Tuesday, December 9, 2008

Are Treasuries The Next Bubble?

Good Evening Folks!

Another crazy day in the markets. It appears that everyone is now asking themselves the same question:

Where in the heck should I put my money?

Its pretty pathetic when the one place in the market that's considered to be the "safe haven of all safe havens" appears to be turning into a giant bubble that's filled with a huge group panicked investors and the Fed who continues to buy their own debt.

Has the world gone mad? Everyday I see something that is unprecedented. Watching the Fed buy its own debt reminds me of a cat run in circles as it chases its own tail? The cat never wins in this game and neither will the Fed!

You need to ask yourself this question: Is there any safe place to put your money anymore? I mean basically here are your safe haven options right now:

A) You can buy the treasuries at zero yield from the US government that's on a one way ticket to bankruptcy.


B) You can buy CD's from an insolvent bank backed by an FDIC "IOU".

Wow what wonderful options! I bet you are having a tough time choosing from these two fine options! (sigh). I do believe that a bubble is forming in the treasury market. The problem is right now there really is no other choice. In the short term I would still buy treasuries until there is another viable alternative.

If another viable flight to safety option is created, it could attract more money than the rights to publish Branjolina's new baby photos. I could see gold becoming the new flight to safety if the treasury market becomes too ridiculously overbought(ummm maybe we are already there?).

I am going to watch gold here like a hawk. The deflation problem is keeping it fairly cheap and this is the one area where I can see money flying as the treasury market turns into the next great bubble. Gold has acted as a flight to safety in the past and we all know history repeats itself.

I must admit I was really hoping we were done with bubbles. Leave it to the good ole US of A to find a new one! The bond market will dislocate at some point but not before there is somewhere else to run and hide.

Another flight to safety down the road could become assets as deflation destroys their value and they become cheap. I mean why not buy a house for pennies on the dollar a couple years from now versus buying worthless US treasury debt? You can't sleep in your treasuries or raise a family in them!


Most investors just want to find some way to simply preserve their capital right now. I personally am seriously starting to think that the mattress might be the best option. As deflation begins to severely take hold, cash will be king. This is why the dollar is going parabolic. Many investor's riches during the "bubble economy" were tied up in assets like houses that are now crumbling in value. This negative wealth effect is devastating when it comes to the consumer.

Companies have virtually zero pricing power with consumers in a deflationary environment where no one is buying. This can devestate the bottom line. Once these price deflation death spirals begin they are awfully difficult to get out of. Deflation scares the hell out of the Fed much more than inflation. The Fed can always raise rates to quell inflation. However, they are defenseless when it comes to deflation because they cannot force consumers to consume!

Economies can be destroyed when consumers run to the sidelines and wait for further price drops.

I explained this scenario in an earlier post:

If prices continue to drop, why buy now when it will only be cheaper later. This is what happened in Japan 26 years ago and their economy still hasn't recovered since. Their markets are still sitting near their lows more than two decades after this devastating deflation spiral began.

Folks, the exact same thing is going to happen here and we are now starting to see some data that proves it. :

Non-financial Implicit Price Deflator QtoQ Annualized

Final Take:

This chart takes a look at consumer by using a basket of goods and services to measure the purchasing habits of the consumer. As you can see above, consumers are dropping down and buying cheaper goods versus more expensive ones in a major way. This shouldn't surprise you. I see it everyday. Anyone been to a Walmart lately? They are packed! Look at their stock price. The .99 cent stores are also doing extremely well.

We will soon be a "trailer park" nation that is filled with US consumers wearing Wrangler jeans with orange stitches. This chart is frightening folks. Look at the dropoff in 2008. Its dropping like no other time going back to the early '80's. As I said before, once this starts and dollars become scarce as people lose jobs and try and payoff debt, its awfully difficult to stop.

Inflation is still off the radar now because people have no money to upgrade and pay more for basic goods! This won't last forever though. Inflation down the road will come back with a vengeance. More on this later.

Bottom Line:

Please stay on the sidelines if you need to buy a house. You will save yourself a small fortune in doing so. If you are hell bent on buying a flatscreen TV at least wait until after the holidays. Look at the deflator price action above folks! Its a buyers market when it comes to consumer items! I saw a 46" for $1200 the other day. That thing will be under a grand once X-mas is over. I am salivating already.

The markets:

We were do for a pullback after the bull run we have seen. We had been up 9 of the last 11 days before today. I don't read too much into it. The market continues to hang in there despite horrific news today from Texas Inststruments, FedEx, and the treasury market yields.

I didn't buy or sell anything today. Citi held up well so I continued to hold my calls. The automotive saga should be a market mover tomorrow. I still think we will continue to move higher in the short term with a few bumps in between. Some good fund managers have bought stocks in the last few days. Ken Heebner bought a boatload of financials this week. He has gotten killed this year but is still one of the better fund managers on the street. There was also a lot of bullish action in the options market.

The news in the past week couldn't have been worse for the bulls yet the markets have held up reasonably well. I know I know: It makes no sense to me either folks! I still come back to the fact that the market was slaughtered this year and a bounce was inevitable. There is no fundamental thesis to support this move other than we were due for a retrace.

