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Originally published March 11 2014

Nobel prize winner warns of rising stock market bubble

by J. D. Heyes

(NaturalNews) We're not much into random doom-and-gloom predictions, but we have pointed out before that a country as far in debt as we are - and getting deeper in debt by the day - cannot sustain itself forever.

So what happens to a country's financial markets when its government tanks economically? You guessed it. The markets tank as well.

But a failing government isn't the only thing that can crash a market. Other factors contribute as well, such as when the market finally adjusts after an over-exuberant period. These are called "bubbles," and it is what happened in 2007 when inflated home prices finally fell back to Earth.

Now, a respected American Nobel Prize winner in economics believes that "sharp rises in equity and property prices could lead to a dangerous financial bubble and may end badly," Reuters reported:

Robert Shiller, who won the esteemed award with two other Americans for research into market prices and asset bubbles, pinpointed the U.S. stock market and Brazilian property market as areas of concern.

It could all 'end badly'

"I am not yet sounding the alarm. But in many countries stock exchanges are at a high level and prices have risen sharply in some property markets," Shiller told Germany's Der Spiegel magazine.

"That could end badly," he continued.

"I am most worried about the boom in the U.S. stock market. Also because our economy is still weak and vulnerable," he noted, adding that the financial and technology sectors were overvalued at present.

In addition to examining the U.S. market, Shiller also looked at "drastically" higher home prices in Rio de Janeiro and Sao Paulo in Brazil over the past five years (sound familiar?).

"There, I felt a bit like in the United States of 2004," he told the magazine. He added that he had begun hearing arguments about investment opportunities and a growing middle class that he heard in the U.S. around the year 2000.

More than anything else, the collapse of the U.S. housing market led to the 2008-2009 global financial crisis, tanking the economy and markets like nothing since the Wall Street crash of 1929.

"Bubbles look like this. And the world is still very vulnerable to a bubble," he said.
As described by Reuters:

Bubbles are created when investors do not recognize when rising asset prices get detached from underlying fundamentals.

In other words, when homes sell at two and three times their worth to people who, traditionally, cannot afford them.

Others have predicted that a 'correction' is due

There are other economists who have also recently predicted a bad time ahead for financial markets.

He may be off somewhat in his timing, but, in August, Marc Farber, publisher of Gloom, Boom & Doom Report, said a "1987-style" market crash was coming in the latter part of 2013.

"In 1987, we had a very powerful rally, but also earnings were no longer rising substantially, and the market became very overbought," Faber said on CNBC's "Futures Now" program. "The final rally into Aug. 25 occurred with a diminishing number of stocks hitting 52-week highs. In other words, the new-high list was contracting, and we have several breaks in different stocks."

Continuing, he said, "The only way this market can go up is if the 10 or 50 stocks that are very strong continue to drive the market higher, with the majority of stocks having actually peaked out. Some of the tailwinds we've had - such as massive monetization and falling interest rates - are no longer in place."

What's even more troubling is that, despite some growth in jobs and the economy, Wall Street reacts badly whenever there is news that the Federal Reserve might actually stop printing so much phony money. Why is that? Because the Fed's money has largely been going to the financial sector.

And remember, Shiller said that is one of the U.S. sectors that is overvalued.


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