Wednesday, December 12, 2012

Lloyd Blankfein: Bond bubble is looming

This is mind blowing. Here's the guy running the biggest investment bank in world, whose firm trades billions $$ in bonds each day and he doesn't understand that the Fed sets interest rates and can keep the Treasury market bid and rates at zero for as long as it wants.

And he says this, on a day when the Fed literally is handing bond traders its "playbook," saying it won't raise rates until the unemployment rate dips below 6.5%. So invfestors have a green light to stay long bonds or refrain from shorting until then.

But Blankfein is worried about an imminent bubble. These Wall Street titans really don't know what they're talking about. They really, really, don't. It's amazing that they make the kind of money they do.

"I think that is one of the big risks that are looming out there right now," says Blankfein. But while low interest rates have been great for corporate borrowers, Blankfein says it may also be creating losses that we will have to deal with later. "Someone is buying that debt," says Blankfein. "What's going to happen when growth picks up and interest rates rise? There's going to be a reversal and people will have losses."


Tom Hickey said...

Ray Dalio, too.

Tom Hickey said...

And Jeff Gundlach shorting yen.

Daniel Jones said...

the Austrians have been predicting a bond bubble for a couple years..

Tom Hickey said...

Right and it hasn't happened because, get ready for it, the Fed sets the interest rate, not the market, as everyone seems to assume.

The yield curve is a projection of expectations about future Fed policy. The Fed just told the market that it does not plan to raise the rate until employment comes down or the rate of inflation rises.

Mike Norman said...

And Jeff Gundlach shorting yen.

Yeah, but I'm long yen and getting KILLED! :(

Greg said...

I wish someone would really ask these guys what they are waiting for? If they really think that bond vigilantes can control the fed why havent they yet?

Why havent they attacked the US in the last 4+ years if they are capable of such an attack? What are they waiting for. They attacked Europe early. Obviously they didnt wait to make a fortune in Euros. Why wait on dollars? Is there more to be made by waiting longer? They are just going to have to pay more taxes soon! Are they not interested in maximizing return today? Right now?

If we dont see them do their vigilante *thing* (whatever it is they do) by the time a new tax plan is enacted, cutting their potential take home gains, Im gonna assume they are just a bunch of sissies, not worthy of being called vigilantes, or capitalists. Arent capitalists supposed to capitalize ?

Tom Hickey said...

Yeah, but I'm long yen and getting KILLED! :(

Wait for the the short squeeze.

Mike Norman said...


Right! And where were they when the US credit rating was downgraded. If there were ever a time for vigilantes, that was it!

Adam1 said...

The correlation between the US Treasury 10yr and the FFR over the past 60 or so years is .89

The correlation with inflation is .66

The correlation with nominal Federal Debt is -.39 and the correlation with Federal Debt to GDP is -.50

No empirical evidence of vigilanties that I can see.

R VMarkov said...

IMO, all of these masters of the universe are just lucky or, otherwise probably, doing something in the grey area to be able to make profits for their investors.

Not too many are skilled enough in single stock pickings, like Mr. Buffett - a skilled micro guy.