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Fed stimulus program raising concerns; Some critics say policy creating asset bubbles.

Byline: Josh Boak

WASHINGTON -- The Federal Reserve's super-low interest-rate policies have inflated a slew of dangerous asset bubbles. Or so critics say.

They say stocks are at unsustainable prices. California homes are fetching frothy sums. Same with farmland, Bitcoins and rare Scotch.

Under Chairman Ben Bernanke, the Fed has aggressively bought bonds to try to cut borrowing rates and accelerate spending, investing and hiring. Its supporters say low rates have helped nourish the still-modest economic rebound.

Yet some say the Fed-engineered rates have produced an economic sugar high that risks triggering a crash akin to the tech-stock swoon in 2000 and the housing bust in 2006.

On the eve of the Fed's latest policy meeting, here's why -- or why not -- these three assets might be in a bubble:


The Standard & Poor's 500 stock index has jumped about 26 percent since the Fed announced a year ago that it would buy $85 billion in bonds each month. And since the Fed's first round of bond buying at the end of 2008, stocks have soared 124 percent. Stocks outside the United States have also surged as other central banks have followed the Fed with their own low-rate policies. Germany's DAX is up 20 percent, Japan's Nikkei index 46 percent.

Why it's a bubble:

By artificially depressing bond yields, the Fed has led more investors to shift money into stocks. Such a flood of cash can swell share prices without regard to corporate earnings. Once the Fed unwinds its support, many investors could abandon stocks and send shares tumbling. ''I am most worried about the boom in the U.S. stock market'' because of its disconnect from a ''weak and vulnerable'' economy, Robert Shiller, the Nobel Prize-winning Yale economist, told the German magazine Der Spiegel a few weeks ago. Shiller knows a bubble when he sees one. He accurately warned of both the tech and housing bubbles before they burst.

Why it isn't:

One key measure assesses stock prices relative to corporate profits. A healthy price-earnings ratio is around 15 -- or $15 a share for each dollar of profit. The current P/E ratio is about 18.4, slightly above average but probably no cause to panic. Janet Yellen, nominated to succeed Bernanke, said last month: ''If you look at traditional valuation measures ... you would not see stock prices in territory that suggests bubble-like conditions.''


Rare decades-old Scotch could give investors a terrible hangover. Over the past five years, prices have shot up 170 percent, according to an index of auctions and sales by the Scotland-based firm Whisky Highland. It's among the investments that have grown more alluring as interest rates have fallen. The buyers aren't just tycoons with tweed blazers, empty snifters and money to burn. Auctions are fetching bids from Chinese nationals, while firms such as Whisky Highland offer guidelines for investing. There's ''a perception that this is a good area of investment at a time when more traditional investments are producing low rates of return,'' says Martin Green, a whisky specialist for the auction house Bonhams.

Why it's a bubble:

Regardless of how high someone bids, Scotch still tastes the same. It generates returns by appreciating in price, not producing income as stocks, bonds or real estate can. By definition, whisky, wine and fine art are speculative and can abruptly lose favor with investors. Not to mention: The $41,077 spent on a 60-year old Macallan -- which sold last month at a Hong Kong auction -- can literally be poured down the drain.

Why it isn't:

What inflates bubbles beyond rationality is greed. Green says most buyers acquire Scotch for other reasons: ''the mystical allure of the taste,'' the thrill of the chase, the pursuit of status. ''One of the motives for Chinese buyers is social aspiration,'' he says.


The last housing bubble ignited the worst economic catastrophe since the Great Depression. Home prices became inflated in part from an influx of cash and low rates driven by the Fed and other central banks. And in recent months, prices have again soared in some hot U.S. markets.

Why it's a bubble:

It depends on location, location, location. All-cash sales, low rates and tight supplies have lifted prices in areas like New York City and Washington, D.C. Fitch Ratings estimated in November that a worrisome 17 percent of the U.S. home market is overvalued, a risk because much of the buying is tied to investments and house-flipping. Coastal California is ''approaching bubble-year peaks,'' with Bay Area prices nearing the ''environment in 2003,'' Fitch said. Some leading forecasters have also warned of bubbles in London and areas of Canada and Norway. New York University economist Nouriel Roubini worries about bubbles in Switzerland, France, India, Indonesia, Turkey, Israel and Brazil.

Why it isn't:

At least in the United States, some safety valves are in place that didn't exist during the previous housing bubble, Roubini wrote this month. Lending standards are tighter. Banks are cushioned from possible losses from greater capital in reserve. And homeowners have more home equity this time.
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Title Annotation:Business
Author:Boak, Josh
Publication:Telegram & Gazette (Worcester, MA)
Date:Dec 17, 2013
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