Why have some asset prices been so high?

Do they have to be bubbles? And is it so terrible if they fall?  I cover those topics in my latest Bloomberg column, here is one bit:

In a volatile and uncertain time politically, we have observed sky-high prices for blue-chip U.S. equities. Other asset prices also seem to be remarkably high: home values and rentals in many of the world’s top-tier cities, negative real rates and sometimes negative nominal rates on the safest government securities, and the formerly skyrocketing and still quite high price of Bitcoin and other crypto-assets.

Might all of those somewhat unusual asset prices be part of a common pattern? Consider that over the past few decades there has been a remarkable increase of wealth in the world, most of all in the emerging economies. Say you hold enough wealth to invest: What are your options? Well, the stock markets of China and Russia are unsafe and not well developed, and many other emerging economies, such as Turkey and Brazil, have been wracked with uncertainty and political turmoil. So you might take a disproportionate share of your money and put it into high-quality, highly liquid assets. That might include the stocks of the Dow Jones Industrial Average and real estate in London, to name two possibilities.

In relative terms, the high-quality, highly liquid blue-chip assets will become expensive. So we end up with especially high price-to-earnings ratios and consistently negative real yields on safe government securities. Those price patterns don’t have to be bubbles. If this state of affairs persists, with a shortage of safe investment opportunities, those prices can stay high for a long time. They may go up further yet.

These high asset prices do reflect a reality of wealth creation. They are broadly bullish at the global scale, but they don’t have to demonstrate much if any good news about those assets per se. Rather there is an imbalance between world wealth and safe ways of transferring that wealth into the future…

To sum this all up in a single nerdy finance sentence, in a world where wealth creation has outraced the evolution of good institutions, the risk premium may be more important than you think.

In this “model,” price declines do not have to be disastrous, but rather can reflect a kind of normalization.  Do read the whole thing.  The theory also predicts that bond, equity, and Bitcoin prices should all decline at the same time, which is indeed what happened yesterday.


Short China and go long on Brazil, the one country that will resist Chinese imperialism!

But not very "anon" presumably.

'Might all of those somewhat unusual asset prices be part of a common pattern?'

Fear of an impoverished future, along with a desire to finally be on the right side of rich getting richer divide? 'He had invested in bitcoin almost two years earlier, so now Jacob Melin had a new house, a new truck, a new consulting business and a line of people coming into his office, trying to become wealthy as quickly as he had. One person said he expected to use a modest investment to “retire in 12 to 18 months.” Another said he wanted to use the proceeds to start a business. And a father of two talked about paying off his own student loans and buying several acres of land — all the things he did not see a chance to do with his income as a software salesman.

“Us little guys working our butts off, we can’t get ahead,” Cedric Knight, 35, told Melin. “This is a once-in-a-lifetime opportunity to change my life.”' https://www.washingtonpost.com/business/economy/bitcoin-is-my-potential-pension-what-is-driving-people-in-kentucky-to-join-the-craze/2018/02/03/aaaea3be-05dc-11e8-b48c-b07fea957bd5_story.html

Or even more likely, the fact that the past few centuries of human history clearly demonstrates a propensity to extraordinary popular delusions and the madness of crowds - http://www.gutenberg.org/ebooks/24518

As for this observation, 'the risk premium may be more important than you think,' another way to phrase it in many cases is that making corruption pay requires some effort. Just ask these no longer quite so wealthy Saudi citizens - 'Saudi Arabia announced Tuesday that it has released most of the businessmen, officials and princes who were being held in a luxury hotel here in connection with what authorities called an anti-corruption campaign after reaching financial settlements with them totaling nearly $107 billion.' https://www.washingtonpost.com/world/middle_east/saudi-arabia-releases-most-detainees-in-corruption-probe-after-settlements-totaling-nearly-107-billion/2018/01/30/969d4d5a-05cb-11e8-aa61-f3391373867e_story.html

If you put $50 million into a big house overlooking the Bel-Air Country Club, you probably won't get hung upside down at the Beverly Hills Hotel until you divulge your passwords.

People who bought mansions in Palmer Woods circa 1960 had a similar line of reasoning. And I'm sure most of them eventually got mugged before the decade was up.

