Consider a thought experiment: If the state of the economy is sluggish and job creation anaemic, then why are real estate prices and transactions exhibiting growth patterns? And now seen through the course of the year.
More pertinently, how can these rises be occurring against a backdrop of falling rents? In a broader sense, how is it that developers — as well as banks — be recording record profits when the underlying economic activity is slow? Economic theory, like the physics on which it is based, is an extended exercise in “perturbation theory”. Solvable and frictionless markets are populated by rational agents, which are then subjected to perturbations in an effort to recover economic realism.
Economists do not believe their idealised models to be exactly accurate, but its fair to say that they assume that deviations from this ideal are manageably small. There are a few market failures that the model cannot account for, where price and value become disconnected.
These are referred to as public goods which share two characteristics: 1. The good must be inexhaustible (my use does not preclude your use or reuse). 2. The goods must be non excludable (the existence of the good means that everyone can benefit from it even if they don’t pay for it).
These goods include the use of the army and/or public parks. In a market economy, payment is secured by force, such as the payment of taxes. As long as public goods make up a minority of the economy, taxes make up the difference.
But in the modern era, things made of atoms (say, compact discs) are being replaced by things made of bits (MP3 files). Even 3D printing highlights how the plans for the object will allow us to disintermediate the manufacturer.
This then means that the occurrence of market failure will become increasingly common.
We already see the newsfeed of economics do not make much sense in the traditional sense. We have strong economic growth being witnessed without an increase in wages.
We have asset prices rising even though underlying dividend and/or rental yields falling. Interest rates at the long end of the curve continue to remain at or below pre-crisis levels even though robust economic growth has returned.
More specifically, asset prices in the region remain stable to rising, even though oil prices are far lower than 2014 levels. Central banks and government agency statistics are already under increasing pressure to make sense of this, as traditional economists come to terms with “the end of theory”. Dubai, like much of the developed world, is engulfed in a technological revolution; a tectonic shift of the underlying economic workplace, where the majority of jobs which are repetitive task-oriented are being replaced far more effectively by software that is loop-based with small variations.
Today’s flexible software programming promises (or threatens) to free us from the drudgery of all repetitive tasks, forcing the labour force away from expertise that it can impart, towards more ingenuous Rube-Goldberg like opportunities.
It is the transition of this shift that is producing the anomalies in the traditional narrative, anomalies that are becoming increasingly more frequent. However, when viewed from the new paradigm, the rise in asset prices (not only in Dubai) do things appear to make more sense.
Asset markets — Dubai’s real estate market in particular — reflect not merely the health of the local economy, but more importantly the health of the global economy and the state of the liquidity markets. This statistical relationship not only highlights the role and mystery of capital, it emphasises that the Rube-Goldberg process will play an increasingly prominent role in distinguishing winners and losers over the next decade as industry after industry gets dislocated by the forces of disruptive (and destructive) capitalism. John Donne wrote the words “no man is an island entire of itself …” more than 400 years ago. And his words are more true, in areas from economic theory to scientific discovery.
As investors navigate through the economic chessboard, they must be willing to abandon traditional economic narratives (capitalism versus socialism) in favour of a more nuanced mindset that allows economic agents to recalibrate their expectations of both asset prices and economic growth amid an era that is in one of the great hinge periods of history.
-The writer is Managing Director of Global Capital Partners.
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