Alan Greenspan, for Fed chairman during the go-go Reagan-Thatcher era of deregulation and Bull Market debauchery of the 1980’s is warning of a bond market bubble pop. Viewers of “Keiser Report” know that this particular market call has been a graveyard for market pundits for years. Starting in the wake of the 2008 GFC (Global Financial Crisis), market observers have warned of a crash in the bond market. Initially it was believed that the trillions printed to bail out the banks would cause inflation and therefore a flight from bonds.
The modern Bond Bull Market that started in 1980 (when interest rates peaked under Paul Volcker), screamed higher. After it became clear that bonds were not going to fall - hitting new all time highs in fact - the debate among economists and market pundits switched to the theme of, ‘inflation vs. deflation’. The thinking: Banks’ balance sheets around the world were deteriorating faster (deflation) than the central banks could print money (inflation) resulting in a net deflationary trend that supported higher bond prices. The truth is: Central bank have been buying their own bonds - with Japan being the most aggressive. And this insatiable trend of debt-monetization by central banks is what has driven the bond bull. To the point were nobody questions it anymore. Except Greenspan, suddenly.
Greenspan’s reasoning for a bond bubble pop, according to Bloomberg,
“By any measure, real long-term interest rates are much too low and therefore unsustainable,” “We are moving into a different phase of the economy”.
To rewrite Greenspan’s statement honestly, including the bits he left out to save face: “By any measure, [the rate of central bank market interference monetising its own debt on an unprecedented scale to keep insolvent banks alive have kept] real long-term interest rates are much too low and therefore unsustainable,”
Putting aside the morals Greenspan seems to be lacking for a moment.. Is he right? Is the 37 year bond rally over? A previous, and famous call by Greenspan was in 1996 about NASDAQ and the dot-coms.
“But how do we know when irrational exuberance has unduly escalated asset values, which then become subject to unexpected and prolonged contractions as they have in Japan over the past decade?
The dot-coms has 4 more years of rising prices before they crashed. I think Greenspan is right about bonds and I don’t think we’ll be waiting four years to find out. If you trade bonds, the old maxim might apply:
“Better three hours too soon than a minute too late”.
Or, as another financier once said:
“I made my money by selling too soon”.