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speedybure (< 20)

Bubbles Bubbles Everywhere: The Next Asset Bubbles Ready To Pop

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June 29, 2009 – Comments (17)


Most People think they have seen enough asset bubbles to last them a lifetime. Even Mark Haynes The CNBC anchor has this mentality and he has been covering the financial markets for ages. Not that I think CNBC is great to begin with, in fact quite the opposite, nor do I think anything of Haynes. That being said even the so called "professionals" were and will be in for a rude awakening. He had Peter Schiff on as a guest in 2006 and looked at Peter as if he had four eyes for saying "Their was a housing bubble" (which turned out to be oh so true).
          What made Haynes reaction interesting was when he went on to say to peter "you expect me to believe there is another bubble, these things come around once in a lifetime". Well who looks stupid now? Way to go Peter, give it to the man.

           Thus far we have seen the NasDaq bubble, housing bubble & a bubble in the U.S markets as a whole (although people think we will soon return to ridiculous valuations from 2 years ago). But what if I told you 3 or 4 more bubble just in the next 2-4 years? You would think I'm crazy right? Well people thought Peter was crazy as well, so being crazy in the eyes of the mainstream is of no importance.


The Bond Bubble - For those who haven't been paying attention or are unfamiliar with the treasury market, The Fed has been artificially suppressing the natural rate of interest for nearly a decade a now. Not only does this cause an inter-temporal missallocation of resources, but it has also set the stage for unprecedented inflation and wealth destruction. Back to the first consequence those who invest capital deeper into the structure of production (those which take longer to reach the consumer) i.e electronics or other technological innovations,etc are more interest rate sensitive and rely heavily on an accurate forecast of the economy's time preference. The Fed by selling bonds via treasury auctions artificially suppresses the interest rate, eventually making these capital investments worthless as mid and long term rates can only be contained for so long. Not to mention to constant inability to forecast people's time preference as it is distorted by the FED.
So where does the bubble come in? Well if you have been watching treasury yields this year, you will notice the FED is starting to have difficulty keeping rates down forcing them to sell bonds via open market operations on a weekly basis. These aren't small auctions either, usually totaling 30-60 Billion. But where the real danger comes in, is when you look at the types of treasuries on the auction block, which have been 5,10 & 20 year. Never before has the fed interfered with the long treasury market as they are now. Obviously these auctions aren't 100% subscribed to, so the fed is monetizing the debt without having to publicly say so. Ok onto the main argument: The FED will soon be unable to control mid-long term rates, which will then send yields to the moon. You also have to remember mortgage rates are highly correlated to the 10 year. In other words, not only will this bubble cause inflation and interest rates to go sky high, but it will also cause a enormous increase in defaults for those with ARMS.


2)The bubble(ALTERNATIVE ENERGY) - Many people will disagree with the following, but I would never touch this group. I am referring to many of the alternative energy groups. I think it will play out as follows: These companies will initially be given large government subsidies to invest in their "green energy solution" i.e solar, wind,etc and report great earnings for a couple of quarters. Well of course they will be good because they have no real input costs as the government subsidizes these as well as be given generous tax credits or something of that nature. Like the dot-com bubble, people will catch notice and once again the hooker turned day trader will appear. It is instinctual for humans to try to accumulate as much wealth with doing the least work.

 

3) The Commercial Real Estate Bubble - This will be identical to the residential housing bubble but will take place later to the nature of commercial real estate. As many people own shopping centers as opposed to a single building, they are better financed, thus allowing them to pro-long the inevitable. This will definitely happen, but the question is really to what degree. Residential Housing still has two or three more legs to drop as ARMS reset, so we have just started the foreclosure process, no matter what the government or newspapers say.

