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The U.S. Government Bond Bubble

Submitted by Expected Returns on 05/28/2010 16:28 -0400

From Expected Returns Blog, which is a blog focused on gold and silver investments.

What follows will read like an indictment on our entire economic system. But underlying my (relatively mild) harangue is an observation that people are ignoring the most obvious bubble out there; that is, the bubble in U.S. government bonds. The following is my attempt to figure out why.

Efficiency Market Theory

Let's face it, markets are inefficient. The efficient market theory, manufactured from the ivory towers of academia, poses perhaps the greatest threat to the stability of our system. Here's why.

False assumptions produce false conclusions. The efficient market theory posits that bubbles aren't recognizable before they pop. The natural consequence of this misguided belief is that government officials will never act to preempt bubbles since they are, by definition, impossible to identify. This is one of the reasons why supposedly "efficient" markets are consistently marked by fat tails, outright panics, and "once in a lifetime" events.

The efficient market theory currently extends to U.S. government debt. In a circular manner, the strength of U.S. bonds is justified by low yields, which is evidence of the strength of U.S. bonds. But take a step back and remember that current yields are a product of government intervention. Stability, especially artificial stability, breeds instability. U.S. bonds are a bubble, and it's pretty damn recognizable at the present time.

Psychology and Cognitive Dissonance

I love incorporating psychology to economics because this dual framework explains the world a whole lot better than pseudo-scientific economic models that are consistently wrong. I'm convinced that one of the biggest barriers to investment success is cognitive dissonance.

To briefly explain, cognitive dissonance is a phenomenon by which people attempt to reconcile two opposing views. When faced with seemingly contradictory facts or opinions, most people will defend their existing framework by explaining away anything that refutes it. To understand why this human tendency is important in the context of a U.S. debt default, we must understand the framework most Americans currently carry.

Most Americans cling to a framework that goes something like this: The U.S. is the biggest economic power the world has ever seen. We are the engine of global growth. We are immune to panics that characterize "less developed" countries. Our debt is rated Triple-A. Therefore, we can never default on our debt.

Any evidence contrary to pre-existing frameworks will be explained away- this is human nature. So when gold goes to record highs, instead of recognizing that it is the free market's indictment of the monetary system, people will say "gold is a bubble." When Greece experiences a debt crises engendered by factors indistinguishable from ours, people say "we're not Greece- we can print our own money." Utter nonsense.

By going short U.S. government bonds, I am basically going short the human tendency to cling to a worldview that provides them the most comfort. Always let historical precedent and facts determine your conclusions, not irrational human tendencies.

Crony Capitalism and Collapse of the Rule of Law

The rule of law is perhaps the most underappreciated aspect of functioning markets. Once the system degenerates into a form of crony capitalism (think: Chrysler bond debacle), you know serious economic shocks lie ahead.

When people realize they can "game" the system, believe me, they will. Economics is all about incentives.

Think about the tragicomedy that is Wall Street. Banks on life support get bailed out from the government to "save" the financial system. But to appease the public, politicians throw in a provision that banks can't hand out bonuses unless they repay TARP. No problem! Banks issue stock and dilute existing shareholders to repay TARP. Then they hand out record bonuses. Follow the path of money and realize your tax dollars are going directly to the pockets of morons who brought down our system. The system is being gamed big-time.

What's the net effect? Investors lose confidence in the entire system and withhold their capital. This especially holds true for government bonds. The system can take only so much corruption before imploding at the seams.

Blindly Trusting Financial "Experts"

To rid you of any delusions that experts know what they are talking about, allow me to briefly walk you through the debacle known as subprime.

Most professionals couldn't see the bubble in housing inflating even though it was staring them in the face. And this was a mere 7 years after the collapse of the Nasdaq! Leading up to the crash of housing, the consensus could not envision a national decline in home prices since their "infallible" economic models used data of home prices over a 60 year period. All quants needed to do was adjust their models back about 15 years to the Great Depression and they would have understood that home prices do indeed fall. Garbage in, garbage out. Models are useless without a proper historical backdrop.

