No bubble to burst

Letter from Charles Tan Meah Yang

I write in response to the letters from concerned readers Lim Boon Hee and Steve Ngo, regarding their views on the state of global price levels and, more specifically, those of our local housing market (”A lesson worth remembering”, May 7 and “Just a lot of bull?”, May 8 ).

Let me quote a more prominent investing legend, Mr Warren Buffett, who said in his 1992 annual report to shareholders: “We’ve long felt that the only value of (stock) forecasters is to make fortune-tellers look good.”

This is not to discount the wisdom of legendary investor Jeremy Grantham — there is merit in his conclusion — but one need not take a six-week trip round the globe to tell you that abundant liquidity, fuelled by cheap Yen carries, exchange rate fixing by Asian central banks and gaping trade surpluses in the Middle East, will invariably lead to global inflation.

I do not doubt that there will be a correction in prices, but I do not agree on how steep the correction will be, and how long it will take. Corrections are inevitable; collapses are improbable.

For one, asset and stock prices are being supported by solid demand fundamentals this time around. For example, on April 29, a highway section collapsed in Oakland, California. But when CNBC first broke the news, contractors were reportedly struggling to find steel in sufficient quantities for the reconstruction effort. It has been more than a week since, and work has not yet begun.

Also, oil prices are high for a variety of economic distortions, but China’s building of a massive strategic reserve isn’t helping.

Lastly, the S&P500 is closing in on highs last seen seven years ago, but with trailing Price to Earnings (P/E) at 18 and forward P/E at 16, I wouldn’t call the market cheap — but I would hardly call it overbought.

Furthermore, central bankers in developed economies have had plenty of time to analyse policy failings from past recessions and are better informed than ever to avert global financial meltdown, and instead engineer a gradual cooling of inflation.

One of the most annoying truisms in financial analysis is: “What goes up must come down”. Stock markets, unlike bad stock analysts, are not subject to the physical laws of gravity. Stock markets trend upwards in reflection of a generally positive growth in population, productivity and profit. To insinuate that prices must return to origin based on a Newtonian concept of nature is simply puerile.

An item is only worth as much as another is willing to pay for it. Rising valuations, as Mr Lim put it, are not a problem if deals are still getting closed, and, in fact, are a sign that there is no shortage of demand even at his perceived “bubble prices”.

If you look only at average salaries here, the current property boom is unsustainable. But our property market is not solely determined by the average Singaporean. Foreign investors with hefty paycheques contribute to demand, too, and this effect filters into the markets that are closed off to them (ie HDB flats) as richer Singaporeans who have been priced out of condominiums divert their fat wallets toward the Government alternative.

Source: Today, 09 May 2007

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