 

4) The USD bubble will obviously be the most devastating. I have talked on this subject in great detail in other posts, therefore I stop myself from sounding like a broken record. But here is the excerpt from one post
"Oh so true, the current environment are the bright and happy days relative to what lies in front of us. Though I have tried to think of all the various ways the dollar could survive after the inflation hits, I have come only to one conclusion: it can't!!. A friend brought up a great idea to solve the debt problem we have with our creditor nations, but the is insignificant and goes far beyond that issue. Yes we could appease our creditors by selling them government land (which could easily cover the 13+ trillion, but there there is no way to resolve the exponetial increase in the money supply since last oct let alone that enormous increase dated back to 1998.

 The most troubling thing is the dramatic increase in deficit spending and the 50T+ of unfunded liabilities we will have in coming the not to distant future. Deficit spending up to date is about 2.9T for 2009 as opposed to 500 billion a year ago. This number is arrived at by adding CBO baseline, Tarp, Stimulus, healthcare, Amt and war (defense).

  Past Hyperinflations (Austria, Hungary, Poland, Germany) all had one thing in common: Deficit % of Expenditures hit 50%. These averaged 58% and the next year after crossing this threshold, Inflation averaged 2179%. Guess where we are today? I would have guessed somewhere between 15-20%. Unfortunately as of 2009 we hit 44%!!. Of course I don't expect inflation to hit 1000% next year, mostly due to the preceding countries included exogenous factors. Instead I think this will be identical to pre-revolutionary france, where prices went up at an accelerarating rate for 5 years until hyperinflation. I'm not a soothsayer, so I'm not saying exacly 5 years but expected it to happen around that time period give or take 2 years or so. But hey, maybe the government will stop running the printing presses 24/7, bailing everyone and their grandmother out, stop deficit spending, let banks fail, Get rid of social security, healthcare, abolish the fed and return to hard money. I know there are those who argue for healthcare like it is their god given right but lets breakdown the real costs:

 

 Healthcare costs more than housing making up 16.5% of GDP while housing makes up 10.5%. This was measured in Q3 2006. 2007 saw healthcare rise to 18.8%.. The estimated projections see it rising to 22% by 2011 and 30% between 2018-2022. That’s enough of the healthcare talk, as it is often a touchy subject. Bailouts... that's something most everyone agrees is bad: It has reached 11 trillion if you exclude tarp funds paid back but is more than negated by the money Wells Fargo and others are asking for and will get without a question.

 

  What is most troubling to me is not just the capital injections of more than 800 billion of total reserves throughout the banking system via the federal reserve, but the amount of excess reserves in the system. Obviously some will be used to cover loan losses (which could be as much as 90% inflationary for those familiar with how banks operate) and the rest for new loans which is the governments strategy to "stimulate" , whatever that means. This will likely be incredibly destructive because any new loans made will have a very high default rate as the economy continues to deepen and more jobs lost.

 To show the magnitude of this situation, one needs to look only at the ratio of excess reserves to industrial production. This ratio has been at or under .2 since 1943 and peaking before that in 1938 at .8. This time around, this ratio is 35x times larger than the historical average , currently 7.22. 

 This is a depressing enough post as it is but I wish to add one more thing. I compile the monetary aggregate (M3) the fed discontinued in 96 (for obvious reasons). As of the first week of April M3= 14.651 Trillion! which excludes the majority of the planned 300 billion dollars worth of Treasury purchases and also assumes those CDS' (1.3 trillion or so) are worth 100% instead of the realistic value of 1%-10%. Is this a lot? well in 1990 M3= about 4.2 trillion, So yes I would say so.

17 Comments – Post Your Own

#1) On June 29, 2009 at 11:12 PM, russiangambit (29.40) wrote:

>  Never before has the fed interfered with the long treasury market as they are now. Obviously these auctions aren't 100% subscribed to, so the fed is monetizing the debt without having to publicly say so. Ok onto the main argument: The FED will soon be unable to control mid-long term rates, which will then send yields to the moon. You also have to remember mortgage rates are highly correlated to the 10 year. In other words, not only will this bubble cause inflation and interest rates to go sky high, but it will also cause a enormous increase in defaults for those with ARMS.