The experts, led by Paul Krugman, are now claiming that the U.S. is not Greece. Some people think this argument is sensible; to me, this is simply evidence of a world gone mad.

The key thing to understand here is correlation. CDO's were priced so richly because it was assumed that different tranches, which respresented a diverse range of mortgages throughout the U.S, were not correlated. This assumption proved to be false because all homes were inflated equally by the same credit bubble and the same fraudulent system.

False assumptions in correlation are prevalent as it pertains to sovereign debt. Somehow we believe the problems in Europe will not find their way to us. Unfortunately, we are experiencing a global sovereign debt crisis. Every single Western government is in debt up to their eyeballs. All bankrupt nations have lent money to each other in a complicated web that can be addressed only through default. Therefore, in the long run, all sovereign debts are correlated.

Failure to Predict Second and Third Order Effects

Perhaps the tendency that underlies policy mistake after policy mistake is the failure to think beyond first order effects. Politicians are especially adept at thinking at a linear level. Let me give you an example.

Imagine you are the governor of California and your state is bankrupt (doesn't take much imagination). Say you want to raise your revenue by $100 million dollars. The easy solution is to tax the arbitrarily defined "rich." Suppose your definition of "rich" is anyone with an income of over $1 million. Assume that the revenue derived from this demographic at current tax rates is $50 million. Simple arithmetic will dictate that you double your tax rate and your problems are solved.

Perhaps people don't believe this could possibly be the fantasy world our politicians live in. But this is essentially what the state of Maryland did. Millionaires promptly went "missing."

Our leaders fail to see potential second and third order effects of debt monetization; the subsidizing of the auto, housing, and financial industry; and the ad hoc disregard of the rule of law. If these trends continue, I am 100% sure capital will flee America. We need to start thinking beyond propping up failed corporations and running up our national debt; this course is unsustainable.

Linear World, Dynamic World

Let's go back to the subprime debacle for a second. Credit default swaps, which were an effective short against housing, only started to crater in mid 2007- even after it was obvious that the models pricing CDO's were seriously flawed. Market makers (Government Sachs) briefly manipulated bond prices to buy time as they faded their clients and ran for the exits. Once people understood the toxicity of CDO's, we saw an all-out stampede as bond prices crashed dynamically,

Does this sound familiar? Is our government not manipulating markets and delaying the inevitable by monetizing debt? Short of saying it outright, our government can't make it any clearer that trouble lies ahead. Seriously, what do you expect? Imagine Bernanke going on national TV and saying the following:

"I would like to inform the American people that we are bankrupt. We have been hoping to maintain confidence in our system by artificially suppressing rates by buying up bonds with money we printed from nothing. We hope that by keeping rates low, we can create another illusory speculative boom and kick the debt can down the road for another administration to take the blame for. I have no clue what I'm doing- after all, I'm the one who thought subprime was "contained."

Yea right. Our leaders are going to spend like drunken sailors until the entire house of cards comes crumbling down. I'm telling you, the evidence is staring you in the face. Gold is your only insurance.

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Sun, 05/30/2010 - 11:33 | 382195 Grand Supercycle

Updated DOW charts :

http://stockmarket618.wordpress.com

http://www.zerohedge.com/forum/latest-market-outlook-1

Sun, 05/30/2010 - 05:41 | 381995 weelp

ZH is sweet. You should do upvote/downvotes like reddit. That would be amazing.

Sat, 05/29/2010 - 18:34 | 381386 DosZap

http://www.youtube.com/watch?v=XwCbI_GrkQ4&feature=player_embedded

Seems Mr.Schiff is right in line w/you.

http://moneymorning.com/2010/05/26/u.s.-treasury-bonds/

Sat, 05/29/2010 - 16:32 | 381359 Dreamwalker420

You had me up until "Gold is your only insurance."

What about silver? Perhaps palladium or platinum? And what do we do when the government issues an executive order to seize the gold again in the United States?

Farmland. Owning real property is as important as the possession of precious metals and firearms to defend yourself.

But I am a skeptic of that type of failure. While it does seem likely that the structure of the United States has to change to account for the unsustainable deficits, I am not akin to the belief that that change will come from default. Instead the process of wealth accumulation will more likely result in a prolonged economic depression that subsidizes the failed system until parity in the international markets are met.

