Are soaring housing markets and prices an “epic bubble” about to burst? | Larry Elliott | Business


There was a lot of bad news in America last week. A crowd of Donald Trump supporters stormed the Capitol building. The number of new Covid-19 infections has reached an all-time high. Employment fell by 140,000 people.
None of this fazed Wall Street as it continued to climb to new dizzying heights. It’s like that with the financial markets. When they’re in that kind of mood, they go up when the news is good and they go up when the news is bad.

Last week’s disappointing jobs report is a case in point. The fact that companies lost manpower meant that Joe Biden would have even more incentive to come up with an expansionary tax and spending program soon after he became president on January 20. The loss of jobs, in Wall Street’s eyes, was not a bad thing at all. Rather, it was a reason to keep buying in a higher stock market than before the pandemic started.

Despite a strong performance last week, London stocks still have a way to go before reaching their pre-crisis level. Here, the asset class that has challenged the depressed state of the economy and the health emergency is residential real estate. According to the latest data from Halifax, the cost of the average home rose 6% in 2020, an annual rate of increase normally associated with a fast-growing economy, and not the one that has just experienced its biggest drop since. great freeze of 1709.

There are specific reasons why house prices are rising. Rishi Sunak’s temporary stamp duty holiday is one of them. The envy of houses with a little more space and a garden is another. The fact that many people can afford to buy more expensive homes because they saved money by working from home is a third.

But what links rising stock prices in the United States and rising house prices in the UK is the creation of money by central banks. The Federal Reserve in Washington and the Bank of England have stepped up their quantitative easing (QE) programs, whereby central banks buy financial assets, usually government bonds, in exchange for cash.

In theory, the newly created money could finance new productive investments for companies keen to expand, but in reality much of it has been loaned for speculative activity in one form or another. There is no real mystery about this. It happened after the 2008 financial crisis and it is happening again.

Major central banks say they had no choice, as the alternative would have been a financial crisis that made last year’s economic collapse even worse than it was. Critics say QE as it is currently designed widens the gap between rich and poor, fails to invest money in the parts of the economy that really need it, and has led to creation. colossal bubbles that are doomed to burst.

Those who remain bullish on stock prices say fears of a crash are misplaced. The global economy will recover quickly as soon as mass immunization programs overcome the pandemic. Yet even strong growth will not force central banks and finance ministries to withdraw the extraordinary stimulus they have provided because inflation will remain low. These two factors, a period of rapid catch-up and a favorable policy, will boost corporate profits and thus justify the rise in stock market valuations.

Not everyone is convinced. British veteran financier Jeremy Grantham, who co-founded US investment firm GMO, issued a warning to the firm’s clients last week. He didn’t fire his shots. “The long, long bull market since 2009 has finally become an epic bubble in its own right,” he said. “With extreme overvaluation, explosive price hikes, frenzied issuances and hysterical behavior by speculative investors, I think this event will be recorded as one of the great bubbles in financial history, just like the the South Sea in 1929 and 2000. ”

For Grantham, Tesla is the title that proves that the market has taken leave of its senses. The current market capitalization of $ 600 billion is $ 1.25 million for every electric car sold, compared to $ 9,000 per car for General Motors. “What does 1929 have to equal that?” he asks.

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The assumption on Wall Street is that the Fed will always be behind the market. If prices fall precipitously, investors can rest easy knowing that its chairman, Jerome Powell, and his colleagues will do what is necessary to limit losses and raise the market.

Grantham says it’s wrong. He believes that “this bubble will burst in due course, regardless of the Fed’s efforts to support it, with adverse effects on the economy and portfolios.”

It’s not that hard to see the circumstances under which Grantham might be right. There is a logical inconsistency in Wall Street’s belief that it will be business as usual for the United States once enough Americans have had their Covid punches and its belief that monetary policy will remain so loose. than it is now. More spoonfuls of stimuli might not really be needed at a time when demand will pick up anyway. Inflationary pressure is currently low but if that were to change, the mood of the markets could also change quickly. The yield, or interest rate, on government bonds would start to rise and stock prices would fall. Wall Street would beg the Fed to come to its rescue, but with rising inflation, it might feel uncomfortable doing so.

Will this happen? Who knows? But financial markets have a lot of confidence in the Fed and other central banks. It is better not to be lost.


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