Former Fed Chairman warns of bond bubble, stagflation

Moving into a stagflation not seen since the 1970s

This will not begood for asset prices

10 Yr Gov bond yields fell from15.8% in 1981 to 2.3%

Interest rates will not stay low, will rise ‘reasonably fast’

Normal interest rates in 4%-5% range

Inflation will not stay at historically low levels

Gold protects savings and is store of value

Gold is the ultimate insurance policy saysGreenspan

Editor: Mark O’Byrne

Greenspan warns of Bond Bubble

‘We are experiencing a bubble, not in stock prices but in bond prices. This is not discounted in the marketplace.’

There are a lot of warnings onBloomberg, CNBC and other financial media these days about a bubble in the stock market, particularly in FANG stocks and the tech sector.

But former Fed Chair Alan Greenspan is not in agreement. He is continuing his message of the last two years, that there is a bond bubble and which is more dangerous than what is going on in the stock market.

He is not the only one, in recent months there has been a growing number of those who are concerned that real bond yields in the U.S., UK, EU and elsewhere are well below where growth and inflation ratesseem to suggest they should be.

They correctly warn that it is only a matter of time before the inflationary pressures (that we are feeling) hit the bond market.

Stagflation on the horizon

Greenspan’s warning this week comes a little over a year after he last warned us that we were currently in the worst period he has seen since he began public service, including the financial crisis.

Things are so bad, he said that he wished he could find something positive to say.

At the time he pointed towards the problem of ‘entitlements’ (welfare / warfare spending of the ‘welfare warfare state’). Something, he argued, is uneconomic and unsustainable. The main reason for its lack of sustainability is the low growth rates developed countries around the world are experiencing (around 2%).

Now, this lack of growth is prompting calls of concern from Greenspan regarding stagflation:

We’ve been in a period of stagnation since 2008 as a consequence of the sharp decline of capital investment and productivity growthWe are moving into a different phase of the economy – to astagflation not seen since the 1970s. That is not good for asset prices.

Felder Report via ZeroHedge

Asset prices obviously include the bond market, and this is where Mr Greenspan believes we should focus our concerns. Thanks to the unsustainable levels of low interest rates. Something which he has expressed concern about before.

Worried about interest rates

By any measure, real long-terminterest rates are much too low and therefore unsustainable,the former Federal Reserve chairman, 91, said in this latest interview.

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.

Two years ago Greenspan told Bloomberg that the bond market price-to-earnings ratio was in an ‘extraordinary position’ and that interest rates sitting below 4% was not normal.

We have pressed the interest rates well below normal for a protracted period of time and the danger is they will come up to back up to where they have always beenThere are two possibilities. Either we move slowly back to normal, or we do it in a fairly aggressive manner. History tells us it’s the latter which tends to be more prevalent than the former,Greenspan said, the market impact, therefore, will benot good.

Yields on the US 10-year Treasury note have been below 4% since the summer of 2008 (see chart below).

No more air for the bubble

Currently around $1.5 trillion a year is created by central banks through money printing schemes. The major central banks (US Federal Reserve, the European Central Bank and the Bank of Japan) have collectively gathered around $13trillion of governmentbonds on their balance sheets.

All of them, including others such as the Bank of England, are signalling that times are changing. For as long as money is being printed then bond prices have