The Emerging Markets Bubble

http://www.portfolio.com/views/blogs/market-movers/2007/09/20/the-emerging-markets-bubble

If the Fed's cutting rates, then it must be blowing another bubble, right? But it's not going to be tech stocks or housing again, so what's left? Green technology, obviously, is bubblicious right now, but it's also tiny: investment of $6 billion this year might be up 60% from last year, but it's still a long way from the point at which a crash could cause any real damage.

In today's WSJ, Justin Lahart and Joanna Slater put forward a different asset class: emerging markets, which are now officially trading on higher multiples than their developed-market counterparts. Everybody seems to think a bubble is forming, and everybody is very excited about this: after all, bubbles have the ability to make a lot of money for a lot of people before they burst, and most people in any case tend to overestimate their ability to get out before the crash....

DRC Blogger Response:

Yes, the term "emerging markets" is often overused and mis-used especially as a broad asset class. However many countries in stage two classification for economic development have been watching many of their couterparts in stage three economies and are rapidly learning from the mistakes made.

The investment strategies of captial market investors do not necessarily mirror the social and economic necessities inherent in emerging economies. One such area for investment oportunities rests in housing finance in many stage two countries. The fundamental economic needs of nations with strong population growth will underscore the potential strength of given investments. Moreover the will of the nation to succeed in addressing the needs of its businesses will create the win-win stategies critical for an emerging market investment.

This can be most evident in housing sector investments. For many nations housing is a commitment for the longterm. Unlike the U.S. where housing needs have been replaced by housing wants and investopr speculation. Many nations are committed to addressing the fundamental needs of its people in times of population growth and global economic expansion.

Lying With Statistics, Subprime Edition

http://www.nakedcapitalism.com/2007/05/lying-with-statistics-subprime-edition.html

"I am beginning to wonder whether there is a single statistic related to the state of the economy that can be trusted. The latest data point to bite the dust is the widely-quoted factoid that 13% of subprime mortgages are in default. Turns out not only is this number wrong, but the methodology used to arrive at it is ludicrous. The Mortgage Banking Association, the source of this information, classifies loans as prime or subprime based on who originated them. Thus, all loans by New Century were subprime and all loans by Wells Fargo (the biggest full service bank in the subprime market) are prime.
Details from the story "Subprime delinquencies higher than reported" by Matthew Padilla in the O.C. Register: ...

DRCBlogger Response:

I am not surprised to hear this story. This train has been running out of control for over 36 months. When market participants placed more trust in yesterday's strategies - gains became more important than the underlying processes of the business. The industry must get back to basics and recognize the importance of housing as a means to financial stability for all market participants. What we see now is long term funding commitments giving way to investor needs for safety and gains. Basic fears across the market cycle have been fueled by greed.

The only way out of this current tailspin is innovation - new products and new practices. Long-term success for housing finance requires more innovation throughout the market process. It requires market participants to develop strategies around disruptive innovations. It is through disruptive innovations that transcend the market processes that we will create new markets or reshape existing markets by delivering relatively simple, convenient, low-cost innovations to a set of customers who are ignored by industry leaders expected to serve the common good. Who should bear the responsibility for the cost of a house? Who should determine the value of home?

These questions are fundamental to our national housing policies and as such will be critical to secure positive trends in economic growth.

Some emerging market have it right!