Currencies & The (New) Global Asset Bubble
Many economists fear a new, larger, asset bubble that will dwarf the housing bubble of the 2000s in it’s destructive impact. It is possible that this is already underway, either in the US, with the Fed propping up prices with monetary stimulus, or in China, where investors are watching for currency appreciation, or both.
Bubble Scenario 1
Since the global financial markets were “saved” in early March 2009, almost every asset class has appreciated in nominal value. Housing, commercial real estate, and US government bonds are the only exceptions I can think of right now (though I’m sure there are others).
Part of this can be explained by the 20% devaluation of the US Dollar since that time. This is reflected in the appreciation of dollar-denominated assets, including commodities such as gold, oil, and steel; and also the stock market. However, while gold is up roughly as much as the dollar is down (~20%), the stock market is up more than 60% from it’s lows. Indeed, today it marked “13 month highs”, as newspapers reported. This appreciation of risky assets is part of the US Fed’s current policy stance.
It’s possible that US companies are worth that much more than they were in March, but there is a huge amount of money supply propping up asset prices, and if removed, those valuations could prove illusory. In any case, Gold looks like much less of a bubble to me than stocks.
Bubble Scenario 2
I’m also curious to see what happens if China agains lets it’s currency appreciate relative to the dollar; Chinese assets are 20-30% undervalued on a nominal basis. I could see a scenario where investors flood Chinese markets racing for a chance to get into the appreciating Chinese assets “before it’s too late”, but I could just as easily imagine a “sell the news” scenario where markets crash as investors exit a trade that’s already been priced in. There’s no evidence that China is keen to change it’s protectionist currency strategy, though, and most don’t expect a change until the US begins to withdraw its monetary stimulus (ahh, the two are linked, after all).
Either of these bubbles, or both, could run a long way yet. With large governements increasingly taking a hand in setting market prices (which the US and China are both doing in their own way), it’s tough to take a high-conviction view based on the fundamentals. So I guess I’m riding the gravy train until it starts to run out of steam (and buying 3 month rolling 10% out-of-the money puts on risky assets).
