World Bank, IMF Speak Out Against Developing World Asset Bubbles

While not viewing the matter as broadly as some of us do, both the World Bank and the IMF are becoming aware of asset prices bubbling up in various parts of the world.

The World Bank warns that the sudden appearance of billions of dollars of investment capital in east Asia is “raising concerns about asset bubbles” in equity markets throughout Asia and in real estate markets in Hong Kong, Singapore, Vietnam and indeed, mainland China.

At the same time, the International Monetary Fund cited the risk arising from a flood of investment capital, particularly in Asia, pushing up asset prices so that they become divorced from the underlying economic realities. The IMF too is focused on asset bubbles.

Our own stock market, well up on its March lows, hovers more at a DOW level befitting a strong V shaped recovery, if not a stable, full employment economy in the middle of a strong growth cycle. While the flow of money against consumer goods worldwide may be waning well below what policy makers would like to see, the flow against financial assets is accelerating, pushing the prices of those assets up, so that now we even have conservative institutions like the World Bank and the IMF speaking up about the matter.

While some deflationary forces exert themselves in regard to consumer goods and services on a worldwide basis, the opposite is true of financial assets. They are undergoing substantial inflation, also worldwide. The flow of funds is strongly away from those in the bottom halves of income distributions with high average propensities to purchase consumer goods and services and concentrated much more in the hands of wealthier families and businesses with lower average propensities to consume and higher propensities to purchase financial assets.

The ultimate source of most of these moneys worldwide is the U.S. federal government and Federal Reserve System, either directly via the carry trade and the zero interest rate policy, or indirectly through various similar means.

Policy makers in Washington, if they are aware of the problem and if they understand it, seem to have no comment and voice no concerns about it.
Indeed, the Federal Reserve just said, in effect, that the zero interest rate policy will be continued.

Disclosures: none

Comments

[BRUCE E. W.:]

Price theory in real time serves only one sector at the cost of another. The stratfied macro-economy is being dissected and micro-segmented with float values at the top (hoarding and competing simultaneously) and all constriction at the other 80% with cost ratios at a loss and basic dimminishing returns as a rule against the real asset value. The distribution of finance and credit is all in one direction and the sellout and shorting is not going into the infrastructure as a whole. Pretty soon se will be eating the price and not much else.

Nov 06 09:27 AM