The Federal Reserve has inflated an asset bubble and that’s going to damp market returns, perma-bear Marc Faber, publisher of The Gloom, Boom & Doom Report, told CNBC Tuesday.
Faber’s remarks follow downbeat assessments from the likes of former Pimco co-chief executive Mohamed El-Erian and Nobel economics laureate Robert Shiller, who have recently spoken on the increasing odds of a US recession and frothiness in stock markets, respectively.
“Say you’re a young person and you’re just starting to work. So take me in the 1970s. In the U.S., with 20 hours of work, I could buy the S&P 500 (.INX). Now you need more than 90 hours of work to buy the S&P 500 if you’re young, with a medium income,” Faber told CNBC in an interview.
“The Fed has basically created with their colleagues in Japan and at the European Central Bank (ECB) and the Bank of England (BOE), they’ve created a colossal asset bubble. And the returns going forward will be disappointing.”
Global central banks have created easy liquidity in markets via zero interest rate policies, and sometimes negative-rate policies, as well as through asset purchases. That’s driven up prices across a range of assets.
Despite Wall Street’s gains Monday, Faber noted that the gains are not evenly spread among stocks.
“The composition of an index is that it’s usually capitalization weighted. So one stock that goes up vertically could theoretically drive up an index and 99 percent of the shares don’t make new highs,” Faber said. “We had a strong day on Wall Street, but on the New York Stock Exchange, out of more than 3,000 shares that are being traded, only less than a hundred made a 12-month new high. The advance is very narrow.”
He’s seeing the same action in the art and property markets.
“Some markets are still strong, but the bulk is no longer moving up so the advance of asset price inflation has been narrowing significantly,” Faber said.
But while Faber is known as Dr. Doom for his pessimistic outlook, this time he’s not entirely alone, with a chorus of other voices also growing concerned.
On Monday, economist El-Erian put the risk of a recession in the United States at 25 percent to 30 percent.
“The road we’re on is going to end. We cannot rely on central banks, and central banks cannot be the only game in town when it comes to policy,” El-Erian, who is the current chief economic advisor to Germany’s Allianz (ALV-DE), parent of Pimco, told CNBC.
In September, Yale professor Shiller told CNBC that investor sentiment is looking similar to conditions just before the dot-com bubble popped in 2000, possibly signaling a bubble. Other analysts have called time on various asset classes, including property, high-yield bonds and technology stocks.
Written by Leslie Shaffer of CNBC