For China: lessons from Japan from Barton Biggs

In the mid-1980’s Morgan Stanley chief investment strategist Barton Biggs saw that the Japanese market was overvalued. If we recall correctly, he advised underweighting in Japanese stocks, which became a quarterly source of consternation as those who were overwighted in them did better and better. On April 21, 1987 he said this, for example, in the NYT:

From both a sociological and analytical point of view, the Japanese market is in the climactic stage of one of the great speculative booms of all time. The market is focusing on themes rather than specifics, like values or earnings.

Some smart money laughed at Biggs and continued to throw dollars at Japan. After all, the grounds of the Imperial Palace in Tokyo were worth more than South America. And wasn’t Mitsubishi outsmarting and outspending the Americans — even buying Rockefeller Center from the Rockefellers. How rich is that? They laughed until 1990.

You never can tell just when a speculative bubble will burst, just that it will. From 44,000 in 1990, the Nikkei fell to less than 8000 a few years ago, and it is less than 12,000 today, still off 70% from its highs of fifteen years ago. Here’s what Biggs said in 2003 about China at an economic symposium (we have no idea whether he still agrees with the statements):

As for the massive investment boom (or should I say “bubble”) in China, a bust is bound to come. A country that does not have a free markets capital allocation mechanism is uniquely unqualified to mitigate the excesses of an investment boom. After all, if the West with its sophisticated public markets and information dissemination systems was totally incapable of coping with the technology bubble, what hope is there for China? The greater the bubble, the bigger the bust. In China’s case, the resulting unemployment of perhaps even several hundred million young men and women could destabilize the world. Of course the hope is that there is a central bank chairman hidden away in some musty office in Beijing who has the stature and knowledge of Greenspan and the guts that Greenspan lacked. I don’t see that there is much the G7 central bankers can do. Economists have created the legend that China is the new engine of world growth. I fear it is a myth about to become a nightmare.

Most economic leading indicators look forward about six months into the future. In the case of Japan, Barton Biggs was 3-4 years ahead of the market. We wouldn’t be surprised, therefore, to see a crack-up in China within the next year or two.

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