Counterparties: Not all that bursts is a bubble

By Ben Walsh
February 5, 2013

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If you aren’t terrified about the coming bond bubble, you should be, according to those who have taken it upon themselves to play interest-rate Paul Revere. Finance heavyweights like Lloyd Blankfein, Gary Cohn, Bill Gross, and Jeff Gundlach have each voiced their concern. Fitch has chimed in too.

There’s nothing particularly new about these warnings. Businessweek’s Roben Farzad charts the “many cautionary, even alarmist, headlines” that have appeared over the last six months. Quartz’s Matt Phillips says that we are now in the fifth year of headlines warning of a spike in rates.

The Washington Post’s Neil Irwin can’t find much evidence of a bond bubble, concluding that “rising rates [are] more likely to occur for good reasons — because the economy is getting back on track — than for bad reasons”. All the worry is “peculiar legacy of the financial crisis”. “Among the financial commentariat,” he writes, “there is a tendency to see a bubble whenever the market for a particular asset rises”. Calculated Risk’s Bill McBride agrees: “I don’t see speculation, significant leveraged buying, storage or any of the other factors that defined a housing bubble”.

There might not be a bond bubble, but that doesn’t mean bonds are a safe place to invest. On PIMCO’s website, Bill Gross has an “investment outlook” that’s more detailed than his CNBC appearances. He makes the case that rising rates aren’t themselves what scares him. Instead, it’s the increasing amount of debt required to generate growth: “In the 1980s, it took four dollars of new credit to generate $1 of real GDP. Over the last decade, it has taken $10, and since 2006, $20 to produce the same result”. That, Gross says, is a problem akin to a supernova expanding by consuming itself. It’s also far beyond the limits of a bond bubble, and closer to arguments about the end of growth itself.

If that sounds a little far-fetched, look at the latest estimates from the Congressional Budget Office, which project years of depressed growth and high unemployment in the US. That’s a far bigger problem than too many people buying bonds at low rates — in fact, low growth and high unemployment, as the BIS noted in December, are most of the reason why rates are low. — Ben Walsh

On to today’s links:

Regulators
The SEC’s “chronic” enforcement problem: conflicts of interest that prevent enforcement – WSJ

Deals
For $24.4 billion, Dell will spend some private time with Michael Dell and Silver Lake – Businesswire
Why Dell is going private – Felix

Primary Sources
The full text of the US suit against S&P – Reuters

Fiscally Speaking
The full CBO budget outlook – Congressional Budget Office

EU Mess
“It is all untrue, except for some things” – Spain’s prime minister on corruption charges – El Pais

Charts
Goldman predicts an unprecedented decline in government spending – Matt Yglesias
The global youth unemployment crisis, visualized – IMF

Alpha
Underperforming Fidelity target date funds stuffed with underperforming Fidelity funds – NYT

Tautological But True
Successful management-led buyouts “successfully enrich management at shareholder expense” – Steven Davidoff

Plutocracy Now
JP Morgan advises wealth management clients to become neo-feudal lords – Bloomberg

FYI
Debt collecting via Facebook is probably illegal – American Banker

Distinctions
Illegal immigrants “break the law in the sense that everyone breaks the law” – Slate

Cephalopods
Goldman releases app to help applicants understand the jobs they probably won’t get – Goldman Sachs

Wonks
Yep, banks “use laxer standards to underwrite loans” that are securitized – Liberty Street Economics
How the IMF could save millions of jobs – Joseph Gagnon

Oxpeckers
An exhaustive etymological investigation into where the horrible term “Big Data” came from – Steve Lohr

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