The Blackstone Group Inc. (BX), one of the world's largest private equity firms with $554 billion in total assets under management, sees growing risks for the markets right now, including a largely overlooked "mother of all bubbles." Moreover, there actually are troubling linkages between several negative developments that, on the surface, appear to be random and unrelated, warns Joseph Zidle, chief investment strategist at Blackstone's private wealth solutions group, per a detailed Business Insider report that is summarized below.
"The failures in the repo market, negative-yielding debt, a deeply negative term premium, trade conflicts around the world and a collapse in manufacturing all seem unrelated right now, but I don't think they are random," Zidle wrote in a recent note to clients. His biggest concern is negative yields on sovereign debt worth $13 trillion, what he believes may be "the mother of all bubbles."
- Seemingly unrelated risks produced the 2008 financial crisis.
- Today, various apparently random events actually are linked.
- Their combined negative impacts are potentially massive.
- Negative interest rates on sovereign debt may be the biggest bubble.
Significance For Investors
Zidle sees a troubling parallel with the 2008 financial crisis, which erupted after a number of apparently unrelated risks converged. Meanwhile, CEO Steve Schwarzman of Blackstone searches for "discordant notes," or trends in the economy and the markets that appear to be separate and isolated, but which can combine with devastating results.
Zidle sees negative yields on sovereign debt as the loudest discordant note today. Heavy speculation in such debt is producing massive price swings, at odds with the traditional stability that fixed income securities give to investment portfolios. For example, a 100-year bond issued by Austria doubled in price within 2 years.
Schwarzman has similar concerns about interest rate cuts by the Federal Reserve. “Interest rates are historically low in the United States, and you keep driving them lower, where do you get? What’s the objective?” he asked rhetorically during a recent interview with MarketWatch. “If you push down [interest rates] too much, you create the problem you are trying to solve,” he continued, indicating that low rates are hampering economic growth, in his opinion.
Schwarzman also worries about slowing economic growth and rising numbers of IPOs from loss-making companies. As recently as 2018, he notes, the world economy still enjoyed largely synchronized growth. Now most countries are in slowdowns. He calls IPOs from unprofitable companies "signs of excess" that often accompany the late stages of an economic expansion. Indeed, large numbers of unprofitable companies going public also marked the dotcom bubble, per a report in Bloomberg.
Harris Kupperman, president of Praetorian Capital Management and CEO of Mongolian Growth Group, has similar concerns. "When you push liquidity through the system like they [the Fed] have the last ten years, you create a giant bubble," he told BI in an earlier report. "I've been through 2 crashes in my life, and I think this is the third one," he added. Kupperman also blames the Fed for creating a "Ponzi sector," which includes "companies that have no chance of ever earning a profit," but which attract investors.
Meanwhile, mortgage backed securities (MBS), whose cratering values were a key catalyst for the 2008 crisis, today are in vicious cycle called negative convexity. Falling interest rates are causing their prices to decline rather than rise, as described in another BI article.
Another contributor to the 2008 crisis was inflated corporate bond ratings, and that problem persists today, The Wall Street Journal reports. Additionally, high risk leveraged loans have been collapsing in value, and the total global exposure may be as high as $3.2 trillion, per the Bank of England (BoE).
Zidle believes that the biggest problem is trade. In his opinion, solving this issue would boost business confidence, keep job growth strong, and extend the economic expansion. Given the current macro environment, he does not expect a recession within the next 6 months, but he thinks that the current expansion is unlikely to persist for more than 2 years.