In response to an FT Markets Insight by Alberto Gallo on 11th August 2014, entitled 'Unwary yield hunters risk liquidity trap'
"High-yield bonds have had a record run. With a cumulative return of more than 150 per cent since 2009, they have beaten stocks in three out of the past six years. But the market is now stumbling, and regulators have highlighted signs of frothiness. With the end of the US Federal Reserve’s low-for-long policy in sight, investors are set for a rough ride...Yields are near record lows and liquidity in secondary markets is declining, making it harder to exit swiftly. Reducing exposure earlier could be a wise decision"
Part One - The wisdom of Alan Greenspan:
"I don't know where the stock market is going, but I will say this, that if it continues higher, this will do more to stimulate the economy than anything we've been talking about today or anything anybody else was talking about"
The real world surrounding Alan Greenspan: Low interest rates + massive borrowing + investment in over-valued stocks by people who believed in Santa Claus.
Result - the bursting of the tech’ bubble
Mr. Greenspan’s policy response? Even lower interest rates. We can spend our way out of debt.
Part Two - The wisdom of Ben Bernanke:
“Well, unquestionably, housing prices are up quite a bit; I think it's important to note that fundamentals are also very strong. We've got a growing economy, jobs, incomes. We've got very low mortgage rates. We've got demographics supporting housing growth. We've got restricted supply in some places. So it's certainly understandable that prices would go up some. I don't know whether prices are exactly where they should be, but I think it's fair to say that much of what's happened is supported by the strength of the economy”.
The real world surrounding Ben Bernanke: Low interest rates + massive borrowing + investment in over-valued housing by people who believed in Santa Claus.
Result - the bursting of the housing bubble.
Mr Bernanke’s policy response? Even lower interest rates and QE. We can spend our way out of debt.
Part Three - The wisdom of Janet Yellen:
“There is evidence of reach for yield behaviour...but ...concerns around financial stability remain moderate”
The real world surrounding Janet Yellen: Low interest rates + massive borrowing + investment in junk bonds by people who believed in Santa Claus
Result - Coming soon to a market place near you…the upcoming release of the Federal Reserve’s latest blockbuster…”Look out Below”, starring Janet Yellen as the policy maker who couldn’t see it coming, Ben Bernanke as the guy who got out just in time, with special guest star Alan Greenspan as Yoda
Ms Yellen’s response? Don’t hold your breath…