Americans have a myopic view that real estate is the ultimate investment. Largely because in the past three decades both crime and interest rates have been on a nonstop decline. We've seen to come to the end of the road for both these trends. Combine rising mortgage rates across the nation with rising homicides in your neighborhood and that's a recipe for real estate ruin. A lot of prudent people got burned by this effect sometime around the Nixon administration. Few of them are alive, let alone still in the home buying market.

Investing in real estate for appreciation is risky. Investing for cash flow is much safer. And if you’re in a stable market rising rents almost guarantee appreciation.

I kept looking for the "savings glut" idea until the end of the piece.

Anyway, an interesting idea. If there are not enough investment vehicles, these ones will be more expensive. Not by intrinsic value but scarcity.

"The theory also predicts ...": since when did a commonplace observation get dubbed a "theory"?

> Consider that over the past few decades there has been a remarkable increase of wealth in the world... Well, the stock markets of China and Russia are unsafe and not well developed

Well, China, Russia and India are for the large part the source of that new wealth. So, one way to rephrase this is China has been much more successful at producing wealth than robust ways to store that wealth. Everyone wants to buy Chinese goods, no one wants to invest in Chinese assets. Prima facie, we wouldn't expect this to be the case. As a country becomes more developed, we probably would expect that its ability to produce consumer vs investment goods would largely remain in balance. I'm not an economic historian, but I don't believe this was the case with previous rounds of development. When the US industrialized from 1870-1910, its stock, bond and asset markets largely took over as the pre-eminent global financial center. Similar story largely holds true with 19th century France, 19th century Germany, post-war Germany, and post-war Japan. As those countries got rich, their asset markets also became developed and mature. This prevented any serious imbalance of investment flows, precluding major dislocation in asset prices. It's not like Japanese investors in the 1980s were snatching up properties in Vancouver and Sydney. If anything, frothy Tokyo real estate and the Nikkei was a major net sponge for global speculative investment.

But this cycle is different. China's less than a decade away from being the largest economy in the world. Yet its asset and financial markets probably don't even rank in the top 10 in terms of importance or global centrality. For every dollar of Western wealth trying to invest in China, there's at least five trying to get out of the country to a "safe" market. This produces clear absurdities, tiny, isolated New Zealand is considered a desirable and safe place to park Chinese assets. Despite having an economy 1/50 the size. It'd be like if everyone in the US didn't trust American banks and insisted on buying a house in Iceland to protect their nest egg. Obviously the distortion in prices would be massive.

The real question is why have the major emerging markets had such uneven development? The increase in their ability to produce manufactured goods, natural resources, and industrial inputs has been incredible. Yet, they're still terrible at running trusted, liquid and stable asset markets. Why?

'no one wants to invest in Chinese assets'

Almost as if the Communists were still in charge, right?

'As a country becomes more developed'

The Chinese government, hard as this might be to imagine today, are not actually devotees of capitalism as a social model. No Chinese government ever has been, actually. (Blame Confucius, with a bit of Marxism/Leninism seasoning the broth.)

'This produces clear absurdities, tiny, isolated New Zealand is considered a desirable and safe place to park Chinese assets. Despite having an economy 1/50 the size.'

The Swiss would likely point to their history of being a tiny place with a small economy which earned a lot of money from offering a desirable and safe place to park anyone's assets, except they are generally notably discrete in such matters.

> The Swiss would likely point to their history of being a tiny place with a small economy which earned a lot of money from offering a desirable and safe place to park anyone’s assets

Swiss banks are the offshore destination. Swiss assets largely are not. By and large Russians are not buying homes in Zurich, the Indians are not acquiring shares in Nestle and the Chinese are not hoarding Swiss bonds. (At least not to more of an extent than they are for homes in London, shares in Facebook and treasury notes.) In fact many of the bank accounts aren't even denominated in francs. But even if they are, the wealth influx into Switzerland very rarely spills beyond the FX market. That's quite a different beast, because the SNB can directly intervene to adjust the currency if the exchange rate gets too far out of line. This is quite a different story than New Zealand, where Kiwis are literally being priced out of living in their own country.

'Swiss banks are the offshore destination.'

Actually, in part due to U.S. and EU pressure, the Swiss have pretty much gone out of that business. However, they will happily take fully documented money - and not so happily give it back if a government can prove the deposited money comes from corruption.

'By and large Russians are not buying homes in Zurich'

Actually, the Russians have always preferred Baden-Baden when it comes to buying property in a German speaking area.

