HSBC Is Asia Already In a Bubble.....( Nice Reading )

Reading the papers, you might think so. However, although bubble talk is all the rage, at this point the region isn’t actually in one. Of course, if left unaddressed, the current monetary set-up in Asia might ultimately blow a bubble of mind-boggling size. But, so far, the train hasn’t left the station. This means two things. One, policy-makers still have time to correct the course, tightening monetary policy even without the Fed. Two, it isn’t too late to purchase your ticket if you believe officials will prove slow to respond. We’ll leave detailed investment calls to our respective strategists. For now, we consider from an economic perspective whether Asia has already entered bubble territory. The evidence suggests not. But the journey appears rapidly headed in that direction.

A bubble, your trusted textbook will tell you, occurs when asset values deviate from their fundamentals. This definition, of course, is as ubiquitous as it is useless. In practice, it’s virtually impossible to call a bubble when it occurs: only in hindsight does it reveal itself as such. But, this doesn’t mean that we cannot define circumstances in which bubbles are more likely to evolve than not. And economists have tried. The literature offers a number of guidelines that help in their detection. The starting point is the following: bubbles are extraordinary events and are therefore associated with a significant deviation from trend of various indicators.

Take stock prices. The charts below show the percentage deviation of Asian equity prices from their long-term trend. The critical thing, of course, is to define the exact deviation that constitutes a bubble. Various studies suggest different thresholds. But for highly volatile assets, such as equities, 40% has been suggested as a rule of thumb. We have indicated that level with a black line in the charts below. According to this criterion, Asia ex Japan entered bubble territory in 1993, came close to one during the tech boom in 2000, and again hit the stratosphere in 2007.