Alan Greenspan delivered his now infamous “irrational exuberance” speech on December 5th, 1996, expressing his concern that stocks were overvalued. This was big news at the time because it was a clear departure from his normal reticence in regards to the financial markets, especially asset prices.
Greenspan’s concerns were eventually validated but not before stocks posted three of the best return years in history. Ultimately, he was right but painfully early.
Today Sir Alan is lamenting an “irrational exuberance” in a different asset class. Bloomberg reports:
Former Federal Reserve Chairman Alan Greenspan said the recent rise in Treasury yields represents a “canary in the mine” that may signal further gains in interest rates. Higher yields reflect investor concerns over “this huge overhang of federal debt which we have never seen before,” Greenspan said in an interview today on Bloomberg Television’s “Political Capital With Al Hunt.” “I’m very much concerned about the fiscal situation,” said Greenspan, 84, who headed the central bank from 1987 to 2006. …Historically, there has been “a large buffer between the level of our federal debt and our capacity to borrow,” he said. “That’s narrowing. And I’m finding it very difficult to look into the future and not worry about that.”
Clearly, the former head of the Fed is worried that long-term rates are too low and that they will likely rise in the future (bond prices will fall). To me this sounds an awful lot like his concern for stock prices being too high back in 1996.
He may be proved right again but, if history is to rhyme, there is a very real possibility we will see an epic blowoff in long-term Treasury bonds just like the late 1990’s stock market blowoff before it’s all said and done.
Disclosure: Long TLT