'This is quite a different story than New Zealand, where Kiwis are literally being priced out of living in their own country.'

And oddly, is that not the entire point of letting the rich get ever richer - who cares about the poor being priced out of anything in such a world?

+1. So the world is paying the price for China's inability to develop its political and legal systems.

"So the world is paying the price for China’s inability to develop its political and legal systems."

No, the world is reaping some of the gains. Westerners hold most of the western stock markets. When Chinese invest large sums of money, they increase the value of those assets. The primary beneficiaries of this rise in value are Westerners. China is implicitly paying for the political distrust engendered by Communist control when its people park their wealth in other countries. This has always been the case with the third world and it's a sure sign that China still is governed by third world standards.

It's almost like the rule of law was important to keep ownership of assets. Who would have thought.

I agree completely. But it moves the goalpost back one step. Traditionally there's been no shortage of countries with terrible rule of law. But the difference is they tend to remain poor. Money fleeing Venezuela is not distorting global markets, but Venezuela has so little money to begin with.

China's managed to produce tremendous amounts of wealth in the past two decades. But it's largely been able to do so with zero commensurate gains in rule of law or governing institution. I'm an outsider, but all the evidence I see says that it's remained as corrupt and authoritarian as it was in 2000. If anything, more so. To a lesser extent, we see somewhat similar phenomenon in other middle income countries. But arguably that's mostly because China's growth has bid up the price of their natural resource exports.

It's still a major quandary. How is a country, who's governance is for all intents and purposes utterly third world, managing to produce vast amounts of first world wealth? And why have we never seen this phenomenon in economic history before?

"It’s still a major quandary. How is a country, who’s governance is for all intents and purposes utterly third world, managing to produce vast amounts of first world wealth? And why have we never seen this phenomenon in economic history before?"

The Communists were generally successful at industrialization and manufacturing. It was the one bright spot of the early Soviet economy. The Chinese Communists have had similar successes.

There's no strong correlation btw between economic growth of a country and stock market returns. Having said that, it takes a brave soul to invest in South Africa (whose stock market did really well), Germany (post WWII, who would have predicted it?), Japan (ditto) and last but not least Australia (at the end of the earth, yet surprisingly did well).

Good comments here imo. Agree it's a fascinating puzzle.

Yet asset prices have also skyrocketed in China. In fact real estate in major Chinese cities have increased far more than in "safe" Western ones. I think Tyler Cowen describes a real issue, affluent people in China and other emerging markets wanting to park some of their wealth in safer jurisdictions, but I doubt it explains much of the extraordinary asset inflation we've witnessed.

of course asset prices have also skyrocketed in China. That's Tyler's point: there is a shortage of places for the newly rich to park their cash. China has not produced assets to store wealth at the rate it has produced wealth. Thus asset price inflation not just in China but all around the world ... bitcoin ... S&P .... London property ....

But the asset price inflation is not limited to "safe" assets, or assets in countries with strong rule of law, which undercuts Cowen's theory.

You still misunderstand Cowen. Whatever the demand for the unsafe assets, there will be more demand for safe assets. So given that China is awash in top end wealth you expect both to go up. But since there are limits to the willingness (especially of the mega rich) to buy unsafe and illiquid assets (Chinese land/property) you will see a disproportionate rise (relative to other historical periods of comparable wealth creation for Europe/America) in investment in safe assets abroad. It does NOT mean that you won't see asset rises in China. On the contrary.

Not enough factories?

Or too many factories?

Not enough railroads?

Too many railroads?

Not enough power plants?

Too many power plants?

I grew up when those defined wealth based on the cost to build productive assets.

The idea a big house could be wealth is a product of post Reagan free lunch economics of wealth for nothing.

Clearly there are people in China with a lot of money who would like to put it somewhere safe. The interesting thing is that so many of the normal institutions seem to be too unsafe for the Chinese - not the stock market, nor bonds, nor even life insurance. But property is acceptable. Which is interesting because the Chinese do not own property. They only get a lease. They lack confidence in shares that they do own but they are sure about property which they do not? China must be an interesting market.

However there is one other thing they could do with their money - they could re-invest it. Why aren't they using it to build their businesses? Presumably most of these people own factories or something. Why not expand?

Which leads to the interesting question - is this political? Are they moving cash out of China because they expect disorder if not violence in China? What do they know that we do not?

