Greenspan: "Investors need to prepare for the worst"

The stock market will remain under pressure in the coming years, and investors should prepare for the worst. Alan Greenspan, former chairman of the US central bank, said this in a interview with CNN. He said he was not surprised by the recent turmoil in the stock market because it fits with people's herd behavior. Still, he also sees fundamental reasons for the decline in stock prices.

According to Greenspan, the fall in the stock market can largely be explained by the rise in interest rates. His outlook for the next few years is that the U.S. economy will enter stagflation. This is a situation in which the economy is not growing, but inflation is rising.

"Does this correction come as a surprise to you?

It's not a surprise, because human nature isn't a surprise. Volatility is a function of how we talk, think and feel. It is variable, there is herd behavior in people, there are all kinds of characteristics. If you put all that together in the financial markets, you can see that it is moving.

Are we still in a bull market in equities?

Not really. You can see that in the reaction of the past few days. I would be surprised if we stabilized at this level and then went up again. That has happened in the past, but at the end of such a rally you really have to take cover.

What message is the bond market trying to send right now?

What's happening now is that we're going to have a very significant rise in real long-term interest rates. If you compare it to the last 15 to 20 years, that's the main factor pushing the stock market down. In fact, all recent weakness in the stock market can be attributed to this. I think this will continue to be the case, because we are now in a period where interest rates will continue to rise.

We are not yet through the cycle, as described in the book I co-published with Adrian Woolridge. We are moving towards an environment of stagflation. That means we're going to have inflation and stagnation, and that's a toxic combination. And the outlook isn't exactly positive.

Where do you see the risks of too much debt today?

The debt ratio is average. I think it will rise further, but that is not a critical point. The most important thing is the bad loans. It's not so much the high debts, it's the debts that arise in the context of bad loans. As long as you don't have it, there's no problem."

This contribution was made from Geotrendlines