"We're In A Bond Market Bubble"

Bond Bubble

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


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. 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. 

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 prospective 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.