Great questions.

Why not expand? I think they understand that factory demand is now incredibly fickle. Today you're hot, tomorrow you're not.

What about land? Yeah, Taiwanese do that, too. It seems safer: rents come in steady vs. guessing what foreigners will like or not. (and payment terms, and currency risk, etc.)

But I think its wrong to assume most of the wealth is from factories. That was the catalyst, but a lot of the sudden wealth is from land price increases and real estate development.

In fact, we visited a factory owner who made their money in land, and then opened a factory. The factory didn't make much money, but had prestige and appearance of working rather than just being a Bao Fa Fu.

Let's imagine you own a toy factory in China and made some money off fidget spinners.

Do you really want to invest that windfall in say, another factory? A chinese food processor?

No, you want something fairly safe. Housing, even in China, seems more reliable. Foreign stocks. Maybe a house in LA so your kid can go to UCLA and pay local fees.

Creating wealth is not the same as preserving it. Different investments.

p.s. Some of Chinese sudden wealth is weird, too. I know someone who made a million dollars in China owning a factory that makes sidewalk chalk. They really didn't make much selling the chalk to Walmart. They made most of that from land appreciation. They built the factory in a field, built roads to it, etc. Its ironic.

"In a volatile and uncertain time politically": is it a cliché to say that you shouldn't start an article with a hackneyed phrase?

Do we know it is politically volatile AND uncertain? Suppose it's actually just one and not the other?

That means that the feedback mechanisms are working just fine. Is it any surprise that the market isn't the same?

Oh by the way Tyler, never reason from a price change.

The high prices of the US blue chips and bitcoin reflect a pessimistic view of the future: one where China, Russia and other emerging countries are incapable to reform and guarantee the safety of their own financial markets. News from Saudi Arabia have not helped lately. They will turn wrong, it is not very complicated, it just requires time and some dedicated political effort.

"The high prices of the US blue chips and bitcoin reflect a pessimistic view of the future: one where China, Russia and other emerging countries are incapable to reform and guarantee the safety of their own financial markets. :

The high prices represent a limited view of the future. If Russia and China became high trust states in 10 years, I doubt the current prices would be considered too high. And what are the odds that these states become high trust states before then?

Just to mention the obvious, lack of a gold standard is one reason prices are so high. Reading L. Ahamed's "Lords of Finance" now.

Bonus trivia: I think money is neutral: while debtors gain and creditors lose under a fiat standard, society as a whole does not profit or lose; ditto for debt vs taxation (within limits), aka "Ricardo Equivalence". I am reading Ahamed's book with this in mind. But I'm in the minority. Keep in mind some people are so strongly in favor of a strong pound sterling (i.e. UK prior to WWII) and so strongly against debt (Google Stanley Baldwin) that they are willing to do the following: "In October 1922, Lloyd George’s government precipitously fell and a new Conservative government under Andrew Bonar Law took office in Britain. The incoming chancellor of the exchequer, Stanley Baldwin , was a practical and sensible businessman who believed strongly in settling one’s debts—he was so firm an advocate of this principle that in 1919 he had anonymously donated $700,000 of his own money, a fifth of his net worth, to the government as his contribution to paying off the national debt after the war. Now THAT's putting your money where your mouth is!

So... we're not as rich as we think we are?

This was probably true in 2007 and definitely true in 1999. Not so much today.

Sorry that money illusion gives you a headache.

@BD - you're not making sense...again :) So eight to eleven years makes a big difference in your view? Money illusion is a figment of your imagination BD.

"So eight to eleven years makes a big difference in your view? "

I suspect BD is saying that the 1999 bubble was much, much higher than any current bubble and that even 2007 was more of a bubble. It's not that the fundamental view has changed, it's just that assets prices don't seem as speculative.

The notion that inflation benefits debtors has become axiomatic. It's not, really. It benefits owners of collateralized assets who bought at the right time. This includes multi-generational institutions such as governments; their collateralized asset is their taxing power.

@ The Anti-Gnostic - that's the 'modern view' post-Salomon brothers. Keep in mind most of the time, assets are not collateralized, even with the sophisticated Medici bank of the medieval era they got stuck with all kinds of non-performing loans.

Isn't it interesting that it seems to be easier to obtain wealth than it might be to keep it. Why should that be?

Easy come, easy go.

