As Ms Curtis’ hand was making its way through three cheeks last week, Forbes columnist Jesse Colombo succeeded in getting everyone’s attention with a piece on how we’re all smoking mushrooms and are unknowingly fueling the next big bubble.
Bubble forecasters have it easy. Pick a popular topic. Issue a gloomy forecast. Throw in a couple of charts that trend upward (often out of context). Sit back a few years, watch the market correct (or the bubbles popping), and get to say “I told you so.” If he’s right, then he can claim street cred for that call. If he’s wrong, he can claim that his timely warnings prevented a bubble. He doesn’t really lose anything either way.
We do: in misinformation and getting lumped together with frothier emerging markets like Singapore or Hong Kong, and thus the foregone foreign direct investment.
So, I feel I have a responsibility to put my views out there. Not just on this so-called bubble, but on a social media-obsessed media culture that incentivizes content like this.
What is a Bubble?
I can “boldly predict” that Facebook’s stock price will come down – and it obviously will at some point. That’s the nature of the market.
Loosely throwing around the word “bubble” is irresponsible. It’s a catchall term – like “sustainable growth”, “competitive advantage” and “efficient markets.” Rising prices don’t mean we’re in bubble territory. Rising consumer spending, FDI, government spending, and low interest rates on their own don’t lead to bubbles.
The distinction matters. Bubbles require very different policy responses from regulators. Premature bubble talk misrepresents the economic prospects of the country to foreign investors – something the country desperately needs.
So for the purpose of this note, here’s what I mean when I refer to “bubbles”. Three things characterize one, and here I borrow from the work of Charles Kindleberger:
1. Rapid increases in prices that don’t reflect the intrinsic, fundamental value of an asset. The mismatch between market vs intrinsic values is a crucial point. So let’s repeat that again: in a bubble, prices do not reflect fundamentals. So when a friend claims that an asset seems to be growing more and more expensive, the first question one should ask is, “relative to what?” (ie should you really P10,000.00 for that juice cleanse?)
2. Speculative, short-term investments in assets with unknowable risks. In the run-up to the 2008 global crisis, investors who took on collateralized mortgage obligations (repackaged and re-rated derivatives from pools of questionable mortgages) were speculating because these were securities that were hard to understand.
3. Herd behavior. The dot-com crash saw masses of would-be entrepreneurs and investors mindlessly jumping into the internet bandwagon.
Looking back, I’ve been a victim of all three, so I’ve learned a thing or two. I eagerly jumped the bandwagon of 1990s comic books: multiple X-Men #1 covers, Gen 13 #1, Brigade #1, and Rob Liefeld. All in the hopes that these would be worth gold one day. These weren’t fancy collateralized debt obligations or pre-series A participating preferred stocks, but for a 12-year old in the 90’s, P10,000.00 lost to comic books were a lot. And over the years, I’ve repeatedly dodged (that pretty, popular girl in college who turned out to be… never mind) and fallen prey to speculative manias (the mini-bubble of a Management Engineering degree). The underlying principles are similar: a a huge mismatch between market and intrinsic values, speculation, and stampedes.
Mr Colombo’s main point is that this period of economic expansion is driven by cheap credit, and that’s a bad thing, because this in turn is driving a.) a bubble in real estate prices, and b.) unsustainable, debt-driven consumer spending. There were a number of other arguments (which have been effectively tackled here, and here), so I’ll focus on these two.
It’s almost impossible to predict bubbles using the traditional economic models – these tend to be lagging, not leading indicators. Maybe the Nate Silvers and the Nassim Taleb’s of the world can sift through all the statistical gobbledygook. I’m not smart enough to do this.
I can, however, look at people. As an entrepreneur, I’m lucky not to be stuck in a desk and be in a position to constantly meet people outside my company. My view involves asking three questions about the underlying behavior of our economic models:
First: Are people buying property like crazy? Nope. My basis of comparison is my time in Singapore: when new condos are launched, thousands of buyers flock to showrooms, with many projects selling out in hours. We definitely don’t see that kind of mania here. If this were the case, they we wouldn’t see all those spam texts and pesky real estate salespeople handing out flyers in the malls.
Oh, and look here. The number of license-to-sell permits from the HLURB for high end condos has actually decreased this year. Note that a license-to-sell doesn’t mean an actual sale – this is the permit given to developers to allow them to start selling a housing unit. It’s a measure of upcoming supply. If this were a bubble, this number would be up this year – not down. And as you can notice, the number of licenses are down across the board. (This is actually not good because the country has a housing gap of up to 4 million units. But only 22,270 socialized housing units were licensed from January to July this year.)
