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Asia Faces More Asset Bubbles

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By John Richardson on 19-Sep-2012

Marc-Faber.jpgMarc Faber

Source of picture: http://www.cliffkule.com/2011_06_26_archive.html

By John Richardson

RECENT action by Western central banks will result in more hot money flowing into Asia, creating further asset-price bubbles.

Last week, the Fed launched QE3 and the previous week, the European Central Bank launched its bond-buying programme.

Equity markets in China could also surge by 10-20 percent, as they are relatively undervalued compared with the stellar-performing US market, says international investor Marc Faber, in this video.

Faber makes the point that the super-rich will search the world for undervalued assets, generating tremendous returns for themselves.

But he added that it was a “complete fallacy” that Western central bank action had already or would in the future benefit the average person in the street.

In fact quite the reverse will happen, as the super-rich become even richer at the expense of everybody else – until the world economy collapses, warns Faber.

For example, property markets could well take off again in China, as could speculation in chemicals and polymers, as all the hot money seeks strong returns.

The existing high cost of homes in China’s major cities is already a cause of social tension, said to be one of the factors behind the anger being vented against Japan over the East China Sea islands dispute.

China might face a tough choice: Either allow all this hot money to further inflate and distort its economy, or impose restrictions on the flow of overseas funds.

Perhaps it might decide to “join the party” by launching a big new economic stimulus of its own, in an attempt to deal with its industrial slowdown.

Living with inflation in excess of 5 percent per year would carry significant political risk – because of increased resentment over an even wider gap between the rich and the poor.

At the moment, though, it seems as if China cannot take major economic policy decisions, as it is too wrapped-up in its highly contentious leadership transition.

At the level of petrochemicals markets in China, which, of course, reflect the real economy, rather than the surreal world of super-rich investors, the demand outlook remains incredibly bleak.

The commodity polyethylene (PE) market, in terms of profitability, is the worst it has been in 15-20 years, we have been told.

PE prices were this week said to be as little as $50/tonne above the cost of ethylene, reflecting the inability of producers to fully pass-on the surging cost of oil.

And, of course, oil has gone up not because demand has got better, but rather because of all of that hot money flowing into commodities.