My definition of a bubble is: "a moment when two very opposite views of the future lead rationally to the purchase of the same asset".

Penetration penetration pricing strategy refers to a marketing strategy used by businesses to attract customers to a new product or service. Penetration pricing is the practice of offering a low price for a new product or service during its initial offering in order to lure customers away from competitors.

We relied on rising asset prices to recover from the financial crisis, and rising asset prices fed on itself, as rising asset prices created more wealth that could fuel ever rising asset prices. That the day of reckoning would surprise anyone is a testament to the innate ability of humans to believe that this time is different. No, it's not. I imagine Cowen's Austrian colleagues at Mercatus are running a few victory laps. Prematurely, I hope. I laugh at the line "we can't spend our way out of an economic crisis", spoken by the same prophets who worship at the altar of markets - when asset prices are rising. Of course, those same prophets now blame, not rising asset prices, but rising wages. "Something must be done" they insist. So one can predict belt tightening at the Fed, which will give Scott Sumner something to complain about. What Sumner has so accurately observed is that the economy needs help the most (from the Fed) just when it appears to need it the least. That Sumner is in the minority is another testament to the innate ability of humans to believe this time is different. I suppose we can hope that the new Fed chair isn't human. Or we could take an entirely different approach to economic growth, one not predicated on rising asset prices but investment in productive capital, the only approach that has consistently been the path to long-term economic growth, widely shared economic growth. I know, another testament to the innate ability of (this) human to believe this time is different.

Now re-read your paragraph Counselor with the assumption that money is largely neutral, and see if it makes sense. Keep in mind nearly all studies show that money is largely neutral and that the Fed is a coincident indicator, not a leading indicator, to the economy. The Fed is not the most powerful institution in the world. They are like Dan Brown's Illuminati: largely a product of your imagination.

“For the last few decades, with minor cyclical interruptions, the supply of safe assets has not kept up with global demand. The reason is straightforward: the collective growth rate of the advanced economies that produce safe assets has been lower than the world’s growth rate, which has been driven disproportionately by the high growth rate of high-saving emerging economies such as China. If demand for safe assets is proportional to global output, this shortage of safe assets is here to stay.”

See Ricardo J Caballero et al https://scholar.harvard.edu/farhi/publications/safe-asset-shortage-conundrum

Free market theory says a shortage will lead to paying workers to produce more.

Why are workers not being paid to build more safe assets?

Too few workers?

Or building more assets by paying workers will destroy wealth by driving asset prices down to labor costs?

I'm being rather dumb, but what does "the risk premium may be more important than you think" mean exactly?

I think it means that stocks are overinflated a the moment, and that the "The equity premium puzzle" is reverting to the mean, making it no longer a puzzle.

Google/Wikipedia: The equity premium puzzle refers to the phenomenon that observed returns on stocks over the past century are much higher than returns on government bonds. It is a term coined by Rajnish Mehra and Edward C. Prescott in 1985

Are bonds over-inflated at the moment?

Probably, if central banks get rid of the paper on their books, like they stay they will, by not printing more money. But I bet they chicken out, since they believe, as you do BD, in money non-neutrality.

If? If? What kind of answer is that? You don't get to place a bet in roulette conditional on seeing the result of the spin first.

Thanks. So the *currently low* risk premium would have been a better way of putting it? Though is the ERP low relative to bond yields? Perhaps he should just have said *everything is expensive*?

Dow futures are down another 400+ points.

Interest rates creep higher. The 10-year rose to 2.86% and 30-year, fixed rate mortgage rates rose to 4.22% (3.94% in December) - 28 basis points below the prime rate. FDIC-insured deposits still pay only 0.1%, while the prime rate rose, since December 2015, from 3.25% to 4.5%. Is the Fed making room for rate cuts in the upcoming recession? Will the yield curve invert (recession)?

Bitcoin is down to $6,400 - about 50% of 1/1 price.

One cause for sky-high prices in some (not Bitcoin) asset categories could be massive government intervention.

On July 13, 2017: Grant was on FOX Business TV and said, the Fed balance sheet reveals that it owns 18% of US single family mortgage paper and 24% of US publicly-held debt.

June 4, 2017, Zero Hedge: Central banks hold a third of the world's marketable bonds, $18 trillion of $54 trillion. Can that amount of debt securities be sold without crashing the bond market?

