What evidence is there for a bond market bubble?

There is a saying that even a blind squirrel occasionally finds a nut. I am left wondering about this as I note that the former Chair of the US Federal Reserve Alan Greenspan has posted a warning about bond markets. From Bloomberg.

Equity bears hunting for excess in the stock market might be better off worrying about bond prices, Alan Greenspan says. That’s where the actual bubble is, and when it pops, it’ll be bad for everyone.

Actually that is troubling on two counts. The simplest is the existence of extraordinarily high bond prices and low and in some cases negative yields. The next is that fact that his successors in charge of the various central banks may start pumping more monetary easing into this bubble to stop it deflating and it being “bad for everyone”. Indeed maybe this mornings ECB monthly bulletin is already on the case.

Looking ahead, the Governing Council confirmed that a very substantial degree of monetary accommodation is needed for euro area inflation pressures to gradually build up and support headline inflation developments in the medium term.

Let us look at what he actually said.

“By any measure, real long-term interest rates are much too low and therefore unsustainable,” the former Federal Reserve chairman, 91, said in an interview. “When they move higher they are likely to move reasonably fast. We are experiencing a bubble, not in stock prices but in bond prices. This is not discounted in the marketplace.”

I find it intriguing that he argues that there is no bubble in stock prices which are far higher than when he thought they were the result of “irrational exuberance” . After all low bond yields must be supporting the share prices of pretty much any stock with a solid dividend in a world where investors are so yield hungry that even index-linked Gilts have been used as such.

What is a bubble?

This is hard to define but involves extreme price rises which are then hard to justify with past metrics or measurement techniques. With convenient timing we have seen a clear demonstration of one only this week as something extraordinary develops. From Sky Sports News.

Sky sources: Neymar agrees 5-year-deal at PSG worth £450m, earning £515,000-a-week after tax. More on SSN.

One sign that we are in the “bubbilicious” zone is that no-one is sure of the exact price as I note others suggesting the deal is £576 million. You could drive the whole London bus fleet through the difference. The next sign is that people immediately assure you that everything is just fine as it is normal. From the BBC.

Mourinho said: “Expensive are the ones who get into a certain level without a certain quality. For £200m, I don’t think [Neymar] is expensive.

To be fair he pointed out that there would however be consequences.

“I think he’s expensive in the fact that now you are going to have more players at £100m, you are going have more players at £80m and more players at £60m. And I think that’s the problem.”

Of course Jose will be relieved that what was previously perceived as a large sum spent on Paul Pogba now looks relatively cheap. Oh and did I say that the numbers get confused?

PSG’s total outlay across the initial five-year deal will come to £400m.

If Sky are correct the high property prices we look at will be no problem as he will earn in a mere 8 months enough to buy the highest price flat they could find in Paris ( £18 million). The rub if there is one is that the price could easily rise if they know he is the buyer!

The comparison with the previous record does give us another clue because if we look at the Paul Pogba transfer it has taken only one year for the previous record to be doubled. That speed and indeed acceleration was seen in both the South Sea Bubble and the Tulip Mania.

Perhaps there was a prescient sign some years ago when the team who has fans who are especially keen on blowing bubbles was on the case. From SkyKaveh.

West Ham were close to signing Neymar from Santos in 2010. Offered £25m but move collapsed when Santos asked for more money

Back to bonds

If we look at market levels then the warning lights flash especially in places where investors are paying to get bonds. If we look at the Euro area then a brief check saw me note that for 2 years yields are negative in Germany, France, Belgium, Italy and Spain. For Germany especially investors can go further out in terms of maturity and get a negative yield. Does that define a bubble on its own as they are paying for something which is supposed to pay you?! There are two additional factors to throw in which is that the real yield situation is even worse as over the next two years inflation looks set to be positive at somewhere between 1% and 2%. Also if we look at Spain with economic growth having been ~3% or so a year for a bit why would you buy a bond at anything like these levels?

Another sign of a bubble that has worked pretty well over time is that you find the Japanese buying it. So I noted this earlier from @liukzilla.

“Japanese Almost Triple Foreign Bond Buying in July” exe: buy or + buy => like a double chocolate pie

Here we do get something of a catch as the issue of foreign investors buying involves the currency as well. Whether that is a sign of the Euro peaking I do not know but in a way it shows another form of looking for yield if you can call a profit a yield. Also there is an issue here of Japanese investors buying foreign bonds not only because there is little or no yield to be found at home but also because the Bank of Japan is soaking up the supply of what there is.


