At Shiller’s Adjusted S&P P/E Ratio of 30, mind you, arguably the highest  valuation level in history if we adjust for 2000 tech distortions. Understandably, he didn’t see one in either 2000 or 2007, but let’s save that for later.

He does see a massive bubble in the bond market that is bound to implode. What he talks about is both complicated and in our view rather foolish. Let’s explore.

Greenspan Sees No Stock Excess, Warns of Bond Market Bubble

“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.”

Fair enough and we agree. At the same time we wold like to point out that the above distortion is caused entirely by the FED and the policies Alan Greenspan himself developed. Take artificially suppressed interest rates away and the market will find its equilibrium at much higher yields.

“The real problem is that when the bond-market bubble collapses, long-term interest rates will rise,” Greenspan said. “We are moving into a different phase of the economy — to a stagflation not seen since the 1970s. That is not good for asset prices.”

Again, we agree. At the same time, the idiots at the FED have proven to be suicidal in terms of our long-term economic trajectory. Make no mistake, they will be bold enough to go all in one more time. Whether or not they will be successful is a different question.

Stocks, in particular, will suffer with bonds, as surging real interest rates will challenge one of the few remaining valuation cases that looks more gently upon U.S. equity prices, Greenspan argues. While hardly universally accepted, the theory underpinning his view, known as the Fed Model, holds that as long as bonds are rallying faster than stocks, investors are justified in sticking with the less-inflated asset.

Bingo. Bulls have been arguing for some time that today’s low interest rates justify almost infinite valuations. We have argued in the past that is historically incorrect. Yet, the theory sticks.

To quickly summarize, Alan Greenspan believes that today’s low interest rates justify today’s insane valuation levels. Yet, that will not be the case in the future as bond yields surge higher. When that happens, and only then, the stock market will re-price.

And perhaps he is right.

At the same time, the above is not set in stone. For instance, it can be a powerful stock market decline that gets the ball rolling on yields. Regardless of what the FED does. And not the other way around.

If you would like to find out exactly what happens next based on our Timing and Mathematical work, please Click Here.