“I’m forever blowing bubbles,
Pretty bubbles in the air
They fly so high, nearly reach the sky
And like my dreams they fade and die.”
From “Forever Blowing Bubbles”
Bubbles are everywhere, according to Bill Gross, aka The Bond King.
According to Gross, there’s a bubble in Treasuries, a bubble in narrow credit spreads and a bubble in high-yield prices. The stock market appears to be in a bubble, too.
The problem with bubbles is that we won’t know we’re in one until it pops. And when it pops, it’s too late to do anything about it. A bubble can cause all sorts of problems, as you may recall from the dot-com bubble in the ‘90s and the housing bubble in 2008.
The current bubbles, Gross believes, were created by The Federal Reserve Board, Bank of Japan and other central banks that “keep writing checks and do not withdraw.” They are blowing bubbles and, “When that stops, there will be repercussions.”
“It doesn’t mean something like 2008,” Gross said, “but it does mean the potential end of the bull markets everywhere – not just in the bond market, but in the stock market and a developing one in the housing market as well.”
Perhaps the only positive is that it will put an end to the Alice-in-Wonderland fantasy existence we’ve been maintaining, which enables the stock market to hit record highs and the bond market to thrive while the economy remains in the doldrums.
As Zerohedge put it, “When you tell the populace that we can all enjoy a free lunch of extremely low interest rates, massive Fed purchases of mounting treasury issuance, trillions of dollars of expansion in the Fed’s balance sheet, and huge deficits far into the future, they are highly skeptical not because they know precisely what will happen but because they are sure that no one else – even, or perhaps especially, the policymakers – does either.”