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Guest Post: The Bastard Child Of The Mother Of All Bubbles
- 10 Year Treasury
- Barry Ritholtz
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Submitted by Jim Quinn of The Burning Platform
The Bastard Child Of The Mother Of All Bubbles
There is no doubt the home price bubble inflated by Easy Al 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 Dr. Shiller put forth,
millions of delusional unsuspecting dupes bought houses at the top of
the market. These were the greater fools. They actually believed the
drivel being spewed forth by the knuckleheaded anchors on CNBC. They
actually believed the propaganda being preached by David Lereah from the
National Association of Realtors (Always the Best Time to Buy) about
home prices never dropping. They actually believed Bennie 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.” – 7/1/2005
“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.” – 2/15/2006
Bennie actually made these statements when the chart below showed
home prices at their absolute peak. You should keep this in mind
whenever this rocket scientist opens his mouth about anything. And
always remember that he is a self proclaimed “expert” on the Great
Depression. That should come in handy in the next few years, just like
his brilliant analysis of the strong housing market.
Source: Barry Ritholtz
Easy Al 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 unshakeable faith in
the free market policing itself allowed Wall Street criminals, knaves
and dirtbags to create fraudulent mortgage products which were then
marketed to willing dupes and “retired” internet day traders. Al’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 ten years. The numbskulls on CNBC and the 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
are not 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%. It ain’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 leads 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 Depot, tanning salons, and strip
joints. 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 political hacks that supposedly run this
country have kneeled down before their insolvent Masters of the
Universe. Bennie 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 his
printing presses can operate, Bennie has birthed the bastard child of
the mother of all bubbles. The chart below clearly shows the birth of
this bastard. It is 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. A small increase in rates will produce large
losses for investors at these rates.
Source: Barry Ritholtz
Only a fool would buy a US Ten 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 fools 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 Bennie and
those in power will do anything to avoid a deflationary spiral. That
means looser money and more printing.
The Federal Reserve does not want a 20 year recession like Japan.
They will not get it. They’ll get a hyperinflationary collapse instead.
Japan entered their 20 years of stagnation with a population that saved
18% of their income and huge trade surpluses. The Japanese government
could count on the Japanese population to buy every bond they issued to
pay for worthless stimulus projects. The US has entered this Depression
with a population that saved 2% of their income and a trade deficit of
$500 billion. John Hussman describes the differences between the US and
Japan in his recent newsletter:
The impact of massive deficit
spending should not be disregarded simply because Japan, with an
enormously high savings rate, was able to pull off huge fiscal
imbalances without an inflationary event. We may be following many of
the same policies that led to stagnation in Japan, but one feature of
Japan that we do not share is our savings rate. It is one thing to
expand fiscal deficits in an economy with a very elevated private
savings rate. In that event, the economy, though weak, has the ability
to absorb the new issuance. It is another to expand fiscal deficits in
an economy that does not save enough. Certainly, the past couple of
years have seen a surge in the U.S. saving rate, which has absorbed new
issuance of government liabilities without pressuring their value. But
it is wrong to think that the ability to absorb these fiscal deficits is
some sort of happy structural feature of the U.S. economy. It is not.
It relies on a soaring savings rate, and without it, our heavy deficits
will ultimately lead to inflationary events.
The bastard child of the mother of all bubbles likes to live
dangerously. The morons in Congress will surely extend all of the Bush
tax cuts without restraining spending in any way. That is what they call
compromise in the hallowed halls of the Capitol. By 2020 the National
Debt would be $30 Trillion under this scenario. Annual interest on the
debt would exceed $2 trillion per year. This is a death spiral scenario,
but it is the path we are choosing. Again, I ask you, who in their
right mind would buy a 10 Year Treasury bond yielding 2.55% when the US
will either have a $30 trillion National Debt or will have already
collapsed under the weight of that debt?
Foreigners own approximately 30% of our outstanding debt. But, we
have been relying on them to purchase almost 40% of our new issuance. We
will need to issue $3 trillion of new debt in the next two years.
