The global asset bubble will burst – the only question is when, and how bad it will be

Since the global financial crisis of 2008, all major economies have kept interest rates at or close to zero and maintained large fiscal deficits. A decade of massive, synchronised monetary and fiscal stimulus has led to the greatest asset bubble in history, to the tune of about US$100 trillion, nearly 1.5 times the world’s GDP.

Even though the US stock market is more expensive than in 1929 or 2000, and China’s property valuation higher than Japan’s a quarter of a century ago, fear-driven sell-offs have been rare and brief, leading to the belief that high asset prices are the new normal. Massive amounts of financial and business activities, especially in tech, are predicated on high asset prices going higher.

But 2018 will teach them a lesson or two. High-risk assets such as internet stocks and high-end properties will struggle like never before in the past decade. US interest rates will rise above inflation for the first time in a decade. And China is tightening, especially in the property sector, out of fear of a life-threatening financial crisis. The interaction between the US Federal Reserve’s quantitative easing and China’s credit targeting has been the liquidity super machine. China accounts for about half of global credit growth. Credit creation in commodity economies has been dependent on China. The property sector roughly accounts for half of China’s credit growth. Yet, China’s monetary expansion may slow to half the average of the past decade.