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End of dollar’s ‘extraordinay esteem’

agenda by k raveendran|By K Raveendran| Is the ‘irrational exuberance’ man at it again? Allen Greenspan, whose description of the state of the market during the course of a nondescript banking speech in 1996 presaged a bubble burst three years later, has spoken out again.

The former Federal Reserve Chairman has in a TV interview suggested that the ‘extraordinary esteem’ in which dollar is held around the world may not be sustainable and that a decline in equity markets is unavoidable in some point of time.

“The stock market has recovered so sharply for so long, you have to assume somewhere along the line we will get a significant correction. Where that is, I do not know,” he said. Upside pressures in the money markets and inflation will come ‘sooner than most of us expected’, he warned.

Greenspan’s comments come amid growing concern that overpriced equities and interest rates near record lows are creating asset price bubbles at different levels. The Standard & Poor’s 500 has gained 17 percent in one year and almost tripled since the 2009 lows, marked by the financial crisis.

Greenspan’s successor Janet Yellen has also toed a similar line. In a congressional testimony, she acknowledged high valuations for assets, including equity prices, but argued that these were not out of line with historical norms. She also referred to stretched valuations in the financial sector, particularly corporate debt. The overriding sentiment among financial market participants is that at least the equity market is close to unsustainable levels.

Best-selling author and ‘Gloom Boom & Doom Report’ editor Marc Faber has, in fact, already pronounced the beginning of the bust. He believes that the colossal bubble in all asset prices has begun to burst already. He expects a 30 percent drop in the S&P benchmark.

Last month the IMF warned about the dangers of a property bubble forming globally. IMF warned that house prices ‘remain well above the historical averages for the majority of countries’ when benchmarked against incomes and rents.

To be more specific, house prices in London rose by 18.7 percent year on year in April. The Fund pointed out that the last time prices rose so quickly was in July 2007, which was followed by credit markets seizing up and the global financial crisis sinking in. That property prices are also rising at a double-digit rate in other desirable international cities, such as Sydney and San Francisco, is worrisome, it said.

The UAE has still not got over the bitterness of a cocktail formed of asset price bubbles in equities and money markets as well as those in the property market. While the world at large had to mostly grapple with the financial crisis, the UAE has had to suffer two crises simultaneously, each making the stranglehold of the other more exasperating.

Only recently the UAE Central Bank warned about the dangers posed by an overheating property market, coupled with imbalances in rental yields in Dubai and Abu Dhabi. The Dubai property market has been cited among the top markets in the world registering maximum price gains over the last one year.  Concerns have also been expressed about dangers of asset price bubbles in other areas.

Whether Greenspan’s complaint about the dollar enjoying extraordinary esteem will have the same impact as his irrational exuberance comment will depend on a number of new factors, including the need for central bankers in the developed countries to keep interest rates low and the commitment by other central banks to pursue further monetary loosening as a matter of policy direction.

But Middle East countries have a lot at stake in another forecast by Greenspan not materializing. And that is about his prediction of oil price. He believes that the price of crude will drop to $15 to $20 per barrel, but for the general unrest in the Middle East and the uncertainties associated with regional issues. According to him, what keeps the oil price at today’s levels is the very high premium related to long term supply security issues.