WSJ.com - Greenspan Casts Doubt on Import Of Falling Rates
Mr. Greenspan doubts the premise that the bond market is declining because of economic weakness. He hints that the reason might be excessive worldwide savings!
In 1997 when the public was over-investing in stock markets, Mr. Greenspan talked about irrational exuberance. He is reluctant to talk about irrational fear; one is not likely to hear a Fed Chairman brow beating savings but the level of world wide savings is higher than normal. (High US savings rates are masked by 401-K accounting rules).
A wealthy businessman friend of mine was a heavy participant in dot.com stocks. Once burned he retreated to become an investor hermit. He still has a very large 401-K; very large indeed. It is invested bonds and in lifestyle stock funds that are heavily laden-ed with bonds.
This man's account is like many I have seen. Many of the "stock" funds people own are balanced funds of some type. Folks who think they are 60% invested in stocks are only 30% invested in stocks. The lifestyle funds automatically increase bond exposure and decrease stock exposure as the participants age--there is a lot of aging going-on.
Another problem is that investors have not adjusted for increased life expectancy. If a couple has reached the age of 50, there is better than a 50/50 chance that one of them will live beyond 90. Those with a 40 year investment horizon should have much exposure to stocks but advisors are suggesting to those 50 and older to reduce stock exposure and to increase bond exposure. These advisors are doing a dis-service to the financial health of these investors.
With excess savings around the world, bond yields get pushed down in the same way that stock prices were pushed too high in '99. It is irrational to buy a 30 year bond at 4.2% unless you believe a depression is at hand. Some hedge funds are probably borrowing money at a 3.2% rate and using it to buy bonds paying 4.2% but this is a very risky strategy.
Layers of irrational fear are fading away. Ironically it has faded faster in regard to airline trips than it has for investable dollars. Airline traffic is at all time highs, so the fear of terrorism is subsiding. Dollars are not distributed as evenly as airline tickets. Many wealthy folks have hunkered down. They have invested trillions into hedge funds--accepting mediocre returns and unwilling to bet on the long-term economy.
6.25% MINUS 4.2% DOES NOT EQUAL ZERO!
The nominal GNP in the US is running at about 6.25%; the long bond is yielding 4.2%; large divergences cannot last forever. This spread will narrow. Stocks are yielding 6.25%--stocks are in line with GNP but bonds are not! I expect the spread to narrow within 6 months. Bond rates and the yield curve suggest it will be GNP that will come down. The house hold survey, home sales data, non-manufacturing data and the stubbornness of commodity prices suggest the FOMC still needs to bump short rates as the economy is still strong and therefore the long-bond rate must rise. The spread between stocks and bonds could become rational by a parallel increase in stock prices and decrease in bond prices.
Steve Roach has capitulated. After calling for higher rates, he and many others are now talking the fear of recession and low long rates. My bet is with Greenspan. He chooses his words careful. Instead of talking about the conundrum--I prefer talking about IRRATIONAL FEAR, but the most likely resolution of either is a slower GNP of perhaps a real rate of only 3% and higher stock prices and lower bond prices.
The spread will disappear as stocks climb the wall of worry. Stocks are likely to break out of the long trading rang just when the long bonds are taking a beating. It is not unusual for stocks and bonds to increase in value for a time and then to come uncoupled. It makes professionals and consumers alike very nervous to have stocks going up at the same time interest rates are going up, but some great moves in the market have been of this type.
The proof is in the pudding. The FOMC has raised short rates 8 times and those who were in stocks at the start of the rate increases have made excellent rates of returns--bonds have done better than almost anyone projected.
Some of my accounts are up 25% or more so far this year. We were lucky to have over-weighted airlines and some other high beta stocks. The move is not over!
BUY THE BIG BULL BOOM BUBBLE BEFORE THE BIG BUST! THE NEXT STOCK MARKET SIGNIFICANT PEAK WILL LIKELY BE WITHIN 5 MONTHS OF THE PRESIDENTIAL ELECTION IN NOVEMBER OF 2008!
