Feeding the Bubble: Is the Next Crash Brewing? Part 1

Published on Spiegel Online International, by Martin Hesse and Anne Seith, December 03, 2013.

Central banks around the world are pumping trillions into the economy. The goal is to stimulate growth, but their actions are also driving up prices in the real estate and equities markets. The question is no longer whether there will be a crash, but when … //

… It Might Go Badly: … //

… A Hunger for German Stocks:

For many people, what Spitznagel is describing is typically American. In the heartland of capitalism, the crash has been to economic life what the Colt gun was to the Wild West. In Germany, on the other hand, centuries-old family businesses operating in brick-and-mortar factories make sophisticated tools, machines and systems, with which real, palpable, everyday products are made in the rest of the world. One would think that prices would be more down-to-earth in such a grounded environment.

Dürr AG, which makes machine tools in Germany’s southwestern Swabia region, is one of those traditional companies. In business since 1895, Dürr is a supplier to automakers, as well as the chemical and aviation industry, and it manufactures production and environment technology systems – a thoroughly solid product line.

But Dürr’s share price has doubled within a year and increased fourfold in the last two years. A share of Dürr stock costs €66 today, whereas it could be had for less than €4 in 2009.

That’s because international investors are hungry for securities like Dürr shares, which embody the successful model of Germany’s export economy. It’s also because companies like Dürr benefit from growth in emerging economies, and because their operations are in Germany and not in one of the crisis-ridden countries of the euro zone.

This demand has driven the MDAX, a German stock index for mid-sized companies, from 11,400 to 16,300 points within a year. The index is currently almost four times as high as it was during the stock market boom in 2000, far outperforming the DAX itself, an index of Germany’s 30 largest companies – although the DAX is also breaking one record after the next.

Germany is a hot commodity among investors, in both the equities and real estate markets. Prices for single-family homes and condominiums in major cities like Munich, Hamburg, Frankfurt and Cologne are rising faster than rents, a sign that speculators are pushing their way into the market. Buyers are from Germany, Italy, Eastern Europe and Asia, and they are buying German real estate because they believe that by investing in “concrete gold,” they can protect themselves against the dangers of inflation.

This buying frenzy creates potential trouble spots around the world. Real estate prices in major Chinese cities have increased by more than 20 percent in only a year, wealthy foreigners are snapping up luxury property in Istanbul, and in the United Kingdom the government is giving an additional boost to the economy by offering a special loan program for homebuyers.

In the last 12 months, real estate prices in the United States have gone up more than they have since 2006. Some cities, like San Francisco and Las Vegas, have even seen price increases of 24 to 27 percent. Ironically, the last crisis began in the overheated US housing market.
(full text and a graph).

Part 2: Ignoring the Risks.


CRIME: The Money Changers Serenade, A New Plot Hatches, on Axis of Logic, by Paul Craig Roberts, Dec 3, 2013;

NPD Ban Bid: Germany’s Risky Push to Outlaw Far-Right Party, on Spiegel Online International, by David Crossland, December 03, 2013 (Photo Gallery): Germany launched a new push to outlaw the NPD party on Tuesday amid doubts whether the legal bid will succeed, and whether a ban would significantly curb the country’s violent far-right scene. But if the motion fails, right-wing extremism will flourish, analysts warn …;

Jailhouse Chic: Investors Remake Germany’s Disused Prisons, on Spiegel Online International, by Stephan Degenhardt, December 03, 2013: As inmate numbers in Germany steadily decline, some states are selling off unneeded correctional facilities to private investors. The result is a new brand of high-end apartments, hotels and event centers housed in renovated former prisons …;

India’s economy: Turning a corner, on The Ecnomist, Dec 3, 2013;

Hooked on Tagging: When Graffiti Becomes a Dangerous Addiction, on Spiegel Online International, by Bruno Schrep, December 03, 2013 (Photo Gallery): Two young Hamburg graffiti artists recently suffered serious accidents in the space of just four days. Both sustained very severe injuries, a typical outcome in a risk-taking subculture in which some have paid for their passion with their lives …;

Early Warning System: A Plan to Halt German Jihadists from Going to Syria, on Spiegel Online International, by Matthias Gebauer and Hubert Gude, December 03, 2013: German jihadists are heading to Syria in ever greater numbers, with some 230 having already traveled to join the opposition in battle. A German politician wants to create an early warning system to prevent young men from making the trip …;

Comments are closed.