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Treasuries: The Bastard Child of the Mother of All Bubbles


Massively expanding debt as the "solution" to a debt crisis is going to have extremely unfortunate and predictable consequences.

There's no doubt the home price bubble inflated by Alan Greenspan between 2000 and 2006 was the Mother of All Bubbles. Robert Shiller clearly showed that home prices were two standard deviations above expectations. Despite the unequivocal facts that Shiller put forth, millions of people bought houses at the top of the market. They believed the anchors on CNBC. They believed the propaganda preached by David Lereah from the National Association of Realtors (Always the Best Time to Buy) about home prices never dropping. They believed Ben Bernanke when he said:

We've never had a decline in house prices on a nationwide basis. So, what I think what is more likely is that house prices will slow, maybe stabilize, might slow consumption spending a bit. I don't think it's gonna drive the economy too far from its full employment path, though. -- July 1, 2005

Housing markets are cooling a bit. Our expectation is that the decline in activity or the slowing in activity will be moderate, that house prices will probably continue to rise. -- February 15, 2006

Bernanke made these statements when the chart below showed home prices at their absolute peak. You should keep this in mind and remember he's an "expert" on the Great Depression. That should come in handy in the next few years, just like his analysis of the strong housing market.

Click to enlarge

Source: Barry Ritholtz

Greenspan created the Mother of All Bubbles by keeping interest rates at 1% for a prolonged period of time while encouraging everyone to take out adjustable rate mortgages. His unshakable faith in the free market being able to police itself allowed Wall Street criminals and dirtbags to create fraudulent mortgage products that were then marketed to willing dupes and "retired" Internet day traders. Greenspan's easy money policies and disinterest in enforcing existing banking regulations also birthed the ugly stepsister of the Mother of All Bubbles. Her name is the Consumer Debt Bubble. The chart below is hauntingly similar to the home price chart above. The consumer will be deleveraging for the next 10 years. The pundits on CNBC and other mainstream media have been falsely reporting for months that consumers were deleveraging when it was really just debt being written off by banks. Baby boomers aren't prepared for retirement and will be shifting dramatically from consuming to saving. As consumer expenditures decline from 70% of GDP back to 65% of GDP, consumer debt will resemble the home price chart to the downside.

The savings rate has soared all the way to 6% of personal income. This is up dramatically from the delusional boom years of 2004 and 2005 when it bottomed out at 1%. But it isn't even close to being enough to fund the looming retirements of the baby boomers. The savings rate averaged 10% from 1959 through 1989. In order for the American economy to revert to a balanced state where savings lead to investment, which leads to wage increases, the savings rate will need to be 10% again. With annual personal income of $12.5 trillion, Americans will need to save an additional $500 billion per year. This means $500 billion less spending at the mall, car dealerships, home improvement, tanning salons, and strip joints. So don't count on a consumer-led recovery for a long, long, time.

So here we stand, two years after the worldwide financial system came within a few hours of imploding, and nothing has changed. Wall Street is still calling the shots. The politicians that supposedly run this country have kneeled down before their insolvent Masters of the Universe. Bernanke has chosen to save his Wall Street masters and throw grandma under the bus. By keeping interest rates at zero, buying up trillions in toxic mortgages, and printing money as fast as the printing presses can operate, Bernanke has birthed the bastard child of the Mother of All Bubbles. The chart below clearly shows the birth of this bastard. It's a distant cousin of the Internet bubble bastard. Despite interest rates at or near all-time lows across the yield curve, money has poured into Treasury bonds. This makes no sense, as interest rates can't go much lower. At these rates a small increase in rates will produce large losses for investors.

Source: Barry Ritholtz

Only a fool would buy a US 10-Year Treasury bond today yielding 2.55%. Of course, only a fool would buy a 1,300-square-foot rancher in Riverside, California, for $800,000 with 0% down using an Option ARM in 2005 too. But that doesn't mean there aren't millions of people willing to do so. Each "investment" will have the same result: huge losses. As anyone can see from the chart below, the 10-Year Treasury has been in a 30-year bull market. At this point you have to ask yourself one question: Do you feel lucky? Well do you, punk? There are a number of analysts who see rates falling further as the economy sinks into depression part 2. That may happen, but we all know that Bernanke and those in power will do anything to avoid a deflationary spiral. That means looser money policy and more printing.

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