Bubble in bubbles means it’s time to close bar

China and India share a dubious honour as the global crisis wanes: They are home to two of the world's most obvious stock bubbles.

First, credit where it's due. Both economies have done remarkably well this year, with China zooming along at 7.9 percent and India at 6.1 percent. Considering Japan and the US are shrinking 7.2 percent and 3.8 percent, respectively, we must tip our hats to officials in Beijing and New Delhi.

The same can't be said of events in Shanghai and Mumbai, where stocks are surging, with gains of 62 percent in Shanghai and 80 percent in Mumbai this year.

Investors could merely be thinking long term. Asia's two nascent superpowers are dripping with as much potential as they are ambition. And investors do need something to buy these days other than low-yielding government debt. Yet do the prospects for the Chinese and Indian economies justify such spectacular stock rallies? It's doubtful.

Asset prices are being driven more by unusually low interest rates than economic fundamentals. It's time for policy makers to mop up that liquidity. That includes Federal Reserve chairman Ben Bernanke in Washington.

Australia's October 6 move to raise rates from 3 percent to 3.25 percent has markets buzzing about which economy will be next. Those betting on South Korea were proven wrong on October 9 when the central bank kept rates at a record low. Attention is turning to India, where inflation is accelerating.

India's predicament has economist Maya Bhandari of Lombard Street Research Ltd in London calling for steps similar to those taken by former Fed chairman Paul Volcker in the early 1980s. "India could soon need Volcker's policy," she says.

Consumer prices paid by Indian farm workers jumped 12.89 percent in August from a year earlier. The inflation rate for industrial workers was 11.72 percent in the same period. Add in this year's gain in the Bombay Stock Exchange Sensitive Index and it's hard to argue that 3.25 percent is an appropriate level for India's reverse-repurchase rate.

India has too much of a good thing on its hands. Bubble troubles are cropping up in real estate markets, too, putting central bank governor Duvvuri Subbarao in a very difficult position.

Raise rates too abruptly and the living standards of India's 1.1 billion people take a hit. Act too timidly and Asia's third-biggest economy overheats.

China's balancing act is also complicated, and like India, there's a role in it for Bernanke. Ultra-low rates are fuelling markets near and far and help explain Asia's stock rally.

The MSCI Asia Pacific Index has climbed 70 percent from a five-year low on March 9 as government stimulus measures and low rates filter through economies. Near-zero borrowing costs in the US and Japan are having an impact globally. All the liquidity they are creating has stock markets rising faster than economic fundamentals are improving.

It's true that the dire predictions of a year ago didn't pan out. China, India and Asia in general have held their ground better than many expected. That hardly seems enough for equities to be surging like it's 1996, the year before the Asian financial crisis.

The stock party is a global phenomenon, of course. The Dow Jones Industrial Average and the Nikkei 225 Stock Average recently reached 10,000 for the first time in more than a year. That's even though the two biggest economies are in recession and have poor employment outlooks.

It seems like the globe is experiencing a bubble in bubbles. Look no further than gold trading at more than $1,000 an ounce; 10-year Treasury yields of less than 3.5 percent as the US amasses an unprecedented debt load; or the likelihood the yen will soon be worth more than 90 to the dollar.

There was a time when a central banker's job was to take away the punchbowl just as the party got going.

Now, Marc Faber, publisher of the Gloom, Boom & Doom report in Hong Kong, rarely misses a chance to blast the Fed for acting more "like a bartender" liquoring up markets than a monetary authority working to calm them.

And he's absolutely right.

Happy hour is lasting a bit too long for comfort. If stocks are rallying because of economic fundamentals, then so be it.

If they are rallying because of easy-money policies, then Asia's stability is more fiction than fact.

It's time for monetary bartenders to start declaring closing time.

William Pesek is a Bloomberg News columnist. The opinions expressed are his own.

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READERS' COMMENTS

gr8 bloomberg guy!!!!
Posted by sebastian, dubai, uae on Sunday 25 October 2009 at 22:34 UAE time


your opinion is absolutely your own,perfect prediction.i think u got the notes from maya bhandari (Nobel prize winner in economics).Buddy better write somethin abt dubai where there is no bubbles at all!!

Ignore India and China at your own Expense
Posted by Naveen Shetty, Dubai, UAE on Sunday 25 October 2009 at 14:33 UAE time


You should be a really dump person if you do not have any exposure to to these two economies. These economies have proved their worth during the crisis even though they plague with enormous challenges at their home turf. The investor will for sure make superiour returns from India and China compared to any other place on earth. And for investors volitality in the stock market is a blessing as every dip is buying opportunity. Its now or never.

what a sour grape?
Posted by ed, Adelaide, Australia on Sunday 25 October 2009 at 11:00 UAE time


if China and India are building up bubbles, then the US is building an enormous bubble again. The foundamentals of the two emerging economies are the never-better-opportunities for their firms to expand quickly and non-western-blockingly. The stock rally in China and india is reasonable, but not, absolutely not in the US and EU as they will soon find themselves at the death corner to see another blowing up... I mean financial crisis, that is for sure, a second dip...double dip normally for a crisis, it is not an exceptance for such the massive one.......

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