Nobel Prize economist warns of US financial bubble

An American who won this year's Nobel Prize for economics believes sharp rises in equity and property prices could lead to a dangerous financial bubble, he told a German magazine.

Robert Shiller, who won the award with two other Americans for research into market prices and asset bubbles, pinpointed the U.S. stock market and Brazilian property market as areas of concern.

"I am not yet sounding the alarm. But in many countries stock exchanges are at a high level and prices have risen sharply in some property markets," Shiller told Sunday's Der Spiegel magazine. "That could end badly," he said.

"I am most worried about the boom in the U.S. stock market. Also because our economy is still weak and vulnerable," he said, describing the financial and technology sectors as overvalued.

He had also looked at what he called "drastically" higher house prices in Rio de Janeiro and Sao Paulo in Brazil in the last five years.

"There, I felt a bit like in the United States of 2004," he said, adding he was hearing arguments about investment opportunities and a growing middle class there that he had heard in the U.S. around the year 2000.

The collapse of the U.S. housing market helped trigger the 2008-09 global financial crisis.

"Bubbles look like this. And the world is still very vulnerable to a bubble," he said.

Bubbles are created when investors do not recognize that rising asset prices are detached from underlying fundamentals.

A major index of world equities rose to near a six-year high on Friday, helped by gains in U.S. stocks, on faith in an improving global economy and support from central banks, while U.S. crude oil rebounded from recent declines.

November marked the third consecutive month of gains for the Dow Jones Industrial Average, the Standard & Poors 500 and the Nasdaq Composite.

The benchmark S&P 500 has gained 27 percent so far in 2013, which would make its best yearly gain since it climbed 26.67 percent in 1998, with the seasonally strong month of December to come.

Reuters