Business

Alan Greenspan: We Are In A Bond Market Bubble

WHEN: Today, Thursday, March 1, 2018

WHERE: CNBC’S “Squawk on the Street”

Following is the unofficial transcript of a CNBC interview with Former Federal Reserve Chairman Alan Greenspan on CNBC’s “Squawk on the Street” today, Thursday March 1st. Following is a link to video of the interview on CNBC.com:

[REITs]

Check out our H2 hedge fund letters here.

Alan Greenspan
By While provided by the Bureau of Engraving and Printing, it is a Federal Reserve image. [Public domain], via Wikimedia Commons
Alan Greenspan: We Are In A Bond Market Bubble

Alan Greenspan: We are in a bond market bubble from CNBC.

Carl Quintanilla: as we said, we’re moments away from the fed semiannual monetary policy report to the senate. We’re going to take you there live as soon as q&a begins. In the meantime, the dow and s&p coming off their worst month since January of ‘16 amid this heightened volatility as investors brace for higher rates perhaps in inflation. Joining us to talk about that, former federal reserve chairman Alan Greenspan is with us. Dr. Greenspan, always great to have you. Welcome back.

Dr. Alan Greenspan: thank you very much. Delighted to be with you.

Quintanilla: I wonder if you remember your first Humphrey-Hawkins and if you think Powell has anything to walk back from Tuesday?

Greenspan: well, it’s not only the first. It’s every one thereafter. It’s an interesting issue. A small minority, maybe a moderate minority, of the congressmen and representatives are truly interested in what the facts are that they’re not interested — they don’t know. But there is a big— significant number of people who are trying to find ways to make themselves look good to their constituents back home. Now, Jay Powell has been around quite a long while. He knows his way around this particular problem, and I suspect he’ll do very well as he did the last time and will continue to do so.

Quintanilla: He’s going to come in this morning armed with some fresh data that we’ve now seen, namely a core pce from this morning as rick just brought us, some of these ism numbers. A 6 1/2 year high on prices paid. How do you think he’s going to put that into a framework?

Greenspan: well, I don’t know how – are you asking how Jay Powell is going to do it or how I would do it?

Quintanilla: let’s say how you would do it?

Greenspan: Well, first, the issue is basically what is your economic forecast and why? As I said the last time I was on the show a couple months ago, I think that stagnation, which has been driven largely over the last five to ten years by a gradual encroachment of entitlement spending on gross domestic savings, and entitlements are rising because they’re mandated, and gross domestic savings is residual of what is left over. And the data are unequivocal on this that sum of the two are flat, meaning the entitlements are crowding out the gross domestic savings. But gross domestic savings, along with the amount of savings we borrow from abroad, is what gross domestic investment is, and gross domestic investment plus some educational issues is the key factor in productivity growth and productivity growth is the key factor in overall economic growth. So I’m reasonably short-term optimistic, largely because I think the tax cut is in the right place mainly in the corporate sector but I find the longer-term outlook rather dismal.

David Faber: And Chairman Greenspan, it’s David Faber. You’ve discussed this before, in particular of course, entitlements. You mentioned it’s been a couple months since we’ve spoken to you, and on the same topic but a bit apart from it, deficits. I’m curious to get your take given the tax cut the deficit will be generating, which we have a better sense of now, and of course the budget deal as well, which is adding to that deficit, particularly given what you said about what is mandated spending on entitlements. Is it a concern, a growing concern for you, and will it crowd out others as well when it comes to the bond market?

Greenspan: absolutely. And I think that’s the main problem we have that we’re disregarding it. The real problem is not monetary policy that’s going to run itself, and the fed is fairly sophisticated in all the increments involved, especially the new chairman.But what isn’t the case is the longer term outlook for the budget deficit, which is downright scary. And budget deficits inevitably engender some introduction of an acceleration of money supply and price level expense. In other words, inflation is going to enter into the stagnation, and as I’ve been arguing for a long time, we are already moving into stagflation, which actually feels better than stagnation because, for example, profit margins are moving up. The data for January are not too bad. And actually, if you look at the overall outlook short-term, you’re beginning to see the effects of the substantial cut in the corporate tax rate. Remember, the corporate tax rate is the critical issue in this tax cut. The other elements of it are really secondary. But this is an extraordinary effort because the last time it has been done was Ireland. Ireland had very much the same 3% to 3.5% marginal upward tax rate and they brought it all the way down, cut it in half, more than that. And the result was an acceleration in productivity growth. I think that’s the one positive fact that’s on the agenda at the moment, but longer term, the entitlement issue is irresistible because the population is ageing and ever more a larger number of entitlements are coming on stream that is going to make the productivity outlook very iffy. And that worries me considerably.

