Bubbles Everywhere?

Are we witnessing the emergence of bubbles everywhere, or isn’t the whole thing becoming a gigantic bubble? All financial assets are going up at the same time, whether it be stocks, sovereign debts, or corporate bonds! And the issuers that are considered low-risk ones, like the USA or Germany for bonds, or blue chip companies, offer very low yields, even negative ones. This results in investors looking for yield on riskier products, which makes said products more costly and yielding less.

We thus see a rush toward high-risk corporate bonds or products that remind us of the sub-prime era, like CLOs (Collateralized Loan Obligations). The risk premiums are getting flatter everywhere but, globally, the systemic risks are on the rise...

In normal times there is a natural arbitrage between assets, as « risk-free » State bonds get out of favor and people invest in stocks, but it isn’t happening now. True, central banks, notably in the USA and Japan, are acquiring a major part of their respective country’s debts, but that doesn’t explain everything.

Developed countries as well as emerging ones are benefiting from this general hike. Commodities, even if their course has been erratic, have benefited as well. Oh, yeah... there is one asset going down a bit these days, gold. Gold hasn’t joined the party. Is that good or bad?

Let’s go back a little... All this rise all over the board in financial assets is happening in a zero-growth (Europe), weak-growth (USA), or slowing-growth (China) environment. In other words, it is not tenable on the long term. This rise is happening on the hope of a recovery, which was particularly well « sold » in the USA, but which is not materializing. Consequently, sooner or later, there will be a more or less brutal « landing ». At that point, many will be crying, but not those who own gold.

When will this happen? Hard to say, of course, but up to now central banks have been explaining that they were in control of the situation and that they would not hesitate using all available tools in case of dangerous imbalances. However they, or at least Ben Bernake, now seem to be a little worried about it. Last Friday he stated : "In light of the current low interest rate environment, we are watching particularly closely for instances of ‘reaching for yield’ and other forms of excessive risk-taking, which may affect asset prices and their relationships with fundamentals". If the head of the Fed is starting to be worried about bubbles, one should be really scared!