Foreigners can add. They see that we are on a course that isn’t
sustainable. They know that the Fed will attempt to monetize our debt
and weaken the USD over time. At 2.5% interest rates, foreigners will
accumulate massive losses as the USD depreciates. They will not accept
these low rates for much longer. It is a confidence game. As they lose
confidence in our ability to confront our debt issues, rates will be
forced higher.
The pollyannas that seem to proliferate on CNBC and the rest of the
mainstream media declare that since interest rates haven’t spiked and
our hyper-debt based financial system is still functioning, then there
is nothing wrong. They also didn’t see the internet collapse, housing
collapse or financial system collapse coming. They never do and never
will. China has actually been selling Treasuries for over a year. Japan
is still buying, but their far worse debt/demographic crisis will force
them to curtail purchases of Treasuries in the coming years. The
purchases being made from the UK are really purchases from Middle
Eastern countries with their oil money. I wonder what would happen to
these purchases if war with Iran breaks out? It seems we have foreign
countries increasingly reluctant to buy our debt when we are about to
issue trillions of new debt in the next few years and as far as the eye
can see.
The only thing that could possibly keep foreigners buying our debt
would be higher interest rates. Our economy is so saturated with debt
from top to bottom, that an increase in interest rates of only 2% would
have a devastating impact on our economy. John Hussman understates the
impact of deficits on our economic future:
Continued deficits will have
substantial economic consequences once the savings rate fails to
increase in an adequate amount to absorb the new issuance, and
particularly if foreign central banks do not pick up the slack. We’re
not there for now, but it’s important not to assume that the current
period of stable and even deflationary price pressures is some sort of
structural feature of the economy that will allow us to run deficits
indefinitely.
The Krugmans of the world are not worried about our debt. They say
pile it on. We are America. We are the most powerful nation in the
history of the world. We can obliterate any enemy with the push of a
button. Why do we need to worry about some debt? This is the hubris that
has led to the downfall of every great Empire. As Rogoff and Reinhart
point out in their recent book, this time is not different:
“As for financial markets, we have
come full circle to the concept of financial fragility in economies with
massive indebtedness. All too often, periods of heavy borrowing can
take place in a bubble and last for a surprisingly long time. But
highly leveraged economies, particularly those in which continual
rollover of short-term debt is sustained only by confidence in
relatively illiquid underlying assets, seldom survive forever,
particularly if leverage continues to grow unchecked.
“This time may seem different, but
all too often a deeper look shows it is not. Encouragingly, history does
point to warning signs that policy makers can look at to assess risk –
if only they do not become too drunk with their credit bubble – fueled
success and say, as their predecessors have for centuries, “This time is
different.”
A tipping point is reached when the government debt exceeds 90% of
GDP. US government debt is currently at 93% of GDP. One year from now it
will exceed 100% of GDP. The bastard child of the mother of all bubbles
has jumped out a window on the hundredth floor of a NYC mega bank. As
he passes the 50th floor, Paul Krugman asks him how is he doing? He says
great, SO FAR. We all know what happens next. SPLAT!!!!
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He who fucks around comes around!
Is that some kind of Chinese saying?
Yes it is. Just like this one:
When you have diarrhea, ever fart is a dangerous undertaking.
Those chinese are wise people...
Ok, I'm sorry, but I don't know why I found that *so funny* (LOL).
The metaphor *works*, though: Everybody wants to ... um... squeeze out a little more, just to relieve a little pressure, just so they can keep running the race. Unfortunately, when you have diarrhea, you never know when that next squeeze gets you in *trouble*.
In short, any one of these QE events by some central bank could send that nation *instantly* to the toilet.
Oh, man--EPIC fail!!