Morgan Brennan: Fed Chairman Greenspan, this is Morgan Brennan. In light of the comments you just made and sort of this talk about budget deficits, I mean, we’ve heard a number of high-profile investors recently, Paul Tudor Jones, Ray Dalio, Bill Gross all say they think the bond market is a bear market. What is your take on the markets right now in light of this fiscal situation?

Greenspan: well, you mean what do I think of the markets generally?

Brennan:  yes.

Greenspan: Yeah, well, I would say we are in a bond market bubble. And a bond market bubble really means that prices are too high and when they move down, long-term interest rates move up. And if you take a look at the structure of not price earnings ratios, but earnings price ratios in the stock market, you find that the critical issue of what engendered some of the strength in the recent period is essentially the decline in real long-term interest rates, as is factored into the market. That is in the process of changing. And I think that the bond market bubble is now beginning to unwind, and that is going to bring us ultimately into a state of stagflation. And beyond that is very difficult to tell. This is not an easy economic outlook because there are too in variables, which we haven’t seen in recent decades.

Quintanilla: Right. One final variable we want to ask you about, you know, people have gone back and looked at Powell’s transcripts in some meetings back in 2012. He was a little bit less convinced than some of his colleagues that the quantitative tightening would be smooth. And we’re a month away or so from going to 90 billion a quarter. Some worry if it’s going to no longer be like watching paint dry. What do you think?

Greenspan: I’m not — I don’t really have a real opinion on that. What specific part of that do you want me to comment on?

Quintanilla: I guess, do we anticipate any noticeable effects on ancillary markets, equities, for example?

Greenspan: well, of course. If the real long-term interest rates go up and you’re in the process of having – it’s inevitable that the effect on stock prices is negative. In fact, that’s one of the really major factors determining equity price ratios, and therefore, as real long-term interest rates rise, stock prices fall. And I’m not saying what we’re looking at in the last few weeks is meaningless – meaningful, but remember, the last few weeks I think are responding to the good part of the tax cut. You know, before I got into government, I was on a lot of corporate boards in which I had to sit through preparations of capital investment expenditure processes. And what struck me all the time is when they got down to the issue, the very end of it, you had what’s the pretax rate of return on this investment and what is the after-tax return. And the after-tax return is a clean cut. So when you’re going down from a 35% marginal rate to 21%, that’s  impact on perspective investments, which is exceptionally high in a marginal sense. So I, on the one hand, in the short-term, think the capital goods markets will be okay, but longer term productivity is in for serious diminution.

Quintanilla: That certainly rhymes with what we’re hearing out of quarterly conference calls. We’re not going to get to talk to you next week on your birthday, but happy birthday in advance. Dr. Greenspan, it’s always good to talk to you.

Greenspan: thank you very much.

Quintanilla: we’ll see you next time.

For more information contact:

Jennifer Dauble

CNBC

t: 201.735.4721

m: 201.615.2787

e: jennifer.dauble@nbcuni.com

Emma Martin

CNBC

t: 201.735.4713

m: 551.275.5221

e: emma.martin@nbcuni.com

About CNBC:

With CNBC in the U.S., CNBC in Asia Pacific, CNBC in Europe, Middle East and Africa, and CNBC World, CNBC is the recognized world leader in business news and provides real-time financial market coverage and business information to more than 409 million homes worldwide, including more than 91 million households in the United States and Canada. CNBC also provides daily business updates to 400 million households across China. The network’s 15 live hours a day of business programming in North America (weekdays from 4:00 a.m. – 7:00 p.m. ET) is produced at CNBC’s global headquarters in Englewood Cliffs, N.J., and includes reports from CNBC News bureaus worldwide. CNBC at night features a mix of new reality programming, CNBC’s highly successful series produced exclusively for CNBC and a number of distinctive in-house documentaries.

CNBC also has a vast portfolio of digital products which deliver real-time financial market news and information across a variety of platforms including: CNBC.com; CNBC PRO, the premium, integrated desktop/mobile service that provides live access to CNBC programming, exclusive video content and global market data and analysis; a suite of CNBC mobile products including the CNBC Apps for iOS, Android and Windows devices; and additional products such as the CNBC App for the Apple Watch and Apple TV.

Members of the media can receive more information about CNBC and its programming on the NBCUniversal Media Village Web site at http://www.nbcumv.com/programming/cnbc.

For more information about NBCUniversal, please visit http://www.NBCUniversal.com.