Your original nym must have gotten banned, hence the "A", eh? hehe. Good observations Dick. At present the Japanese central bank holds half of the Nikkei Dow, so this phenomena is world wide. It's sort of an experiment in the wild in the nuances of Ricardo Equivalence theory ("debt: we owe it to ourselves") and if it ends badly it's proof I suppose of money non-neutrality.

Hope all's well, Ray.

I'm not proscribed. And, I'm not sophisticated. I simply type the name each time and move on, often without seeing the typo.

At least, the US Fed has not yet begun to purchase US equities.

Haven't heard of the 'Plunge Protection Team'?

Haven't heard of the 'Plunge Protection Team'?


The ZeroHedge door is to your right.

And just because someone decides to believe a conspiracy theory doesn't make the theory true.

“there is an imbalance between world wealth and safe ways of transferring that wealth into the future…”

Yes, and much of that is a direct result of the risk weighted capital requirements for banks

Banks are allowed to leverage much more their own capital with other people’s money when lending or investing in what is perceived as safe, and in this respect they have been given a comparative advantage over other people, when it comes to obtain risk adjusted returns lending or investing in what is perceived as safe. That means banks are investing more than usual in what is perceived decreed or concocted as safe, which brings down the “neutral rate” and the “risk free” rate for everyone.

That de facto closes the doors for what is perceived risky to have fair access to bank credit.

For instance, the risk weight of a mortgage is 35% while that of an unrated entrepreneur is 100%
How much of this regulatory favoritism is reflected in the price of houses?

When we now finance the purchase of a house how much do we have to finance the added value of that house that results from regulatory favoritism?


FYI the risk weighting for "conforming" single family mortgage loans stayed at 50%.

The proposed BASEL III (post crisis) risk-weights rates for such loans were ranged at 50% to 200% (for subprime; liberal underwriting/terms). The "politicians" and their bank-rollers got a hold of it and the weighting stayed at 50%.

"When we now finance the purchase of a house how much do we have to finance the added value of that house that results from regulatory favoritism?"

Free lunch economics argued monopoly premium should be value to finance.

Keynesian economics argued only labor cost cut be financed. Thus if prices are higher than labor costs, pay more workers.

There are no real monopolies. Just the widespread wish to not pay workers. Especially since free lunch economics argued wealth is created by paying workers less.

We have the two views of wealth creation:
Free lunch Apple: pay workers less by going to China.
Keynsian (tanstaafl) Elon Musk: pay american workers to build the biggest factories and rockets in the world

In China, dozens of companies are building wealth destroying alternatives to Apple products. When Apple product prices must be cut in half to retain 20% market share, what will happen to the "wealth" of Apple market cap.

What you are asking is: why are yields so low?

It's a rich world, but still scarred by the financial tumults of this century, so guarantees remain expensive for the time being.

Labor costs are rising, interest rates are rising. Mismanaged and highly leveraged companies are not worth as much.

You might want to read some works on behavioral finance. For example, if you gamble at the casino and get lucky and hold a pile of chips that is greater in value than what you had before you arrived, what is your reference point for wealth during the exciting time that you are there. Is the reference point for your wealth what it was before you came in, or is it the reference point with these plastic chips in your hand.

Hey, I just got some of these chips in my hand. Let me put some more money on the table. I can brag about it later and I'm ahead, and my reference point for wealth is what I came into the casino with before I started, so there is nothing to lose.

By the way, if you want to view the creation and collapse of a bubble from rational actors, you may want to watch the youtube video of Charlie Plott's experiment involving econ students in a market game. It is a great experiment. Here is the link: https://www.youtube.com/watch?v=yJWy-cLbqh8 Begin about 58 minutes into the lecture.

It's true: when I inherited a pile of money from my senile uncle (I rescued it from some servants, who stole a large portion), I spent it more freely than "my" money, which I have earned through working. Behavioral economics is for real, and an antidote to the "Rational Expectations" nonsense of the 1980s. That said, money is still largely neutral says the evidence.

Tyler hits on an interesting idea, but doesn't develop it. Should/can Western markets (stock, real estate, education) serve as a safety valve for the rest of the world? In smaller markets people are already screaming about Chinese money inflows (Vancouver, Sydney). In 10 years, India will be in a position to make a global impact the way China did over the past 5 years or so. In 10 years, China will make an exponentially larger impact. (I expect a downturn, but that only delays the math by at most a decade.)

