From Vern Gowdie – The Daily Reckoning (Australia) –
No, this is not another article on the fate of the Washington elite.
But first to the markets. Gold steady. Bonds steady. Dow steady. Looks like pulses have settled down after a week of trying to anticipate what the president-elect will, or will not, do.
Judging by the recent highs on the US share market, the consensus appears to be ‘business as usual’.
In fact, business may be even better than usual.
President-elect Trump is talking big on infrastructure. A US$1 trillion spending plan means an awful lot (say 20% — $200 billion) is going to fall off the table and into the pockets of those closest to the action. That’s how the insider game works. The US elected a Trojan horse — Trump for the ‘little guy’ on the outside, but, on the inside, it’s Trump for the ‘big guy’.
Rising yields in the bond market are an indication that fixed-interest traders think Trump’s ‘nation building’ policies are going to be inflationary. Perhaps. Firstly, Congress has to approve the expenditure.
Before Donald gets too carried away spending money he doesn’t have on grand projects of dubious value, he might like to get a copy of last weekend’s Gold Coast Bulletin.
Granted, the local paper lacks the journalistic pedigree of the Wall Street Journal and the New York Times, but occasionally (OK, rarely) there’s a story behind the story.
The headline persuaded me to part with $2.20.
‘High and Mighty — 103-storey giant to become tallest tower’.
The Gold Coast property market is enjoying a purple patch at present, thanks to cashed-up interstate buyers, the ever-present Chinese buyer, and the infrastructure spending (and accompanying hype) for the 2018 Commonwealth Games.
The upbeat mood on the Glitter Strip makes for expansive visions.
According to the article:
‘The southern hemisphere’s tallest building is set to tower over Surfers Paradise at an astonishing 103 storeys. The proposed $1.2 billion Orion Towers would reach 328m…’
Tall buildings and big egos have a long history.
In 1999, economist Andrew Lawrence created ‘The Skyscraper Index’.
Lawrence identified a correlation between the construction of the world’s tallest buildings and a subsequent financial crisis.
During the ‘Roaring Twenties’, construction began on three record breaking buildings: 40 Wall Street, the Chrysler Building, and the Empire State Building. The Great Depression followed.
In recent times, the curse has struck Dubai. The building of Burj Khalifa Tower (the world’s tallest building) began during the boom times.
In 2009, Dubai fell victim to its ambitious, debt-laden plans. Progress payments on the construction of the skyscraper were delayed. The United Arab Emirates Sovereign fund (which built the tower) was broke, and had to be bailed out by the sheikh of Abu Dhabi to the tune of $US10 billion.
Landmark buildings are the product of grand thinking. Boom times — periods of ‘seemingly endless and easy riches’ — are fertile ground for dreamers and risk-takers. There is nothing like a boom for mass misallocation of capital.
Wealth has a tendency to inflate egos. How do you show the world your success and prosperity? Construct a status-symbol skyscraper.
The design, planning, tendering and construction process of a major building takes years. The grand concept is born when a boom has well and truly taken hold…when the social mood is upbeat, bordering on euphoric.
Building a monument to wealth is considered a natural extension of how society feels about itself.
This has become an all too familiar pattern for these symbols of excess — engineered in times of expansion and completed during periods of contraction.
Hence the term: ‘The Skyscraper’s Curse’.
The following graphic shows how the curse has plagued the completion of these landmark buildings since 1970.
[Click to enlarge]
A euphoric social mood (created by a multi-year boom) leads to overreach. The classic Minsky moment of ‘stability creating instability’. The Chinese property boom (funded in large part from China’s $US28 trillion of debt) has been without peer. Right on cue, following the (ego-driven) trend, China built its very own status symbol to itself.
The Shanghai Tower — the world’s second tallest skyscraper.
The grand plan was envisaged when China’s GDP growth was running at 15% per annum. The tower’s construction commenced in November 2008.
And according to Wikipedia:
‘Although the building was originally scheduled to open to the public in June 2015, as of October 2016, most of the building is still closed. The observation deck was opened on 1 July 2016.’
The recent news out of China indicates that the ‘skyscraper curse’ may be ready to strike again.
The former chief economist of the International Monetary Fund has told the BBC that a slowdown in China is the greatest threat to the global economy. Ken Rogoff said a calamitous ‘hard landing’ for one of the main engines of global growth could not be ruled out. ‘China is going through a big political revolution,’ he said. ‘And I think the economy is slowing down much more than the official figures show.’
Mr Rogoff added: ‘If you want to look at a part of the world that has a debt problem look at China. They’ve seen credit fuelled growth and these things don’t go on forever.’
BBC, 26 September 2016
Michael Pettis, Professor at Peking University’s Guanghua School of Management, wrote in his excellent blog on 31 August 2016 (emphasis mine):
‘Because debt itself is constraining growth — I expect it to force [China’s] economic activity to drop to less than half current levels well before the end of this decade — the debt must be written down or paid down and its costs must be allocated, the sooner the better for China.’
The Shanghai Tower was conceived when the Chinese economy was pumping out double-digit growth. Yet it is likely to open its doors when China’s growth is in the low single-digit range.
However, the (almost empty) Shanghai Tower’s title as the second tallest skyscraper could be short-lived:
‘Dubai’s Burj Khalifa is losing its title of “World’s Tallest Building” to Saudi Arabia’s new project: the Jeddah Tower. The Saudi government announced this week that it secured fund to complete the Jeddah Tower, which will measure 3,280 feet when it’s completed in 2018. The Jeddah Tower, also known as the Kingdom Tower, will be the first building in the world to reach a full kilometer into the air. This new tower will make the Burj Khalifa the second tallest building on Earth, standing at 2,722 feet tall at its spire.’
New York Daily News, 6 December 2015
But has the curse struck yet again?
Bloomberg News reported on 9 August 2016:
‘As Saudi authorities slash spending and delay payments to contractors to cope with the plunge in oil prices, the austerity is exacerbating the woes of private businesses that have, for decades, relied on government spending for growth. Casualties include the thousands of foreign laborers who helped to keep the economy humming with low-paying jobs in construction.
‘Yet as oil prices plummeted, government efforts to repair public finances hit a construction industry already struggling amid a building slowdown. Companies such as Saudi Oger and the Saudi BinLadin Group have delayed wages and cut thousands of construction jobs, according to media reports.’
Perhaps Freud would have analysed this need by the male species to erect huge edifices as ‘tall tower envy’.
These monuments to man’s ego invariably tend to coincide with a prevailing social mood of excessive optimism. The top of a market.
There is only one way to go from ‘high and mighty’ — and that’s to ‘much lower and more humble’…just ask Hillary Clinton.
The Gold Coast Bulletin headline could be the bell ringing on the Australian property market.
In yesterday’s Australian:
‘The IMF has given powerful backing to Labor’s call for a crackdown on negative gearing saying Australia’s tax rules are encouraging people to take on too much debt to invest in the housing market, pushing prices higher.
‘“A major concern is that external risks with a large impact, including a sharp growth slowdown in China, could interact with, or even trigger domestic risks, especially a housing correction.”’
After 25 recession-free years, it is easy to understand why debt-funded risk-taking is reaching extreme levels. People forget how tough a contracting economy can be on asset prices and employment prospects.
If history is any guide, the ‘High and Mighty’ headline should be a warning to get your house in order.
The curse looks set to strike in Australia.