Essentially, the power to tax and print money will be used to compell the working class to pay for the mistakes/debt of the banking industry. History will repeat itself.

Sat, 05/29/2010 - 17:59 | 381446 DosZap

Dwalker,

Bud, you think the gov't will allow you to OWN property?.

If it get's that bad, your ass is on your own.They will make sure you cannot OWN anything,even if they did you would have to pay taxes on it to stay..............and maintain control.

That begs the question, with what?.New Fiat?.............where ya getting it?.

Silver should still be money as well as an industrial commodity.

As far a Pall, and Plat, they are purely (except for some jewelry apps), totally Industrial....

Constitutionally there are only TWO legitimate forms of money.

Gld/Slvr....................

Watch the UTUBE vid of Schiff..................he agree's, that Bonds are the next BUBBLE.

Sun, 05/30/2010 - 05:41 | 381996 weelp

I concur. +1

Sat, 05/29/2010 - 15:11 | 381295 kryogenikz

Keep that money machine running Bernanke, while I continue to buy my gold and silver!!!!

Sat, 05/29/2010 - 14:22 | 381235 WestAfricanChief

If the whole American Fiat money system is dependent on debt. .why are ppl still bellowing and screaming about so much debt?

I dont get it. . .Also the The seems to want Govt to act to prevent bubbles,That is such a bad idea. .

I say let the buubles come and let those that think they are smart enough to navigate it do so. .if they loose all they have in the process. .its good

The creative destructive nature of capitalism will cleanse it all

who cares if the NASDAQ crashed before the Housing market crashed. . if it goes up so much,let it come down so much

and let the next generation have a chance of accumulating assets cheaply

as for Gold. . I like to get all blinged up with it, cause i am a chief. . apart from that i see no reason to accumulate it. .i rather accumulate blue chip companies like Mastercard or Visa. . .

THE WESTAFRICAN CHIEF

Sat, 05/29/2010 - 13:20 | 381156 trav7777

explanation of what the oil peak means to economics:

Just another way to phrase what I've been trying to say

http://www.theoildrum.com/node/6517#more

Sat, 05/29/2010 - 11:57 | 381053 williambanzai7

DISASSEMBLING BERNANKE:

http://williambanzai7.blogspot.com/2010/05/blog-post_29.html

Sat, 05/29/2010 - 11:27 | 381029 Silver Bullet

I'm with you, Expected Returns until "Gold is your only insurance". Otherwise, excellent piece.

Again, gold is a FIAT commodity, like the Dollar is a FIAT currency.

Gold is the ultimate bubble. However, if you believe gold to be going higher for reasons untold, by all means buy here and hope you can find some poor bastard to take it off your hands later before it eventually comes crashing down.

Sat, 05/29/2010 - 16:45 | 381371 EscapeKey

Whatever. You could zip into a time machine with Gold and Silver to any time in the past and use it as money. Try that with your precious paper currency.

You might think the ultimate store of value for thousands of years will just go away because YOU think so, but it won't happen.

Sat, 05/29/2010 - 15:11 | 381293 trav7777

There is no such thing as a fiat commodity.

Nobody proclaimed gold to be of value.

Take it off your hands...for WHAT?

Idiots like you think art is worthless, as well as diamonds. The industrial utility of diamonds warrants a low price, which is what the vast majority of diamonds fetch. The large, clear, flawless ones somehow manage to talk people into paying more of their work for them. And they always have. Rubies and sapphires? Same.

Sat, 05/29/2010 - 11:00 | 381013 37FullHedge

Never let the facts get in the way of the truth, I assume this is the bottom line,

What is the truth?

The west is 100% bankrupt including the US

The East will be 100% bankrupt if the west goes bust and they have no market to sell their goods to which the west has offshored,

Bottom line we are all in this together and all will do whatever it takes to please the elite and NWO needs,

This system may hold up longer than you can remain solvent, The US t bills are where the elite stores their money and I expect them to hold up well for longer than you think, They are worthless but where else can the elite park all their wealth?