Yes, I expect this drama to start playing out in late fall-winter. We live in intresting times. I wonder what is FED's plan to mitigate this looming disaster.  Does FED have a plan?

Last week auctions went well and the market rallied, but it doesn't mean that all the following auctions will continue to go well and at the first sign of trouble there will be a stampede out of US treasuries and equities.

 

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#2) On June 29, 2009 at 11:36 PM, ReadEmAnWeep (79.75) wrote:

Do you really think the USD is in that bad of shape. How much money did they use for bailouts it can't be ~11 trillion (I think thats what you were daying) and did they just print all that money?

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#3) On June 30, 2009 at 12:04 AM, russiangambit (29.40) wrote:

One more thing I wanted to mention - currently FED is issuing debt to pay interest on older debt. Is that not a Ponzi scheme? The only reason it is able to do so is that the debt is backed by the US taxpayer. But how much could be collected from the US tax payer if need be, I wonder? To stop accumulating debt first US needs to balance the budget and that hasn't happened in years. To start paying off debt, taxes should probably increase by at least 10%. No politician will pull that, debt or no debt.

There are only 2 ways out : 1) inflation to reduce debt 2) substantial growth (5% in real terms for a number of years) to increase tax revenues.

There is always default option of course, but currently it is not being discussed.

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#4) On June 30, 2009 at 12:49 AM, speedybure (< 20) wrote:

An extreme solution that would marginally help this problem is if we sold off government land to foreigners.

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#5) On June 30, 2009 at 6:50 AM, kaskoosek (73.45) wrote:

There is one solution, other than inflation.

It is TAXATION

 

Increase taxation on the rich by a 1000%. 

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#6) On June 30, 2009 at 8:47 AM, wrparks (62.48) wrote:

"Increase taxation on the rich by a 1000%. "

 Yes, this too would change the dynamics of the picture, but it's not a long term solution.  Using less than 1% of the populace to fund the other 99% is not a long term solution.  Raising tax rates on everybody is the order of the game.  That, coupled with dramatic spending cuts is the only way to avert massive inflation.  Hopefully, by the time the debt is paid off, we learned something.

 Of course, any solution is political suicide, so I suspect we keep going the direction we currently have of deficit spending, until the dollar collapses.  We lambast the corporations for shortsightedness, but applaud it in our politicians.

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#7) On June 30, 2009 at 12:35 PM, gigi2029 (< 20) wrote:

There is another way to help contain this that no one's mentioned.  Slash government spending and government interference!  That's the problem that's at the root of this crisis.

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#8) On June 30, 2009 at 12:49 PM, russiangambit (29.40) wrote:

> There is another way to help contain this that no one's mentioned.  Slash government spending and government interference!  That's the problem that's at the root of this crisis.

 Yes, I believe this is on everybody's wish list. But nobody sees it happening  on big enough scale to make impact until all other options are exhausted and that does include inflation and default. Just look at California, they'd rather default than slash spending. That is why we don't really talk about it.

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#9) On June 30, 2009 at 6:43 PM, speedybure (< 20) wrote:

The root of this crisis goes far beyong government spending in a sense. This crisis originates from Bretton Woods, which allowed us to accumulate massive debts (which we squandered) and will soon have over a trillion of interest payments each year (i expect LT rates to go to near 20% similiar to the 70's, which means it would cost 2.8 trillion per annum just to service our debt!. Even worse is healhcare (social seurity, medicare, medicaid) which like the aformentioned interest payments are completely unfunded. These costs will be 956 billion in 2010, doubleing by 2018 to 2 trillion and again to 4 trillion by 2028. Not to mention defense spending. The best yet impractical solution would be to defualt on our debt( or better yet sell some government land to foreigners), stop social security, let the market for both money and loanable funds float which is what the free market it trying to do. Cut defense, stop bailouts, don;t try to create artifical jobs like FDR and no price controls (which make things more expensive), privatize roads (and use that revnue to pay off foreign debt).

