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August 23, 2005
Bubble after bubble (Steven Roach)
Bubble after bubble has since percolated to the surface during this
period of extraordinary monetary accommodation -- especially in a
multitude of fixed income products (i.e., Treasuries, investment-grade
corporates, high-yield bonds, emerging market debt, and a host of
credit instruments). With overnight money basically free in real
terms, the “carry trade” was a no-brainer -- investors and speculators
alike could pocket the spread anywhere on the yield curve. This
created an artificial demand for fixed income securities that was
quick to take on bubble-like implications of its own.
Out of this same mania, the property bubble was borne. Behavioral
economics tells us the American consumer should have been decimated
once the equity bubble popped in 2000 -- the pain of loss should have
been far greater than the ecstasy of gain. But US households never
skipped a beat. House price inflation took over where the equity
bubble left off, and the Fed’s post-bubble rescue plan facilitated the
greatest bonanza of them all -- a massive wave of home mortgage
refinancing that became a powerful supplement for an income-short US
consumer.
The home became the cash machine -- the manna from heaven
that drew its sustenance from rock-bottom interest rates. And it
became contagious -- as most bubbles do. The more consumers succeeded
in extracting purchasing power from their assets, the greater the
demand for the asset. Once borne out of a legitimate effort at
post-bubble life-style defense, the asset-based consumption mindset
took on a life of its own. Like the carry trade in fixed income, this
phenomenon created an artificial demand for the underlying asset. We
now call it a property bubble.
-- Steven Roach (Morgan Stanley)
Posted by omor at August 23, 2005 02:54 AM
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