Asset Bubble

This is an MBA class. However, I won't charge my usual $100/handout. It's a free class because I know you just borrowed to pay school fees or emptied your account "wey dey find who go empty am before"😊

Bros,  don't even deny that you borrowed this September for school fees😕

"Na we-we now". We know each other. 

And if you continue denying, I will ask GT Bank,  Diamond Bank, StanbicIbtc, First Bank and co to publish the list of school fees borrowers.  One page of color advert is not less than N500k in national newspapers and they have been advertising the "school fees borrowing program dailily dailily". Are those adverts for ghosts?  If not for you,  won't they shut those adverts down?

Just one more denial,  they will publish "ka pitipiti kwe n'iru efvi"😕

Anyway,  today's class is on Asset Bubble!

I saw a former Governor of The People's Bank of China (their CBN) warning China of Asset Bubble. 

I can't remember his name but it won't be more than "Xi" or "Ju". Chinese people are busy and don't waste time with names. 

In Nigeria, if the name is not long and tongue twisting, then we haven't started - Onyekachukwu,  Chukwusolukwue,  Chimeremeze😀

Leave that argument that our names have meanings. How has that helped grow our GDP? 

"Osayumamem" - one person's name😕. From this alone, you can name 5 Chinese. 

And so we spend half of the day in Nigeria just trying to call people's names. Leave all those English names the Chinese answer like Michael. They're business names they adopt once leaving China so they can relate. 

But who even told us that Chinese names don't have meaning? Who told us that "Ma" does not mean "Money"?.

Talking about "Ma", Jack Ma, founder of "Alibaba.com" has an interesting life history. 

Hear CNBC! 

"When China decided to open up to the world, Jack Ma was just a tourist guide,  just guiding visitors to China. That was how he learnt English and would later become an English teacher. He tried to improve himself by getting higher paying jobs. He went for three interviews including to work in a hotel but they all bounced him that he was not good enough. When the idea came to him to put China on the world map by establishing Alibaba.com,  he approached not less than 30 Venture Capitalists and they all bounced him. Infact, one of them told him to keep to his English classes and grow there😊. But he was unrelenting. He called in 12 of his friends and sold the idea. But there was a problem! Non of them save 2, including Jack Ma, could use a computer. Frustrations! Until he found himself in the US. They did 'ogwu ego' for him and he became a multi billionaire  👏 👏 👏. Still he didn't know how to carry himself as a billionaire in US dollars. He was repeatedly told by his handlers to 'puff his shoulders' a little bit more as a Billionaire🤣. Today,  Jack Ma is tired. He wants to hand over Alibaba and go back to teaching. That's the only thing that appeals to him now. Speculations were that he might quit last Monday. Jack Ma feels that sometimes, it's better for a fool (probably a wise fool😊) to lead smart people.".

That's Jack Ma! 

But you borrow to pay school fees. Borrow to pay house rent.😕

"Ebele gi emegbugom"😕

The other time, I advised you that "piggy banks" are not for only children and that you should have one. Babas!

I advised you to put the children in schools you can afford without "borrowing around". "Otu awu n'ezi"😕

Take the handout below for free and see how you can improve yourself my brother. 

"Onodu gi n'esizi isi"😕

I remain Sam 

CC:  Asset Bubble!

BY KIMBERLY AMADEO  Updated August 07, 2018

An asset bubble is when the price of an asset, such as housing, stocks or ​gold, become over-inflated. Prices rise quickly over a short period. They are not supported by an underlying demand for the product itself. It's a bubble when investors bid up the price beyond any real sustainable value. These price spikes often occur when investors all flock to a particular asset class, such as the stock market, real estate or commodities. Such a bubble is also called asset inflation.

Three Causes!

Low interest rates are the most frequent cause of an asset bubble. They create an over-expansion of the money supply. Hence, investors can borrow cheaply but cannot receive a good return on their bonds. So they look for another asset class. 

The second biggest cause is demand-pull inflation. That's when an asset class suddenly becomes popular. As asset prices rise, everyone wants to get in on the profits. But the consumer price index does not always accurately capture this form of inflation. So policy-makers overlook it. 

Third, a supply shortage will aggravate an asset bubble. That's when investors think that there is not enough of the asset to go around. They panic and start buying more before it runs out.

Examples!

2005 - Housing. An asset bubble occurred in real estate in 2005. Credit default swaps insured derivatives such as mortgage-backed securities.  Hedge fund managers created a huge demand for these supposedly risk-free securities. That created demand for the mortgages that backed them.

To meet this demand for mortgages, banks and mortgage brokers offered home loans to just about anyone. That drove up demand for housing, which homebuilders tried to meet. Many people bought homes, not to live in them or even rent them, but just as investments to sell as prices kept rising. When the homebuilders finally caught up with demand, housing prices started to fall in 2006. That burst the asset bubble. It created the subprime mortgage crisis in 2006. That led to the banking credit crisis in 2007 and the global financial crisis in 2008.

