...TICK...TICK...TICK...:

Gold, China, and Facebook: Detecting market bubbles (Nin-Hai Tseng, March 18, 2011 , Fortune)

How do you spot a bubble?

There are five lenses. The first is a situation where there is a self-fulfilling dynamic going on -- when asset prices are rising rapidly and it's usually fueled by credit at the same time. A classic case would be the housing market, where a bank lends money to someone and that creates a new buyer. In securing the loan, the buyer drives up the price of the collateral. The bank then feels more secure, potentially even smart about its decision. So then it issues more loans, thereby creating more buyers to drive up the prices of real estate that are securing their loans.

The second is looking at the cost of money, how it's allocated and whether there is overcapacity. The South China Mall in southern China is a great example. It was designed for 1,500 tenants. As of last year, I think they had a dozen tenants. The president of the shopping mall was recently interviewed by Bloomberg, saying he would continue expanding the mall, despite it being 90-something percent vacant.

The third is overconfidence. Are we seeing signs of hubris? One indicator that I love to point to is the world's tallest skyscraper, because it signals a speculative instinct. Skyscrapers are never built by their intended tenants. It's usually a developer who is hoping to attract tenants after the building is complete. The tallest building in the world today is the Burj Khalifa in Dubai, which has been bailed out by the government of Abu Dhabi. So if you look forward at where the world's tallest towers under construction are today -- five of the 10 largest towers under construction are in China.

Also, watch for spikes in Sotheby's (BID) common stock prices. This also signals overconfidence. Over long periods of time the price of the art auction house has generally been around $15 to $25 a share. In 1990, it rose considerably. If you look back and listen to what they were saying about the markets at the time, it was that world record art prices were being set left and right by Japanese buyers. In 1999 we had another surge in Sotheby's stock price driven by a couple of things. For one, we had Internet buyers, and two, Sotheby's launched Sotheby's.com, so it played into the mania that was going on. In 2007 we had Russian billionaires, hedge fund managers, private equity executives all driving the art markets. Sotheby's stock price reflected that and it spiked back up. It fell back down immediately after that bubble imploded.

Today Sotheby's stock is elevated once again and it's being driven by Chinese art buyers.

What do you think is the biggest bubble today?

China's economy. It exhibits all the tell tale signs that have characterized all the great speculative manias throughout history. We have reflexive dynamics under way that are self-fulfilling. Look at property prices -- they're rising rapidly, driven by increasing amounts of credit. It's not an overly leveraged situation yet, but it's increasingly so.

There's also misallocated capital. We can see this, for instance, with South China Mall and the skyscrapers under construction. And then there's the moral hazard factor. A lot of state-run banks are lending money to projects because they're told to politically -- not because they're economically rational projects to lend against. We have state-owned banks lending money to state-owned enterprises to buy land from the state. How we can possibly think that's market oriented and not self-dealing is confusing to me. It's all funny money.

Follow @brothersjudd