Global crash imminent, warns expert

by Joel Bowman
ArabianBusiness
Nov. 21, 2007

A sharp downward correction is due in the global markets as real estate, stocks and energy soar to record highs, warned a leading expert on the opening day at this year's Dubai International Financial Centre (DIFC) Week.

Even as emerging markets like China, India and Brazil careen ahead at voracious growth rates, the speculative "bubbles" arising in the markets could cause a major global recession, cautioned Robert Shiller, the Stanley B. Resor Professor of Economics at Yale University, at yesterday's event.

"Perhaps we have gotten a little too confident in the global economic growth," said Shiller. "The problem is high oil, stock and real estate prices. I believe that a substantial part is speculative bubble thinking. We have gotten too confident of the prices in these markets," he said.

Oil prices, driven partly by demand from the rampant economic expansion of emerging markets, are flirting with all time record prices, even when adjusted for the devaluing of the U.S. dollar, in which oil is almost universally priced.

Housing too has been boosted to obscene highs on the back of the liquidity glut caused by low interest rates around the turn of the century and by speculative buying. Shiller pointed to the increase in long term home prices in the Netherlands, Norway and the U.S. to illustrate the precarious position the markets have been elevated to.

Now that the global credit crunch has all but dried up the lending and borrowing frenzy that fueled these price run-ups, the markets could face troubled times ahead.

"The unwinding of these markets is the most serious risk facing these markets today," Shiller said.

The confidence of consumers and investors has steadily eroded as they buckle under the pressure of these record high prices, according to measures taken by the Yale School of Management Stock Market Crash Confidence Index and its Market Valuation Confidence Index.

Shiller also pointed to the futures market, such as that of the CME in Chicago, which now predicts a major, ongoing decline over the coming four years.