Tags: David Stockman | Federal Reserve | bubbles | Russia

Former Reagan Budget Head David Stockman: Russia Could Be the Next 'Black Swan'

By Dan Weil   |   Friday, 18 Jul 2014 09:52 AM

The Federal Reserve has created bubbles in asset markets, and the conflict in Ukraine and Russia may pop them, says David Stockman, former director of the Office of Management and Budget under the Reagan administration.

"We're at the very edge of a bubble which has been inflating since early 2009, and as a result of that any time now we could be hit by something you don't expect like this incident in the Ukraine or anything else that will take the market down in a big way," he told CNBC.

He was referring to the downing of a Malaysia Airline plane over eastern Ukraine Thursday. He said turmoil in Russia could spark the next series of "black swan" events and cause the S&P 500 to lose "hundreds" of points.  (Editor's Note: The black swan theory or theory of black swan events is a metaphor that describes an event that comes as a surprise, has a major effect, and is often inappropriately rationalized after the fact with the benefit of hindsight.)

Editor’s Note:
Dow Predicted Will Hit 60,000 — Buy These 4 Stocks Now

Meanwhile, the Fed has gone way too far in its easing program, Stockman argued.

"The short interest has been killed by the Fed's constant intervention," he noted. "As a result you have dangerously fragile markets, so it could easily drop by hundreds of points if things [in Ukraine] go far enough."

The Dow closed at 16,976.81 Thursday, after dropping 0.9 percent.

Stockman agrees with the Fed's assessment that valuations are stretched in some parts of the stock market. "If you look at obviously the small caps in the speculative sectors, we're way over the deep end," he explained.

"We've had 68 months of 0 percent interest rates running. There's nothing like this in history. . . . We'll be lucky to get a 2 percent growth, which is really the natural capacity of the economy that has nothing to do with all this Fed stimulus that is creating bubbles," Stockman stated, noting that the Fed "has really lost control of policy."

"We've set ourselves up for a big fall and where this leads to, I'm not sure," he said.

While concern about the jet shoot-down jolted stocks Thursday, the effect may not last long, some experts say. "People are using any downward movement as an excuse to buy the market," JJ Kinahan, chief strategist at TD Ameritrade, told The Wall Street Journal.

Editor’s Note: Dow Predicted Will Hit 60,000 — Buy These 4 Stocks Now

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