Wealth and trade raced ahead of people's ability to adapt. Not only psychologically, but also major institutions. A nation such as Australia might want to put a limit on how many people can move there, as well as how much they can invest, if they do not want a distorted economy. If the whole world can buy Sydney real estate, but Australians don't want to live in Chongqing or New Delhi, then the Australian people will eventually demand some type of tit-for-tat. Or throw up very steep taxes on capital and real estate transactions to socialize the benefit. Or maybe colonialism is due for a comeback. Why not sell empty land to Chinese and create a special zone where foreigners can live under Western rule? Set it up in Africa! Chinese can live under British rule in Zimbabwe.

The current strategy of forcing poor and middle class people in Western countries to absorb the cost of globalism (rising crime, rising real estate prices, falling wages, higher education costs, overcrowding) is at an end. Govts should treat their nations like gated communities. Colonialism makes sense for foreigners and natives both and would immediately alleviate anti-globalization pressure in the West.

"Dr Jane O'Sullivan, honorary senior research fellow at the University of Queensland's School of Agriculture and Food Sciences, said Australia was effectively "running to stand still" to keep pace with the infrastructure needed to accommodate new arrivals.

"It costs more than $100,000 in public money per person that we add to our population," she said. Dr O'Sullivan said the figure was derived by looking at the gross fixed capital formation figures and household expenditure data.

"What we spend on durables is partly replacing the things which reach the end of their lifespan, and partly expanding our stock of those things to keep pace with population growth," she said.

"So you can separate those parts to come up with the figure for how much we actually spend on expanding everything we need to support our lifestyle. It turns out as a society, it's around 6.5 per cent to 7 per cent of GDP per 1 per cent of population growth.

"So if we're growing at 1.6 per cent, we're spending more than 10 per cent of GDP just running in order to stand still, not improving the level of service we're able to provide people, simply keeping up with the number of hospital beds and school classes to keep things at a level standard.

"To a large extent we are not keeping pace, we're actually falling behind, so the quality of life people are enjoying is going backwards."'

So paying workers $100,000 costs too much to add people who will eventually work and spend $50,000 a year for 50 years.

Economies are zero sum. GDP can only grow by paying workers who spend every dollar more to produce GDP.

GDP can't be grown by hiking prices but keeping labor costs fixed.

But adding population while keeping prices and wages fixed will grow GDP. Zero sum.

My thoughts run along these same lines. Shouldn't the questions be: What is the risk premium to our institutions when our commercial marketplace is distorted by investors who have neither contributed in time, energy or ideology to support institutions such as: banking systems, educational systems, regulatory systems, ..... formed over multigenerational timeframes. And to what extent will the erosion of trust in our institutions cause participants to stop working toward their perpetuity when global events eat up their wealth, and the opportunities for their children's success? What is the cost of distorted real estate markets; distorted by investors who do not participate in the formation of any of the quality of life amenities tied to the locale, by investors who are simply hedging their investment in the most trustworthy global option?
I think the dollar amount listed by Dr. J Sullivan is grossly underestimated.

Very good points.

The potential problem with a new British law colony in Zimbabwe for Chinese are twofold:

1. Even though there is likely a price at which Zimbabwe is willing to lease out a fraction of it's territory, and liberty oriented Chinese would be willing to pay, the Zimbabweans are likely to spend the money upfront, and reneg, and in some way take back the territory. This is a symptom of decay in the western world, that we don't make cheaters regret.

2. It can not be taken for granted that China will allow a significant fraction of its population to leave.

Regarding India repeating what China has done to the world economy:


Smart fraction theory might imply that India's hour will never arrive.

these places already exist.

Singapore is essentially under UK law and Taiwan under US law.
They both attract scads of Chinese money.

BTW, foreigners probably can't own land in China or India.

honestly, these kind of rules hurt China and India at the end of the day.

Stop globalisation because China has avoided a crisis for a while? NO.

Who said anything about stopping globalisation? Pretty sure it isn't something that can be stopped. But understanding what it is we are trading and accounting for it properly is simply smart.

I read this yesterday, thinking it was remarkably conventionally contrarian, for Tyler.

It might be true, but if so, we should give Shiller, and PE10, more credit. That would have been then a measure of overcommitment to US equities.