2008 - Oil. The asset bubble started in the summer of 2008 with oil prices. Investors got out of the stock market in 2007 and started investing in oil futures. At first, they thought that demand from China would outstrip supply due to a mild shortage in Nigeria. But demand fell that year, due to the recession, while supply increased. That didn't stop the asset bubble from creating high oil prices. They set a record of $143.68 a barrel in July 2008.

2011 - Gold. Gold prices reached a record high of $1,895 an ounce in September 2011. They started rising in 2009, reaching a record high of $1,081 in November. Investors bought gold as a hedge against the global financial crisis, not for its value in producing jewelry or dental fillings. Many thought the global economy would recover quickly. When it didn't, gold prices just kept rising for two more years. Gold, the "ultimate bubble," burst when the anticipation of further inflation dropped.

2012 - Treasury Notes. On June 1, 2012, Treasury yields hit a 200-year low. The yield on the 10-year Treasury note briefly hit 1.442 percent during the day, closing at 1.47 percent. The Fed had been buying $85 billion a month in Treasurys since September 2011. It kept rates low, boosting demand.

Second, investors were worried by high unemployment and worsening of the eurozone debt crisis. They sold off stocks, driving the Dow down 275 points, and bought the safe-haven U.S. Treasury notes. As a result, mortgage rates also dropped. That helped revive the housing market. There is a direct relationship between Treasury notes and mortgage interest rates. When Treasury yields rise, the interest rates on fixed-rate mortgages also increase and vice-versa.

By 2013, interest rates started to rise as the Fed hinted it would begin winding down its purchases of Treasury notes in September. Treasury yields rose 75 percent between May and July. The Fed postponed its intended course of action when the government shut down in October. The yield on the 10-year Treasury remained between 2.5 and 2.8 percent. 

2013 - Stock Market. The stock market took off in 2013. By July, it had gained more points than any year on record. On March 11, the Dow Jones Industrial Average closed at 14,254.38, breaking its previous record of 14,164.43 set on October 9, 2007. On May 7, it broke the 15,000 barrier, closing at 15,056.20. It broke the 16,000 barrier on November 21, closing at 16,009.99. The Dow set its high for the year at 16,576.55 on December 31, 2013. The Dow closing history exhibits the index’s trends since the Great Depression.

Price gains rose faster than corporate earnings, which are the underlying driver of stock prices. Companies achieved increases in earnings by cutting costs, not increasing revenue. Demand for many consumer products was weak since unemployment was still high, at around 7 percent, and average income levels were low. Investors were more concerned about whether the Fed would taper quantitative easing than they were about the real economic growth.

2014 and 2015 - U.S. Dollar. Forex traders stampeded into the dollar, which rose 25 percent between July 2014 and the middle of 2015. It happened when the U.S. Federal Reserve announced that quantitative easing would end in October. At the same time, the European Central Bank stated it would start QE. U.S. gross domestic product also dramatically improved. All these reflected American economic strength combined with weakness in the European Union and emerging markets, especially China.  The U.S. dollar index and euro to dollar conversion history both indicate how the dollar measures up to the euro at any given time.

The strong dollar hurt exports, lowering U.S. GDP in 2015. It also aggravated a drop in oil prices. That cost jobs in the oil industry. It also threatened the viability of many shale oil companies.

2017 - Bitcoin. In 2017, Bitcoin rose 955 percent, eclipsing the rise of any previous asset bubble. Its total market value was $16 billion in the beginning of the year. It was $171 billion by mid-December. On November 29, 2017, the price of a single Bitcoin reached a record high of $11,000. Hours later, it fell to $9,500. It started the year at $968.23.

One reason for Bitcoin's rise is that Japan's Financial Services Agency recognized it as a legitimate payment method in April. Japanese traders comprise 60 percent of the entire market. Bitcoin is a digital currency. It is a computer-based form of monetary exchange. No government or central bank controls, manufactures, or regulates it. In September 2015, the U.S. Commodity Futures Trading Commission designated Bitcoin as a commodity. 

How to Protect Yourself from an Asset Bubble

The hallmark of an asset bubble is irrational exuberance. Almost everyone is buying that asset. For a long time, buying that asset seems profitable. Often the price just keeps going up for years.

The problem is that it is tough to time a bubble. As a result, most financial planners recommend a well-diversified portfolio of investments. Diversification means a balanced mix of stocks, bonds, commodities and even equity in your home. Revisit your asset allocation over time to make sure that it is still balanced. If there is an asset bubble in gold or even housing, it will drive up the percentage you have in that asset class. That's the time to sell. Work with a qualified financial planner, and you won't get caught up in irrational exuberance and fall prey to an asset bubble.