Mr. Greenspan doubts the premise that the bond market is declining because of economic weakness. He hints that the reason might be excessive worldwide savings!
In 1997 when the public was over-investing in stock markets, Mr. Greenspan talked about irrational exuberance. He is reluctant to talk about irrational fear; one is not likely to hear a Fed Chairman brow beating savings but the level of world wide savings is higher than normal. (High US savings rates are masked by 401-K accounting rules).A wealthy businessman friend of mine was a heavy participant in dot.com stocks. Once burned he retreated to become an investor hermit. He still has a very large 401-K; very large indeed. It is invested bonds and in lifestyle stock funds that are heavily laden-ed with bonds.
This man's account is like many I have seen. Many of the "stock" funds people own are balanced funds of some type. Folks who think they are 60% invested in stocks are only 30% invested in stocks. The lifestyle funds automatically increase bond exposure and decrease stock exposure as the participants age--there is a lot of aging going-on.
Another problem is that investors have not adjusted for increased life expectancy. If a couple has reached the age of 50, there is better than a 50/50 chance that one of them will live beyond 90. Those with a 40 year investment horizon should have much exposure to stocks but advisors are suggesting to those 50 and older to reduce stock exposure and to increase bond exposure. These advisors are doing a dis-service to the financial health of these investors.
With excess savings around the world, bond yields get pushed down in the same way that stock prices were pushed too high in '99. It is irrational to buy a 30 year bond at 4.2% unless you believe a depression is at hand. Some hedge funds are probably borrowing money at a 3.2% rate and using it to buy bonds paying 4.2% but this is a very risky strategy.
Layers of irrational fear are fading away. Ironically it has faded faster in regard to airline trips than it has for investable dollars. Airline traffic is at all time highs, so the fear of terrorism is subsiding. Dollars are not distributed as evenly as airline tickets. Many wealthy folks have hunkered down. They have invested trillions into hedge funds--accepting mediocre returns and unwilling to bet on the long-term economy.
6.25% MINUS 4.2% DOES NOT EQUAL ZERO!
The nominal GNP in the US is running at about 6.25%; the long bond is yielding 4.2%; large divergences cannot last forever. This spread will narrow. Stocks are yielding 6.25%--stocks are in line with GNP but bonds are not! I expect the spread to narrow within 6 months. Bond rates and the yield curve suggest it will be GNP that will come down. The house hold survey, home sales data, non-manufacturing data and the stubbornness of commodity prices suggest the FOMC still needs to bump short rates as the economy is still strong and therefore the long-bond rate must rise. The spread between stocks and bonds could become rational by a parallel increase in stock prices and decrease in bond prices.
Steve Roach has capitulated. After calling for higher rates, he and many others are now talking the fear of recession and low long rates. My bet is with Greenspan. He chooses his words careful. Instead of talking about the conundrum--I prefer talking about IRRATIONAL FEAR, but the most likely resolution of either is a slower GNP of perhaps a real rate of only 3% and higher stock prices and lower bond prices.The spread will disappear as stocks climb the wall of worry. Stocks are likely to break out of the long trading rang just when the long bonds are taking a beating. It is not unusual for stocks and bonds to increase in value for a time and then to come uncoupled. It makes professionals and consumers alike very nervous to have stocks going up at the same time interest rates are going up, but some great moves in the market have been of this type.
The proof is in the pudding. The FOMC has raised short rates 8 times and those who were in stocks at the start of the rate increases have made excellent rates of returns--bonds have done better than almost anyone projected.
Some of my accounts are up 25% or more so far this year. We were lucky to have over-weighted airlines and some other high beta stocks. The move is not over!
BUY THE BIG BULL BOOM BUBBLE BEFORE THE BIG BUST! THE NEXT STOCK MARKET SIGNIFICANT PEAK WILL LIKELY BE WITHIN 5 MONTHS OF THE PRESIDENTIAL ELECTION IN NOVEMBER OF 2008!
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