In February 2013, NYU professor Nouriel Roubini made the call that US markets had entered the “mother of all asset bubbles.”
With the rally in stocks that we’ve seen this year and a surge in high-yield debt issuance, Roubini said we’re now at the midpoint of the bubble, in an interview with Yahoo Finance.
Next year may see more gains across markets, but the bubble, bigger than the one before the 2008 recession, will pop in 2016.
Because there is low growth, and low inflation in much of the world, there is liquidity that’s leading to asset inflation, Roubini said:
“I think that this frothiness that we have seen in financial markets is likely to continue, from equities to credit to housing, and in a couple of years, most likely, this asset inflation is going to become asset frothiness and eventually an asset and a credit bubble and eventually any bubble ends up in a bust and a crash. I would say that valuations in many markets, whether it’s government bonds or credit, or real estate, or some equity markets, are already stretched. And they’re going to become more stretched as the real economy justifies the slow exit, and all this liquidity is going to go into more asset inflation.
So two years down the line, we could have this shakeout … 2016 I would say.”
His advice for investors is to be underweight US equities next year as stock valuations increase, particularly in the biotech, technology and social media sectors. Emerging markets that are heavy oil importers and will benefit from lower oil prices are attractive.