I have gold silver and t bills I have no faith in things hence my boring portfolio.

Sat, 05/29/2010 - 10:59 | 381012 a_moran3

I'm glad somebody realize that the bond market is in a bubble and is on the verge of collapse. How come nobody is realizing this? The only thing the U.S. exports are war, <a href="http://www.wallstreetoasis.com/blog/ill-take-a-heart-attack-hold-the-bun">fast food</a> and IOUs to the world.

The only reason why we're not paying more interest on our debt is because countries, for some ungodly reason, are buying our Treasuries. Why? It reminds me of the Bergman film "Winterlight" where the Pastor says, "God, my God. Why has thou forsaken me?"

Sat, 05/29/2010 - 17:47 | 381439 DosZap

a_moran3,

"for some ungodly reason, are buying our Treasuries".

Bingo...................for some odd reason(habit?, history?,no idea what else to do?.)............most americans have no clue how bad off we really are, why would we expect foreigners to know more?.

They wouldn't............they are truly going to be screwed,along with millions of Americans.

Sat, 05/29/2010 - 10:50 | 381003 unemployed

Nice. Either the money rates are determined by the market, or the FRB controls everything. I suspect the former. The paranoid are in short term Bills. The FRB Treasury holdings are no greater now than they were two years ago, perhaps with a tad longer average maturity.

The adage of "dont" fight the Fed may be more due to their Trillion dollar assets on any given day rather than an assumed ability of the Fed to manipulate the markets long term.

The illegal seizing of private bonds only drives investors to buy the government bonds you are shorting. Looks like a matter of timing to me.

Sat, 05/29/2010 - 09:54 | 380945 Geronimo66

Very well written! Paul Wilmott could have written it. Same basic ideas.

Of course you can find more on Paul's site but also a nice (partly Dutch) documentary can be found here: http://tegenlicht.vpro.nl/afleveringen/2009-2010/Crisis-als-kans/quants-de-alchemisten-van-wall-street.html

Sat, 05/29/2010 - 09:08 | 380944 Common_Cents22

I'm trying to think what the catalyst might be. What is the alternative? Will the masses find an alternative store of wealth to pop the bubble? I agree that we will extend and pretend until we can't.

Us treasuries depend on the buddy system. When you are in the woods full of grizzly bears you know you can't outrun them, but, you can outrun your buddies.

Us can outrun other countries for awhile. If that runs out the stock market will be sacrificed. The moneyed elite and their govt whore accomplices will do anything to preserve themselves.

As far as wealthy, they may even encourage an eventual crash as their relative wealth and buying power will go up. They might lose half their fortune but double their buying power, that is real wealth. Relative wealth, not absolute.

Sat, 05/29/2010 - 10:33 | 380993 DaveyJones

"The US can outrun other countries for awhile. If that runs out the stock market will be sacrificed. The moneyed elite and their govt whore accomplices will do anything to preserve themselves."

The world in three sentences

Sat, 05/29/2010 - 08:48 | 380935 BRB2226@sbcglob...

If this is a deflationary spiral, to be followed by the inflationary spiral that ZH predicts, bond yields can stay low for a long time. You can get killed shorting Treasuries.

Sat, 05/29/2010 - 08:41 | 380933 Panafrican Funk...

Thoughts on the following appreciated:

1. Whether it's worth having positions in TIPS.

2. Whether I should just switch to all physical commodities, and what the suggested outlays should be.

I'm currently about 1/3 TIPS, 1/3 physical gold and silver (mix of coins and bullion), and 1/3 SHTF survival gear (liquor/guns/seeds/etc.). I also own and manage couple of apartment buildings for my day to day work/expenses/cash.

Sat, 05/29/2010 - 10:07 | 380971 snowball777

The problem with TIPS (pointed out by ShadowStats, I think) is that they won't track hyperinflation fast enough for it to be worthwhile since the TIPS are pegged to CPI at long intervals compared to the wage-price spiraling.

I have some in my 'folio along with PMs and you can never go wrong with non-perishable preparedness...most importantly a clean, renewable water source.

