Greenspan: "We're In A Bond Market Bubble" And "Stock Prices Will Fall"

During an interview on CNBC  Thursday morning ahead of his Jerome Powell's second day of Congressional testimony, former Fed Chairman Alan Greenspan joined Ray Dalio, Bill Gross, and now Paul Tudor Jones in expecting a very unhappy ending for the decades-long bond-market rally, which in turn will remove the last remaining support under equities.

Alan Greenspan: We are in a bond market bubble from CNBC.

In response to a question from CNBC's Morgan Brennan about his view on markets, Greenspan said he believes we are in a bond-market bubble, and that rising long-term rates will ultimately push the US economy into a state of stagflation.

Morgan Brennan: Fed Chairman Greenspan, this is Morgan Brennan. In Light of the comments you just made and sort of this talk about budget deficits, I mean, we've heard a number of high-profile investors recently, Paul Tudor Jones, Ray Dalio, Bill Gross all say they think the bond market is a bear market. What is your take on the markets right now in light of this fiscal situation?

Greenspan: Well, you mean what do I think of markets generally?

Brennan: Yes.

Greenspan: Yeah, well I would say we are in a bond market bubble. And a bond market bubble really means that prices are too high and when they move down, long-term interest rates move up. And if you take a look at the structure of not price earnings ratios, but earnings price ratios in the stock market, you find that the critical issue of what engendered some of the strength in the recent period is essentially the decline in real long-term interest rates, as is factored into the market. That is in the process of changing. And I think that the bond market bubble is now beginning to unwind, and that is going to bring us ultimately into a state of stagflation. And beyond that it's very difficult to tell. This is not an easy economic outlook because there are too many variables, which we haven't seen in recent decades. 

Of course, the fallout from rising inflation and yields will have far-reaching reverberations across markets, particularly the equity market, Greenspan said. That's because, as real long-term interest rates rise, equity markets will inevitably decline.

Quintanilla: I guess, do we anticipate any noticeable effects on ancillary markets, equities, for example?

Greenspan: Well, of course. If the real long-term interest rates go up and you're in the process of having - it's inevitable that the effect on stock prices is negative. In fact, that's one of the really major factors determining equity price ratios, and therefore, as real long-term interest rates rise, stock prices fall. And I'm not saying what we're looking at in the last few weeks is meaningless - meaningful, but remember, the last few weeks I think are responding to the good part of the tax cut. You know, before I got into government, I was on a lot of corporate boards in which I had to sit through preparations of capital investment expenditure processes. And what struck me all the time is when they got down to the issue, the very end of it, you had what's the pretax rate of return on this investment and what is the after-tax return. And the after-tax return is a clean cut. So when you're going down from a 35% marginal rate to 21%, that's impact on perspective investments, which is exceptionally high in a marginal sense.

So I, on the one hand, in the short-term, think the capital goods markets will be okay, but longer term productivity is in for serious diminution.

In summary, investors who're trying to discern the beginning of the next equity selloff should keep an eye on break-evens.


Continuing on the subject of the Trump tax cuts, Greenspan said he's optimistic about economic growth in the short term, but long term, he said he's "rather dismal" due to the "gradual encroachment of entitlement spending on gross domestic savings," which is defined as GDP minus total spending. Furthermore, the tax cuts will blow out the deficit - which will only help push yields higher.


Pinto Currency FreeShitter Thu, 03/01/2018 - 20:18 Permalink

Greenspan forgot to mention "We're in a bond bubble because we started to rig the price of gold in 1987 with the creation of the LBMA so that gold could not rise and warn the market when we were running inflationary monetary policy. We learned from 1980 and fooled almost everyone.

Madoff had nothing on what we did along with the Bank of England! Heh, heh. I would judiciously estimate that we executed the greatest fraud in history."

In reply to by FreeShitter

NumbersUsa Withdrawn Sanction Thu, 03/01/2018 - 21:19 Permalink

Read it and weep you sheep, you lambs slated for the prisons of the jew supremacists !!

"No Free Speech for the Goyim: The Jews Escalate Their Zio-Supremacist War on Our Ancient Liberties

Here in the United States, the friends of Israel appear to believe that anyone who is unwilling to do business with Israel or even with the territories that it has illegally occupied should not be allowed to do business in any capacity with federal, state or even local governments. Constitutional guarantees of freedom of association for every American are apparently not valid if one particular highly favored foreign country is involved.