Next, let’s look at real estate prices. Yes, prices have risen. But is there a huge mismatch from its intrinsic value? One way is to look at rents in relation to property prices, which is how The Economist tracks global property prices. Looking at CBD prices (since this the data Mr Colombo quoted), the average monthly residential rent is P800.00 per sqm vs an average property value of P132,000.00 per sqm. This is an asset yield of 7.3%. Asian property buyers will recognize that this is actually a decent deal. In the peak of Singapore’s housing booms, yields can fall as low as 1-2%. For a so-called economic analyst, it’s annoying how he didn’t take the time to dig into this.
Plus, these properties were purchased by Filipino households who are significantly less leveraged than their US counterparts – so even if property prices “burst”, there will likely be no widespread sell off that can further deflate prices.
Second: Are people maxing out credit cards for conspicuous consumption like, say, handbags and a trip to London? Nope. My basis for comparison: my time in Boston, where it is common to take on additional student debt just to go to that weekend trip to Iceland.
Lets dig deeper into Mr Colombo’s contention that easy credit will make consumers spend beyond their means. If this is the case, then we should see numbers like this: massive credit card growth, increasing credit card balances, and increasing consumer defaults.
What he fails to see is that the Philippines has one of the lowest credit card penetration rates in Asia. So even if the vast majority want to splurge on a Louis Vuitton bag, they simply can’t. The vast majority still pays in cash.
This is data from the BSP showing the balance of credit card loans. Credit card balances grew 10% vs last year – quite reasonable in an emerging market and coming from a small base. If we assume 4 million cardholders, then we have around P39,000 in average card balance per card holder: hardly reminiscent of the US.
The problem with with Mr Colombo’s argument on cheap credit is this – it’s cheap relative to what? After all, short term interest rates are still 4-7%, and long term rates at 7-12%. Debt may be cheap by historical standards, but not by any means too cheap that it makes everyone take on debt.
Oh, and look here. Mr Colombo likes to post charts that trend up, such as this one, which he uses to assert that consumer spending is growing unsustainably. But if you look at closely at the scale (don’t be deceived by the sizes of the bars, look at the numbers) and the time period (from Jan 2008 to the present), you’ll see that consumer spending grew 6% year-on-year in 2013 and 7% the year before. An emerging economy whose consumer spending growing 6-7% a year? Hardly sounds excessive to me.
Third: Are tech companies getting unjustified investments? Companies that play in tech + emerging markets are a good bellwether for observing bubbles, simply because of the perceived high growth opportunities. As an entrepreneur in this space, am I seeing frothy behavior among investors? Absolutely not. Domestic investors still tend to be cautious with valuations. And foreign investors are wary about things like user acquisition, regulation, and logistics.
So, based on purely man-on-the-street, daily observations – no, we’re likely not experiencing an overheating economy. What will make my answer change? When people rush to scoop new condos a la Singapore showroom launches, when my friends start complaining about credit card debt, and when we see pre-product, idea-stage startups getting $5 million pre-money valuations.
What’s Behind the Scenes? Fear Mongering and Content Marketing
I always love a good debate, but with a bold pronouncement such as Mr Colombo’s, the bigger question to ask is this: Does one have an incentive to, at best exaggerate the context, or worse – distort the facts? It seems he does. Worryingly, Mr Colombo proclaims to be an investor – without disclosing if any of his investments may benefit from his writing (for instance, shorting an emerging market stock). Mr Colombo is a self-proclaimed bubble watcher – his entire career is dependent on making dire warnings, and his strategy is to attract online traffic via bold proclamations of various sectors that are heating up.
And Mr Colombo is definitely concerned about traffic, as he proudly states in a previous post,“I published a report that went viral, and was read over 145,000 times and shared over 6,700 times via social media.” This is part of the worrying side of journalism in the digital age – when writers optimize for views and shares, they under-optimize for quality and integrity. It’ll be great to see him in a local conference (and debate him on stage).
And this leads us back to Ms Curtis. Celebrity culture thrives in manias and herd behavior – popularity snowballs and leads to more fame. Ms Curtis’ bubble might have temporarily popped last week, though she was quick to apologize. In trying to be a celebrity bubble-spotter himself, Mr Colombo may have unknowingly burst his own.