Nouriel Roubini, the respected New York University economist, says the Federal Reserve’s quantitative easing (QE) is brewing a credit bubble that means trouble down the road.
Through QE, the Fed has injected more than $2 trillion into the financial system over the last five years,
“The risk from QE isn’t goods inflation; it’s not going to be a rout in the bond market, because the Fed will exit slowly,” Roubini tells Yahoo. “The risk is like during the 2003-06 cycle. We exited very slowly, and we got an asset bubble.”
But he thinks this bubble could be “bigger than 2003-06.”
Meanwhile, many commentators have trumpeted the arrival of a currency war, and Roubini says the conflict is inextricably intertwined with QE.
Growth is below trend in advanced economies, thanks to slow domestic demand. “So how can you achieve strong economic growth?” Roubini asks.
“In every economy the only way to do it is more external demand,” he answers. “How do you achieve that? Through a weaker currency.
“And how do you achieve that? Through more QE. There’s a QE war that’s a proxy for a currency war,” Roubini says.
Retired hedge fund manager Andy Kessler says that when the Fed finally withdraws its easing, stocks will be in big trouble.
Perhaps the Fed has realized that “the experiment to kick-start the economy with near-zero interest rates has failed,” he writes in The Wall Street Journal.
“The prospect of higher interest rates is like the Sword of Damocles hanging over the stock market. Be advised that in selloffs, stocks fall into the valley of despair.”
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Beware the bond bubble in 2013
By Hibah Yousuf @CNNMoneyInvest January 16, 2013: 10:41 AM ET
After three decades of declines, interest rates are near rock bottom, and many Wall Street experts think the bond bubble may be about to burst.
In fact, nearly 40% of the 32 investment strategists and money managers surveyed by CNNMoney think that interest rates will begin to rise in 2013, and another 30% say the shift will begin in 2014.
That would be even sooner than the Federal Reserve’s projections. The central bank doesn’t expect to raise the federal funds rate, the key interest rate that influences overall interest rates, until some time in 2015. The Fed said last monththat it will keep its stimulative policies in place until the unemployment rate falls to 6.5%, which it doesn’t think will happen before then.
“Like it’s been in the case of Japan, low interest rates can go on much longer than expected, but right now it seems that all the stars are aligned for interest rates to rise,” said Jeff Weniger, senior investment analyst at BMO Private Bank. “But ultimately, whether it happens in 2013, 2014 or 2015 doesn’t matter too much. What matters is that you’re not invested in bonds when they do rise.”
That’s because investors could get stuck with big losses if they wait to sell until after rates rise, since the value of bonds decline when interest rate move higher.
The threat is especially worrisome for individual investors, who have been rushing into bond funds while fleeing the stock market in search of safety and the preservation of capital in the aftermath of the financial crisis.
According to fund flow tracking firm EPFR, individual investors have plowed nearly $210 billion in bond mutual funds and ETFs since the beginning of 2008, while yanking almost $700 billion out of U.S. stocks. In 2012 alone, investors added more than $90 billion to bonds, while pulling more than $150 billion from stocks.
Plus, the fact that the bond market has become so crowded is a danger in itself, said Ryan Detrick, senior technical analyst at Schaeffer’s Investment Research.
“Bonds are definitely an area we would lighten up exposure,” he said. “If we’ve learned anything over the past 100 years of market history, it is that when the crowd thinks one way, you might want to go the other way. Should you have some bond exposure? Yes. But should you be overweight bonds? Absolutely not.”
Experts are most worried about bonds with longer maturities, and advise investors to shift into shorter-term notes, or into debt that offers floating rates — those that would rise along with the market.