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23-09-2014, 07:03 AM
Stock and bond double bubble to end in ‘very bad way’
There are worries that ultra low interest rates from central banks have pushed investors into riskier assets and pumped up prices to unsustainable levels Photo: Reuters
JOHN KEHOE New York
One of the founding fathers of the hedge fund industry, Julian Robertson, says global stock and bond markets are in a double bubble that will end in a “very bad way”.
Mr Robertson, who earned billions betting against the American subprime housing market before it collapsed in 2008, is worried that ultra low interest rates from central banks have pushed investors into riskier assets and pumped up prices to unsustainable levels.
There are two bubbles that will “bite us”, he said at a conference in New York.
“The first bubble is that bonds are at ridiculous levels,” the billionaire investor said. “The small saver has no place to put his money except stocks. I think that the situation is serious on that score. No one seems to be concerned about that.”
Mr Robertson founded US hedge Tiger Management in 1980 with $US8 million in capital that grew to as much as $US22 billion over two decades. Now retired, the 82-year old has an estimated net worth of $US3.3 billion and still manages his own trading book, according to Forbes.
He drew comparisons between the frenzied state of the financial markets today to the lead up to the Black Monday stock market crash in October 1987 that came “out of the blue”.
“There was a bubble and it was pricked and then boom!” he said.
‘NOT THAT MUCH PRUDENCE AROUND’
Speaking immediately after Mr Robertson at a Bloomberg conference in New York, the chairman of Oaktree Capital Management, Howard Marks, said there was “not that much prudence around.”
“To replace the return that people used to make safely in Treasurys or high-yield bonds they move up the risk curve to higher risk investments to replicate the returns they used to make,” Mr Marks said.
“Along the way, they usually forget to be cautious.”
Oaktree manages more than $US80 billion and specialises in distressed debt and alternative assets. The firm has two board seats on Australia’s Nine Entertainment Co. It acquired distressed debt in the television and entertainment company before swapping it for equity when the company was recapitalised in 2012.
Central banks in the US, Japan, United Kingdom and to a lesser extent Europe have been embarked on large scale asset purchase programs in recent years, in a bid to jump start their weak economies. The policies are designed to lower long term interest rates and stimulate investment by businesses and encourage consumers to spend.
Leon Cooperman, chairman and founder of Omega Advisors, said bonds were “very overvalued”.
Global high yield bond issuance hit a new high of $US487 billion in 2013 and the record pace has continued this year, data provider Dealogic says.
Bond investors have loaned long-term money to sub-investment grade companies at interest rates below 5 per cent, compared to 8 or 9 per cent a few years ago.
DEBT FINANCING OFFERS ‘NOT ALL THAT HEALTHY’
William Conway, co-founder of The Carlyle Group, said the private equity firm was typically being offered even more debt financing than it required for leveraged buyouts.
“I’m just not real sure it’s all that healthy,” Mr Conway said. “It’s very low rates, low covenance, and enormous amounts of leverage are available,”
The 10-year US-Treasury bond was yielding 2.56 per cent on Monday, after rising about 0.15 percentage point over the past month in anticipation of the US Federal Reserve lifting interest rates. However, Treasury yields remain well below their long term average. Bond yields and bond prices are inversely related.
Mr Conway said he did not disagree with the bond bubble warning, but could not see a catalyst for a collapse.
Mr Cooperman was comfortable with US stock prices, saying they were not overvalued compared to bonds.
The US S&P 500 is trading at about 19.5 times trailing earnings, compared to an historical average of 15.5 times.
There are worries that ultra low interest rates from central banks have pushed investors into riskier assets and pumped up prices to unsustainable levels Photo: Reuters
JOHN KEHOE New York
One of the founding fathers of the hedge fund industry, Julian Robertson, says global stock and bond markets are in a double bubble that will end in a “very bad way”.
Mr Robertson, who earned billions betting against the American subprime housing market before it collapsed in 2008, is worried that ultra low interest rates from central banks have pushed investors into riskier assets and pumped up prices to unsustainable levels.
There are two bubbles that will “bite us”, he said at a conference in New York.
“The first bubble is that bonds are at ridiculous levels,” the billionaire investor said. “The small saver has no place to put his money except stocks. I think that the situation is serious on that score. No one seems to be concerned about that.”
Mr Robertson founded US hedge Tiger Management in 1980 with $US8 million in capital that grew to as much as $US22 billion over two decades. Now retired, the 82-year old has an estimated net worth of $US3.3 billion and still manages his own trading book, according to Forbes.
He drew comparisons between the frenzied state of the financial markets today to the lead up to the Black Monday stock market crash in October 1987 that came “out of the blue”.
“There was a bubble and it was pricked and then boom!” he said.
‘NOT THAT MUCH PRUDENCE AROUND’
Speaking immediately after Mr Robertson at a Bloomberg conference in New York, the chairman of Oaktree Capital Management, Howard Marks, said there was “not that much prudence around.”
“To replace the return that people used to make safely in Treasurys or high-yield bonds they move up the risk curve to higher risk investments to replicate the returns they used to make,” Mr Marks said.
“Along the way, they usually forget to be cautious.”
Oaktree manages more than $US80 billion and specialises in distressed debt and alternative assets. The firm has two board seats on Australia’s Nine Entertainment Co. It acquired distressed debt in the television and entertainment company before swapping it for equity when the company was recapitalised in 2012.
Central banks in the US, Japan, United Kingdom and to a lesser extent Europe have been embarked on large scale asset purchase programs in recent years, in a bid to jump start their weak economies. The policies are designed to lower long term interest rates and stimulate investment by businesses and encourage consumers to spend.
Leon Cooperman, chairman and founder of Omega Advisors, said bonds were “very overvalued”.
Global high yield bond issuance hit a new high of $US487 billion in 2013 and the record pace has continued this year, data provider Dealogic says.
Bond investors have loaned long-term money to sub-investment grade companies at interest rates below 5 per cent, compared to 8 or 9 per cent a few years ago.
DEBT FINANCING OFFERS ‘NOT ALL THAT HEALTHY’
William Conway, co-founder of The Carlyle Group, said the private equity firm was typically being offered even more debt financing than it required for leveraged buyouts.
“I’m just not real sure it’s all that healthy,” Mr Conway said. “It’s very low rates, low covenance, and enormous amounts of leverage are available,”
The 10-year US-Treasury bond was yielding 2.56 per cent on Monday, after rising about 0.15 percentage point over the past month in anticipation of the US Federal Reserve lifting interest rates. However, Treasury yields remain well below their long term average. Bond yields and bond prices are inversely related.
Mr Conway said he did not disagree with the bond bubble warning, but could not see a catalyst for a collapse.
Mr Cooperman was comfortable with US stock prices, saying they were not overvalued compared to bonds.
The US S&P 500 is trading at about 19.5 times trailing earnings, compared to an historical average of 15.5 times.