Well, Sudden, that reminds me of a funny story. This story was told to me when the topic of conversation was, "what's the most embarrassing thing that ever happened to you?" Well, this guy had the best story I'd ever heard. He had finally gotten a date with a woman that he really, really liked. He said she was absolutely beautiful. He was really looking forward to taking her out to dinner. He'd made a reservation at a very exclusive restaurant and finally the evening of the date had arrived. Unfortunately, he wasn't feeling very well. His stomach was bothering him, but there was no way he was going to cancel this date. As it's summer, he decided to wear his cream-colored linen suit. They arrive at the restaurant, order their meal and are having drinks. His stomach is still kind of funny. He feels like he needs to pass a little gas, so he leans over onto one cheek and gives a little push. Well, he can't believe what's happening. Uncontrollable diarrhea. He's sitting across from the most beautiful girl he's ever dated and he's shitting in his pants. He can't stop it, it just starts and keeps on coming. Mind you, in addition to the cream-colored suit, he's sitting on an upholstered chair. The shit is literally coming through his pants, onto the chair and dripping onto the carpet. He looks up at his date who has the most disgusted look of horror on her face...and the shit just keeps on coming. His date runs out of the restaurant. The waiters come over. They don't know what to do. Other diners are also getting a whiff of things. One of the waiters brings over a tablecloth to wrap around him and escorts him to the bathroom. He ends up taking a cab home wrapped in aprons from the kitchen.
That was great.
I still remember being small at my aunt's house and my two teenaged cousins going out. They came back a little while later and one had a black eye and and the other had shit all down his legs (summer/shorts).
They had gone to a store and cousin Bob had bought laxitives and put it in cousin Jim's coke. Shortly after they met some girls and Bob had told the girls he had put laxatives in Jim's coke.
One of the girls had eventually told Jim either out of pity or spite about the laxative in his coke, Jim suddenly realised why his guts had felt so odd since the coke.
Soon after one girl's (large) boyfriend had turned up and Jim spotted the chance for retribution and decided to tell the boyfriend that Bob had been kissing his girlfriend before he showed up. Bob after being confronted decided now was a good time to run away and ran with Jim in close pursuit. After running for a while they slowed to a walk. Jim decided for a laugh to yell out "He's there, run!" and Bob promptly ran straight in to a lamp post. Jim laughed so hard he shit himself.
Cue a long demeaning walk home.
I must have stumbled onto a scatology website.
No sh*t, Sherlock. :)
We dabble in eschatology too.
Sorry, let's resume with the current formula:
Gold bitchez! To the moooon!
:o
Do you feel lucky? Well do you, punk? Keep buying stocks
Bought a few AAPL Dec 310 puts today. It's about the same as putting 3 or 4 chips on a roulette table.
JACKASS REPOST
http://williambanzai7.blogspot.com/2010/03/no-risk-is-not-worth-taking.html
Banzai does it again!
Google "krugman is right" - 203,000 hits.
Google "bernanke is right" for 1,650,000 hits.
Keep the quote marks - these are restrictive searches.
Obviously, some hits are ironic.
now that is depressing
I find the equity fund and bond fund flow by Barry Ritholtz most interesting.
It explains to me what has been happening over the last 15 years from the retail perspective, and the markets as whole.
It shows the stock bubble in 2000, people were selling their bonds to get the best .com stocks.
It shows the inflation run up in 2006 / 2007 in both stocks and bonds.
It shows the panic of 2008, everyone selling everything.
In 2009, people pouring money hand over fist into bonds and a tiny bit in stocks, although most of that was foreign according to ici. So, the perhaps all the people selling the bonds to retail have been buying stocks on the otherside.
However, and most importantly, now both stocks and bonds are on the decline.
My guess is that slow decline will continue for many years to come.
(Jan) "So the more you owe, the more you're worth?"?
(Pete) "In the national scheme of things, that's quite right..." Rep. Pete Stark (CA)
http://www.youtube.com/watch?v=UjbPZAMked0
If we are going to have a debt bubble, let's at least get some jobs out of it. The housing bubble provided millions of jobs for semi skilled domestic workers. This zero interest, carry trade, debt bubble is only creating big year end bonuses for a handful of Wall St. banksters.
Where are the 125% of value 401K lines of credit at 1% interest rates? Let's get some sort of party started.
Goes well with biden's comment about spending to prevent the US from going bankrupt,
http://www.youtube.com/watch?v=ydzfV_vab5c
Going into debt to create jobs works the best when done by small, innovative start-ups that can compete in the real world with their own niche markets. I think most of the economic arrogance of the USA stems from our history of innovating out of prior recessions. But a conundrum remains - would Steve Jobs, Andrew Grove, et. al. start up now?
