by Mish

The answer in words: The world’s biggest junk bond bubble.

I prefer gold.

On August 4, I commented on the Bubblicious Debate: Greenspan Says “Bond Bubble About to Break”, No Stock Market Bubble

There’s a bond bubble for sure, but it’s in corporate bonds, not treasuries.

This also isn’t the first time Greenspan has expressed concern about a bond bubble. Two years ago, when the 10-year Treasury yield was 2.44% and the CPI was 0.2%, he told Bloomberg TV that “we have a pending bond market bubble.” In a Bloomberg TV interview July 2016, he expressed concerns about stagflation and said “we’re seeing the very early signs of inflation beginning to tick up.” He also said with the 10-year Treasury yield pushed down to 1.50% by Brexit concerns, that he was “nervous” bond prices were too high.

“No Irrational Exuberance in Stocks”

“There is no irrational exuberance that I can see. In fact, it is just the opposite at this stage.”

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Greenspan the Contrarian Indicator

Major comments by Alan Greenspan, widely portrayed by the media are most likely perfect contrarian indicators.

He has been calling the bond market a bubble for years but only recently did he say there was no stock market bubble.

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With Greenspan, one needs to be careful. He is frequently correct about some things. However, the things about which he is correct are either never widely published, or they are widely disputed.

“You can’t get growth going so long as entitlement expansion is anywhere near where it’s been recently. It’s eating up the sources of investment and the sources of growth and you can’t have it both ways. You cannot fund all of the entitlements that everybody wants and expect that you are going to get GDP growth out of that at three percent or more.”

Truer words were never spoken. But that particular comment was not widely disseminated, nor does the biased social media agree.

Bubblicious Debate

Is there a bond market bubble? Absolutely!

Say what? Yes, Virginia, there is a bubble. However, it’s not the bond bubble that Greenspan and nearly everyone else sees.

The bond market bubble is in corporate bonds. Junk bonds yields are near record lows. Issuance of covenant-lite bonds with no protections and can pay yields, not in cash, but with more bonds, is at or near all-time highs.

Yields are prices as if defaults will never rise again. That’s the real bond bubble.

When the junk bond bubble bursts (and that is what it may take to bust the stock market bubble), Treasury yields are likely to plunge, and the economy is likely to head into recession.

The low in Treasury yields may not even be in.

Greenspan on Bubbles

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I offer this bit of advice on Greenspan.

Mike “Mish” Shedlock

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