Wall Street has benefited from a “once-in-a-lifetime move” in interest rates from 14% to basically 0%, says Jim Chanos, founder and president of Kynikos Associates. This slide in rates has gone on for so long that many people working in financial markets today haven’t seen high or rising interest rates for any sustainable period of time. However, “when you see things like Greece borrowing at rates lower than the US for two-year notes”, it suggests things aren’t sustainable. Indeed, based on current nominal growth levels and inflation, then history suggests that ten-year US bonds should be “north of 4%” rather than below 3%, as they are at present.
Another sign that we’re in the midst of a bubble is that investors seem to be “discounting the same good news over and over and over again”. For example, it was clear nine months ago that tax reform was going to pass in the US. Yet “people wanted to get more and more excited about it” and the market continued to rise in the last half of last year. However, Chanos warns, while “people will find all kinds of reasons” to discount the same piece of news multiple times in bull markets, “they do the opposite in bear markets”.
It’s not just America that concerns him. Chanos thinks that “the most important single asset class globally” is Chinese real estate, which “is probably a quarter of the Chinese economy” and the “backbone of their banking system”. That means that 4% of global GDP is being spent on an asset class that “most would realise is simply being bought for speculative purposes.” A Chinese property collapse could have huge implications for markets – and commodities in particular.