Roubini Warns: 'Every Boom Eventually Leads to a Crash'

Tuesday, 06 May 2014 07:41 AM

By Dan Weil

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The torrid rallies in many financial markets during the past few years might end in a meltdown, according to renowned experts such as New York University economist Nouriel Roubini.

The luminaries voiced their sentiments at the Milken Institute's prestigious Global Conference in Los Angeles last week, CNBC reports.

As for Roubini, he warned that continued central bank easing could spark the next crisis, according to the news service.

Editor's Note: CIA Global Forecast: Prepare for the Worst

"The risk is that they exit too late and they cause the mother of all bubbles," he said. "We saw what happened last time around: every boom and bubble eventually leads to a bust and a crash." Roubini was referring to the 2008-09 financial crisis.

A catastrophe is unlikely in the next year, but the odds increase in the 12 months after that. "I would worry about that one," Roubini noted.

Joshua Harris, co-founder of private equity titan Apollo Global Management, also is concerned about the Fed.

"The quantitative easing (QE) and the excess money and the low interest rates have driven pricing up of almost all financial assets to beyond what their intrinsic value might be," he argued, according to CNBC.

QE has expanded the Fed's balance sheet to more than $4 trillion.

"So even though we can all chat about the benevolent growth environment that exists in the U.S., and to a lesser extent globally, the ability to make money and invest wisely on that is very challenging right now, because you're starting at a point in the valuation cycle that is very aggressive," Harris explained.

"Almost every asset is overvalued."

Another Apollo co-founder, Marc Rowan, is wary of trouble on the horizon too. "I do see many signs of the bubble of the future — the default specter," he said, according to CNBC. "I agree that short term we're not likely to see that, but all the danger signs are there of a future crisis."

One problem is that bank lending terms are slipping, Rowan said. "Covenants have been stripped away," he insisted.

"Cov-lite is the norm. Senior debt levels are actually higher than they were in 2007, although total debt is not quite where it was. We're back to doing exactly the same things that were done in the credit markets in the crisis."

Meanwhile, Jeremy Grantham, chief investment officer of money manager GMO, predicted in his quarterly letter to investors that a stock market crash, to the tune of 50 percent or more, is coming around November 2016.

He thinks the S&P 500 will climb past 2,250 by the next presidential election. Around that time, "the market bubble will burst, as bubbles always do, and will revert to its trend value, around half of its peak or worse, depending on what new ammunition the Fed can dig up," Grantham wrote.

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