Greed Is An Intoxicating Flaw
A weekend topic starting with the Khaleej Times. “There is a litany of research surrounding the formation of an asset bubble on how and if even possible to identify them. In the real estate market, the largest crash in recent times was during the World Financial Crisis (WFC) of 2008. A closer look into Dubai and California reveals that both cities rallied 50 per cent and 30 per cent respectively (24 months before their peak). During the WFC, the housing market in California crashed by 32 per cent whereas Dubai real estate assets declined by 29 per cent.”
“A look into the second run-up (2012-2014) of real estate prices in Dubai reveals that assets on a city-wide basis appreciated close to 50 per cent. However, unlike the WFC, markets have had a soft landing falling only 13 per cent in 24 months. We opine that this time around, there has been lower amount of speculator activity as long-term investors enter the market, along with stricter government regulations.”
From Bloomberg on Hong Kong. “Why are official warnings of the threat that rising interest rates pose to Hong Kong’s red-hot housing market falling on deaf ears? The Hong Kong Monetary Authority and the International Monetary Fund have both highlighted the risks. But three Federal Reserve rate increases forecast for this year won’t stop prices from climbing, according to analysts at firms including JPMorgan Chase & Co and Union Bancaire Privee. Prices already jumped 22 percent as the Fed raised rates five times from December 2015.”
“Household debt-to-gross domestic product is higher now than in 1997, just before a housing crash that lasted six years. As HKMA chief Norman Chan points out, not only is the ratio elevated, it’s recently rallied from its historical trend. Mortgage payments amounted to 68 per cent of median monthly income in the third quarter, compared with an average of 45 percent between 1997 and 2016. Yesterday, Chan recalled the ‘very painful and unforgettable experience’ of the property bubble bursting and cited the role of loose credit in creating bubbles, without commenting on the current market.”
”At the peak of a bubble, people always find many reasons to prove ‘this time is different!’ Look at history, we’ve now realised how naïve and ridiculous is this,’ Chan told a conference.”
From the Grand Rapids Business Journal. “If you’re like me, over the past few months you’ve probably been inundated with emails, texts, news reports and speculation about bitcoin. I am not a trained psychologist, but I am a trained professional in finance where I used human behavior to trade various asset classes for over 20 years. This is what frightens me the most about cryptocurrencies: Humans have an incredibly short memory, and greed is an intoxicating flaw in our decision-making process.”
“Bubbles are formed by manic hysteria with the belief asset prices will never go down. But why do prices rise to the point that if you look at a chart of any ‘bubbly’ asset class it becomes asymptotic (prices relative to time rise so quickly that on a chart the prices explode higher almost forming a straight line up)? To be clear, this is incredibly unhealthy because when buyers of any ‘bubbly’ asset stop buying, it becomes a game of musical chairs with the last one standing getting burned the most.”
From Pymnts.com. “Did you know that mania is considered a mental illness? Google Dictionary defines it as a ‘mental illness marked by periods of great excitement, euphoria, delusions and overactivity.’ Among its synonyms are ‘madness,’ ‘insanity’ and ‘lunacy.’”
“We’ll let you decide how you come down on that as an appropriate description of the cryptomania that has seized not just the payments community, but the public at large. Regardless of whether one feels it’s ‘lunacy’ to invest in cryptos, everyone can agree that this trend has generated ‘great excitement,’ ‘euphoria’ and ‘overactivity.’ And possibly also ‘delusions.’”
“At the very least, it’s safe to say that many speculators have visions of wealth and grandeur, as some even go so far as to pour their savings into bitcoin, Ethereum and other cryptocurrencies — while at the same time understanding very little about how these currencies actually work, where their value is stored or, indeed, whether they have any value at all.”
“As the great prophet Yogi Berra once said, a nickel ain’t worth a dime anymore. He also said, it’s like déjà vu all over again. Both aphorisms seem rather fitting for where we are right now in the midst of the cryptomania that’s taken hold of not only the trade press, but the mainstream press too. Crypto and its regulatory implications have even made the agenda at the upcoming G20 Summit. Imagine that.”
“What’s certain is that fads come to an end, and bubbles eventually burst — and the life span of either is anyone’s guess. The one question today that no one can answer is when that will happen. To that question, there is one certainty: For many, it will come to an end far too late for them to recover. You only know that the bubble has burst when, in fact, it has.”
From News.com.au. “As Bitcoin on Wednesday dipped below $US10,000 for the first time since late November, extending a plunge that has wiped roughly half the value off the digital currency in the past month, there was only one question on investors’ minds. Has the ‘bubble’ finally burst, or was this just another wild fluctuation as bitcoin marches towards its ‘true value’ of $US100,000 or even higher?”
“With Bloomberg mulling whether Wednesday’s plunge marked the beginning of the end, and the top post on Reddit’s 500,000-strong cryptocurrency forum linking to the Suicide Prevention Hotline, one Twitter user made a dry observation. ‘It has to bounce because 1) the coinfreude is way too high 2) there is no f***ing way the market gods will let the chart look EXACTLY like the archetype bubble chart,’ wrote user Modest Proposal.”
“The two charts attached by the user — named after Jonathan Swift’s satirical 1729 essay advocating child cannibalism — do bear a striking similarity, and would place the current point in the cycle midway through the blow-off phase, somewhere between ‘fear’ and ‘capitulation.’”
“‘The big move from $US4000 to $US19,000 was driven purely by speculative flows and a mania, and that’s over now,’ said IG Markets chief strategist Chris Weston. ‘It was FOMO and greed which drove it up to such extreme levels through September and December. It was not about the usage of bitcoin, it was just the idea that it was front page news, it was going up by a lot every day, and people were watching other people they knew making money. [Now it’s], ‘How much am I going to lose?’ That’s a negative.’”
“Amid the regulatory uncertainty, Mr Weston said the thing that would drive bitcoin higher again was the price itself. ‘It sounds bizarre, but if it starts moving higher, if it gets to $US17,000, people [will] say, ‘It’s back on again’,’ he said. ‘Until that situation, it’s lacking a catalyst. My advice to anyone who is genuinely worried is always take some off the table. You should never be genuinely worried about an investment. You should never have gone out and mortgaged your house to get a loan to buy bitcoin, that’s just stupid — and that’s what people have done.’”
