Please stop taking the Mickey..
Source of picture: China Daily
By John Richardson
ECONOMIC bubbles have been given their name for a good reason: They behave exactly the same as the soap bubbles that were prevalent at Hong Kong’s Disneyland, where I paid with my three-year-old son yesterday.
So when the momentum of rising equity and commodity prices – mainly driven by what’s happening in emerging markets – slows down the surface tension of economic bubbles eventually increases and they go pop.
It doesn’t have to be one major event that causes such events and so it won’t necessarily be another Lehman Bros-scale trigger that will cause equities and commodity prices, including chemicals, to retreat. It could instead be a loss of confidence that causes the momentum of bubble inflation to slow down, leading to investors exiting as they cash-in on their profits.
“During bull runs, like the one we are experiencing right now, the longer a rally lasts the more investors start becoming deluded that this time it will be different, that this time the boom will last forever,” a former investment banker, who is based in Hong Kong, told the blog late last week.
“I know of several hedge funds which have strategies in place to take advantage of the end of the current run.”
Ironically, it might be Asian investors who have made a fortune from the boom who pour money into hedge funds based in this region that are ready to short markets in a big way.
“Chinese investors are emerging as new a source of capital for (hedge fund) managers in Asia as fundraising from international institutions has become tougher after the financial crisis,” writes Bloomberg in this article.
In the same article, the news service reported that hedge fund JT Greater China Long/Short Fund was launched in Hong Kong last week by a former senior adviser to China’s state pension fund and the ex-head of Morgan Stanley’s prime brokerage.
The blog remains convinced that the long-term trajectory for chemicals demand is very positive. Emerging markets have surpassed a tipping point, meaning that levels of consumption will over the next few decades compensate for any long-lasting problems in the West.
But this doesn’t meant to say that the road ahead won’t be rocky and littered with fragmented and slippery bubbles, in what indeed is an ugly sentence with an appalling mix of clichés.
John Authers, in his excellent The Long View in last weekend’s edition of the Financial Times, makes the point that the rallies in equities and commodities since Lehman Bros can be exactly correlated with the availability of lots of cheap money.
And the latest round of Fed quantitative easing has resulted in more cheap money and the expectation that interest rates will remain depressed for a long time.
This in turn, of course, has led to the flood of money into emerging markets in search of higher returns, creating the danger of currency wars and inflationary pressures that hedge funds are likely to attempt to take advantage of.
“For investors, there is money in bubbles, so it is best to go with the herd and buy anything that would benefit – gold, oil and emerging markets could also rise much more before the bubbles burst – and make sure to get out in time,” writes Authers.
For chemicals markets the dangers are that real demand pictures get distorted as buyers hedge against the anticipation of higher oil prices by building stocks (sounds familiar?).
And as the great scramble to guard against feedstock inflation gathers momentum, those who trade in chemicals might well be tempted to come out with outlandish and silly stories to justify why “real demand” is strong – i.e. to promote a bit more panic among the buyers.
We will detail suspected examples of these silly stories over next week or so.
Chemicals producers preparing budget plans for next year need to be prepared.