A recent article by Paul B. Farrell of MarketWatch said that there is a 98% risk of a stock market crash before the end of 2014.
He said in the article "bubbles are everywhere. . .ready to blow."
That's quite a statement. One key reason Farrell expects a crash? Federal Reserve policies.
He believes that the three major bubbles that have blown up in the past two decades were caused in large part by the Fed's loose monetary policies.
The three bubbles are: the Asian financial bubble that resulted in the Asian Financial Crisis of 1997, the Dot-Com bubble of the late '90s and early '00s, and the credit/housing bubble that resulted in the 2008 financial crisis.
For readers unfamiliar with the term bubble, it simply means a financial asset whose price has been driven far beyond any rational analysis of its true worth. And although they look like they will rise forever, since there is little substantial basis for the valuation, these asset prices will eventually pop just like a soap bubble.
The pop results in a substantial drop in price – in other words, a crash.
Farrell quotes SocGen's global strategist Kit Juckes as saying all these bubbles were "fueled by the Fed keeping policy rates below the nominal growth rate of the economy far too long." Juckes went on to call current conditions the "bubble with no name."
He may be on to something. Even members of the Federal Reserve are worried.
In the mid-May meeting of the Fed's Advisory Council, some members expressed "strong concerns" over the Fed's low interest rate policies and its bond purchase program, which some members said could result in an "unsustainable bubble" in the stock and bond markets.
Thus, we've had the talk in recent weeks about 'tapering' the Fed's purchases of bonds.
The most recent Fed meeting minutes released today (Wednesday) revealed nearly half of the FOMC members were in favor of starting to end QE this year.
But, Farrell could be a bit ahead of schedule. Money Morning Global Investing Strategist Martin Hutchinson thinks the Fed-induced bubble won't pop until 2014.
But it will pop – and the effect will ripple through the stock market. History tells us that the Federal Reserve can and often does play a role in causing a major stock market pullback, or crash.
How the Fed Causes a Stock Market Crash
Many historians believe that the Fed was a major catalyst in the 1929 stock market crash and subsequent Great Depression.