First, it was a gaggle of billionaires. Now, the global financial puppeteers are getting queasy.
Late last year, Chinese property tycoon Wang Jianlin reckoned the very thing that had elevated him into the nose-bleed section of wealth rankings, Chinese real estate, had become “the biggest bubble in history”.
He’s in good company. Bill Gross, once the king of American bond trading, has been calling a bubble in bonds and US Treasuries for years — most recently a few weeks back — while a fortnight ago Bernard Arnault, the stylemeister behind luxury goods outfit LVHM, reckoned asset prices were at “scary levels” and another financial crisis may be just around the corner.
Now, even those responsible for the bubble trouble roiling through the financial world, are having second thoughts.
There was the US Federal Reserve’s Stanley Fischer expressing concerns about debt and risks in the system before his boss, Janet Yellen, dropped this clanger during a keynote speech in London:
“Asset valuations are somewhat rich if you use some traditional metrics, like price earnings ratios,” she said.
That may not sound too concerning until you understand it is coming from someone whose job it is to soothe fears, not whip them up.
The problem for Ms Yellen, as it is for other central bankers like Europe’s Super Mario Draghi and Japan’s Haruhiko Kuroda is that the bubbles they have formed — in property, stock and bond markets — are entirely of their own making.
To a large extent, they have become captives to the monster they have created.
Killing the beast will be nigh on impossible. Taming it could wreak havoc. They’re trying, by slowly raising interest rates. But at the rate they’re going, it’ll take years.
Our stock market may still be way below its 2007 peak. But, like most global markets, it remains expensive by historical standards.
The real problem for the Australian economy, courtesy of the deluge of cheap cash flooding the globe, has been in real estate.
So, how did we arrive here?
Money is no longer real. It’s a theoretical concept. You may know it as the little plastic sheets and metal coins you’ve become accustomed to, but around 90 per cent of the world’s cash is electronic.
And since 2008, when the financial crisis was threatening to destroy capitalism, central banks have been manufacturing it by the petabyte (or whatever measurement is appropriate).
To start with, they used it to soak up the debt created by investment banks that created the problems in the first place.
Then, they figured they’d keep going, that if they could just inject enough cash into the system, everything would eventually return to “normal”.
Fuel to the fire
When we entered the new millennium, the world’s biggest central banks held debt worth about 2.5 per cent of global GDP. Now, it’s grown to just shy of 20 per cent.
The problem is, most of that created cash has been used — not for productive purposes, but for speculation.
That’s why Wall Street has boomed right through the worst economic downturn since the Great Depression. It’s why housing has become an unattainable dream for our youth. And it underpins the growing disparity in wealth permeating the developed world and the political instability that has created.
Will Janet Yellen bring all that to a halt? Nope. She can’t.
While her comments last week, echoed by her European counterpart Mr Draghi, showed their concern, both fear the consequences of a major market correction.
Once upon a time, many economists dismissed the idea that financial markets had much sway over the “real economy”.
The Great Depression followed the crash of 1929. The 1991 recession came on the heels of the 1987 collapse. There was a link, but it wasn’t a causal link, they argued.
That all changed in 2008. The US housing market collapse set off a seismic chain of events that, for a time, appeared unstoppable.
The emergency measures seem to have worked. Global growth is back in recovery phase. The real economy finally is showing life after a near-death experience.
To a large extent, however, it is a charade. The debt problems from a decade ago haven’t been solved. They’ve grown worse, to the point where they can no longer be unwound, at least not by conventional means.
While central bank debts have risen enormously, the ultra low interest rates have seen private and corporate debt levels soar. Our own household debt, at 125 per cent of GDP, is among the highest in the world.
Ms Yellen and her counterparts, meanwhile, understand they cannot afford to upset markets — financial or housing — for fear of unleashing a repeat of the cataclysmic events of a decade ago.
When markets tank, consumers feel less wealthy and spend less. That reduces demand and employers lay off workers.
Having discovered the magic formula for keeping the world economy afloat by conjuring up electronic cash, it’s likely central banks will simply keep doing it, just to keep markets buoyant or at least from capsizing.
What does this mean for our stock market?
If you read the commentary from financial experts, they’ll tell you last financial year was a cracker. Stocks were up almost 10 per cent, the best performance in three years.
The problem is, the Australian market has been banging between 5,000 and 6,000 points since 2013. So, unlike the US or Europe, it’s really gone nowhere.
Despite avoiding the excesses of America’s stock market boom, if there is a correction on Wall Street — as Donald Trump’s plans to slash taxes and build expensive walls come to grief — we undoubtedly will be caught in the melee.
Even without that kind of upheaval, market prospects for the new financial year are looking lacklustre — with economic growth constrained by high household debt and as the lowest wages growth since the last recession puts a handbrake on spending.
Our market is dominated by banks and miners, neither of which are looking particularly flash in the new financial year.
The great east coast housing boom is petering out, leaving our real estate-addicted banks high and dry, while mineral prices are under threat from an uncomfortable combination of excess supply and weakening demand.
China is the key
Then there’s China. Our trade is dominated by it. In fact, more than 35 per cent of our trade, most of it in the form of raw iron ore, is with the world’s second biggest economy.
With eye-watering debt levels of around 277 per cent of GDP, it is little wonder ratings agency Moody’s decided to downgrade it in late May.
China was instrumental in saving the global economy in 2008 and 2009, when its investment splurge on infrastructure catapulted Australia into the best performing developed economy. Since then, it has played a key role in reflating the US economy, despite what Mr Trump says.
Now, however, its debts are causing conniptions within the Communist Party leadership. And just like the west, any attempt to reel it in results in immediate problems.
Several times in the past three years, Beijing has attempted to ween the country off debt-funded stimulus and each time, growth has sagged. Each time, the stimulus tap has been turned back on.
At some stage, logic dictates there must be a reckoning. But when?
In a note to clients late last week, Macquarie took the cautious route for the year ahead — as you do when you’re in the business of selling stocks — predicting markets would either muddle through or slow down. (The other options were for healthy reflation or recession).
Still, it doesn’t make for pleasant reading. America is likely to disappoint, Europe and Japan won’t add much to global demand and “in addition, we could be entering a period where policy mistakes are becoming a real risk, particularly from Anglo-Saxon Central Banks”.
“There are already strong indications that global macro momentum is fading as China’s reflationary pulse dissipates,” it added.
“We believe that over the next twelve months, China is far more likely to prioritise domestic issues and balancing ‘bubbles’ rather than stimulus.”
There’s that B word again.