But we are doing the exact opposite while the perfect storm form hyperinflation slowly takes place. these morons have to go. 

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#10) On June 30, 2009 at 7:07 PM, gs8212 (< 20) wrote:

Regarding the $11 billion in various stimulus/bailout/rescue/pet-project-spending, we are at $10.5 billion committed and $2.5 billion spent.  See CNN's tracker, by program (TARP, Stimulus package, etc.).  It's updated periodically.

http://money.cnn.com/news/storysupplement/economy/bailouttracker/index.html

 

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#11) On June 30, 2009 at 7:16 PM, gs8212 (< 20) wrote:

The intersting thing about social security is that if you were to compare longevity/mortality of our society today compared to 1930's when SS was enacted, you would have to wait until 85 to draw social security today to make it comparable to when you could draw SS back in the '30's, which was around 60 or 65.  That recognition alone, that 85 today is the 1930's 65, would probably rescue the program.  Unfortunately, SS has come to mean "pension" and not "old age pension."   It has come to be used as a replacement for a defined benefit pension, which it was never intended to be.

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#12) On June 30, 2009 at 7:19 PM, gs8212 (< 20) wrote:

Regarding comment #10 in the thread, my bad.....that is Trillion, not Billion.  I guess it is just too hard to get my mind to accept!!

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#13) On June 30, 2009 at 7:35 PM, mts4243369 (< 20) wrote:

kaskoosek and wrparks....are you morons!? If you taxed someone 1000% (which isnt even possible by the way), where would the money come from. You know that according to the IRS, 85% of taxable revenue comes from the top 10% of earners. The middle class then pays 13% and the lower class pays a wopping 2% woooooooo. Not to mention that they are already sucking up vast amounts of cash from those who produce for things like medicare, etc. The only solution is to kill govt spending, and give HUGE incintives (such as tax cuts, rebates, etc.) for inventive people and new business owners. Spending and taxing WILL NEVER EVER EVER EVER EVER EVER WORK. Plus at that tax rate how long would the rich stay rich? Who would even want to be rich? HOW COULD ANYONE BE RICH? Why don't you ask Lenin about his comprehensive economic policy.

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#14) On June 30, 2009 at 9:19 PM, checklist34 (99.72) wrote:

mts is correct.  its cutting spending ($700B/year for welfare that nobody talksa bout.  build some big, big factories and at least make the welfare crowd work for the taxpayer who pays them to live or SOMETHING other than handing them free rides and training them thtat they deserve to live for free).

 

ebush

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#15) On June 30, 2009 at 9:26 PM, ReadEmAnWeep (79.75) wrote:

"mts is correct.  its cutting spending ($700B/year for welfare that nobody talksa bout.  build some big, big factories and at least make the welfare crowd work for the taxpayer who pays them to live or SOMETHING other than handing them free rides and training them thtat they deserve to live for free)."

 

I completely agree with this. Welfare does not work. How can you can someone money each month and then expect them to go work for money next month.

 

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#16) On June 30, 2009 at 10:21 PM, wrparks (62.48) wrote:

mts, read what I wrote again in post #6.  I don't think I said what you think I said......

 Practically speaking, spending will not be cut.  Come to grips with it now, it will make life easier on you later.  It sucks, it's stupid, it's reality.  Fleecing the wealthy may work to fill the gaps for a short period of time, but as I said before (look at the 1%/99% section of post 6), it isn't a long term solution.  In order to pay off current debt, increased taxes on everybody will be necessary.  

My point is that it will never happen, hence monetization of said debt and inflation......

 

BTW, increaseing a tax by 1000% is not the same as taxing at a 1000% rate.  Completely different.  If the tax rate is currenlty 1% and increases to 11%, that is a 1000% increase, so technically it is possible.

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#17) On July 01, 2009 at 8:09 AM, wrparks (62.48) wrote:

I'll add.  Yes, I'm aware that our tax rates are not 1%,  and that at some point, probably around 10% starting rate, a 1000% increase would go over 100%.

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