FT's Michael Mackenzie: Only Inflation Scare Will Burst Market Bubbles

Friday, 18 Jul 2014 12:51 PM

By Dan Weil

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While the Federal Reserve and its Chair Janet Yellen warned of "stretched" valuations in various equity and debt securities this week, don't expect the Fed to do anything about it beyond jawboning, says Michael Mackenzie of the Financial Times.

"For all the concern expressed by Yellen and the central bank this week that certain asset classes were rather rich, we are unlikely to see pre-emptive action in the form of tighter rates to nip excessive or bubbly prices, until the economy is much stronger and inflation is firmly established," he writes.

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Many experts are worried that the Fed's massive easing program has sparked asset bubbles.

"From record equity prices to meager risk premiums on all types of bonds, investors have pumped money into a multitude of financial assets and property thanks to the central bank’s strenuous stimulus efforts," Mackenzie said.

The Fed and Yellen specifically cited high-yield bonds, leveraged loans, small-cap stocks, biotechnology stocks and social media stocks.

So what can change the equation? "Only a genuine inflation scare can alter investors’ mindsets, but by then any major market reversal could well damage the economy and central bank credibility," Mackenzie writes.

Some experts say the Fed is moving too slowly to withdraw its stimulus. "I think they are behind the curve," David Gerstenhaber, president of Argonaut Capital Management, told CNBC.

And there could be consequences for the stock market, he says. "If the Fed loses credibility, you'd be in for a good correction on the stock market, 10 percent easily."

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