Have the latest government actions in response to the crisis had a positive influence on small businesses?
Oh, I loved that comments of Ahmadinejad yesterday about 9/11 being an inside job...
He knows what he is talking about. That armed group called Jundallah usually does terrorist attacks in Iranian territory, against Iranian people, and the group is linked both to Al Qaeda and to CIA.
He also says there was no Holocaust, and there are no gays in Iran.
Of course he's wrong about the Holocaust, but it has no relation with the subject of 9/11.
well anyone who has done any investigation of the facts surrounding 9/11 know that it was a false flag. No point "junking" me on this. It doesn't dishonour those who died to say what is the truth, that it was at a minimum known by the government, and at worst, carried out by them.
As for bonds, well people are buying them to stash their money, and given the fraud being perpetrated in the equity market they are probably right in doing so.
Smokey Quinn writes convoluted explanations to distract people from a more basic and important truth, which is usually the intent of these MORONS doing the explaining. The end result is large numbers of HIS sheep pretend to understand things they don’t.
Maybe Muslims did it.
http://www.informationclearinghouse.info/article26443.htm
..................................................................................
Smokey Quinn... a guy who is so deluded by his own ego that he posts comments to himself on his blog using various fictitious names.
Pity the fool!
#577149
#577421
Smokey Quinn:
You will always have 'sheep' who will still respect you in the morning.
Good article.
Pick your favorite Bubble...(is gold a bubble?)
http://www.sharelynx.com/chartstemp/BubbleComparisons.php
on the issue of consumer debt it pays to revisit the personal income numbers and how the supposed DPI translates into real assets. Short anwser it doesn't at least as far as the flow of funds. Where is the nearly $2T that was supposedly "saved"? Bueller
Succinct analysis and absolutely beautiful writing. Thanks, Jim!
Today's equity action is indicative of the bubble economy. Nobody questions a 200 point move on the DOW for absolutely no good reason. Further, there was no downside volatility whatsoever. The market jumped up 170 points in the first hour of trading and traded within a 30 point range for the rest of the trading day. Humans take profits after a 10% in three trading weeks, computers don't.
From flockofsheeples at Cap Stool...
"Apple announced today that it has developed a breast implant that can
store and play music. The iTit will cost from $4990 to $6990, depending
on cup and speaker size. This is considered a major social breakthrough,
because women are always complaining about men staring at their breasts
and not listening to them."
hi robo, heph/vulcan told me to play nice†
what do you think? i like your invention of iTit.
your a very clever young man.
Hard drive...?
The author forgets Japan. You can have very low interest rates and an equity market that sucks for decades. The fool has been anyone not in cash or bonds for the last 10 years. The Fed doesn't want hyperinflation anymore than deflation. It would be game over for the Fed. His whole argument begs for any income stream at all for future retirees. You can debase the currency and have everything you import go up in value but unless wages increase they won't be selling any of it domestically. People automatically assume with inflation of goods comes inflation of wages.....I wouldn't bet on that.
And yes foreigners will continue to buy treasury debt.....the belief that they won't is a red herring....they have to....believe me....to the extent they receive $ for goods sold they will reinvest that into UST's.
"Greenspan created the Mother of All Bubbles by keeping interest rates at 1% [by fiat]..."
"His unshakeable faith in the free market..."
What free market?!?
If there is a bureaucrat who has the power to set the price of money by decree, that is *NOT* a free market!
We are presented with a false alternative, either:
(1) fiat money without fascist controls
or
(2) fiat money with fascist controls
There is a third way, folks, and its advocates are not basing it on "unshakable faith", which term would be better applied to the belief in irredeemable fiat paper money.
Oh no Matey - its waaaay worse than that. Taking hedonics out of the GDP calculation gives a GDP of between $7-10Tr so the debt to GDP ratio could be as high as 2.
Hyperinflation and the palaeolithic - here we come!
http://www.youtube.com/watch?v=hqOn5XEm86A
The history of home prices in Vancouver using roller coaster simulator. It's different here in Canada folks!
