Is This the Last Great Bubble? 19 comments
Nicholas Jones
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If I were to put the blame of this current financial crisis squarely on the shoulders of one individual, hands down, Easy Al Greenspan would be in the middle of my cross-hairs. The combination of his loose monetary policy, praise of exotic financial derivative instruments, and encouragment of living beyond our means has directly resulted in the current financial mess.
The root of these issues can all be traced back to the growth of money and credit that made all of this possible. When money and credit are created, the most common vehicle to get the fiat garbage into the economy is financial markets.
When the money enters via financial markets, it has to find a home. This is exactly how growth in the monetary base results in inflation of asset markets. Unfortunately this sort of Keynesian based economic policy, if allowed to run its course, results in a sort of inflation/deflation cycle.
Blowing Bubbles
First was the Dot Com bubble. Once that bubble burst, deflation ensued as markets declined. Greenspan and company reacted by lower interest rates to negative real levels and pumping up the money supply. The deflation, followed by reflation, is the exact thing that is occurring now, but on a much smaller scale.
You see, Keynesian economics can't go on forever. The notion of wealth creation through debt creation is SIMPLY FALSE, but that's the world we live in.
Anyways, Easy Al's reflation following the Dot Com bubble required more money and credit to keep afloat than it took to cause the tech bubble. Once again, we had massive money and credit entering the economy via financia markets. This time it took some more creative thinking to get that money behind an asset; hence the creation of the now infamous exotic mortgages.
As we are all well aware of at this point, that bubble has burst too. What we are realizing, and it's an important part of the Keynesian process, is that this bubble was much larger and affected a lot more people.
That's how Keynesian economics works. Growth in money and credit can go on for some time and actually appears as economic growth in the short run. That is why these policies are enacted. All policy makers care about is the short run and reelection, and that also happens to be why Greenspan lasted so long.
Eventually the monetary base wants to contract and revert to the mean. The only way to prevent this is to flood the economy with more money and credit. The problem is that each contraction of money and credit is significantly larger than the prior one. What that means is that it will take more money and credit to prevent it from deflating; and what that means is another bubble, but on a larger scale.
Popped Bubbles
This next bubble will be the last bubble of this economic cycle, and with it will come the death of Keynesian economics as a respectable school of economic thought. Let's think about this.
Right now we are reflating on a level that dwarfs the reflation that resulted in the housing bubble. As a direct result, I PROMISE YOU THAT THERE IS CURRENTLY A BUBBLE THAT DWARFS THE MORTGAGE MELTDOWN THAT IS ABOUT TO BURST.
I'm referring to long dated U.S. Treasuries. I know I've mentioned this in recent posts, but I wanted to take the time and look specifically into how it has formed, and give you some sort of comparison as to the size of this thing. More importantly, I've recently come across a way to play this bubble that should not be overlooked.
I'm not going to get into the fundamental weakness that will result in the inevitable popping of this bubble. I have covered these issues in my most recent B&B articles. You can find them by clicking here.
Understand Bubble Finance
The problem with going short long dated treasuries is that there are very few financial instruments to play this trend. In fact, until very recently, I was under the impression that the only plausible way to short government debt was through the futures market. Futures markets are definitely not ideal for the average investor, especially with current market volatility.
Then I stumbled across a little something called the Profunds Rising Rates Opportunity Fund (RRPIX). This fund is like an inverse ETF, but in bond form. Here's how this works; The fund represents 125% the inverse daily price movement of the most recently issued 30-year notes. DO I NEED TO REPEAT MYSELF? This is EXACTLY what the doctor ordered.
I really want to put this into perspective for you. I've talked to several of my close friends and family about this issue. I usually describe it in one of two ways:
Getting short long dated government debt right now is like getting long gold in 2000. Gold had to move 150% before people stopped calling me crazy. This, like gold in 2000, is a serious contrarian play. The main stream media won't pick up on this and/or will consciously not cover this trade until a lot of money has already been made.
The other comparison I make is, imagine getting short the mortgage market 16 months ago. Multiply that trade several times over, and that's what were looking at with this last great bubble. Please consider this trade, and don't find yourself playing the would of should of game.
And one last thing, I'm not a change the world kind of guy. I don't write my public servants about current financial socialism and other issues, because I don't really care. You may hate me for it, but it's that attitude that makes me darn good at what I do. By staying emotionally detached to political/economic current events I can take a non-biased approach that allows me to identify key money making opportunities. That doesn't mean I'm a heartless individual either. I am spreading the word of the "Last Great Bubble" to the people I care about. That's how I make a difference and I encourage you to do the same before it's too late.
