When markets play Russian roulette

In normal circumstances last night’s fall on Wall Street would be seen as nothing more than a normal correction after a strong rise.

But all the US share traders know that they are playing a dangerous game of Russian roulette. When the US Federal Reserve starts reducing (tapering) the liquidity in the system by winding back its buying of mortgages there will be a sharp fall in the asset classes that have been boosted by quantitative easing. That includes US shares.

And so every time there is a fall in the market there is a rash of speculation that the next time the Federal Reserve fires the gun the barrel will contain the tapering bullet and prices will fall.

I must say the sharp rise in the value of the Bitcoin online currency market is a clear sign of how the excess liquidity in the system is creating bubbles (Is Bitcoin rolling towards longevity?, November 28).

Robert Shiller, one of the three Americans who won the 2013 Nobel Prize for economics, nominates the Brazilian property market and the American share market as among the most concerning asset classes.

As it turns out, the speculators are turning their backs on many commodities, which has been contributing to the reduction of the Australian dollar and helping our non-mining industries create employment. 

I don’t think anyone really knows when the US Federal Reserve is going to start tapering. What we do know is that fear of the tapering is now holding back US employment and investment (A world-class flaw in the Fed’s job plot, November 21).

Comments like those from Shiller fuel that nervousness.

I think the Americans are smart enough to realise this earlier rather than later and so the current moves in the market are signs that tapering is going to come earlier than expected.

ANZ Bank chief executive Mike Smith expressed a similar view to me about the market effects of tapering, but he believes that it will not take place until the end of 2014. And, of course, he could well be right because this is a Russian roulette-style game without precedent.

I quoted Robert Shiller because he won the Nobel Prize for economics in October for his research that has improved the forecasting of asset prices in the long term and helped the emergence of index funds in stock markets. (He shared the awards with fellow economists Eugene Fama and Lars Peter Hansen.)

In an interview with Germany's Der Spiegel magazine he warns that in many countries the stock price levels are high, and “in many real estate markets prices have risen sharply... that could end badly."

Shiller says the real estate market in Brazil was worrying because it is similar to the US housing boom of the mid-2000s.

Shiller believes the world is still very vulnerable to bubbles.

"I find the boom in the US stock market most concerning… but I'm not sounding the alarm yet”.