If we survey the situation we see that prices and yields especially in what we consider to be the first world do show “bubbilicious” signs. If we look at my home country of the UK it seemed extraordinary when the ten-year Gilt yield went below 2% and yet it is now around 1.2%. Of course the Bank of England with its “Sledgehammer” QE a year ago blew so much that it fell briefly to 0.5% in an effort which was a type of financial vandalism as we set yet again assets prioritised over the real economy. What we are not seeing is an acceleration unless perhaps we move to real yields which have dropped as inflation has picked up.

So far I have looked at sovereign bonds but this has also spilled over into corporate bonds especially with central banks buying them. We have seen them issued at negative yields as well which makes us wonder how that all works if one of the companies should ever go bust. Yet we also need to remind ourselves that there are geographical issues as we look around as Africa has double-digit yields in many places and according to Bloomberg buying short dated bonds in the Venezuelan state oil company yields 152% although the ride would not be good for your heart rate.




The Inflationary World Of UK Premiership football bubbles on

If we look at ordinary life in the UK we see that there are quite a few disinflationary pressures right now. Many of these have been driven by the fall in the oil price represented by the fact that even after this morning’s bounce the price of a barrel of Brent Crude Oil at US $44.39 is down some 56% on a year ago. This has led us to a situation where consumer inflation is described thus by our official statisticians.

The prices households pay for the goods and services they buy remain largely unchanged on a year ago. The Consumer Prices Index (CPI) – which measures these changes – shows that prices increased by 0.1% (or 10p on a £100 shop) in the year to July 2015. Annual inflation (the overall rate at which prices have increased over the last year) has been at or around 0% for the last 6 months.

Perhaps “noflation” would be the bets description of our official consumer inflation experience although of course other measures (RPI and RPIJ) do record low inflation.

The world of UK football transfers

A completely different situation emerges however if we now look at the world of Premiership football where the numbers are rising with dizzying speed! If we go back to July then the lights were flashing amber if not red. From the Guardian.

Raheem Sterling will undertake a medical at Manchester City on Monday after the deposed Premier League champions finally agreed a fee with Liverpool that could potentially rise as high as £49m for the England forward….Agreement was eventually struck on Sunday afternoon on a deal which will cost City an initial £44m, with a further £5m due in add-ons.

This represented quite a rise on the £600,000 that Liverpool paid for him back in 2010 as we mull how much he has improved as a player, although an add-on clause will have raised that towards £10 million now. It is also true that British players tend to be more expensive than foreign ones which is one of the reasons why premiership football has so many foreign players in it.

But we found ourselves reviewing the most expensive player under-21 and also the most expensive English player ever.

How did we get here?

Back on the 4th of June I suggested that we could see this.

A spending splurge this summer?


So a lack of world-class players has led to a Champions League slump for premiership clubs. The same clubs are now in this situation of having ever more money and a stronger currency meaning that Pink Floyd may be playing.


Money, it’s a gas
Grab that cash with both hands and make a stash
New car, caviar, four star daydream,
Think I’ll buy me a football team.

Let us be clear that the boom in terms of money for premiership football goes on and on and on.

England’s top division has passed the £3 billion revenue mark for the first time and widened the gap to its nearest rival, the Bundesliga, to over £1 billion. The Premier League now generates more revenue than La Liga and Serie A combined.

Not only has it surged but it is about to again.

The next deals will commence in the 2016/17 season, with the value of the live domestic element already confirmed to be 70% higher than the current deal.

What happened next?

If we progress in Question of Sport style we have already noted the Raheem Sterling transfer but that was gazumped by the same club last night as reports began to filter out of this. From the Guardian.

Manchester City are confident they have finally agreed a deal to sign Kevin De Bruyne from Wolfsburg for an initial €74m (£54m)……which could eventually be worth more than €80m (£58.5m) with performance-related bonuses, goes through.

There is still the question of the medical and a supposed matching bid from Paris St.Germain but we do have some numbers to mull. This is because De Bruyne was bought by Chelsea for £7 million (January 2012) and then sold to Wolfsburg (January 2014) for £18 million in what seemed to be a really good piece of business. Indeed I note some 20/20 hindsight trading going on as some bemoan the lack of a sell-on clause!

I am not the only person considering the issue of inflation here as I note these comments on Twitter from Paul Hayward.

