Bubble trouble:Andy Xie

Andy Xie mince no words in writing this marvellous article:

From South China Morning Post:

Five years after Lehman Brothers went bust, the global economy remains in stagnation. But you wouldn’t notice it if you are in the stock market. The US market is hitting all-time highs. The Japanese market has risen by half in five months. And while Europe’s economies are in recession, the shares of its top companies are highly elevated too. Shouldn’t stock prices reflect or predict the economy? Don’t count on it. The dichotomy shows how ill economic management has become.

In the name of stimulating the economy and creating jobs, today’s macro policies mainly cook up asset inflation to benefit a few, which may trickle down to the unemployed through the so-called wealth effect. Unfortunately, few crumbs reach the bottom.

Pumping cheap money in through asset markets only benefits those people who can borrow

The US Federal Reserve claims that its policy has helped create two million jobs; that’s less than US$100 billion in income per annum. But one-third of the stock market valuation, over US$6 trillion, can be attributed to the Fed’s policy. The decline in interest rates may account for one-fifth of the corporate earnings. Instead of investing more to create jobs, the big companies have borrowed to buy back shares or pay dividends. Unless you are a shareholder, the Fed’s policy doesn’t benefit you much. The unemployed are, of course, least likely to be shareholders.

The Bank of Japan is learning from the Fed about boosting asset prices by printing money to buy whatever it wants to lift. Japan doesn’t even have an unemployment problem. It believes that asset inflation will lead to sustainable economic growth, ignoring that Japan’s main economic problems are its declining population (falling by around one million per year) and that its leading companies such as Sony and Sharp are no longer relevant to today’s world. Euphoria over the bubbly asset prices is giving instant credibility to the Bank of Japan’s policy. If asset inflation were the solution, Japan wouldn’t have suffered for the past two decades. Didn’t people blame the prolonged stagnation on its asset bubble then? A decade ago, even the then Fed chairman, Alan Greenspan, blushed to explain the logic of asset inflation leading to economic growth. Bubble-making was then considered wrong. Now what the Fed is doing is widely praised. And the Bank of Japan has earned much kudos for copying it. Didn’t the bursting of the Greenspan bubble lead the world into this mess? When people are in pain for too long, they begin to believe in quick remedies. Current Fed chief Ben Bernanke is being praised for doing what Greenspan was cursed for. It will take another bubble burst for people to see through this.

Capitalism is about market forces or the profit motive allocating capital, not governments or inherited power. In the real world, though, it never works exactly that way. It is often more profitable to subvert market forces rather then embrace them. Robber baron capitalism is one manifestation. John D. Rockefeller acquired his wealth mainly through creating and enforcing a monopoly. No one could be so rich in a perfectly competitive environment. Since antitrust laws were introduced in the developed economies, no one has become as rich as the robber barons a century ago.

Most emerging economies remain emerging because they practise crony capitalism. If undocumented wealth is included, the richest people in the world are really from emerging economies, not people like Bill Gates or Warren Buffett. Bad systems, not a lack of money, is the reason poor economies remain poor. If an emerging economy wants to develop, it must replace crony capitalism with the rule of law. But that, of course, won’t please the rich people there.

Monetary activism is a new factor that has subverted the market economy in the past quarter of a century. In the name of stimulating an economy in a downturn, to benefit the unemployed, a government cuts interest rates and pumps in liquidity, which inflates asset bubbles. Greenspan did it to the stock market in the 1990s and then the property market. When a bubble bursts, more stimulus is called for, again in the name of helping the unemployed.

The current debate on stimulus versus austerity misses the point. Neither really helps the people most in need. If central banks really want to help people through monetary policy, they should print money and distribute it equally. If monetary policy works, giving it to the people should be most effective.

Pumping cheap money in through asset markets only benefits those people who can borrow. Through such bubble cycles, wealth becomes more concentrated among those who gamble with debt. Maybe it is intended. Central banks seem too close to the people who gamble with borrowed money. Just check out the glitzy financial talk shops. Greenspan-style monetary policy is really a new form of crony capitalism. It rewards a special class of people who borrow cheap money to gamble. When it goes wrong, the bubble bursts. Another round of cheaper money follows. Hence, those with access can always double up. With so much wealth concentrated in finance, the central banks can even justify making policy for them. Otherwise, they may bring down the house.

