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Feldstein: 'Increased Chance' Stock Crash Will Erase $9.5 Trillion in Wealth

Feldstein: 'Increased Chance' Stock Crash Will Erase $9.5 Trillion in Wealth

By    |   Tuesday, 21 November 2017 01:26 PM

Harvard economics professor Martin Feldstein is warning savvy investors that he sees an "increased chance" stocks will soon plunge despite seemingly hitting new record highs on a daily basis.

He blames the fragile financial system is the result of the Fed’s aggressive bond buying in the wake of the financial crisis, MarketWatch quoted him as saying.

As a result, $9.5 trillion in wealth could disappear if the Fed doesn’t aggressively hike interest rates, MarketWatch quoted him as saying.

Speaking recently at the Cato Institute, he called on the Fed to tighten monetary policy swiftly, bringing the fed funds rate up to 4% by the end of 2019 from just over 1% now.

Feldstein said that former Fed chairman Ben Bernanke “was right” when he warned excessive risk-taking was a side effect of bond purchases and the extremely low interest rates they engendered, MarketWatch reported.

“There is obviously now an increased chance that share prices will decline,” Feldstein said.

Meanwhile, the bull run since 2008, in U.S. stocks in particular, against a backdrop of steady economic growth, is leaving even skeptical fund managers and analysts reluctant to predict a near-term pullback, according to participants at the Reuters Global Investment 2018 Outlook Summit in New York.

Still, even as they advise investors to stay in the market, they also see the need to be wary of what they see as widespread complacency about valuations and be prepared for a bumpy ride in the year ahead.

The S&P 500, for example, now trades at 18 times next year’s earnings, according to Thomson Reuters data, versus a long-time average of around 15.

Stocks with small market capitalizations are even pricier still, at nearly 25 times next year’s earnings, making them more expensive than they have been 96 percent of the time over the past three decades, according to Joel Greenblatt, co-chief investment officer at Gotham Asset Management LLC.

Markets this pricey tend to deliver low-single digit percentage returns in the ensuing 12 months, Greenblatt’s research shows.

“People and pension plans have had to put more money in the equity markets and that has been beneficial to them - so they’ve actually gotten rewarded for bad behavior,” said Avenue Capital Group LLC co-founder Marc Lasry.

“What I find amazing is that nobody believes any exogenous event is going to occur. I worry about the unexpected.”

Geopolitical risks such as a Chinese economic slowdown due to high debt levels, the North Korean missile crisis, political changes in Saudi Arabia that could disrupt Middle East oil supplies, and the outlook for the UK economy due to the Brexit decision last year are all being discounted by investors.

Markets have not been reacting normally to risk, said Michael Vranos, who oversees $6.5 billion at Ellington Management Group LLC.

“I’ve personally been surprised how the market has shrugged off all this geo-political risk,” he said.

BlackRock Inc. Chief Executive Larry Fink said economic growth in Europe, the U.S. and Asia is happening at the same time for the first time since the 2007-2009 global financial crisis. That is good news, but it has lulled some investors to sleep.

“The biggest risk I see in the world is this benign confidence that volatility is not creeping up,” he said.

Fund managers surveyed by Bank of America Corp (BAC.N) are wading into the stock market. The average investor they surveyed was holding only 4.4 percent of their portfolio in cash, the lowest level since 2013, as they boosted stock buying.

“Earnings are going to be okay,” said Mario Gabelli, chief executive of GAMCO Investors Inc.

“The business sector is feeling more confident.”

The U.S. stock market in particular has also benefited this year from expectations for a tax overhaul promised by President Trump.

(Newsmax wire services contributed to this report).

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Harvard economics professor Martin Feldstein is warning savvy investors that he sees an "increased chance" stocks will soon plunge despite seemingly hitting new record highs on a daily basis.
harvard, martin feldstein, stocks, plunge
Tuesday, 21 November 2017 01:26 PM
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