GDPR Notice

GDPR Notice:
Please note that Google, Blogger, Adsense and other Google services may be using cookies and doing whatever they do. Please take notice that by using this blog you give your consent to those activities.

Wednesday, February 27, 2008

Asset prices rising - Is trouble brewing?

There are reasons to believe that "investor demand" is driving asset prices through the roof. The "investor" crowd dynamics and the wealth they bring to this party may be acting as a self-reinforcing mechanisms at the core of this increase. If this party has gone on too far then we are in for trouble. A really big trouble.

Invested - appreciated - invested more!
This cycle has continued in almost every globalized economy. The increasing returns from the initial run of this cycle did bring in lot of new investors. The cycle, luckily, kept going enriching investor class substantially. This brought into "investment focus" various "asset classes" - like commodities, real estate, currencies etc. The cycle kept turning till about June 2007.

The last buyer - Where art thou?
Typically all investments terminate with end-user or what we can call the last buyer. Road investment look for the car /truck driver - mall investments look for the shopper - and houses look for the person wanting to stay.
The real estate sector, typically, is the first to look for last buyer. But there we had some interesting toxic concoction brewing - with easy credit flowing into the sector. As the sub-prime crises unfolded last year - the real estate sector finally started looking for the last buyer. It didn't find any.
The reality dawned upon the masses that "real estate" was priced too high for the real buyer. Based on current prices the real buyers will have to slog for many years before they can make any significant impact as "last buyers".
This is probably true for all "asset classes". Real estate (residential and commercial), stocks, bonds, non-agri commodities, derivatives across the globe are at the vortex of this hurricane. These asset classes have experienced tremendous upward force. The asset classes at the periphery - agri-commodities, are beginning to feel the force putting upward pressure on inflation - particularly food prices.

A Quick conclusion
If the hypotheses is true we are in for a particularly long painful period.
Even most powerful hurricane drops the things it throws in the air. So will prices drop - in real terms - either through inflation shooting up making this new wealth worthless or prices will deflate to a pain-point.
The most dramatic inflection point will come, if at all, within two quarters where large money will take sides on either possibilities - anticipating a killing. Let us brace for impact.
Meanwhile - we will look at what may have caused this in a little more details - and like always only hypotheses.

 

No comments:

Post a Comment

Note: only a member of this blog may post a comment.