Asia keeps on rising.

paulren's picture

The problem in American and Europe is debt -far too much of it.   The result is low global interest rates for some time along with a re-rating of Asian currencies.

Collectively, the U.S. government, state governments, corporate America and American consumers have accumulated the biggest mountain of debt in the history of the world. The massive debt binge has financed tremendous growth and prosperity over the last couple of decades, but now the day of reckoning my be there?  And its going to be painful as even if it does not blow into a crisis of master proportion, the long de-leveraging of this almost certainly will mean low real economic growth besides low interest rates for years to come for the world still largest economy.

The US economy remains in rough shape by any standard. Its easy to confuse its condition which is bad with its direction which may be getting better -and then to lose sight of how much worse it could be. The just recent US market sell off was blamed by news reports on EU growth stalling besides China cooling off, so seemingly forgetting that the US is and remains in dire shape.

According to one US study I just read, 30% of people age 45 to 54, and 18% of those between 55 and 64, were underwater with their homes in calendar 2009. Which means, their mortgage balances are higher then the current market value of their homes. 

Also a 1998 study by the Federal Reserve Bank in Dallas, undertaken well before the housing boom, provided detailed empirical evidence that the US has over-invested in housing relative to other forms of capital since 1929. This has proven to be a gigantic misallocation of resources gone wild for decades.  

Can you believe, except for some exceptional boom periods, US housing has never been a good financial investment. Yale’s Robert Shiller, the world’s leading student of bubbles, housing and otherwise, shows that from 1890 to 1990 (well before the bubble) the rate of return on residential real estate was just about zero, after inflation. (See Jason Zieg ”Shiller” Mr. Worst case scenario”, Money, July 6th 2007. Stocks in general way outperformed.

It used to be that America’s business’ was business, then the business of America got to be homeownership.  Mobility and flexibility to move are key principles of the modern US economy and homeownership chains both.  The US used to have a very flexible workforce with people moving around to get new jobs. The US tax code even allows for deducting moving costs and so indirectly subsidies moving costs.  This has now ended gravely with so many stuck with their homes and so just can’t move.  In 2008 fewer people moved as a % of the population than in any year since the Census bureau started tracking address changes in the late 1940’.  * One study by the economist Andrew Oswald found that across European cities a 10% increase in home ownership correlated with a 2% increase in unemployment, I think because of the long geographic flexibility of the US workers this is even more acute in the US.

Its bitterly ironic that housing, for so many Americans, has gone form being their shelter to being their burden….for too many, the dream of home ownership turned into a an economic trap, one of their own making!   The most damaging reality by the US housing crisis may not be the impact of the financial markets or consumer wealth, it may well be the long run competitive disadvantage caused by the inability to relocate the agile labor force to where the jobs of the future lie -at a time when this is most needed.

What does all this have to do with Thai stocks?  It shows the grave problems Americans and Europeans investors are confronted with now -and how an equity revaluation will likely continue to take place in SE Asia and its currencies. Through longer lasting low global interest rates, high dividend paying Thai growth stocks with their low financial leverage and lowest US/EU exposure may well be in for a massive re-rating and this is now happening already.

Best Regards,

Paul A. Renaud.

* From the book " The Great Reset"  by Richard Florida (2010).