Tuesday, May 01, 2007
World Wide Asset Bubble Redux
Mr. Dodge indicated he was more concerned about the global liquidity glut and its fuelling of takeover activity by private-equity funds.Private equity pools and hedge funds "seem to have an inexhaustible supply" of liquidity behind them, driving a trend to "take companies out of the public domain," Mr. Dodge said.
A glut of liquidity will tend to drive the up the price of real assets. Raghuram G. Rajan explained this in a speech in indonesia:
The mismatch between unabated global desired savings and lower realized investment, between the amounts available for finance and the flow of hard assets to absorb it, has led to a liquidity glut which has pushed long term real interest rates the world over lower. This has spilt over into markets for existing real and financial assets — real estate, high-risk credit, private equity, art, commodities, etc — pushing prices higher. Indeed, casual empiricism suggests that the most illiquid markets, where typically there are few transactions, and small infusions of liquidity can have substantial effect, have been pushed the highest.Shorter version: Assets prices rise when there is too much money around. Sounds like this talk of a a global economic bubble sounds a bit more real.
Here is another example:
Worldwide, an abundance of liquidity has lured investors into riskier assets in search of higher returns. Though there is no agreement on how to measure liquidity, using the global supply of dollars as a proxy, The Economist estimates that in the past four years it has risen by an annual average of 18%, probably the fastest pace ever.And Alan Greenspan has also warned of it.
Former Federal Reserve Chairman Alan Greenspan warned on Wednesday a global glut in liquidity would result in a fall in asset prices. Greenspan, speaking to a financial conference in Seoul via satellite, ... said the market value of assets worldwide had been rising faster than nominal gross domestic product globally due to a decline in real long-term interest rates over the years and a significant fall in real equity premiums.“A good part of this expansion is a direct function of the decline in real equity premiums,” Greenspan said. “That cannot go on indefinitely.” He said asset prices would begin to fall, but did not predict when that would happen. “I am reasonably certain that what we are looking at today is an abnormal situation,” he said...
Conclusion: We are in an asset price bubble so big and so broad that we could the forest for the trees.
Shorter Conclusion: Oh Shit.
