Speaking in an interview with CNBC on Friday, the contrarian investor warned “we have a bubble in everything, everywhere,” soon after the Dow Jones and the S&P 500 ended the day’s trading session at new all-time highs.
Faber, who has been a staunch critic of the so-called economic recovery in the United States and Europe, believes the Federal Reserve’s intense quantitative easing program and near-zero interest rates have inflated stock prices. If the stock market decreases then it could be because of an interest rate hike “not engineered by the Fed” but rather a spike in bond yields.
In addition, the markets will experience a shock once another recession hits the global economy.
“The big surprise will be that the global economy slows down and goes into recession. And that will shock markets,” said Faber, who added that there would be dire straits and a lack of confidence in the economies of the world if governments and central banks can’t recovery even with all of the money pumping by the Fed.
Right now, Faber is more concerned about the rising cost of living for American consumers: “Their cost of living have gone up more than the salary increases, so they’re getting squeezed. So that’s why retailing is not doing particularly well.”
Others worry about bubble environment
Contrarian investors like Faber aren’t the only ones sounding the alarm when it comes to bubbles. There have been a number of mainstream, establishment economists and entities discussing the various bubbles popping up all over the markets.
We reported last week that a group of Deutsche Bank strategists wrote that the international government bond market is facing a bubble because it is already experiencing quite a bit of frothiness. The concern is that the bond market has nowhere else to go to because it’s already in the hands of governments and central banks.
“The worry is that there is nowhere left for this bubble to go given that it is now in the hands of the lenders of last resort (governments and central banks with regulators ensuring other large captive buyers),” the economists wrote. “Although we think this bubble needs to be maintained to ensure the solvency of the current financial system, the best case scenario is that it slowly pops over time via negative real returns for bondholders. The worst-case scenario being future restructuring.”
Fed Chair Janet Yellen, meanwhile, concurred this past summer that stocks are in a bubble, but noted that the U.S. central bank wouldn’t raise rates in order to burst them. Yellen argued that it should be up to financial regulatory bodies to bring about stability to markets rather than monetary policy, though it’s the Fed’s artificial rates and money printing that’s producing bubbles.
In June, Wilbur Ross, CEO of WL Ross, averred that the sovereign debt market bubble will pop within the next two years, citing the 10-year U.S. Treasury yields hitting a record low in 2012.
“I’ve felt for some time that the ultimate bubble, when we look back a few years from now, is going to be sovereign debt, both U.S. and other, because it’s way below any kind of reversion to the mean of interest rates,” Ross told CNBC. “If you look at where the U.S. 10-year had averaged over the 10 preceding years, it’s around 4 percent. If it reverts back to that level at some point, there will be terrible losses in the long-term Treasury market, and those will probably be accentuated in other areas of fixed income.”
Bubbles, bubbles are indeed everywhere.
- Source, Economic Collapse News
