- Experts all across Wall Street have been throwing around the word “bubble” in reference to various asset classes.
- The most recent comments – which could be construed as warnings – have come from the Societe Generale strategist Albert Edwards and the former Federal Reserve Chair Alan Greenspan.
As Wall Street grows increasingly concerned about overheated conditions in multiple asset classes, one troubling word keeps popping up: “bubble.”
The Societe Generale strategist and outspoken market bear Albert Edwards titled his most recent research note “Double Bubble Trouble,” in which he continued his long-standing argument that stocks are headed for a reckoning, while also weighing in on the three-decade bond bull market.
Alan Greenspan, who served as Federal Reserve chair from 1987 to 2006, made similar comments on Bloomberg Television on Wednesday. Both asset classes are in a bubble, he said, attributing the bond situation to debt that has risen “very significantly.”
While the argument that stocks are at unsustainably high valuations has been bandied about for years, the escalating situation in bonds is fairly new. And the fact that both alleged bubbles are occurring at the same time has market experts on edge.
Never one to mince words, Edwards in particular has a stark outlook – one that harks back to one of the biggest economic disasters in US history.
“Just like 2007, this is another economic boom fuelled by an unsustainable credit bubble that will inevitably blow up with a rookie Fed chairman in place,” he wrote in a note on Thursday.
And don’t get him started on the stock market. For months, Edwards has been comparing today’s situation in stocks to the 1987 market crash – a parallel he drew once again in Thursday’s research.
Interestingly enough, while Edwards certainly sees worsening situations in both stocks and bonds, when he says “double bubble,” he’s referring to what he sees as twin bubbles in corporate and household debt.
It’s a lot of different bubbles to juggle for sure, but these recent warnings from the likes of Edwards and Greenspan eventual end up with the same conclusion: The bond market situation is untenable, even if specific forecasts are varied.
Let’s break down the different variations of these arguments, with a focus on bubble calls:
Albert Edwards, Societe Generale chief investment strategist
As previously mentioned, Edwards thinks there are bubbles in both corporate and household debt, and he likens stock market conditions to those of the 1987 crash. But his view on 10-year US Treasurys, a lightning rod for a unique situation, is surprisingly tame – at least for now.
While he’s undoubtedly one of the most consistently bearish strategists on Wall Street, he argues that despite the bond sell-off, we’re not yet in a bear market. That will come only when Treasurys are yielding more than 3%, he says, citing the work of the SocGen technical analyst Stephanie Aymes.
Once that level is breached, all bets are off, and you can bet Edwards will have some typically outlandish commentary on the matter.
Alan Greenspan, economist / former Fed chair
Greenspan has been a fan of the word “bubble” since the perilous dot-com era, and he didn’t hold back from using it on Bloomberg Television on Wednesday.
“There are two bubbles: We have a stock market bubble, and we have a bond market bubble,” he said. “At the end of the day, the bond market bubble will eventually be the critical issue, but for the short term it’s not too bad.”
Considering Greenspan’s warnings against “irrational exuberance” ahead of the tech bubble’s explosion, investors would be well-served to heed his words.
Michael Hartnett, Bank of America Merrill Lynch chief investment strategist
Hartnett’s recent claim to fame is his coining of the so-called Icarus trade, which he defines as a reversal of the “melt up” see in stocks since early 2016. The idea is, as investors continue flying too close to the proverbial sun, their wings will melt, and they will come crashing down to earth.
While his forecast of a late-2017 meltdown didn’t come to fruition, Hartnett has continued to warn against a bubble in equities, going as far as to call investor overexuberance a “non-stop euphoric cabaret.”
Barry Bannister, Stifel head of institutional equity strategy
Bannister recently argued we are in an asset bubble, which he blames on seemingly endless accommodation from global central banks. He forecasts that US equities could drop by 5% in the first quarter of 2018 as those central banks start to tighten their purse strings, but he notes that many different assets are pricey right now.
“This bubble is central bank repressed cost of capital for all, which has made ‘all’ too expensive,” Bannister said. “That’s why central banks scaling back in unison is bearish.”