The apartments will be a worthwhile investment when hyperstagflation hits, but you won't want to be anywhere near them to collect rent.

Sat, 05/29/2010 - 08:35 | 380929 MarketFox

Act I....Derivatives

There are several means to print worthless paper...

This is manufactured false value via CDOs and similar instruments...ie naked securities transactions...and the common government money printing...

Both must be shelved...

The exchange must represent true value...

This means defragmentation...and plain jane vanilla stocks and bonds.....

A singular direct access efficient electronic exchange...that is easily accessible by any size account with 1 to 10 to 1 leverage....There would be size restrictions per account...and there would be no short sale rules....The short supply would be restricted by number of shares outstanding via electronic tag....

The exchange in turn would be "supervisable"....by a new electronic regulator...

Information about each security would be fact based wiki format....and all languages and currencies could participate seamlessly....

Sat, 05/29/2010 - 10:16 | 380927 Trichy

Markets are efficient until manipulated. Nothing more manipulated than the us bond market where Ben with raincoat and moustache is reigning supreme, by giving out free monies knowing the benefactors, squids and other parasites, will return the favour by buying treasuries, with 10x leverage. Of course they pocket a 3% risk free return with 10 leverage in the process, courtesy of us tax payers. This trade is indeed risk free until the next black-swan event makes this fat tail wag this dog out of control.

Sat, 05/29/2010 - 08:17 | 380921 Clinteastwood

Seems like we're missing something. If the objective is to be "invested" such that you're still standing once the margins are all called, wouldn't it be likely that the most moral investments would be the best? I mean, we're all railing about "moral hazard," right?

If you're thinking of being long treasuries until just the last minute before they crash, how do you know when that will be? Truth is: no one can know. Or....modify that slightly......if anyone has that kind of wisdom, s/he would likely be invested "morally" right now.

I think there's a good argument that being 100% invested in gold and precious metals is the most moral investment. If you're in the position to be invested in other commodities that could be relied upon when the bubbles all burst, that would seem a moral investment. What doesn't seem moral is to attempt to make money by owning a wad of papers---derivatives, stocks, notes, etc.

Call me a flat earther, but I just can't see making money outta thin air. Seems like those that do never enjoy the fruits of that labor. And many of the so-called "wealthy" in this fiat system may one day soon find their wealth has disappeared "as if it had the wings of a bird."

Sun, 05/30/2010 - 05:39 | 381993 weelp

Clit, do you have sand in your vagina? He's not talking about timing, just an obvious bubble that will happen in the future. Look up LEAP's than repost an intelligent response or go suck your moral nut sack.

Sat, 05/29/2010 - 05:18 | 380882 weelp

WOW! SWEEEET!

I've read thousands of articles from ZH, a lot of them are great but this one takes the cake! Fantastic analysis, well written and very informative. I even printed it.

Sat, 05/29/2010 - 04:29 | 380875 OneArmBandit

If everybody owns money to somebody what is going to happen if someone decides not to pay his debt?

Sat, 05/29/2010 - 02:24 | 380821 Grand Supercycle

Interesting EURO chart :

http://stockmarket618.wordpress.com

http://www.zerohedge.com/forum/latest-market-outlook-1

Sat, 05/29/2010 - 02:02 | 380810 steve from virginia

Hey! EZ extend and pretend works. Don't knock it since you are already doing it.

Do you have a credit (extend and pretend) card?

We all live beyond our means, even if we don't want to.

Interesting article but he's sellng gold. Notice how the gold bugs always have the best scary stories?

Debt is real but gold also represents debt. Without the embedded debt, gold is actually worthless. Think about it.

There is no escape other than the destruction of trust, in that event life is not worth living/short, brutish and nasty. We all must muddle through, somehow. In the long run we are all dead.

So are some ideas. The US government will never run out of credit the same way a bowling alley never runs out of points or a baseball park never runs out of ... runs. (Thanks, James Galbraith.) Galbraith is right, of course. The bottom line is politics and gold salesmen who have the same tired, old ideas about the rich getting richer.

The biggest problem in this country right now is not bubbles but the lack of revolutionaries.