The real flip side though, the real contrary position, is that this isn't good at all, and look out below. Way too many people were happy, sometimes maniacally so on financial television, yesterday as they assured viewers everything was fine.

What happened to the wall of worry?

As an aside, I don't want to be right, I want to be rich. I am willing to suffer another 20 years fearing bubbles to achieve that. Come on, baby. Close in the green.

haha, dream on Anonymous. The only way to get rich is via the real estate asset premium puzzle, aka why housing in key marque cites like NYC, LA, SF, Boston, DC (where my 1% family is) and maybe a few others I missed are enjoying over the last two generations near stock market returns but at much less volatility. Real estate, baby. (That said, we own about $4 M in stocks in our little family, counting the IRA money, and I tried but failed to get my family out of GE and dog media stocks like Viacom). As for bear markets, keep in mind going back 100 years, if you hold onto a basket of diversified stocks for ten years they will come back, no matter what price you bought them at (even at the peak), even including the period of the Great Depression. Regression back to the mean.

Stock ownership is concentrated in wealthier households, but reaches down into the 401k holding middle class. All of us are experiencing the flip side of the Wealth Effect this morning.

I can't believe that was the first mention on this page, but it was.


Where are you in your life cycle? For young people with decades of accumulation ahead of them, the recent pullback in stocks is good news. Stocks on sale, prices slashed.

Maybe it's time to start buying art.
Just kidding really. What other assets are there besides stocks bonds and real estate? Or derivatives thereof? Gold?

A ladder of bank CDs is super boring and low return, but insured by good old Uncle Sam against any loss.

Not a good primary investment vehicle, but this morning it feels good having a minority share set up that way.

This is not a bad idea, if you are 70 years old, risk averse, and in danger of running out of money.

It's probably a decent choice if you think the economy is going into a serious recession. IIRC, bank CDs actually paid more than stocks and bonds for a period in 2009.
In this case, nobody thinks the US economy is going into a recession. It's just a correction and not a herald of bad times. (IMO).

Or if you are in a strong enough position that you don't have to chase returns into high risk premia.

Well, as Paul Krugman will tell you, it's somehow Trump's fault.


Lack of diversification in the market could be a potential problem. Too many people investing in essentially the same basket of goods means that minor shifts in indicators can cause a seismic shift in markets.

While there are segments that are underinvested too much investment goes to "safe" investments. Not enough investment in entrepreneurial activities. Not enough investment in some regions of the country or world. Untapped sectors that fail to attract investment. Untapped resources.

Pushing ten pounds of shit into a five-pound bag causes problems. Over concentration of resources may not give enough diversification to promote growth and reduce risk. It just pushes up prices in some areas without generating real growth driven by sufficient productivity gains.

A signal of the need to diversify? Why is the market not sufficiently diversified? Is the growth and concentration (i.e. Amazon) good for the long-term health of the economy or will markets need to generate more competition, more innovation, to stabilize? That path will mean constantly shifting markets but fewer seismic shifts.

What is the best way to diversify in the current world? For companies and individuals?

"The theory also predicts that bond, equity, and Bitcoin prices should all decline at the same time, which is indeed what happened yesterday."

No they didn't. Bond prices rallied yesterday in a flight to quality. 10 year notes were up a point and a half from their lows or about a 14 basis point decline in yield.

And bond prices are lower today as stocks have stabilized.

Nope, bond prices are up again today

You know interest rates are the opposite of bond prices, right?

I'm looking at my Bloomberg this very moment. Bond prices are down today (interest rates higher) and they were up yesterday.

Markets were really volatile today, yields were down most of the day.

No they weren't. When I walked into my office today at 7 am, west coast time, bonds were already down. At 10, the three year auction went off poorly at 2.28, the market rallied weakly for about an hour, and then faded all the way into the close.

Isn't this a polite way of saying 'the scum have plundered their countries faster than they have built the institutions that would make home a safe place for them - or their children - to invest their fortunes?'

People seem to be puzzled that China has not financialized its economy and oriented its economy to cater to financial investment and speculation. There's no puzzle here. Financialization has correlated with imperial and state decline, and the CCP bureaucrats are surely aware of this. From the perspective of the CCP and the Chinese state, protecting the domestic economy from the interests and influence of a financial investment class while having Chinese buy up assets abroad is a positive development.

Artificially low interest rates encourages speculation. - Hazlett

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