Far from lauding the rally in bond markets as a welcome sign Europe’s debt crisis may be on the wane, bankers are beginning to warn the exuberance may already be going too far. The risk is rising that bond markets fueled by cheap central bank cash will soon see a “substantial repricing,” said Gary Cohn, President of Goldman Sachs Group Inc. (GS:US), in an interview in Davos, Switzerland.
Attendees at the 2013 World Economic Forum in Davos are beginning to talk on the margins about what will happen when the end of the era of cheap cash comes to an end. “If I am not thirsty you cannot pour as much water as you want into my stomach,” said Xu Xiaonian, Professor of Economics and Finance at China Europe International Business School. “Look at how much money there is in the system. Look at the balance sheet of the Fed. Isn’t that scary?”
The risks are widespread, but not imminent, according to George Soros, the billionaire who bet against the pound in 1992 and won. While there’s no “near-term” risk in developed markets, regional bubbles could occur.
“There is an asset bubble in China in real estate, sustained by lending in the quasi-banking system,” he said. “The real estate market in China is rising again. That, I think, is a potential bubble because of the source of financing.”
Check out Bloomberg TV’s interview with Goldman’s Cohn below. He discusses bubble risk about 10 minutes in.