In a recent research note Edward Chancellor of GMO gives us 10 ways to know if you’re in a bubble. He says China just so happens to fit the mold:
1. A growth story that is uncritically accepted.
2. Overconfidence in authorities.
3. Easy money and credit expansion are precursors to a financial crisis, according to Chancellor, who cited data similar to that published by Reinhart and Rogoff showing that debt-to-GDP invariably rises rapidly before a crisis.
4. An investment boom and a misallocation of capital.
5. Troubling “agency” issues. At the peak of the dot-com era, Chancellor said it was common for investment banks to hire brokers and analysts not based on their ability to understand businesses or their competitive strategies, but based on how well they understood the “game” of underwriting and how fees were allocated among, for example, trading, new issues and corporate finance.
6. Collective irrationality and herd behavior.
7. & 8. Fraud and Ponzi financing.
9. Conspicuous consumption, which in China has been most obvious in excess investment.
10. Valuations.
You can read the details at Advisor Perspectives.
Mr. Roche is the Founder and Chief Investment Officer of Discipline Funds.Discipline Funds is a low fee financial advisory firm with a focus on helping people be more disciplined with their finances.
He is also the author of Pragmatic Capitalism: What Every Investor Needs to Understand About Money and Finance, Understanding the Modern Monetary System and Understanding Modern Portfolio Construction.
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