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The Inflection Point Of Foam, Catalyst And Conduction Mechanism
Jan 05, 2018

I very much understand that many people are caught up with the times, out of fear of an unprecedented big inflation and active or passive shot involved in the housing market drums pass the game frustration. However, the real estate bubble in the powerful country has no substantial difference from the history of other countries in the world within a hundred years in terms of its causes, its transmission mechanism, its economic foundation, the climate of the times, and its trend of evolution. Today, various public comments that can be heard around the world, The people in their own bubble activities in the same remarks.


In view of the greater value of judging the inflection point area, although we can not accurately predict the time, we can try to extract from the history of our country some experiences and logic that capture the arrival of the inflection point:


1) The level of leverage is not a reliable indicator of the inflection point of the debt cycle. 270% is already high, but the leverage ratio can rise to 300% and 400%. Only when a sufficient proportion of the debtor can not rely on its own income and cash flow Interest and liability on schedule, so that only the sale of assets in stock to repay the debt borrowed for the purchase of assets, this is the basic logic of inflection point appears. This is similar to the enterprise asset-liability ratio of 120%, but the cash flow continues to be normal, the asset-liability ratio of 50%, cash flow rupture must be bankruptcy logic.


Since most financial markets are marginal-transaction pricing, the ratio does not have to be high, and the more liquid and opaque markets are, the lower the proportion is needed (the low pre-crisis rates in the United States before the 2008 crisis). The rise of the foreclosure rate and the default rate of loans caused by the inability of the cash flow to finance the debt is the key factor that drives the turning point when the price is still stable. However, this process evolves under the synergy of other economic sectors. When the price After the emergence of the next trend, the rate of foreclosure and default rate of loans will be driven upwards in turn, eventually forming a negative feedback.


2) The formation of these basic logic has always been the tightening of policy as a catalyst. The Federal Reserve's tightening in 2004-2006 was typical of a punctuated catalyst for the bubble and was pro-active based on the realization that the current bubble was horrible enough to strike. The powerful countries voted to limit their liability and at most 20% Passively follow the influence of peripheral tightening. Historically, nominal interest rates have risen for some time before the Great Depression and Heisei Bubble sub-prime crisis and the sub-prime crisis. The nominal interest rate dropped sharply (but the real interest rate rose sharply) after the bubble burst, Descendants attributed to the initiative to pierce the bubble. The driving forces behind the passive tightening of the powerful countries are now capital outflows, deteriorating trade environment and exchange rate problems. The problem is complicated and can not be started.


3) Whenever voluntary tightening, there is a common basis afterwards. When policy makers realize that there is a huge bubble and are afraid of serious consequences of continuing to blow big ones, they must shoulder their responsibilities and result in a tightening of their hand.


Although the political system is different, there is no difference at this point. So that the power does not consider active contraction, it is not correct, but often hesitate to rock it with more goals. Sometimes you think the bubble maker is so short-sighted. In fact, it puts the priorities of other policy goals at a given stage prior to curbing the bubbles and maintaining financial stability (such as de-leveraging, de-leveraging, family plus leverage instead of business plus Leverage) and believe they have room for turmoil; however, the implementation of these priorities will have the consequence of continuing to blow up the bubble, sooner or later it will return to the goal of deflationary control of the bubble. The question has come, no one will set the goal of tightening the initiative to pierce the bubble, want to dissolve sideways.


Now, after a retrospective review, both said that the three famous recessions in history were proactively piercing the bubble and even arguing that it was an over-exertion policy mistake, but it was not. Bubble things to a very high absolute level, there is no sideways possible (two-track system can not), shot tightening too small ineffective, will result in gradually overweight, the final overshoot. Posterior seemingly made a mistake, but in fact holds the danger of being buried under the inevitable logic of the egg. Therefore, the cross-cutting intertwining of the passive reaction-type tightening under the emergent situation in the future and the initiative determination-type tightening at a stable situation (currency, taxation and regulatory fields) will be the main line of evolution.


However, it needs to be emphasized that although the logic and the path are clear, these must all play a role in resonating with the public sentiment. In the past, numerous reasons for the failure of guessing were the core reasons for the failure of global monetary policy, such as the unrealized shift of global monetary policy, the safety margin of household savings, and the non-performing debt caused by invalid investment in fixed assets, which have not yet accumulated enough stock to cause qualitative change. faith. Public sentiment support will peak a few years life is very easy. It is not logical to be able to capture when popular beliefs break down and when emotions turn away. I do not have this ability to predict.