×

'Frothy' markets remind me of 2007, and rising rates could kill the rally, Stephen Roach warns

The stock market looks expensive and it may not be equipped to handle rising interest rates, according to Yale University fellow Stephen Roach.

The former chairman of Morgan Stanley Asia suggests Wall Street has a case of amnesia, and the prognosis is poor for the 8½-year-old rally.

"Inflation has all but vanished from the scene. Policymakers as well as investment managers, to say nothing of the investors that they represent, don't remember what inflation is like and what monetary tightening might be in that environment," Roach warned on Wednesday on CNBC's "Trading Nation."

Roach has been critical of the world's central banks — particularly the Federal Reserve.

"The point on policy is: Just because inflation is surprising in terms of coming in below what we think doesn't mean we should not restore our policy to a more normal approach," he said.

In a note earlier this week, Roach applauded the Fed on its "commitment to normalization of its policy rate and balance sheet." But he said it should have happened much earlier.

"The markets are frothy, and it's a froth again that strikes me as reminiscent of what we saw in a lengthy pre-crisis period in the 2003 to early 2007 period," he said. "I think the one lesson we learned from that crisis is that financial stability addressing frothy markets with a more normal, tougher, disciplined monetary policy is not such a bad thing."

According to Roach, the odds are higher than 50-50 that stocks will plunge as much as 10 percent in the final months of the year.

Roach said the catalyst could be anything from a North Korea strike to unexpected weakness in the U.S. economy.

"We are long overdue for a correction," Roach said.

Vote
Vote to see results
Total Votes:

Not a Scientific Survey. Results may not total 100% due to rounding.

Videos

Trades to Watch

Trader Bios

About

Trading Nation is a multimedia financial news program that shows investors and traders how to use the news of the day to their advantage. This is where experts from across the financial world – including macro strategists, technical analysts, stock-pickers, and traders who specialize in options, currencies, and fixed income – come together to find the best ways to capitalize on recent developments in the market. Trading Nation: Where headlines become opportunities.

Brian Sullivan

Brian Sullivan is co-anchor of CNBC's "Power Lunch" (M-F,1PM-3PM ET), one of the network's longest running programs, as well as the host of the daily investing program "Trading Nation." He is also a frequent guest on MSNBC's "Morning Joe" and other NBC properties.

Read more

Connect