Kovacevich warns market bubbles may burst in 2016

Created by too many years of the Federal Reserve's easy money policies, bubbles in bonds, commercial real estate and parts of the stock market could soon pop, former Wells Fargo Chairman and CEO Richard Kovacevich said Monday.

"That's what happened in the high-yield market," he said on CNBC's "Squawk Box."

The junk bond market, mirrored by the iShares iBoxx $ High Yield Corporate ETF, accelerated to the downside in late 2015, for overall losses in the past 12 months of about 10 percent.

Read MoreWhy Fed will backtrack on rates in 2016: Jim Grant

As for the stock market, Kovacevich predicted flat returns to up 5 percent for 2016. "As long as we have relatively slow economic growth in the 2 to 2.5 percent [range], I don't see any reason for the market to do much, if at all."

He said he felt stocks were fully valued 1½ years ago.

Kovacevich predicted that the Fed will continue to normalize monetary policy. "They're too slow with that. At least they made one step. But they have to get out of reinvesting their $4 trillion portfolio."

"They have to gradually increase interest rates, hopefully about four times this year and eventually get to 2 percent by sometime in the middle of next year," he added.

Presidential primary politics

Looking at the presidential race, Kovacevich, a supporter of Republican Jeb Bush, admitted it does not look good in the polls for the former Florida governor. Bush continued to languish in single digits, while front-runner Donald Trump enjoyed 35 percent support, according to the RealClear Politics aggregator of major national polls.

"I think [Bush] has come out with some great policies. But this does not seem to be a policy political race at the moment," Kovacevich said. He said early contests in Iowa and New Hampshire will reveal whether Americans change their support to a "more sane policy" candidate.

On the Democratic side, Kovacevich has been baffled front-runner Hillary Clinton doesn't evoke the memory of the good economic times during her husband's presidency. "I don't know how they reconcile the great economic performance in the Democratic administration of Bill Clinton with her policies today," he said.

"Maybe she will flip back to a more central policy," he said. "But at the moment, it certainly feels like ... a third term of [President Barack] Obama, which would be an absolute economic disaster."

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