I will continue to watch the price action very closely. The bottom of this market could fallout at any moment based on the news flow but I don't sense that its going to happen before the holidays. I sense that many investors are worn out from all of the gloom and doom and are ready for a break.

Taking a few weeks off might be a good thing for both the bears and the bulls.

Until Tomorrow!


Avl Guy said...

Good post, Jeff.
Re: Rallies, Capitulations, Bubble & Busts. An undeclared yet defacto 'Sovereign Default' by the US is about the final 'worst thing' that awaits us now. And since it will be undeclared, given our cultural sense of superiority (We Will Never Declare A Default) and our great talent at 'spinning' and word-smithing, we will have to keep our radar out for evidence of such a US default. We do this by assessing the behavior of our creditors towards us and our dollar. This ‘seek-for-evidence’ approach also applies to how creditors react to Helicopter Ben doing stealth ‘drops’.
That makes our ‘worst case’ a manageable fear, in a way. That leaves less-than-worst case market scenarios....and there are a hydra-headed quantity of such scenarios.
So maybe the numbing trickle of horrid earning reports and falsified unemployment data is something we'll grow use to. If so, maybe this rules out a ‘buyers capitulation’.

Such a 'capitulation-free' era would be a new paradigm unbeholden to precepts of markets past. We’ve had new paradigms ushered in before. I could list these seven:
The Roaring 20s; the 4-year crash of '29-33; the Great Depression; WW2; the post-war mini-boom of 1946 to the mid-1960s; the 20-years of sideway trading of 1960s and 70s up to 1982; and the 25-year Secular Bull market & 'GDP Comprised of Consumer Spending’ of 1982-2007.
Is it time for a new 20-year-plus paradigm and cycle?
BUT... trying to PRE-envision a new market dynamic paradigm never seen before is like trying to describe colors that are invisible to the human retina and have no reference point in our minds, like Infrared and Ultraviolet; they wont look 'red' or 'violet'.
Consequently, we may be forced to venture deep into this new paradigm before learning the collectively shared words to describe it. Fun, eh?

johndaniels said...

50% physical precious metals.

50% raw cash, out of the bank.

thats what i did. i have nothing digital. i dont figure ill ever go back to the digital system and cash will insure i benefot from deflation with regards to physical goods.

my theory? we will have cheap housing and cheap food, just like china. everything else (excluding digitally determined priced assets, like some stocks and definately housing) will appreciate with eventual asset appreciation and currency devaluation once all them bailout dollars hit the streets.

johndaniels said...

the problem i have with housing and real estate in genereral is the vulnerability to government confiscation. even when you on a house free and clear, you dont really own it; the government does, through taxation. and all the extra expenses make it by default a liability, not an asset... and the non liquidity, dependence on emplyment, the network of leeches that survives on homeownership, and basically it cant be concealed from the government.

thats why i like physical gold; its concealable, its is not taxed, it doesnt cost anything to hold, it can be passed to heirs without government intervention or involvement, it can be liquidated without a record of sale, is saleable amongst the general population (dont need a broker or appraisal), and and it benefits in some way from inflation or deflation, and currency collapses/weaknesses.

the more people realize (too late) these benefits of being "out of the system" with gold, the more desireable it will become. gold confiscation? wont happen; too expensive and confrontational to conduct... thats what 401k's are for!

Jeff said...



Excellent post.

That is so true. We have never experienced anything this bad so its impossible to predict how the markets react to it.

We will definately have some type of paradigm shift thats like nothing we have ever seen before.

I gotta admit. I am afraid what it will look like? Some type of Mad Max on steroids?

Its going to be interesting to see.

Jeff said...


I like your thoughts. I hope you loaded up on a few guns and some ammo to protect it.

You make a great point about the 401k's and the potential for the government to step in and rape them with taxation.

When they confiscated gold in the 1930's, they didn't have 401k's that they could pillage!

I have paper gold but stronlgy considering buying a safe and grabbing some of the real stuff.

Guns and GOld. Maybe thats the future!

Jeff said...

MAde a few trades this morning on the bounce


FAZ at $41
SRS $86

Sold by C calls

The news flow is too insanely negative. Couldn't resist these entry points.

GHappy trading.

Jeff said...

Dumped UYG an hour ago at around $6.30.

Financials are not participating on this move higher.

Auto bailout news is taking the market higher. Lets see where we close

Anonymous said...

The problem with the markets is that too many monkeys been playing the expeculative game... right now the rich are shaking them monkeys off the tree!!!

I have spoken AngieP

Anonymous said...

... And guess who's pulling the strings?

1st they sell us the idea that buying a property is an excellent long term investment

We all fall for it and became greedy

2nd the housing market collapse

We all lose our biggest investment capital

3rd Uncle Sam steps in... the money presses start rolling AND we pay the consequences

Whichever way we look at itm the Government always win (but this time around people know a little better)

By the way... (did you know) the big 3 auto makers are busy setting up plants in South America and Asia