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
Also consider Greenspan’s New Bond Bubble Warning Feels Like ‘Irrational Exuberance’ Deja 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?
Forbes writer Daniel Kruger says Greenspan Is Wrong. There Is No Bond Bubble.
“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.
Bubblicious Debate
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.
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Mike “Mish” Shedlock
Greenspan was one of the bottom-feeders who pushed the country over the economic cliff. Now he’s trying to wash his hands of it and blame others. He oughta be serving time in prison.
“‘beware the burst’ by Youthography, Toronto — August 29, 2006”
http://www.campaignlive.co.uk/the-work/advertiser/bubblicious/7062
I wonder how much of any crash in any asset we can attribute to Russians. After all, the reporters at NYT and Wapo believe Russians are behind everything including supplying them with weed. May be Greenspan is also hooked on the Russian weed.
At this point in our globally distorted economy, identifying an asset class as a ‘bubble’ is no more than an exercise in relativism. Just like on the Animal Farm, *everything* is a bubble, but some asset classes are more bubbliscious than others.
Real estate? Equities? Bonds? Earnings? Cryptocurrencies?
The only things I don’t worry about being in a bubble are oil, the white metals & gold.
Gullibility and stupidity are in bubbles.
Skullduggery and kleptomania are in bubbles.
Well, gosh, Greenspan has such a great predictive track record that we really should listen to anything he says.
“Track records” are entirely irrelevant for predicting lottery numbers.
The lottery offices don’t claim to be able to predict lottery numbers with mathematical models. Greenspan and Co. do.
I realize that. It’s just that it’s not a problem with Greenspan in particular. Everyone is equally talented at the whole lottery number picking trade. That most never win, while some have a track record of winning multiple times, is utterly irrelevant.
Most economists agree that zero interest rates is the best of all worlds. That Greenspan has veered off into his casino thinking, just because the number for bonds hasn’t come up in a while, it must be due, contradicts his own position. He should in fact be celebrating ZIRP for as far as the eye can see, and laying down the gauntlet for ways to make it happen. The collapse in oil prices is directly related to low interest rates, Do we really want $100 oil?
Greenspan’s track record as a financial forecaster speaks for itself.
He became involved in government shortly after his private forecasting firm had lost its last clients back in the ’70’s.
Greenspan’s track record as a financial forecaster was so bad that his private forecasting firm lost every one of it’s clients back in the 70’s.
And that’s when he decided to get involved in Government.
Only “the best and the brightest”.
Lol.
He signed a letter saying Keating’s Lincoln Savings and Loan was sound. Some may recall he was the one who organized the “Keating 5” Senators–where he got so chummy with McCain.
He’s a meat head dead from the neck up. Like the bubonic plague; the scourge of flee’s trying their best to infest an unsuspecting body. Lesly has obviously stahlled out in the russian narrritive pot hole of cbs news parking lot. Hey Greenspew! Keep digging down, you’re both headed in the right direction!
“Correct me if I am wrong, but it seems “forever” qualifies as irrational exuberance no matter what the conditions are.”
Okay then, you’re wrong, so I’ll correct you.
Forever is actually 9:41 in length, per previous Mish thread quoting The Donald.
Of course there is a bubble just ask Japan. Their bond bubble is going 20 years strong. Didn’t they used to call those who shorted them the widowmaker trade. As long as we have incompetent central banks it can go on as long as the eveready bunny.
https://m.youtube.com/watch?v=9zWpCsnrbcA
If Greenspawn still had power to destroy like he did before, that unrepentent retromingent disciple of Ayn Rand might scare me.
This stock market is simply dependent on whether the CBs can hold it up or not. Till now they have done a great job. Every time it looks like crashing you have Dudley, Bullard or Yellen coming out of the woodwork to stick save it.
Investment flows can and will overwhelm CB’S, which is why they follow, not lead the invisible hand.
https://render.fineartamerica.com/images/rendered/search/framed-print/images-medium-5/corporate-leaders-gather-in-a-field-dana-frado.jpg
Paul Singer sums it up well…
“monetary policymakers’ knowledge of the world is somewhere between “close to nothing” and “way less than zero,” and that their pronouncements and policies usually range from “silly but harmless” to “dumb and dangerous.”
(http://www.zerohedge.com/news/2017-08-04/epic-quarterly-letter-elliotts-paul-singer-rages-against-everything-passive-investin)
I will take the “way less than zero” as far as the Central Banksters are concerned.
Too many people seeing too many bubbles.
A bubble in bubble predictions?
Late 2018-2020 shtf IMHO.
Significant correction (15%) put in during Jan-Feb 2016. We are good here. The call? It is still, and sadly remains : buy stocks.
Sadly because the FOMC has barred all the exits. We’re in the theater until the movie is over so never mind the cries of “Fire!” you’ll hear, exhorting you to get out. Hot markets are like that.
Who told you everything must be neat and orderly and according to a chart? Nobody who ever made any money, that’s who. It’s messy, nerve wracking, doubt filled and volatile. You’ll worry constantly, trust in people you’ve never seen and never really be confident until you press the sell button and get out.
At that point, somebody will proclaim that the key to it all is “time in the market” and that your ability to persevere and remain in, fully invested,: is itself your greatest asset.
I agree, still too many bears for their to be a real bubble. Everybody and their grandmother these days is a permabear that thinks they are some crafty wise contrarian by endlessly calling for imminent crashes. Being a permabear is pretty mainstream conformist these days.
