“We are experiencing a bubble, not in stock prices, but in bond prices.” It’s a dire warning about the state of the markets, and it’s not really one I’d be inclined to disagree with. But I am rather more inclined to take issue with the person who uttered these words to Bloomberg in an interview earlier this week – none other than former Federal Reserve chairman Alan Greenspan.
You see, if there’s genuinely a bubble in the bond market (and I think there is), then there can be few human beings on earth who did more to make it happen. While he was in charge of the Fed, there was no financial wobble that couldn’t be sorted out by cutting interest rates and organising bailouts for the banks and financiers involved. And even after he’d gone, his disciples Ben Bernanke and current incumbent Janet Yellen picked up right where he left off, printing money and setting rates as low as they could go. In short, if – as Greenspan avers – “real long-term interest rates are much too low and therefore unsustainable”, it’s in large part because he put them there.
It wasn’t the only wonderful piece of central-bank double-speak we saw this week. Here in the UK, the Bank of England is getting worried about the boom in consumer credit, berating lenders and borrowers for over-indulging. Once again, this is a little like giving a swarm of small children free rein in a sweet shop and then moaning when they’re all sick a couple of hours later.
Howard Marks of Oaktree Capital has put out a long memo in which he lists the many things that are out of whack with today’s markets. Among the myriad examples are the overvaluation of US equities, and the free pass given to debt issued by historically unreliable sovereign nations. But what it ultimately boils down to, says Marks, is that investors are making one classic error: they’re “reaching for return”. In other words, faced with a zero-rate world, income-starved investors are ignoring risk in their desperation to hit a specific yield target. That always ends in disaster. On that front, in this week’s cover story Ben Judge looks at P2P lending. The big question, says Ben, is – do the yields now on offer reward you for the risks to your capital? I’d think carefully about it if I were you.
Yet, as Michael J Howell of Crossborder Capital notes, our current low-rate world has left plenty of money sloshing around the globe looking for a good home. By looking at where that money is flowing at any given point, you can get a good idea of which markets are set to do well and which are heading for rougher times. If he’s right, then the FTSE 100’s current surge should continue for a while longer.