www.washingtonpost.com/wp-dyn/articles/A58600-2005Mar22_2.html
Back Bubbles Abound In a World of Ready Cash The house market is so hot, there is even the equivalent of day traders. Makin reports that during his drive in from the Key West airport recentl y, all the driver would talk about was the million-dollar condos that we re flipped several times before construction was even completed. David Berson, the chief economist at Fannie Mae, takes note of the sharp increase in the number of homes being purchased solely for investment pu rposes -- up to 30 percent in some markets, by his reckoning. One study by the National Association of Realtors estimated that 23 percent of hom es in 2004 were purchased primarily for investment. Rising oil prices are reflected in the retail price of gasoline.
Sign Up Now The downtown office-building market is also red hot, despite the fact tha t, nationally, there has been little increase in net rents. Torto said m ost of the price escalation can be explained only by an expectation that price appreciation will continue at its current pace. Phil Verleger, the energy expert, brings a similar analysis to the recent run-up in oil prices, which he said is being driven less by fundamental s (supply, demand and the cost of replacing reserves) than it is by the upward pull of futures markets. He said OPEC and its silent partners, th e major oil companies, know that they earn the highest profit when oil i nventories are lean, and the best way to keep them lean is to keep spot prices higher than futures prices. Now that every hedge fund and college endowment is in the futures market placing bets on higher prices over t he next year, spot prices are following suit. The current bond-market bubble was attested to by no less an authority th an Greenspan, when he admitted he was puzzled by long-term interest rate s that have failed to respond to the 175-percentage-point increase in s hort rates engineered by the Fed. I c all it a speculative market driven by irrational exuberance and herd beh avior. A similar story is told by narrowing "spreads" on riskier bonds -- the in terest-rate premium that borrowers have to pay over "risk-free" US Tre asury bonds. On the junk-bond market, spreads are near historic lows, wi th many new issues oversubscribed. In the market for emerging-market bon ds, spreads that peaked at more than 10 percentage points at the time of the Argentine debt crisis in late 2001 fell to a low of 33 percentage points earlier this month. It is more of a stretch to argue that stock prices have again entered bub ble territory. Certainly as a multiple of earnings, today's prices are o nly slightly above historic averages. But there is a strong sense of dej a vu in seeing banks and Wall Street investment houses tripping over one another to provide gobs of money on easy terms to companies and private equity funds engaged in bidding wars for telecom and software firms. An d I assign some significance to the fact that Warren Buffett, who correc tly identified the last bubble, now has $43 billion sitting in the bank, unable to find acquisitions to make at reasonable prices. The tendency among economists has been to assume that bubbles happen only when there is too much cheap money around and that responsibility for c ontrolling the money supply and containing bubbles rests with the Fed an d other central banks. Adam Posen of the Institute of International Econ omics did a nice job of knocking down such outdated monetarism in a shor t, pithy article in a German newspaper last week. But Posen -- like the Greenspan Fed -- also makes a mistake in concluding from that observation that policymakers need not worry about asset bubb les, largely because they have little long-run impact on what economists call "the real economy." But this is a wo rld in which billions of dollars earned by Chinese exporters can be recy cled into Fannie Mae bonds, lowering US mortgage rates enough to give a couple in Rockville the wherewithal to spend an extra $50,000 for thei r dream house. It's also a world in which billions of extra petrodollars now quickly make their way into hedge funds and real estate investment trusts that are bidding up the prices of satellite companies, Manhattan real estate and Treasury bonds. In such a world, the old distinctions be tween financial markets and the "real economy" quickly blur. I don't know whether this means the Fed was right or wrong this week in n ot raising interest rates more than a quarter of a point and in sticking to its promise of "measured" increases in the future. What I do know, h owever, is that it is silly for the Fed to continue to ignore the condit ion of asset and currency markets when making such decisions and explain ing them to the public.
|
http://csua.com/feed/