Twenty-four states now have legislation sanctioning those who criticize or boycott Israel. And one particular pending piece of federal legislation that is also continuing to make its way through the Senate would far exceed what is happening at the state level and would set a new standard for deference to Israeli interests on the part of the national government. It would criminalize any U.S. citizen “engaged in interstate or foreign commerce” who supports a boycott of Israel or who even goes about “requesting the furnishing of information” regarding it, with penalties enforced through amendments of two existing laws, the Export Administration Act of 1979 and the Export-Import Act of 1945, that include potential fines of between $250,000 and $1 million and up to 20 years in prison."

The jew supremacists of the world are the enemies of the entire human race-Period

In reply to by Withdrawn Sanction

bshirley1968 Putrid_Scum Thu, 03/01/2018 - 20:53 Permalink

I would strap that old bastard to a chair, hook some 110 up to his shriveled up scrotum, remind him he said this:

"under the gold standard, a free banking system stands as the protector of an economy's stability and balanced growth... The abandonment of the gold standard made it possible for the welfare statists to use the banking system as a means to an unlimited expansion of credit... In the absence of the gold standard, there is no way to protect savings from confiscation through inflation”

....and ask him how, knowing that, he could then become the head of the very parasitic system that robs us daily for the benefit of a few.

When he started up with that "fed-speak", I would light his ass up until he cried and begged for forgiveness.....and made me believe it.....then I would turn on the current and walk out the door.

In reply to by Putrid_Scum

Mike in GA Putrid_Scum Thu, 03/01/2018 - 20:59 Permalink

Volcker knows better than to waste his breath on talking to a vacumn.  Anything he could say is being said by others all day.

Greenspan's last comment about bubbles when he was chairman was ""We can't identify a bubble until after it bursts...".

If you think the reset has started, you are in for a surprise.  The reset of the everything bubble is gonna be off the charts.

In reply to by Putrid_Scum

Harry Lightning Aeonios Fri, 03/02/2018 - 02:54 Permalink

Greenspan is wrong as usual. Bonds will rally to all-time new low yields at or under 2.00% as the US stock market pulls back to the 13,000 area. At that point, the Federal spending that will be engaged to keep the economy from collapsing will crash the US bond market unless the Fed is willing to engage in another multi-trillion dollar money printing scheme. My bet is they will not be able to print enough to save the bond market, for if they try the dollar will collapse and any hope of a recovery in the global economy will be destroyed.

This all has happened before, multiple times in Argentina starting in 1974. It also has happened in Japan with a different outcome since 1990. Japan did not have a debt collapse because when they printed money to save their bond market, it was good for their export economy. Additionally, the Japanese savings rate is so high that they did not have to depend on foreign investment in their bond market, so when the currency fell it did not cause a flight of capital out of their bond market. 

The US has a much different dynamic. A falling dollar is poison for the US economy, and the extremely low savings rate in the US will cause massive problems for their bond market should foreign investors withdraw from their holdings in US bonds because of the losses being taken on the currency value of those investments. When the US currency starts falling, the hedge slippage on hedges used to protect against a falling dollar will be so great because of the amount of the US bond holdings that most foreign investors will see both a capital as well as a cash flow loss. The forward prices to continue the hedge will widen so rapidly that the hedge will be almost uncorrelated from the start, and the low rate of interest on the bond holdings will not be enough to help compensate for the currency and capital declines. So, foreigners will sell, in panic fashion, and that will create a terrible negative feedback loop between the dollar and US bonds. It will be too complex for the Central Banks to halt, and finally the US will pay for all the sins of the last forty years.

But we are not there yet, probably a year or more away. When bond yields get down to 2% as the stock market is collapsing, that's when to get short the bond market.

In reply to by Aeonios

ted41776 Thu, 03/01/2018 - 20:06 Permalink

in an actual market stock prices would fall, but since our "market" is priced in virtual monopoly funny money, the "market" has nowhere to go but up

is the shit making up the credit and derivatives number suddenly going to disappear or stop being produced? this shit is what our  "markets" are priced in. are the virtual printers are running out of virtual paper and virtual ink? come on now, let's be serious here

* this is not financial advice

Baron von Bud Lost in translation Thu, 03/01/2018 - 20:33 Permalink

The US debt to gdp is now $105%. According to Rogoff/Rhinehart's "This Time is Different", once the debt/gdp goes above 90% no nation recovers. Currency debasement/collapse and poverty follow. We're way past the point of no return. That means speculators will pile in once the bond or stock market turns down and accelerate the market processes. Smart long put players will have the trend on their side.

In reply to by Lost in translation

InnVestuhrr Thu, 03/01/2018 - 20:14 Permalink

NO, pompous egotistical arrogant sociopathic market mass-market destroyer,

*WE* are NOT In A Bond Market Bubble