Serial Bubbles: Now It's Bonds

First it was high-tech boom. Then it was real estate. Now it is the bond bubble. Bonds have appeared to go into the last phase of parabolic rise.

Fall it must eventually, yet the timing is hard to determine. The timing could probably be approximated from the log-periodic power law which puts a hard limit on the parabolic (or rather super-exponetial) price function. For this bond bubble however, it is going to take quite a lot of “approaching infinity” for it to burst since the Federal Reserve does have the capacity to print infinite amount of money to buy up bonds. According to the log-periodic power law, at the time of burst, the rate of money creation is infiinity. Let’s see if we get there. Of course, centra bankers would think that the money printing power grants them a staying power for continuing to blow the bond bubble. But mathematically, the time to burst is finite in time.

Wishing to lower the long term interest rates so that housing markets will not deflate or collapse, the Federal Reserve does not learn from financial history that ALL financial bubbles cannot be reflated. Not a single bubble in human history that I know of was reflated over its peak in the duration of less than 20 or even 100 years. In fact, bubbles like the Tulip bubble never get reflated again. The only way to save this economy is to have a dramatically lower US dollar to create mild to high inflation. That is the only way to sustain or increase the housing nominal prices at the current level, while let the housing markets slowly go back to a healthy balance between supply and demand at the inflation-adjusted price. With higher inflation, there will be higher rents. With higher rents, the housing prices are automatically supported. Lowering the long term interest rates is simply not sustainable. It is creating unnecessary further dislocation of precious capital in the marketplace.

We just passed the mid-point (2007/2/27) of the current 52-year cycle of a private wave of economic confidence, which will last until 2033. I would rather put this private wave as a non-public wave, meaning that gradually we will be losing more and more confidence in public government (and government bonds too). If the economic confidence model by Martin Armstrong is really correct, I think you may add another bubble after the bond bubble, which could be the gold bubble.

Comments

[Smarty_Pants:]

Aside from the inclusion of a chart for the DJIA instead of the 30 Year T-Bond ($USB at stockcharts.com) this was an insightful article. Eventually the time will come to short the US long bond for a healthy profit.

One issue implied but not mentioned is that pretty much every major currency on the planet is printing money like mad. They will jockey with each other for position (or relative worth), but they will all depreciate in purchasing power against tangible property.

Realization of this fact is what will ignite the rally in gold, eventually.

2008 Dec 19 12:19 PM

[igggy:]

If it's a bubble does that mean everyone will dump their 30-year treasuries once the tide turns around? I am just trying to figure out how buys 30-year bonds at less than 3%.

2008 Dec 19 06:05 PM

[catbox32@ya...:]

The next bubble after bonds will be Gold? A "Gold bubble" is better stated as the "collapse of fiat currencies"... in other words, the ultimate bubble to collapse and drive us to the worst kind of deflation is the bursting of the fiat money bubble. Everything will grind to a halt because there will be no consistent means of exchange among the masses. Hopefully, this will not occur in our lifetime, but the FED seems to be accelerating us to that end.

2008 Dec 20 09:57 AM

[OldLimey:]

dtv999: " I am just trying to figure out how [sic] buys 30-year bonds at less than 3%."

1. Genuinely fearful investors.
2. People who have bought into the long-term deflation argument.
3. Conservative endowments/family offices etc. which write restrictive mandates for fixed income investments.
4. Trend following traders/programmes.
5. The Fed. (Does anybody really know when QE started?)

What I haven't listed is SWFs and foreign central banks reinvesting USD surpluses, because although they certainly won't be the ones to shout 'fire' in a crowded theatre by massively liquidating their existing holdings I do wonder just how much of their future wealth they are now prepared to entrust to the USD and its stewards. Wondering is not knowing, however - so maybe they should be listed as well.

2008 Dec 20 10:20 AM

[derryl:]

In an article yesterday Steve Hansen pointed to a May, 2003 opinion by the S.F. Fed that currency manipulation may be a final weapon in a battle against deflation. The 2003 Fed article cites Ben Bernanke's Nov.21, 2002 speech (to the National Economists Club in DC) describing tools the Fed might use against deflation.

Mr. Bernanke favorably refers to FDR's 1933-34 40% devaluation of the US$ against gold, and points out that inflation went from 10.3% in 1932 to -5.1% in 1933 to 3.4% in 1934, a fast 8.5% turnaround from deflation to reflation. He notes that "1934 was one of the best years of the century for the stock market".

Mr. Bernanke's Fed is already employing all of the other anti-deflation measures he outlined in 2002 (including massive purchases of Treasuries and possibly the debt of other countries' governments, low or zero rate loans to commercial banks, directly or indirectly buying private debt, and holding medium term interest rates near zero, in coordination with large scale fiscal stimulus by the government, all to inject new money into the system) so I think we can expect an attempt at devaluing the US$ and holding it low as long as it takes to kickstart some inflation and elevate mortgages and other asset debt above water.

But for devaluation to succeed, other countries will have to agree to not simply devalue their own currencies in lockstep. There have been threats in recent years from oil exporters to value oil in some currency other than the US$, so if the US devalued and others didn't, and oil exporters demanded Euros or Yuan or Yen, then the US$ price of oil imports could go right back to $100/barrel levels even if the price of oil remains depressed. There would be US price inflation with negative balance of trade consequences along with 'oil price recession' pressures as energy costs squeeze out spending on everything else.

Monetary policy is treading in unknown territory. There will be unanticipated consequences that can only be reacted to, not prevented. There may well be a "gold bubble" if fear of fiat money collapse or hyperinflation gains strength.

I don't think fiat money will collapse and I don't think we will see hyperinflation but this is guessing, not predicting. Many advisors recommend holding 5% of your assets in gold just in case. It's probably not a bad idea. Anything could happen so it's probably wise to cover all bases. I have a feeling that deflation will be defeated and the economy will be revived over the next year or so with some inflation/reflation, but who knows?

2008 Dec 20 11:48 AM

[henarl:]

So then, should we be buying TBT now?

2008 Dec 20 02:06 PM

[bearfund:]

The only bad thing about TBT is that you're short Treasuries against dollars. You really want to be short Treasuries against gold. You'll still make money, just not as much. Or you could buy TBT and use it as collateral for shorting the dollar to hedge out the exposure TBT gives you. But you'll have to pay your broker's margin rate instead of the ridiculously low rates most funds can get. Since the dollar is losing value at a rate greater than 60% per year, paying 4% or so shouldn't be too bad.

There can be no such thing as a gold bubble; gold is the standard of value. What you're really saying is that the dollar will crater. Wouldn't surprise me, given how incompetent these central bankers are. Your average kindergarten student could do better.

2008 Dec 20 10:55 PM