Rosenblatt Securities’ Reynolds: Credit Bubble Building

Friday, 30 Nov 2012 08:51 AM

By Dan Weil

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A credit bubble is brewing that will carry stocks and bonds higher for the next two to five years and then burst with a vengeance, says Brian Reynolds, chief market strategist of Rosenblatt Securities.

“People always overdo it [leverage] while they’re doing it,” he tells CNBC. “It’s a positive for share prices. When this cycle ends, we’re probably going to have more leverage, and that means the next bear market will be worse than the last one.”

That’s not particularly encouraging given that the Standard & Poor’s 500 plunged 58 percent in the last bear market (October 2007 to March 2009).

Editor's Note: Economist Warns: ‘Money From Heaven a Path to Hell.’ See Evidence.

“It’s great while it lasts, but when the music stops it’s going to be really bad,” Reynolds says.

But he doesn’t see the party ending soon, because leverage is just starting to build. “[G]iven the demand from pensions and insurance companies that’s probably not going to happen for another two to five years.”

Many analysts have been calling for a selloff in Treasurys for months, but it hasn’t happened.

Now, “There’s a flight to quality,” Hiromasa Nakamura, a senior investor for Mizuho Asset Management, tells Bloomberg.

“The government may increase taxes on higher-end households. That’s negative for the stock market and the economy.”

The 10-year Treasury yield stood at 1.62 percent late Thursday, down from 1.89 percent at the beginning of the year.

Editor's Note: Economist Warns: ‘Money From Heaven a Path to Hell.’ See Evidence.

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