A Repeat Of An Earlier Situation
A weekend topic starting with the Japan News. “The global economic recovery continues to gather steam. Why has strong global economic growth continued since last year even as political turmoil has emerged in the United States and Europe? Despite stormy seas since last year, with Britain leaving the European Union and U.S. President Donald Trump emerging as a vocal advocate of protectionism, the U.S. economic recovery has entered its ninth year. Meanwhile, Japan’s recovery period is thought to be the second longest since World War II, topping the Izanagi economic boom of 1965-70. What is happening in the global economy?”
“Periods of high stock prices are thought to produce an ‘asset effect,’ in which increases in the value of asset holdings push up consumption and other areas. Improvements in corporate earnings due to trade expansion and the brisk semiconductor market are driving up stock prices, and it is possible that Japan is in a virtuous cycle that positively affects the mind-sets of consumers and companies.”
“Semiconductors are going through a so-called ’silicon cycle’, and there is fear that oversupply will cause prices to collapse. An IT bubble occurred around the early 2000s, in which stock prices surged based on high hopes over the sudden expansion of IT-related businesses. According to the Mizuho Research Institute, the market capitalization of stock prices, seen through global GDP ratios, is approaching levels seen in previous bubbles.”
“Monetary easing has caused surplus funds, and the system of pouring money into assets such as stocks and real estate is the same as in past bubbles. As interest rates begin to rise in the United States, and European countries start to scale back monetary easing, stock prices could slump at any moment. The cycle of boom and bust in the semiconductor market that repeats every three to four years. Thought to occur due to factors such as generational turnover in memory caused by technological innovation. Besides the high growth of semiconductors, the balance of supply and demand is considered fragile due to such factors as enormous amounts of capital investment.”
From the Guardian. “Walk down almost any major New York street, and some of the most expensive retail areas in the world are blitzed with vacant storefronts. Over the past several years, thousands of small retailers have closed, replaced by national chains. When they, too, fail, the stores lie vacant, and landlords, often institutional investors, are unwilling to drop rents.”
“The common refrain is that the devastation is the product of a profound shift in consumption to online, with Amazon frequently identified as the leading culprit. But this is maybe an over-simplification. ‘It’s not Amazon, it’s rent,’ says Jeremiah Moss, author of the website and book Vanishing New York. ‘Over the decades, small businesses weathered the New York of the 70s with it near-bankruptcy and high crime. Businesses could survive the internet, but they need a reasonable rent to do that.’”
“Part of the problem is the changing make-up of New York landlords. Many are no longer mom-and-pop operations, but institutional investors and hedge funds that are unwilling to drop rents to match retail conditions. ‘They are running small businesses out of the city and replacing them with chain stores and temporary luxury businesses,’ says Moss.”
“In addition, he says, banks will devalue a property if it’s occupied by a small business, and increase it for a chain store. ‘There’s benefit to waiting for chain stores. If you are a hedge fund manager running a portfolio you leave it empty and take a write-off.’”
“Like Moss, New York retail property agent Robin Zendell believes it’s too simplistic to blame Amazon. The same signals of over-pricing are seen in every area of real estate, including housing. ‘When you see [that] every corner has a bank or a pharmacy, and there is a gym on the second floor, there’s a simple reason for that: people can’t afford the rent. Why did restaurants go to Brooklyn? Because it’s cool? No, because it was cheap, and [because] restaurateurs were sick of giving investors’ money away so they could pay their rent.’”
“In some areas, notably Bleecker Street, once lined with fashion boutiques including Ralph Lauren and Marc Jacobs, too many vacancies create their own problems. ‘Rents have fallen but now there are so many empty stores there, nobody wants to be alone. So they’ve created more of a crisis.’”
From Desmond Lachman. “Back in 1933, renowned investor Sir John Templeton famously said that the investor who says that ‘this time is different,’ when in fact it is virtually a repeat of an earlier situation, has uttered among the four most costly words in the annals of investing. He might very well have been speaking about economic policymakers and investors today who try to convince themselves that the bubbles in today’s global economy will have a happier ending than previous bubbles because ‘this time is different.’”
“They do so despite the fact that there are a number of good reasons to fear that if today’s global bubble situation is indeed different from 2008, it might be because it is more dangerous. The most obvious way in which today’s global economic situation would appear to be more worrying than that in 2008 is the increased pervasiveness of bubbles today than before. In the run-up to the 2008 Lehman crisis, the bubbles were contained to the U.S. housing and credit markets; today, they appear to be found in almost every corner of the world economy.”
“It is not simply that we are witnessing egregious bubbles of historic proportions in exotic markets like the Bitcoin market or the Leonardo da Vinci art market. Rather, it is as the former Federal Reserve Chairman Alan Greenspan recently warned, years of highly unorthodox monetary policy by the world’s major central banks has created an unprecedented global government bond bubble, with long-term interest rates plumbing historically low levels.”
“Indeed, global equity valuations are at lofty levels that have only been experienced three times in the last century. At the same time, housing-price bubbles are all too evident in key countries like Australia, Canada, China and Britain, while interest rates have been driven down to unusually low levels for the high-yield debt and emerging-market corporate debt markets.”
“If one had any doubt that global credit markets have lost touch with reality, all one needs to do is to consider a number of recent international bond issues. How is it that a country like Argentina, which has distinguished itself by defaulting no less than five times in the last hundred years, has managed to place a 100-year bond on good terms in the market? Or how is it that war-torn Iraq or little-known Mongolia not only can place bonds in the market but can have these bonds several times oversubscribed?”
“It also does not help matters that the bursting of bubbles today would be taking place in the context of a world more indebted than it was on the eve of the Lehman crisis.”
