Tags: Rickards | Fed | bubbles | stock

James Rickards to Moneynews: Fed Inflating Bubbles in Stock, Housing Markets

Wednesday, 20 Feb 2013 04:37 PM

By John Bachman and Dan Weil

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The Federal Reserve’s massive easing program is creating bubbles in the stock and housing markets, says economist, investment banker and "Currency Wars" author James Rickards.

“Equity prices are higher, housing prices are higher, but they’re higher for the wrong reason,” Rickards tells Newsmax TV in an exclusive interview. “They’re higher because of money printing. In other words, these are new asset bubbles forming.”

Major stock indices touched five-year highs Tuesday, and home prices, as measured by the S&P/Case-Shiller 20-city index, rose by the most in six years during the 12 months ended in November.

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Equity and home prices could well have further to go, says Rickards, author of “Currency Wars: The Making of the Next Global Crisis.”

Declassified: ‘Financial War’ Could Wipe Out 50% of Your Wealth’

“One of the things we know about bubbles is they go on a lot longer than people expect,” says Rickards, senior managing director of Tangent Capital Partners.

“Of course they also pop unexpectedly, but we’re not at that stage yet. We’re closer to the beginning than the end of bubbles in housing and stocks caused by money printing by the Fed.”

So stocks are likely to perform well this year, but for the wrong reasons, Rickards says. “It’s not that there’s fundamental strength in the economy.”

The economy contracted 0.1 percent in the fourth quarter, and many economists expect it will expand about 2 percent this year.

Rising asset prices represent the Fed’s exact aim, Rickards says. And he expects the easing to continue, perhaps into 2015. “In theory that creates a wealth effect. People feel richer because their assets are going up, so they might be willing to spend more, etc.,” Rickards says.

But he doesn’t think it will work in the long run. “At the end of the day, a bubble’s a bubble.” For the short term, at least enjoy the ride because stocks are headed higher, Rickards says.

Whatever ends up happening with automatic spending cuts (the sequester) and other elements of fiscal policy, uncertainty reigns in the private sector, putting a damper on activity there, he says.

“We’ve got uncertainty about healthcare costs, uncertainty about tax policy, uncertainty about spending policy, uncertainty about regulatory policy,” Rickards says. “You pile it all up, and the private sector says quite sensibly, 'let’s keep our liquidity, stay on the sidelines.'”

He says Japan’s policy to devalue the yen will end up intensifying the currency war that began in 2010 with the Fed’s intensive easing.

Japan is pushing its currency downward not to boost exports but rather to spark large increases in import prices, Rickards says. "The reason they’re doing it is because they want to import inflation."

“It probably won’t be successful, because that may be a little short-term boost, but other countries are going to do the same thing,” he says. “Other countries are going to devalue their currencies.”

Actually, at some point Japan will succeed in boosting inflation, Rickards says. “But why is that a good thing? What you need is real growth.”

Declassified: ‘Financial War’ Could Wipe Out 50% of Your Wealth’

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