First, let’s rewind to two decades ago,
Alan Greenspan famously warned of what he called...
Now the former Federal Reserve chairman says
investors worried about excess in stocks might
be better off worrying about bonds.
people betting that prices will only go up.
Like the infamous tulip mania in the 17th
century.
It happened in Holland...where prices for
tulip bulbs skyrocketed...and then suffered
a spectacular collapse.
The problem - prices of tulips got way out
of line with their intrinsic value.
Prices of bonds… well they have been climbing
for decades.
In recent years borrowing costs for governments
have hit record lows in many countries and
we can easily point to two basic reasons for
that.
One: since the financial crisis, central banks
have been buying trillions and trillions of
dollars worth of bonds to stimulate the global
economy, that's boosted demand for assets
in a massive way.
Driving bond prices up and borrowing costs
much, much lower.
Two: low inflation.
Consider inflation the enemy of bond investors,
when consumer prices rise that eats into the
real income of bond investors and market participants
demand higher interest payments from borrowers
to compensate them.
For years now, inflation has remained stubbornly
low, that's a fertile environment for a strong
bond market.
Now Greenspan's basic argument is that we are moving into different environment.
And environment where
Combine that with central banks beginning
to remove stimulus and end bond buying programs
and the argument is essentially that it could
spell trouble for the bond market.
Right now you'll struggle to find an investor
who will tell you what they see in bonds is
reminiscent of the tulip mania of centuries
ago but most accept the bond market is very
expensive.
Greenspan thinks it's unsustainable and when
it pops, it will be bad for everyone.
