Conventional wisdom holds that with central banks’ beginning to throw their experimental policies into reverse the strings holding the asset price boom together are slowly being cut. No disagreement here. But while the divergence between the fundamentals and asset prices suggests things like equities are in/near bubble territory, the bond market is not so much a ‘bubble’ as simply a rigged game. Some would disagree…
Former Fed Chairman Alan Greenspan recently offered his opinion about market ‘bubbles’ (or the very subject matter he spent his tenure at the Fed proclaiming could never be identified):
“By any measure, real long-term interest rates are much too low and therefore unsustainable. 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.” Bloomberg
Greenspan added that stocks are enamored with the Fed model and things are about to change: “The real problem is that when the bond-market bubble collapses, long-term interest rates will rise. We are moving into a different phase of the economy — to a stagflation not seen since the 1970s. That is not good for asset prices.”
The contradiction, if otherwise unclear, is that Greenspan asserts the great bond boom is playing the role of puppeteer while at the same time insinuating the stock market is dancing around without strings. Simple bubblenomics states that if unsustainably low interest rates are the main support for stocks then stock prices are unsustainably high, but I digress.
Asset Prices Go Boom And Bust
The current boom is 33-quarters old, meaning we are less than 5-quarters away from surpassing the duration of the great 1990s boom.
Much like the two previous booms the general themes today are more debt and/or less growth per unit of paper wealth summoned. For example, during the 1990s boom for every dollar in net worth that was generated GDP rose by 17 cents and during the last unsustainable boom (2001-2007) GDP rose by 15 cents for every dollar in paper wealth created. By contrast, for every dollar in net worth generated since 1Q09 there has been a mere 11 cent increase in GDP.
While today’s asset boom lacks the bubblesque leadership of yesteryear, that doesn’t mean stocks are somehow immune from collapse. Recall that during the subprime/real estate centric bust the broader stock market (S&P 500) lost 56% of its value, and during the dot com meltdown the S&P 500 crashed by 49%. In other words, to fixate on bond market distortions when there is no precedent for amount of paper wealth that has been created since 1Q09 is a trivial pursuit – the great boom in asset prices is drawing closer to a bust!
There is no widespread greater fool theory at play in bonds; there are no crazed yield chasers bragging to their neighbors about the time they bagged a bond back in 2016 that had a negative yield! Instead today’s global bond market is controlled by a dramatic increase in central bank ownership, leverage/carry trades, and the increasing lack of ‘safe’ investment and/or currency alternatives. More simply, the global bond market is subsidized by a global monetary system gone wild.
Under this system the very idea of a “bond-market bubble collapse” is a nonstarter. After all, how does a great bond bust that triggers a great asset bust not then trigger a great rush of capital back into bonds? To put this into terms that even the irrationally exuberant can understand: the bond market will either cease to exist (i.e. default or the like) or it will remain rigged! There is no scenario where any major central banker, anywhere, would idly watch bond prices collapse unless they no longer had a currency left to print.
In 2011 when Standard and Poor’s downgraded U.S. debt panicky ‘safe haven’ money flows plowed into U.S. debt. Many people were surprised by this seemingly irrational occurrence. Assuming the great fiat money experiment is not about to fail, don’t be surprised if the largest benefactor of the upcoming global bond bust is the global bond market itself.