Disclosure: The author and publisher do not hold positions in the securities mentioned.
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This article has 19 comments:
My question to the author - are there better vehicle than the TBT right now?
this guy is a SCHMUCK!!! THAT IS WHY HE DOESN'T OWN IT!
you tell me where you are going to make more money.a treasury bill or rrpix.take a look at thier chart.more bs.preservation of capital!
Just don't do it soon. Long-dated US paper may be headed towards a precipice, but right now it's a freight train that will flatten you thinner than a copper penny. The trend will change...
Can you tell us why the long TSY bubble will burst?
thx,
Alex
To try to answer Alex's question (and I don't mean to speak for Nick): We've been trying to solve the problem of easy money (abundant low interest loans) with more easy money. The treasury is issuing low interest debt at an unbelievable place, almost half to foreigners. We do not have the means to pay this debt in real terms, so we will print more and more money to pretend we are covering the debt. When it dawns on everyone that this is what we are doing, they will dump our debt, and the Fed will have no control over interest rates.
It's important to understand that when rates rise, existing bond prices fall. A while back, I ran some examples and I figured if rates go to 10%, treasury long bond holders will lose about 50% (flight to safety?). So, it's just a question of when the world loses it's appetite for our debt. And your guess is as good as mine.
I hope Nick would agree with that explanation.
M3 has been contracting at a very rapid rate. The fed has not been "printing money", as you say. They are issuing low cost debt to buy potentially high return assets. They are expanding the balance sheet, not issuing debt and spending it.
Also, using your logic, Japan would be now where you predict the US will be. their country debt is 170% of GDP, up from almost 0 in the late '80s, are projected to lose 2/3rds (yes, 2/3rds !!) of their population by the end of the century. With foreign reserves at less than 1/7th of national debt, they are much less likely to be able to pay back the debt. Their 30 yr bond is at a 2.25%.
Alex
Bonds getting blasted everywhere. Treasuries could well be next.
The market(s) (all of them) try to hurt as many people as possible. What could be better than sinking the Treasury market?
The flip side of this trade is probably gold with way too many digits. Especially with the wicked correction from $1030 to $700 and perhaps further.
"Keynesian based economic policy" where is this in the General Theory?
"This is exactly how growth in the monetary base [sic] results in inflation of asset markets" -- tripe
Issuing short term debt is printing money. You say "potentially high return assests", I say gambling. Going gambling with newly printed money means you are probably going to need to print more very soon. How does it end? When no one wants to lend you money anymore.
If US citizens held the vast majority of US debt (as is the case in Japan) I'd agree that this could go on for quite some time. But we are dependent on the kindness of strangers, who quite frankly, never liked us much. What we are vulnerable to is a stampede out of treasuries.
I can't predict when the US will lose it's credit rating, but it's credibility rating is already gone.
Also on SA at: seekingalpha.com/artic...
This is my largest dollar-denominated position by far and I intend to own it until yields reach the 10-12% range - because I'm conservative and don't want to be too greedy; my gut tells me these bonds are worthless and I should be planning to short to zero. Since I do not use (additional) leverage there is no reason for me to sell until I can do so on my own terms. Anyone can see that the bear has spared this particular asset class thus far and will in time turn his full fury upon it, and that the government is determined (what else does it know how to do?) to print and borrow and spend in unlimited quantity, so my patience here is likewise unlimited. I don't really care about mark to market losses when I'm betting against macro imbalances.
The market corrects imbalances like these. Always. You just have to wait and endure. I ought to know - I've been living in the San Francisco Bay Area since 2000, watching my friends' and neighbours' houses appreciate like rockets, refusing to buy the whole time because I knew the prices were too high. They took out equity and went to Tahiti; I mailed off another teeny rent check. Yes, I left money on the table. But they're not going to Tahiti this winter, while I'm in the same apartment paying the same rent - and sitting now on a pile of gold watching their world crumble and waiting for my next big profit.
Patience.
"The American government bonds are the world’s last bubble and the price of commodities has to increase." Jim Rogers
Jim has said that he IS short US Treasuries.
On Oct 24 11:59 AM daytrader wrote:
> mcadoo3312
>
> this guy is a SCHMUCK!!! THAT IS WHY HE DOESN'T OWN IT!
>
> you tell me where you are going to make more money.a treasury bill
> or rrpix.take a look at thier chart.more bs.preservation of capital!
Since the Fed has lowered it to 25 basis points, there's not much lower it could go. Don't forget the massive amount of bonds and TBT held by foreigners. At some point they will demand higher returns (i.e. interests), or they'll dump the dollar.
Bottom line: This is a bet that long term rates will go up, everything else is noise.