The `Skyscraper Curse' Is Worth Watching in 2007

William Pesek

By William Pesek

Dec. 11 (Bloomberg) -- Hundreds of thousands of Taiwanese have been taking to the streets of Taipei in recent months to oust their president, prompting observers to wonder what gives.

Corruption is behind the protests, many will say. Prosecutors have been questioning President Chen Shui-bian over a series of scandals. Others point to his unsteady handling of relations with China, which considers Taiwan a renegade province. I'm wondering if it might make more sense to look at the skyline.

Standing out amidst the tangle of skyscrapers is the 1,671- foot (509 meters) Taipei 101, which is currently the world's tallest building. Its presence, coupled with a worsening political crisis that could trip up the economy, reminds one of the ``Skyscraper Curse.''

A bizarre suggestion, perhaps, and certainly an unscientific one. Yet history shows an uncanny correlation between tallest building projects and financial crises. Be it in Kuala Lumpur in 1997, Chicago in 1974, New York in 1930 or the biblical Tower of Babel long ago, mankind's penchant for architectural overreach is a strangely reliable omen of troubles.

A coincidence? Perhaps, yet economists such as Mark Thornton, senior fellow at the Ludwig von Mises Institute in Auburn, Alabama, argue that skyscrapers can speak volumes about a nation's wealth, technological prowess, ambition and, perhaps most importantly, hubris.

Rome's Last Days

``It's these features that make skyscrapers, especially the construction of the world's tallest building, a salient marker of 20th-century business cycle,'' Thornton argues.

For a time in the early 2000s, analyst Andrew Lawrence, then with Deutsche Bank Securities in Hong Kong, published a periodic ``Skyscraper Index'' for investors. As 2007 approaches, perhaps we need to start producing more building-project barometers.

Take Dubai, which is undergoing one of history's greatest construction booms. After visiting the city recently, economist Claudia Zeisberger of the Asia Pacific Institute of Finance at Insead in Singapore quipped: ``All the building going on made me feel like I was experiencing the last days of ancient Rome.''

Perhaps it is just a coincidence, but Dubai is putting the finishing touches on a 2,300-foot building that will top Taipei 101. In China, the 101-story Shanghai World Financial Center will become the most populous nation's tallest building. And a residential construction project in Chicago will top the Sears Tower, currently North America's tallest skyscraper.

Excess Cash

In India, developers are planning to build a 140-story skyscraper in the city of Gurgaon, near New Delhi. In 2008, South Korea will complete the 1,903-foot International Business Center, which the government hopes will solidify Seoul's place as a global business hub. Massive skyscrapers also are being considered from Australia to Russia to Brazil.

``It all makes sense given current conditions,'' Thornton says.

Even though the Federal Reserve, Bank of Japan and European Central Bank have been raising interest rates, markets are still awash in excess cash. Loose monetary policies have fueled investment frenzies in London, Shanghai, Tokyo and elsewhere. They have increased the amount of leverage in the global financial system, raising the stakes if growth slows markedly in 2007.

Over-investment and financial speculation led to each of the Skyscraper Curse episodes during the 20th century. Coincidence or not, history suggests such projects are often less about technological innovation than economic booms. The desire to have the tallest building correlates suspiciously well with sudden capital inflows that pump up credit creation and confidence.

Presaging Gloom

In 1908, for example, New York's 47-floor Singer Building opened, followed by the 50-story Metropolitan Life Building. Both were planned, financed and raised while the U.S. was in the midst of the Panic of 1907, a credit crunch that necessitated help from financier J.P. Morgan.

In 1929, the opening of 40 Wall Street and the Chrysler Building were harbingers of the worst-ever U.S. meltdown, the Great Depression. A year later, the Empire State Building became the world's tallest building, presaging years of gloom.

The 1970s saw the completion of New York's World Trade Center and Chicago's Sears Tower. They opened amid stagflation in the U.S. economy, a fiscal crisis in New York and the breakdown of the Bretton Woods monetary system.

Tall Task

More recently, Malaysia's 1,483-foot Petronas Towers were being completed during the Asian crisis. And in 2004, Taipei 101 grabbed the tallest-building title. That was the year in which President Chen survived an assassination attempt and tensions with China hit a fever pitch.

I guess we will stay tuned to events in Taiwan. Ditto for the architectural one-upmanship afoot in countries hoping to draw attention to their skylines.

Thickening the plot: the plunge in the U.S. dollar analysts have predicted for years may come in 2007. Other risks include a slowdown in China, higher global interest rates and inflation and geopolitical risks from North Korea, Iran, Iraq and a number of other regions. Oil prices also might climb anew.

Add in the rapid increase in the number of hedge funds and the proliferation of the so-called yen-carry trade. The trade, a favorite among hedge-fund managers, involves borrowing in ultra- low-interest-rate yen and re-investing the funds in riskier, higher-yielding assets elsewhere. It is believed to have greatly increased leverage in markets around the globe.

None of this means a crisis is in the cards -- not the smorgasbord of risks out there, not the construction trends, not the vagaries of boom-and-bust cycles. Yet a smooth year would mean avoiding the Skyscraper Curse. History suggests that's a tall task.

(William Pesek is a Bloomberg News columnist. The opinions expressed are his own.)

To contact the writer of this column: William Pesek in Tokyo at wpesek@bloomberg.net .

Last Updated: December 10, 2006 13:52 EST