The next big shoe to drop and giant bubble to pop is the US bond market. The explosive run up into December 2008 was an absolute Christmas present for bond bears willing to short the panic top. The 2008 fear-related spike in bonds was the equivalent to NASDAQ in 2000 or real estate in 2004. However, this explosive move up was primarily driven by global fear, where the other two bubbles were driven by greed.

Another opportunity to get short in bonds is upon us. Using technical analysis, it appears that the run up in bonds last December was the head of a giant head-and-shoulders top on the weekly charts. I wouldn't advise anyone to short bond weakness but instead to short failed rallies into resistance. Bonds don’t end their seasonally strongest period until late November, and there seem to be plenty of eager buyers around at auction time. In spite of this fact, I do expect bonds to complete this huge head-and-shoulders top between now and Thanksgiving. The long secular bull market in bonds ended in December 2008 and a new secular bear market in bonds has only just begun.

As the US government continues to waste money bailing out failed enterprises, failed business practices, and Wall Street investment banks, they're rapidly adding to an enormous mountain of debt. The government is flooding the market with a record monthly supply of new Treasuries to fund our irresponsible ways as a nation. Surprisingly, central banks continue to aggressively buy a record amount of bonds at what I perceive to be the top, just as they sold record amounts of gold at its bottom, now nearly a decade ago. Central banks buying bonds today will be a regretful act comparable to that of central banks selling gold at $250-$350 per ounce.

There's a growing confidence that the Fed will continue to purchase bonds with an unending bid coupled with the promise of keeping short-term rates low for the foreseeable future. Individual investors have pumped record amounts of cash into bond mutual funds this year, just like they did in stock funds in 1999. I believe that with the first rumor of a failed Treasury auction, investors will finally flee bonds in droves. The monthly record supply of bonds and the coming decline in demand is all that's needed to spell disaster for the bond market. (The TBT ETF is a great way to play the coming bear market in bonds.)

Inflate or Deflate?

As the Federal Reserve prints money and monetizes our debt, they're giving politicians in Washington a green light to spend our country into financial ruin. In my opinion, Ben Bernanke will be treated by history just as his predecessor Alan Greenspan will be treated. Ultimately, both will be totally discredited after having been praised as heroes for saving the world from economic collapse. Until Mr. Bernanke stops monetizing US debt, and hikes rates to protect the US dollar, he's literally sending this message to every bond trader: "Sell us bonds now."

Bond traders are responding to this message in 2009 by selling the long end of the yield curve with growing confidence, believing that there will continue to be enormous volume of bonds issued with increasing rates. In my recently published book, Discover the Upside of Down, I describe in detail how Ben Bernanke, along with his boss, the Congress of the United States, will cause interest rates to rise, and the country to enter into a new era of stagflation.