouble, Grantham says, is that the bursting of this bubble “will be across all countries and all assets, with the probable exception of high-grade bonds. Risk premiums in particular will widen. Since no similar global event has occurred before, the stresses to the system are likely to be unexpected.”

Good luck multitasking that.

World Bank: Predictions through Rose-tinted glasses

No this is not about Wolfowitz and his girl friend but actually about what the world bank does!


The global economy through rose-tinted glasses





Robert Wade



FT Published: April 30 2007 18:29 | Last updated: April 30 2007 18:29



Talk of the future has been dominated by climate change and the mood is one of alarm. But among those who focus on economics the mood is upbeat. Climate change worries aside, the future to 2030 looks quite rosy.



According to the World Bank’s recent Global Economic Prospects, output will probably double in real terms by 2030 and developing countries’ output will triple. In much of the developing world, average incomes per head will converge with those in high-income countries and the number of people living in poverty (on less than $2 a day) will fall from 2.7bn today to 1.9bn. These trends will be driven by increasing integration of trade and finance and diffusion of technology. If they continue on beyond 2030, Bangladesh will have a chance to become as prosperous as the Netherlands.



It is worth taking a closer look at the World Bank’s model, for projections are only as good as the assumptions. The model assumes, first, that globalisation has been and will continue to be the main driver of improvements in economic performance – provided there is no protectionist backlash.



In reality, much of the success attributed to globalisation is in fact the success of one giant country: China. The picture of the past 25 years would look quite different if we took the typical developing country rather than the average for all of them (which is pulled up by China). For example, the fall in the number of people in extreme poverty since the early 1980s is due entirely to the fall in poverty in China. Take out China, and the number rose.



Many developing countries have gained little from globalisation and export-led growth and it is unclear whether they will gain more by continuing on the same track. The World Bank’s model also assumes that free-trade norms will continue to prevail. This is doubtful. In affluent countries, a lot of evidence suggests that further affluence is reducing people’s capacity to enjoy it. Throughout the west, rates of over-eating, family breakdown and addiction are rising. It is possible that electorates will respond by seeking to "embed" certain markets more firmly in a framework of political controls, even at the cost of slower growth.



In developing countries, disillusionment with the paradigm of maximum openness is growing, as those that have moved towards free movement of goods, finance and enterprises have not experienced substantially improved economic performance. The focus on export-led growth has created intense competition between developing country producers to lower costs – including labour and environmental costs – and the exchange rate.



Developing countries’ governments may begin to pay more attention to the growth of domestic demand and less to export demand as it becomes clear that export-led growth is not delivering. Commentators in the west will misrepresent this shift as a "protectionist backlash". But the task for analysts is to figure out how to do import substitution well, and subject to multilateral disciplines, rather than just less.



The Bank’s projections assume, third, no significant interruption from war. But the rise of important new economic states has almost always raised the level of conflict between them and existing dominant states. China’s rise is likely to generate further tensions between it and the US. The US may reassert its dominance by invoking China and Russia – flanked by Iran, North Korea and other non-compliant states – as a threat far beyond their "real" threat.



The other impetus for conflict comes from the tendency for global supply capacity to run ahead of demand and for profits to fall. In response, the west has pushed for market liberalisation and infrastructure investment in developing countries, which help to expand demand by bringing in more consumers and producers. But their efforts have often generated conflict over the ownership of the newly liberalised assets and over the terms of exploitation. We saw western companies buying bankrupted Asian companies at rock-bottom prices after the Asian financial crisis of 1997-98, prompting a strong anti-western reaction. The emergence of China only adds to the tendency for supply capacity to run ahead of demand and for global financial instability to rise as payments imbalances accumulate.



None of these less-than-rosy dynamics features in the World Bank’s projections to 2030 or in the prevailing optimism about the economic future. But we would be foolish to ignore them.

The writer, a professor of political economy at the London School of Economics, is the author of Governing the Market