Biggest Bubble in Human History?
by Bill Bonner: A
Close Encounter With Zombiedom
Dow up 125
points yesterday, to a new all-time record.
behind it? The economy is not so hot. Why the red-hot stock market?
China is back
in the news. A
new report from CBS's "60 Minutes" documents the extent
of the ghost cities in China miles and miles of empty highway,
office towers, apartments and malls. Analysts are talking about
the biggest real estate bubble in history!
a bubble? We don't know.
Does it matter?
Well... yes... maybe. If China melts down or blows up the demand
for oil and other resources goes down. The Chinese have pumped vast
sums of money into development projects. That money helped to keep
people on the job... and also kept the ships full of stuff, going
back and forth across the world's oceans.
China is trouble everywhere particularly in Australia (which
has been selling itself by the ton to the Chinese) and in Europe
(which sells its precious, high-touch products by the boatload).
Drive around Beijing and you see German autos, Italian shoes, Swiss
watches and French perfumes.
But why worry?
The Chinese can print
money too! When China does something, it tends to do it to excess.
That's why there are so many empty buildings in the Middle Kingdom
and why it might have created the biggest real estate bubble in
it when it comes to central bank stimulus measures too. Arguably,
no central bank has done more than the People's Bank of China when
it comes to pumping up the economy.
M2 money supply
in China is roughly twice GDP. In developed economies the ratio
between M2 and GDP is usually below one. In emerging market countries,
M2 is usually 1 to 1.5 times GPD.
bad news for China... like bad news for the U.S. economy... could
be good news for the stocks. The Chinese feds will pump more money.
Stocks will go up!
York Times reports:
The Dow Jones
industrial average, which measures the performance of 30 blue-chip
companies, closed with a gain of more than 125 points Tuesday,
surpassing its previous record close of 14,164.53, which it achieved
nearly five and a half years ago, as well as its record intraday
high, set around the same time, of 14,198.10.
a few things have happened since October 2007. The housing market
collapsed, the financial system went into meltdown, the European
Union started to fray and politicians dragged the United States
through an on-off-on-again fiscal imbroglio.
managed to move beyond all that.
Since a low
point in March 2009, the Dow Jones index has more than doubled,
stunning even the most seasoned stock market watchers. It closed
at 14,253.77 Tuesday.
amazing about this bull market is that people still don't think
it's real," said Richard Bernstein, chief executive of Richard
Bernstein Advisors, a money management firm. "We think this
could be the biggest bull market of our careers."
you can count us among those who don't think it's real. We think
it's what happens when all the world's central
banks are evaporating yields on bonds and corralling investors
If China goes
into a serious correction, how will its leaders overreact? With
even more funny money and EZ credit?
We don't know
enough about the Chinese situation to make an educated guess. So
we'll make an uneducated one. Whether they live in Beijing or Washington,
economists tend to have the same dumb ideas.
They are heirs
to the Aristotelian error: the belief that without them the whole
world will fall to pieces. They believe they must set the price
of the economy's most essential ingredient: credit. And if the economy
fails to do their bidding, they will give it more money too.
All major central
banks are in agreement about this. All believe they can see, in
their mind's eye today, a picture of the world as it will be tomorrow.
And they further believe that they can Photoshop it to make it better.
the future by making credit cheaper or dearer, as the occasion requires.
But how is
it possible, you might wonder, that these few homo sapiens can do
something so remarkable?
How do they
know precisely how much new money to create and how to price it?
What kind of bread do they eat? What kind of liquor do they drink?
Surely, they do not eat and drink the same things we do; for they
must sup at the gods' table to be able to do such things.
In their naïve
and simpleminded way, the planners believe that a slack economy
calls for overtime work at the central bank. That which the private
sector taketh away, they say, is what we will put back and
So stocks go
up. That's our best explanation.
bestselling author and founder of Agora, one of the largest independent
financial publishers in the world. If you would like to read more
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Bonnerís Diary of a Rogue Economist.
© 2013 Bill Bonner
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