Kevin De Bruyne’s price rose faster than a cup of coffee in the Weimar Republic.

Kevin De Bruyne left England in 2014 for £18m and is coming back in 2015 for £54m. He’s hyperinflation on legs.

Of course even the £54 million will probably be too low but it is treble the £18 million Wolfsburg paid as we mull quite an inflationary burst. I think I am being generous in saying that the £11 million profit they gave Chelsea was due to a skill improvement although I am sure that readers will have their own thoughts. Measuring output and quality is somewhat intangible.

What we can say is that Wolfsburg are certainly not distress sellers as they are owned by Volkswagen but it would appear that even they could not turn down such a sum of money which in the normal world of pretty much zero inflation you could buy quite a lot with.

The ever inflating Stones

As we review the issue of the quality and output of a young man who has played for England then a wry smile passed my lips as BBC Radio 5 live reported this last night.

Stones, back at his first club, was not his usual composed self and made an error of judgement when Winnall gave the home side the lead, inexplicably stepping over his goalbound shot.

Actually this is more favourable than the radio broadcast which blamed him for two goals. Let us make an allowance for what Hard Fi described below and move on.

Pressure, pressure, pressure pressure pressure
Feel the pressure
Pressure, pressure, pressure pressure pressure

Living for the weekend [x8]

However I note that the opening bid of £20 million was more than the £18 million paid by Leeds United for Rio Ferdinand some years ago and of course it has been replaced by £26 million and then £30 million. On the other side of the coin it did appear that around £34/5 million would be sufficient but that now seems to have been replaced by £40 million. In fact even that may be old hat as I listened to Danny Mills on BBC Radio 5 Live last night going £42,3,4 million.

If we believe the hype then there may be another launch forwards. From the Daily Star.

Chelsea are in talks with Juventus about signing Paul Pogba and are prepared to make a £73m bid for the midfielder.

What about the wages?

In the normal world there was some welcome news today especially for employees of Sainsburys. From the BBC.

Sainsbury’s has given its shop workers a 4% pay rise, the highest increase in more than a decade, to take staff wages to just above average for the sector.

It says 137,000 of its workers will see their pay rise from £7.08 an hour to £7.36 from the end of this month.

Putting it another way if Raheem Sterling is getting £200,000 a week then if all 137,000 worked for an hour they could pay him for five weeks and if Kevin De Bruyne is getting £250,000 per week then they could pay him for four weeks or so.


For those who are not football fans I guess the way that it hits the headlines at this time of year has them singing along with Green Day.

Summer has come and passed
The innocent can never last
Wake me up when September ends

For the rest of us we see a world where there is clear disinflation in commodities and oil and fears of deflation as the Chinese bubble bursts. However as soon as we try to apply any quality and output measure we see that there is an extraordinary bubble going on particularly in Premiership football. Ironically it will mostly be recorded as economic growth as I doubt there is a football deflator which will do the job. So just like any other economic bubble really, what could go wrong? Not even membership of the House of Lords is growing this fast.






The China Equity Market Syndrome Is Bubbling Up

It was only yesterday that I pointed out that central banks ( Riksbank and the Bank of England) were starting to publicly admit to worries about Greece. The logic here is that some form of default would upset the world’s financial system via contagion effects. However something potentially much more systemically important is happening in the Far East to no fanfare and indeed not much attention. There have been many column inches devoted to the concept and possibility/probability of financial bubbles building in China but so far much fewer about the reality of one showing signs of bursting.

Regulatory Action

One sign of turmoil and official concern is action by regulators and my attention was drawn to this from earlier today. From the South China Morning Post.

the China Securities Regulatory Commission (CSRC) has set up a team to look at “clues of illegal manipulation across markets”.

Let us move to the China Daily which broke the news to us westerners at least.

The country’s securities watchdog announced late Thursday it will investigate suspected manipulation of the stock market as experts fail to explain worst collapse in years.

Zhang Xiaojun of the China Securities Regulatory Commission (CSRC), said the investigationwill focus on such activities occurring simultaneously in multiple markets. The CSRC has tracked irregularities between securities and futures trading.

The CSRC will transfer any criminal cases to the police, Zhang said.

Have you noticed that the regulator the CSRC only seems to have got interested when the equity market has had the “worst collapse in years”? The bubbilicious surge which preceded this decline never bothered it like this! Such behaviour concerns our suspicion that as far as equity markets are concerned the official view virtually everywhere is to sing along with Yazz.