The endless rally in stock markets across the world is most confusing but it has reached the point where some people are saying this is the new normal. Still, many investors feel the markets reflect a total disconnect from economic reality and are not sustainable, the numbers going forward simply do not work.
Questions extend to issues such as growing inequality and just where we are headed when it comes to people being able to earn a living in the future. Jobs, jobs, jobs, much of this is about what is produced and how the fruits of our labor are distributed. The post below explores these issues.
http://brucewilds.blogspot.com/2017/07/this-cannot-be-new-normal.html
I don’t worry about being in a bubble are oil, the white metals & gold…
What asset classes are actually backed by real assets? What assets are liquid and moveable (even through airport security)? Leverage exists in stocks, but unlike govt bonds, there is a bottom. Govt’s default all the time. Corps at least have something to liquidate.
Greenspan is the epitome of an ivory tower theorotician, but even a child can see that govt/govt bonds/socialism is in a bubble. Anyone depending on govt to fulfill their obligations, including pensioners and social security recipients, should move north and join hands and sing kumbayah with the gloBull warming delusionalist.
“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.
…
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.”
….
yes … Yes …. YES!!!
“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.”
…
Laughable.
Business carrying heavy inventory. Weak wage and salary growth. High debt to income. Low civilian labor force participation rate.
https://fred.stlouisfed.org/series/CIVPART
There will be no surge.
O/T again as continuation from previous one. A topic that is well known but rarely questiomed in the west, let alone confronted – the place of tourism in national economies and its effects on local society and national hierarchy/international leverage . Brought into the limelight in Spain, I thought it would stay local news as it is not a major following but international media has decided to take it up for whatever reason :
http://www.ibtimes.co.uk/holidaymakers-warned-anarchists-plan-mass-protests-against-tourist-invasion-europe-1633658
http://www.independent.co.uk/news/world/europe/tourist-attacked-spain-anarchists-british-bus-barcelona-palma-de-mallorca-arran-restaurants-a7878226.html
Reblogged this on World4Justice : NOW! Lobby Forum..
Greenspans locked into the 94′ bond collapse, which sent the stock market higher. its not going to happen, anymore than holding off on rate hikes will avoid the 1937 recession, redux. the policy target is global deflation, and the policy is to let the air out of the bubble as slowly as possible, a little deflation like a little salt, is actually good. and AG might be right about stagflation but its only cyclical, the secular trend is toward a shrinking monetary base, which is achieved by first inflating the base money supply to dilute its value.
“Retromingent disciple of Ayn Rand”…made my day. Thank you respond2you and Mish! A good laugh for a beautiful day.
Greenspan said he couldn’t see a bubble before it burst. Now he is proclaiming there is a bond bubble before it bursts. Not to mention, he declares there is no bubble in the stock market.
Back in the 1960’s Greenspan wrote that 1920’s FED policy lead into the Great Depression. Knowing that, Greenspan should have avoided that policy when he was FED HED. Instead, he doubled down on 1920’s FED policy.
In 2005 he praised bankers for getting people into homes they otherwise could not afford. After the crash he said he thought they would have been more responsible.
Anything Greenspan says, is suspect.
Greenspan’s wife works for MSNBC News. She costars with Chris Mathews and Rachel Maddow. Misinformation is a family specialty.
Reblogged this on John Barleycorn and commented:
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Thank you, Mish for reminding that the pricing factors of bonds are independent. Default rate can change independently of interest rate, and the latter.
The default risk premium has been lost in most coverage of bonds. “Great rotations” and the inflation rate are all one reads elsewhere.
Of course there’s no bubble in stocks. Not as long as the baby boomers are able to convince themselves they want to keep working. Never mind the 10000 65th birthday celebrations happening every day for the next 12 years:
http://www.pewsocialtrends.org/2010/12/20/baby-boomers-approach-65-glumly/
When they start seeing all the fun their friends are having not at work they’ll all jump ship. Then look out! No single raindrop is to blame for the flood. The first movers will be the big winners, but everyone else will lose out to them. The draining of the stock market over the next few decades will be epic. I only hope the rockstar fund manager taking care of my 401(k) over the next few years knows that. Because I have no intention of working much past 65. Work isn’t a means to an end, it is just another part of life.
Let me offer a brief rendition of panics/crashes since I was studying economics
We had an inflationary panic under Carter, part certainly from bad policies going back to Vietnam and part pure emotion from the iranian hostage crisis and the sense that the leadership didn’t much care. Volcker crushed the inflation to the point of overkill, a lot of people blamed Reagan, the Fed kept it’s foot on the neck of the economy until…Aug. ’82 and Mexico threatened to default on it’s debt. The “Mexican Resue” ensued, the Fed had to reverse policy, presto, Reagan Recovery and 1984 landslide.
In 1987 the Dow lost 22% in one day (in October the worst ever one-day). No official explanation but apparently Treasury Secty Brady let slip it was Japan not showing up for a bond auction. Whatever, no Great Depression.
In the 90’s Mexico inflated itself to get NAFTA passed. Once done again it threatened to default on “Tesso bonos” (this one is worth web searching for–“Tequila Crisis”) dollar denominated debt. US capital flight was only arrested by another rescue, this one draining the US currency stabilization fund of $20 Billion. Robert Rubin’s friends got a deal. But no dramatic consequences here.
We had the dot-com bubble burst at the end of Clinton’s term; the usual speculative excess. Then a nervous breakdown after 9/11 which turned out to be a buying opportunity the same as after the ’08 crash.
Sounds like we’re due for another bad downturn. Question is how bad and what consequences result. No reason for it to be The End of the World…unless somebody wants it to be.