In 1996 Alan Greenspan, Fed Chair, warned of “irrational exuberance” in the stock market.
Some say he was just early. But the real story is much different. By the year 2000, Greenspan was the market’s and the economy’s biggest cheerleader. Right before the dotcom bubble collapsed, he fully embraced the productivity miracle.
Today Greenspan is back with another “irrational exuberance” call. This time he says Bond bubble About to Break Because of ‘Abnormally Low’ Interest Rates.
Former Federal Reserve Chairman Alan Greenspan issued a bold warning Friday that the bond market is on the cusp of a collapse that also will threaten stock prices.
In a CNBC interview, the longtime central bank chief said the prolonged period of low interest rates is about to end and, with it, a bull market in fixed income that has lasted more than three decades.
“The current level of interest rates is abnormally low and there’s only one direction in which they can go, and when they start they will be rather rapid,” Greenspan said on “Squawk Box.”
“I have no time frame on the forecast,” he said. “I have a chart which goes back to the 1800s and I can tell you that this particular period sticks out. But you have no way of knowing in advance when it will actually trigger.”
One point he did make about timing is it likely will be quick and take the market by surprise.
“It looks stronger just before it isn’t stronger,” he said. Anyone who thinks they can forecast when the bubble will break is “in for a disastrous” experience.”
Greenspan Déjà Vu
Former Fed Chairman Alan Greenspan told CNBC on Friday that it’s fair to characterize [the the bond market bubble as an “irrational exuberance” type forecast.
The reference to “irrational exuberance” — the two words Greenspan is most famous for — hearkens back to remarks he delivered at a 1996 American Enterprise Institute dinner.
“What I was trying to say in the AEI speech … is you never can be quite sure when ‘irrational exuberance’ arises. I was doing it as part of a much broader speech, and talking about the analysis of markets,” Greenspan said on “Squawk Box,” reflecting on the investment environment of more than two decades ago.
“I wasn’t trying to focus short term. But the press loved that term,” he added. “I am sort of now questioning whether it was wise to put it in the speech.”
Greenspan said he’s trying to ask similar questions in the current environment about when the three-decade bull market in bonds might end, considering “there’s only one way” historically low interest rates can go and that’s higher.
Only One Way to Go?
“By any measure, real long-term interest rates are much too low and therefore unsustainable,” Greenspan told Bloomberg TV in a July 31 interview. “When they move higher they are likely to move reasonably fast. We are experiencing a bubble, not in stock prices but in bond prices. This is not discounted in the marketplace.”
Greenspan’s biggest worry is that the U.S. economy is about to enter a period of stagflation, or stagnant growth paired with surging prices. And because rising inflation erodes the future purchasing power of a bond’s fixed interest payments, that 2.27% yield should obviously a major concern for bondholders in Greenspan’s scenario, especially if the bond market were showing signs of frothiness.
The economy is entering its ninth year of expansion, making it one of the most enduring recoveries on record. However, average hourly earnings of 2.5% are still below longer-term historical averages and indicate workers still lack leverage to push wages higher, even with an unemployment rate of 4.4%. A Wall Street Journal economist survey projects U.S. gross domestic product will climb 2.3% this year and 2.4% in 2018. It’s not gangbusters growth, but it’s not stagnant, either.
This also isn’t the first time Greenspan has expressed concern about a bond bubble. Two years ago, when the 10-year Treasury yield was 2.44% and the CPI was 0.2%, he told Bloomberg TV that “we have a pending bond market bubble.” In a Bloomberg TV interview July 2016, he expressed concerns about stagflation and said “we’re seeing the very early signs of inflation beginning to tick up.” He also said with the 10-year Treasury yield pushed down to 1.50% by Brexit concerns, that he was “nervous” bond prices were too high.
Barring the emergence of some catalyst to push prices higher, the bond market’s lack of concern, as expressed in current yields, doesn’t seem misguided.
“No Irrational Exuberance in Stocks”
“There is no irrational exuberance that I can see. In fact, it is just the opposite at this stage.”
Stock Bull Market Can Continue Forever
Here’s an amazing article from just today: Jim Paulsen, chief investment strategist at Leuthold, outlines conditions in which ‘The bull market could continue forever‘.
“We’ve got a fully employed economy, rising real wages. We restarted the corporate earnings cycle. We’ve got strong confidence among business and consumers,” he said on “Squawk Box.”
“The kick is we can do all of this without aggravating inflation and interest rates,” he said. “If that’s going to continue, I think the bull market could continue to forever.”
Correct me if I am wrong, but it seems “forever” qualifies as irrational exuberance no matter what the conditions are.
Greenspan the Contrarian Indicator
Major comments by Alan Greenspan, widely portrayed by the media are most likely perfect contrarian indicators.
He has been calling the bond market a bubble for years but only recently did he say there was no stock market bubble.
With Greenspan, one needs to be careful. He is frequently correct about some things. However, the things about which he is correct are either never widely published, or they are widely disputed.
An example of the latter is free trade. Greenspan was a free trade advocate his entire life. The mainstream media disagrees. An example of the former and the latter is in regards to entitlements. From the very same video I quoted above Greenspan offered these words of wisdom.
“You can’t get growth going so long as entitlement expansion is anywhere near where it’s been recently. It’s eating up the sources of investment and the sources of growth and you can’t have it both ways. You cannot fund all of the entitlements that everybody wants and expect that you are going to get GDP growth out of that at three percent or more.”
Truer words were never spoken. But that particular comment was not widely disseminated, nor does the biased social media agree.
Is there a bond market bubble? Absolutely!
Say what? Yes, Virginia, there is a bubble. However, it’s not the bond bubble that Greenspan and nearly everyone else sees.
The bond market bubble is in corporate bonds. Junk bonds yields are near record lows. Issuance of covenant-lite bonds with no protections and can pay yields, not in cash, but with more bonds, is at or near all time highs.
Yields are prices as if defaults will never rise again. That’s the real bond bubble.
When the junk bond bubble bursts (and that is what it may take to bust the stock market bubble), treasury yields are likely to plunge, and the economy is likely to head into recession.
The low in treasury yields may not even be in.
Greenspan on Bubbles
I offer this bit of advice on Greenspan.
- Central Banks Puzzled as Global Inflation Hits Lowest Level Since 2009: Solving the Puzzle
- “Idiosyncratic and Transitory Factors” Holding Down Inflation: New Definition of Transitory
Mike “Mish” Shedlock