The only way is up, baby
For you and me, baby
The only way is up
For you and me

Margin Trading

A feature of such problems is the advent and then increase in the amount of margin trading – where trading is financed by borrowed money – which the CSRC implicitly confirmed earlier this week when it did this. From the South China Morning Post.

The CSRC has also relaxed rules on using borrowed money to speculate on stock markets, letting brokerages set their own tolerance level on margin calls and allowing the roll-over of margin lending contracts.

This may be behind the sharp rally on Tuesday although phases like this do experience sharp short-covering rallies which are known by the unpleasant phrase “dead cat bounces”. The more a market depends on borrowed money or margin trading the more likely these become as things become more tightly wired and vulnerable. Reuters puts it thus below.

Much of the selling of Chinese stocks has been driven by “margin calls”, when a brokerage that has extended credit to an investor to buy stocks demands more cash or collateral because prices have fallen.

The official attempts to stop this are looking increasingly desperate. From Bloomberg.

Under new rules announced Wednesday by the country’s securities regulator, real estate has become an acceptable form of collateral for Chinese margin traders, who borrow money from securities firms to amplify their wagers on equities.

So you can finance the equity bubble from the property bubble! What could go wrong?

Paranoia Alert

I think that this from the South China Morning Post is rather extraordinary even for China.

Were foreign puppet-masters really behind the tanking Chinese stock market?

It echoes some imagery from the later Dune novels and there is more.

In a cartoon published on Tuesday by thepaper.cn, a state-owned digital media outlet that aims to engage with a young audience, an old Chinese woman is depicted as saying she wants to thank the government for helping to rescue the market. She also blames “foreign ghosts” for willing it to crash.

The cartoon immediately went viral on Weibo and WeChat, China’s two most popular social media networks.

Of course China would be far from the first country to make scapegoats of foreigners.

Actually the cause may be much nearer to home

On the lines of what goes up (especially at that rate) must come down I was interested to see this from J Capital Research in the Financial Times.

The sucking sound you hear is the average person’s bank account being drawn off into the hands of the red elite. Stay tuned, but maintain a safe distance.

Indeed the elites seem to have been behaving rather like the evil capitalist imperialists.

Ultimately, market participants all understand that the A-share bubble has been engineered to distract the average person from sinking values and illiquidity in the property markets. The pools of cash owned by Chinese people are regularly redirected to the asset classes that the government needs to rise and that elites are tapped into,

An interesting view of what is perceived to be capitalism but is really just another version of central planning.

Moving from the financial to the real economy

Iron Ore

This is another market which has been affected by margin trading and we should not be surprised that it has been unsettled by events if we recall how big a player China is in it. From Reuters.

China uses more than a billion tonnes of iron ore a year to make steel – 14 times the consumption of the United States

That is an extraordinary number is it not? Well perhaps traders are mulling it now.

the price of the raw material fell by 5 percent.

Iron ore delivered to China .IO62-CNI=SI stood at $55.80 a tonne, its weakest since late April,

This gives us link to the real economy as we know that the overall trend for Iron Ore prices have put Iron Ore solidly into a bear market. There is an implication here for the underlying strength of the Chinese economy and also for the western end of the South China Territories (Australia).

Monetary policy hints at fears for the real economy

This situation is one where the Chinese economy is plainly showing signs of slowing and what it does not need is what is happening in its equity markets. We have seen a variety of easing moves by the People’s Bank of China in 2015 with the latest interest-rate cut coming as recently as last Saturday.

The problem is a familiar one to the Greek crisis and it is that when there are worries about solvency providing liquidity and lowering interest-rates help little. If you have to pay 1% per annum less it does not help a lot if you have investments which have just lost more than 20% over the past three weeks. The situation gets worse by an order of magnitude each time the investor has geared the position by borrowing funds.


On the surface it may seem that there is little to worry about here. After all the Chinese stock market has rallied strongly and indeed more than doubled since last summer. But the catch is that the ordinary or retail investor only tends to get in on the tail end of such moves and of course any margin trading is especially vulnerable to declines and bear markets. There will be cross currents from other struggling markets like Iron Ore for institutional traders and for the ordinary person from the troubles in the property market.

Accordingly as we stand right now it looks as though the Chinese elite did not learn much at all from the problems of the evil capitalist imperialists. If they also slam into a credit crunch then on a world scale it will have much more impact than what is happening in Greece.