"If something cannot go on forever, it will stop"
"If something goes on for longer than expected, people will start explaining why it will last forever." - Lucky's Law
Today's ST front page : Asian markets are hot, hot, hot. The back page talks about the best July the stock markets had in 20 years. Singapore's STI beat everyone else in Asia except for Shanghai. Now you see why the simple advice I gave out [Link] to invest during recession does make some sense because once the slightest signs that recovery is on the way, the stock market seems to go all out to discount an all singing all dancing economy. At the current level stock markets are discounting a V-shaped recovery (when it is actually L or U?) if it goes higher it is discounting longer period of strong growth....if it gets above certain levels (STI 3000+?) it will discount the best possible economic scenario. Stock markets often get it wrong that is why it is more volatile than the real economy. However, they will humiliate nay sayers first by defying logic. In 2006-2007, I read that the SSE (Shanghai) market was a bubble when it was at 2000, nay sayers said the market was in for a crash when it was 3000.....it peaked at 6000. During the dot.com bubble George Soros famously shorted the Nasdaq Index when it go to 3600 declaring that it was a mania of historic proportions and he was right and wrong...before crashing to 1000, the Nasdaq Index rose to 6000 costing Soros several hundred million dollars. Stock market bubbles are fuelled by overly optimistic investors and short sellers who are forced to cover when their bets go wrong. The fact is most people make money then eventually lose in a bubble. The trick is getting out ...walking away...not looking back...taking your money and run. While there is no way to tell the peak of a bubble, one successful speculator who made off with several fortunes in each of the past bubbles (1987, 1996, 2000, 2007) told me there is some kind of symmetry in the market movement and psychology - in the current market rally, one can see that at stock index levels when it fell the fastest in Sept-Nov 2008, it is rising the fastest and he expects the market to stop rising so fast when it reaches levels where the market had consolidated last year.
We appear to be seeing 2 potential bubbles forming this time. The other one is in the property market. You can just see from the number launches over the weekend....(hmm..why are the developers selling now if prices are poised to go higher). There was an interesting remark by the CEO of Capital Land that this whole thing is not a bubble. It is actually not difficult to tell if the property market is in a bubble compared with the stock market. I'll show you how later in this posting.
HDB prices surging to all time highs. Suburban condos approaching prime condo prices[Link]. At the height of the 1996 bubble, one of my friends told me, "It is not possible for prices to go down because land in Singapore is limited". Yes, our land is limited but so are our incomes. For the good size bungalows and super-prime condos, the limit is the pocket books of rich Indonesians and our home grown billionaires. HDB is still very much the housing of ordinary residents, regardless of the number of PRs, newly minted citizens, the price is bounded by the monthly income of buyers. Given income hasn't risen much since a year ago, the rise in prices mean people are willing forgo other forms of consumption to service their housing loans. There are also a number of people waiting by the side with savings who jumped on to the bandwagon but this spurt in demand is only temporary - in the long run, after the one off rule change to allow CPF to be used for property, the rise in price of resale flats in the long run can only be sustained by increase in personal income. There can be one-off events such as allowing the use of CPF for property, increase of loan tenure, etc that cause the price to shift up but once it adjusts for these changes, the rate of increase follows the growth in personal income because that is where the source of funding that supports the property prices comes from. Unless income goes up dramatically, the price rise is not sustainable in the long run. The problem is bubble such as the ones we have seen in Singapore in the past and in US can last for several years before they are deflated by a recession or govt intervention. Here is what property prices in Singapore look like relative to incomes:
You can detect bubbles when the PPI (Property Index) goes above the real income graph. At the height of the bubble, the market is full of speculators flipping property because their income does not allow them to hold and service the loan. Minister Mah Bow Tan tried to talk down the HDB market a few days ago by saying 'whatever action necessary' to prevent excessive speculation in the property market. He also reminded Singaporeans to ask themselves if they can afford what they are buying and think about what happens when the buyer loses his job. He could have done better if he had bravely announced a new policy that new HDB flats prices will now be linked to median household income rather than the market because that is a true measure affordability immune to market bubble tendencies - affordable housing is the HDB's mandate but its pricing mechanism is not consistent with the mandate (yep..so what else is new, our pledge also says 'to build a democratic society'....come on HDB should build affordable flats for a start!).