Robo....priceless
Very good article. One items was wrong though. It should read "They'll get a deflationary collapse instead"
Yes, but not without a hyperinflationary blowoff, much like this graph: http://fofoa.blogspot.com/2010/09/just-another-hyperinflation-post.html
It's just a question of where we are in the run-up to it.
at this point in the exercise the powers that
be know and see it as a perfect time to loot
the failing country of it's treasure. all looting
fraudulently disquised as poor judgement and
misguided altruism. no guilt, just flawed
or mistaken expectation, like stealing candy
from a baby.
"His unshakeable faith in the free market policing itself allowed Wall Street criminals, knaves and dirtbags to create fraudulent mortgage products which were then marketed to willing dupes and “retired” internet day traders."
Why are you having a go at Knaves? Are they not people who distanced themselves from the monarchy on a point of principle over things such as the plantation of Ulster and the potato famine?
I don't think you are being too fare bundling the knaves in with the crooks!
You don't have to be a fool to buy 10-year Treasuries at 2.55%, you just need that Fed QE put.
http://keynesianfailure.wordpress.com/2010/09/24/why-this-time-qe-really-will-spur-inflation/
Thanks for the lesson on knaves irishbogperson.
As Greenspan himself said recently - 'there is no place else for money to go other than gold.'
Gonna be interesting to watch - whats the peak though?
it aint as high as some fantasise about
The "peak" is probably somewhere around $100,000 to $250,000 per ounce... but could be several million.
I doubt several million will happen though, because they'll formally disband the dollar and attempt to force americans to switch to "bancor" notes (from the IMF).
In any case, the price of gold is utterly irrelevant. Though the purchasing power (actual value) of gold will wobble around by 25% or so, the rise in price of gold is actually a measure of the fall in value of the fiat dollar. Thus all focus on the price of gold in dollars is almost entirely beside the point (except short periods for futures traders).
History sez: when this sucker blows, it will be spectacular. This time, "this sucker" is the US dollar, and quite possibly ALL fiat currencies.
How can anyone accuse the Fed chairman of being an adamant of the free market? The credit central planner chairman is pro-free market?
There's so many bubbles I've lost count. It doesn't matter which snow flake finally sets off the avalanche. Looking for serious positive news is a lost cause. It's no surprise the Fed tries (lies) to soothe markets with their words.
I'm good with gold. I don't know what the Mandarin word for gold is, but I think we'll find out.
Deleted - misplaced.
Another Obama (Reid, Pelosi, Democrat) Nightmare
9-24-10
Did you know that if you sell your house after 2012 you will pay a 3.8% sales tax on it?
That’s $3,800 on a $100,000 home etc.
When did this happen? It’s in the healthcare bill. Just thought you should know.
SALES TAX TO GO INTO EFFECT 2013
(Part of HC Bill)
REAL ESTATE SALES TAX
So, this is “change you can believe in”?
Under the new health care bill - did you know that all real estate transactions will be subject to a 3.8% Sales Tax?
The bulk of these new taxes don’t kick in until 2013 (presumably after obama’s reelection). You can thank Nancy, Harry and Barack and your local Democrat Congressman for this one. If you sell your $400,000 home, there will be a $15,200 tax.
This bill is set to screw the retiring generation who often downsize their homes. Is this Hope & Change great or what? Does this stuff makes your November and 2012 votes more important?
Oh, you weren’t aware this was in the obamacare bill? Guess what, you aren’t alone. There are more than a few members of Congress that aren’t aware of it either (result of clandestine midnight voting for huge bills they’ve never read). AND, there are a few other surprises lurking.
www.gop.gov/blog/10/04/08/obamacare-flatlines-obamacare-taxes-home
Forward this article with the emailer below to every single person in your address book because an election is coming in November.
- Source Unknown
How on earth is the UK treasury managing to buy and pay for 250 billion worth of US treasuries when it is implementing cuts cuts and more cuts and is looking to be spending more than £150 billion pounds more than it takes in this year alone ??????
MORTGAGES HALF OF FEDS SWOLEN BALANCE SHEET http://img.photobucket.com/albums/v393/youricarma/Miscellaneous
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