Bubbles are really a redistribution game. As money becomes cheaper and cheaper, inflation is inevitable. Even though reported consumer price indices are not yet high, check out education, health care and housing. The biggest expenditure items are not in the CPI basket and are rapidly inflating. The little people are hurt most from such inflation. Their suffering then subsidises those who borrow cheap money to bet on asset bubbles.

Crony capitalism is associated with backwardness, and for a good reason. When profits go to those with power, not productivity, economic progress is slow. As the developed economies embrace bubble economics and crony monetary policy, they may join the ranks of emerging economies. The world may become more equal after all, with the top falling down.

REIT fever -too high for comfort?

Another REIT IPO, M&L hospitality REIT is jumping into the bandwagon of desperate search for yield plays due to ultra-loose monetary policy.Many of new Singapore stock exchange IPOs in recent years are REITS. As the saying goes:”‘What the wise do in the beginning, fools do in the end.’ Sooner or later, you will see REITs offering lower yields but still attract subscribers. When FED decides to raise interest rates, expect REITs to suffer drastic drop in price.

Can Super Group continue its super performance?

If you have bought Super Group during the financial crisis, congratulations, you have got a 10 bagger.Super Group has been disposing its non core assets and using the cash plus cash from placement shares, invested in their new line of business of selling ingredients which have reaped dividends. They are debt free presently and new ingredients lines will start production in the next few years.

However, their share price is too high for my liking. If other companies also learn the trick of producing food ingredients as good as them and muscle into their business, can Super Group sustain its double digit growth in earnings?

Growth stocks like Super Group will ultimately suffer a fall in price drastically not because of poor business but because expectations of their business prospects are too high. Sure, Super Group shares can zoom higher but remember Apple?

How to solve problem of AGM bunching

Two forum letters in Business Times highlighted the problem of having too many AGMs held within the same day.One way to avoid this problem is not to hold so many stocks. Another way is to appeal to SGX to implement a ruling that all listed companies must publish AGM minutes so that even if you are unable to attend the AGM, you will not miss out on relevant info being dished out. A third way in this internet era is to upload videos of AGM highlights on the net (SGX should also force listed companies to do so)

As for those who like to attend AGMs solely for the food, i don’t see any problem for them since you can’t eat every hour or so.

丁蟹效应 Adam’s Effect is working again

One day after Adam Cheng’s new film started its premiere, Hang Seng Index has dropped significantly.Hongkongers call it 丁蟹效应 Adam’s Effect . It is a mystery why it works frequently as the date of premiere is known in advance. This shows that stock market is inefficient at times as herd behaviour takes precedent. If enough people believes in an effect and takes action, the prophecy will come true. If you want to beat the market, you must be a keen student of the behaviour of the crowd.

As Benjamin Graham said:”In the short term, the stock market is a voting machine” Another famous investor, John Maynard Keynes summed up the 丁蟹效应 Adam’s Effect “It is not a case of choosing those (faces) which, to the best of one’s judgment, are really the prettiest, nor even those which average opinion genuinely thinks the prettiest.We have reached the third degree where we devote our intelligence to anticipating what average opinion expects the average opinion to be.”

sgcarmart, a SPH splurge again?

SPH announced a 60 million purchase of top car sales website, sgcarmart. This is similar to its purchase of hardwarezone, shareinvestor and recently, Chope(a restaurant reservation website). As SPH was slow in starting its own websites, sites like sgcarmart grabbed the first mover advantage and being more nimble than SPH, they continue to grab pole position despite competition from SPH new online websites. As SPH is losing money on its online websites, the only way to stem loss without giving up on its online strategy is to buy out its rivals.

However, this comes at a rich price. sgcarmart has a turnover of about 7 million, it is valued at 43.5 million by Ernst & Young as of 2012. Although it has high profit margin due to its dominant position, growth will certainly slow over the years. But, it is expanding into Indonesia to counter that.

The question remains whether sgcarmart will be different from websites bought by SPH and earn enough money to justify the high valuation. What’s next, propertyguru? Even though SPH has money to spend and more from the upcoming REIT, millions here, millions there, soon you are talking about serious money which should be returned to shareholders rather than spent unwisely.

Is the secular bear market coming to an end?

The bullish rally in stock market has led to many analysts, fund managers saying that secular bear market is coming to an end. but if you look at Warren Buffett’s valuation metric as shown by businessInsider article, the rally will end one day unless GNP picks up significantly.

http://www.businessinsider.com/warren-buffetts-favorite-valuation-metric-2013-2