Sat, 05/29/2010 - 04:33 | 380835 Escapeclaws

The only thing that seems to explain the current situation is the mathematical approach called "Catastrophe Theory". An unfortunate name, because the word "catastrophe" in this context just means a sudden discontinuous change resulting from continuous change with no connotation of disaster, unless you regard a snapping rubber band as a disaster. I know the same idea is represented by "tipping point", but that idea does not even hint at the richness of the underlying mathematical theory. Granted, it was abused in the 70's as it was used to explain anything and everything. Mathematicians rightly shy away from anything that becomes fashionable.

See http://en.wikipedia.org/wiki/Catastrophe_theory

However, at this point, modeling the world economy using this approach would be the most rational approach to understanding the underlying dynamics. Problem is, the mathematics is hard and it would take a collection of geniuses who also understand economics and finance--perhaps something on the level of the Manhattan Project--to implement such a study. Nevertheless, the underlying mathematical theory is solid and rigorous and offers a leg up on grasping the economic problem. Catastrophe theory was actually invented by René Thom--a Fields Medalist--to "explain" biology; ie, it is not the same as Mathematical Biology, which is the application of mathematics "to" biology. Rather, Thom was more interested in how cells decide to become nerve cells vs skin cells, etc.

In the same spirit, I believe catastrophe theory could be used to "explain" economics, but, as far as I know, it has never been seriously tried. But just look at financial markets, with their sudden changes, like the May 6 flash-crash, or the crash of Oct 87. It is just a question of setting up an appropriate model with umpteen variables. Catastrophe theory posits that no matter what the dynamical system and the number of independant variables, there is a maximum of 7 variables that are systemically important.

Just to give a simple example of applying the theory, there was an interesting study done on prison riots in English prisons. Using the theory, they were able to isolate the one variable with the most predictive value in determining when a riot was likely to occur. Unfortunately, I can't say "Guess" and then print the variable in small print upside down at the bottom of this page, so I'll just brazenly spill the beans: the frequency of visits to the prison infirmary.

The great Russian mathematician, Vladimir Arnold, wrote a layman's guide to Catastrophe Theory (note: PhD in mathematics required). At the end of the book, he draws some interesting conclusions. To give just two of his bullet points, he says

"3. The maximum of the resistance is attained sooner than the worst state through which it is necessary to pass in order to reach the better state. After passing the maximum of resistance the state continues to grow worse.

4. As one approaches the worst state on the path to perestroika the resistance from a certain moment onward begins to decrease, and as soon as the worst state has been passed, not only does the resistance completely vanish, but the system starts to be attracted toward the better state."

"perestroika" here refers to a metamorphosis of the system, not Gorbachev.

One more Arnold quote:

"Napoleon criticised Laplace for his 'attempt to introduce the spirit of infinitesimals into government'. The mathematical theory of metamorphoses (or perestroikas) is that part of contemporary infinitesimal analysis without which a conscious management of complicated and poorly known nonlinear systems is practically impossible."

Sun, 05/30/2010 - 05:27 | 381988 weelp

If I snapped a rubber band at your nuts, would you consider it a disaster?

Sat, 05/29/2010 - 14:15 | 381226 Nikki

Quants... Catastrophe theory.. Game theory... Bull shit.

Occams razor...

Bernanke's reappointment was in jeopardy. A nice warning shot via M1 spigot was sent. Message received. Brrnanke confirmed.

Fed audit legislation being debated. Flash crash on same freaking day. Message received. No audit. No derivitive curbs.

The string pulls the puppet.. Physics. Not theory.

Sat, 05/29/2010 - 09:07 | 380940 Irwin Fletcher

"Catastrophe theory posits that no matter what the dynamical system and the number of independant variables, there is a maximum of 7 variables that are systemically important."

