Is Wall Street Setting Us Up for a Redo of the 2008 Bubble Burst?

The worldwide asset bubble is growing to alarming proportions.

Spanish bonds are hotter than at any time since George Washington was president. Manhattan real estate valuations are reaching higher than the Empire State building, and a French cable TV company you have never heard of just borrowed $11 billion, the largest junk bond deal on record.

What gives? It looks like Wall Street is setting up the American investing public for another fiasco.

There has definitely been a boom since the 2008 collapse of the credit markets and global banking system which caused the Fed to bailout Wall Street. The broad stock market has gone up almost in a straight line since its lows of March 2009 and is now routinely scraping record highs.

And where there is a boom, there is likely a bubble. Investors, along with investment fraud attorneys, should be prepared for when it pops.

The New York Times earlier this month highlighted the dangers facing investors in this frothy market.

“Welcome to the Everything Boom — and, quite possibly, the Everything Bubble,” writes reporter Neil Irwin. “Around the world, nearly every asset class is expensive by historical standards. Stocks and bonds; emerging markets and advanced economies; urban office towers and Iowa farmland; you name it, and it is trading at prices that are high by historical standards relative to fundamentals. The inverse of that is relatively low returns for investors.”

The big question facing the global economy is what happens next, according to Irwin. Interest rates on government bonds and bank certificates of deposit are at record lows. Putting money in a savings account is about as cheery as digging a grave for your pet cat in the back yard.

And that’s where the danger for investors lies. As this blog has noted repeatedly, Wall Street is hard at work pitching Mom and Pop retail investors high risk and high fee alternatives – nontraded REITs, liquid alternative mutual funds that imitate hedge funds, whacked out annuities – which offer a bit more yield than government bonds but a lot more risk. And this current risk/reward dichotomy is at the heart of Irwin’s line of questioning.

“How long will this low-return environment last,” he writes. “And what risks are being created that might be realized only if and when the Everything Boom ends?”

“Safe assets, like United States Treasury bonds, have been offering investors paltry returns for years, ever since the global financial crisis. What has changed in the last two years is that risky assets, like stocks, junk bonds, real estate and emerging market bonds, have also joined the party.

He continues: “The Everything Boom brings obvious economic risks. In the most pleasant outcome, global economic growth would pick up, causing today’s expensive assets to begin looking more reasonably priced. But other outcomes are also possible, including busts in one or more markets that could create a new wave of economic ripples in a world economy still not fully recovered from the last crisis.”

“If this analysis of the world is correct, investors have an unpleasant choice: consign themselves to returns lower than the historical norm, or chase ever more obscure investments that might offer an extra percentage point or two of return,” he concludes.

Investors need to be aware of the unprecedented risks this Everything Boom is creating in the markets. Stay away from putting too many eggs in one basket. In other words, don’t let your financial advisor sweet talk you into putting half or all your life savings into esoteric bonds, illiquid loan funds or some other risky investment you don’t understand.

Be careful, when the “Everything Bubble” bursts, you don’t want to go down the drain with it.

Zamansky LLC are securities and investment fraud attorneys representing investors in federal and state litigation against financial institutions.

About Jacob H. Zamansky 57 Articles

Jacob (”Jake”) H. Zamansky is one of the country’s foremost authorities on securities arbitration law, the legal recourse for investors claiming broker wrongdoing, or for brokers claiming wrongful termination or other misconduct by their employer. Zamansky & Associates, the New York-based law firm he founded, represents both individuals and institutions in complex securities, hedge fund, and employment arbitrations.

Mr. Zamansky was at the forefront of recent efforts to “clean up” Wall Street. In 2001, he successfully sued former Merrill Lynch analyst Henry Blodget on behalf of a New York pediatrician misled by Blodget’s stock research. The case’s successful resolution was the catalyst for New York Attorney General Elliot Spitzer to investigate the conflicts of interest on Wall Street and resulted in the well-reported $1.4 billion Global Settlement, which included many of the biggest names on Wall Street.

More recently, Mr. Zamansky is one of the leading litigators and opinion leaders of the subprime mortgage crisis and the related hedge fund collapses, representing both investors and mortgage borrowers who were defrauded by Wall Street firms and mortgage lenders. Among Mr. Zamansky’s early actions is filing the first arbitration case on behalf of institutional and high net worth investors against Bear Stearns Asset Management with regard to the two hedge funds which collapsed as a result of exposure to subprime mortgage backed securities. He also has filed claims on behalf of individual investors victimized by brokers that steered their portfolios into unsuitable subprime stocks and mortgage borrowers who were fraudulently coerced into inappropriate mortgage and investment transactions.

Earlier in his career, Mr. Zamansky worked for more than 30 years as a litigator, including positions at Skadden Arps, Slate, Meagher and Flom LLP. His tenure also included serving as a federal prosecutor with the Federal Trade Commission.

A native of Philadelphia, Mr. Zamansky has been a frequent expert commentator on CNBC, CNN, and FOX News and has published opinion pieces in The Wall Street Journal, Financial Times and USA Today. He is regularly quoted and his cases have been chronicled in major financial and news publications including The New York Times, USA Today, The Washington Post, BusinessWeek, Fortune and Forbes. He is a frequent lecturer for industry and legal groups around the country. He also writes a blog that can be viewed here.

Visit: Zamansky & Associates

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