I'll file this under "beware of geeks bearing formulas"

Sat, 05/29/2010 - 15:07 | 381285 Kali

Irwin, yes. When complexity keeps increasing, NO PUNY HUMAN BRAIN/BODY can predict or control it. Nor can human's creations (super computers,CDOs,etc), because that creation increases complexity even more. I am leery of any system (economic, mechanical, etc) that gets beyond the complexity of "human scale". That is why Einstein said true genius is making complex systems simple. I say, skip the need for the complexity and we won't have to worry about it. I am not a Luddite. I embrace some of our technologies. But look where it has gotten us, we are drunk with "technology". People hail the internet this way, but face it, how much of it is wasted on things like porn? We use modern technology to circle jerk. Murphy's law: The more complex a system, the more that can go wrong and at the worst possible moment."

Sat, 05/29/2010 - 23:17 | 381799 Rusty_Shackleford

Good post.

Reminds me of that part in Pandora's Box where some egghead from the UK back in the 60's came up with an "economy machine" that worked with the flow of colored water. They actually used the damn thing for years to make policy decisions. I shit you not.

http://video.google.com/videoplay?docid=8639026381197734332#docid=-3272903211813223143

goto 4:48 to see it.

“The study of history is a powerful antidote to contemporary arrogance. It is humbling to discover how many of our glib assumptions, which seem to us novel and plausible, have been tested before, not once but many times and in innumerable guises; and discovered to be, at great human cost, wholly false.” - Paul Johnson

Sat, 05/29/2010 - 19:15 | 381539 Irwin Fletcher

There are a lot of things on the internet more wasteful than porn. Porn was very significant in the internet's early development, and the internet as we know it might not exist without it. We might not have a great deal of the world's knowledge at our fingertips if the original pervs didn't set a precedent for disseminating offensive material to the world. Kind of like the original NASCAR guys, who just wanted to outrun the fuzz, and ended up creating a beloved, $$$ sponsored hobby for the entire southern United States. Now seat belts are safer for everybody, and we can all search the internet and learn all about Godel's incompleteness theorem or complexity if we so desire.

Sat, 05/29/2010 - 12:53 | 381122 phaesed

Yep... Until you get a notice from SEC saying.... "You're not immune bitch, you're still a servant of the establishment."

Sat, 05/29/2010 - 19:31 | 381562 Irwin Fletcher

To which I might reply that technically, I am a servant of the NIH, and we kill rats rather than breed them like the SEC.

Sat, 05/29/2010 - 08:02 | 380915 mikla

Good post.

You're specifically talking about a "precipitating event", or "what does it take to *finally* get the dominoes moving?" While I agree that there (even rare) mathematical events that can cause this (summation of waves resulting in a rare epic "high" or "low"), IMHO it's not the critical factor to this problem. Rather, we're continually lowering the "noise" bar for what an event might be.

Specifically, this is finance: We "threshold out" noise, and the increasing debt level continuously lowers the threshold until it is triggered by noise.

Because we have growing debt, the system can only remain stable as long as the debt is serviced. Because the debt grows, the debt service payments required similarly grows. Unfortunately, those service payments can't keep up.

With lower debt levels, the dominoes can't start falling without a "1,000 year flood". With higher debt levels we only need a "500 year flood", then "100 year flood", then "50 year flood", then "10 year flood", then a typical flood in any given year. Ultimately, the debt level grows so large that dominoes start falling if there are rumors of clouds on any given day.

At present, we're at the "rumor" stage. Iceland was FAR more than THREE TIMES past the point-of-no-return when people finally called "Bullsh*t". At present, most other sovereigns are far beyond Iceland (e.g., worse demographics, worse social spending, worse liabilities).

So, while I accept your assertion on the nature of "Catastrophe Theory", IMHO finance doesn't need a catastrophe. The parrot is dead, but we're merely pretending it is not. We don't need a catastrophe. We need the Central Planning Ministers to misstep in their fraudulent reporting of liabilities or activities, and some little boy shall call out, "The Emperor has no clothes!"

Sun, 05/30/2010 - 11:04 | 382161 SWRichmond

Sat, 05/29/2010 - 01:07 | 380780 Chris88

Hit the nail on the head. I've realized this for quite some time and have been puzzled that the rest of the world doesn't see it. US government bonds are the most overpriced asset on the planet right now. As Jim Rogers put it in so many words, "The fact that anybody would lend the US government money for 30 years at 4 or 5% is ludicrous". Think about it for a second, the largest debtor in the history of the world borrowing money for 30 years at less than 5% - it's absolutely ridiculous. Interest rates are going to go through the roof, anybody caught holding notes and bonds is going to get wiped out. Buying puts on TLT may be a nice idea. The 2012 contracts have been going up still despite the "flight to less crappy at the moment" which has pushed yields down. The US government really has two options: honest default, which will send rates sky high and kill the dollar or hyperinflate which will still destroy the dollar. Gold, silver, and all commodities will be sound, long term investments. Let's not neglect commodities that are dirt cheap right now like most agricultural commodities; they will perform well during runaway or hyperinflationary periods.

Sat, 05/29/2010 - 10:29 | 380985 DaveyJones

Agree. It seems to me that the bastards running this show are in a serious catch 22. The very strategies they employ to keep the dollar at the top of the heap will be the very thing that accellerates its fall. As things get worse, so do their strategies. More than anything else, this communicates their desperation and unfortunately, ours. It is indeed more psychology than finance and the lies, like our debt, are more exponential than linear. Does this not mean that every day, the total timeline contracts?

Sat, 05/29/2010 - 00:47 | 380762 Brett in Manhattan

"By going short U.S. government bonds, I am basically going short the human tendency to cling to a worldview that provides them the most comfort. Always let historical precedent and facts determine your conclusions, not irrational human tendencies."

This sounds good but the problem with shorting on the come, is that you usually go broke before you end up being right. Moral victories are of little consolation for a busted brokerage account.

Sun, 05/30/2010 - 05:25 | 381987 weelp

Or you can wait till the end of this year, when rates are at all time lows and then buy some put LEAPS on government bond etf's and be both.

Fri, 05/28/2010 - 22:31 | 380595 demsco

I agree and disagree at the same time. It is only a matter of time before treasuries collapse, that is a given, we are broke, but it will take much longer to play out than most think. I am actually long treasuries right now because we are in deflation, also long gold and silver in its physical form.

However, I know we will move from deflation to inflation virtually overnight. What happened to the PIIGS, which is still happening, will come here. IMHO it will move to other European countries first and the US will shine bright before the super nova blows up. As France, Germany, the UK get hit by the nasty speculators they will scramble for dollars driving down the money supply and keeping yields low, they all need to settle debts in USD's still as the reserve currency. We will print to meet the demand for dollars and when all of Europe blows all those dollars will come home and there is where the problems really become serious for us. That is when you want to be short UST's, but, IMHO, not now I think we have more upside in UST's for now.

Hey, i could be wrong, who knows the whole thing could blow up over the weekend as it is that fragile and I am not dumb enough to think "it can never happen here" as history is literred with people in that mind set. Frankly, I hope I am right and you all should hope I am right as well because deflation means much lower prices for food, property, clothes, guns, ammo, GOLD, and a host of other things you will need when the SHTF. So, don't junk me, but look at what I am saying in a positive light and as the final opportunity to store up what you can as I think 3 years out we will be living in a world we never thought could exist.

Fri, 05/28/2010 - 23:43 | 380669 AndrewWJewell

10^oo

100% we are in agreement though I’m afraid you’d left out something substantial which I would like people to too comment on. (thoughts)

ATM I suspect there are conversations taking place which might hurry a forthcoming disaster in U.S. Treasury debt. So many individuals are now relying on governmental aide (unemployment, food stamps, ect) that when such is eventually paired (pealed) back, there will be lots and lots of upset people. We might there turn into Greece

I know it already to be !!!FACT!!! that PIMCO is contemplating the aforementioned

Sat, 05/29/2010 - 06:40 | 380895 moneymutt

We are in a debt bubble, so anyone at any time is vulnerable to speculators trashing their currency, just like any over leveraged company could be taken out by shorts...but bear stern and Lehman, were they way better than gsacs, jpmorgan? So in my mind, it's all about who the insiders decide to attack...of course they tend to go for weaker ones in herd, but they can gang up on strong ones if they want to...

US does h ave option to take control of it's money and resist this, but doubt any decisions will be made in the interest of the people

The U.S. Government Bond Bubble

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