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Frighteningly, like the rush into tech stocks, then the rush into real estate, and then the rush into commodities, the rush into U.S. government bonds has created a Treasury bubble. In a cruel twist of economic fate, passage of an aggressive Obama administration stimulus plan could further inflate that bubble – before popping it.
The United States of America is an expensive household to run. In order to pay the nation's bills, the U.S. government levies taxes. When expenditures exceed tax revenue, the government has to borrow money. The United States borrows money by ordering the Treasury Department to sell government IOUs to investors in the form of Treasury bills, notes and bonds, known as "Treasuries."
How much does the government owe? As of Friday, according to TreasuryDirect.gov, total U.S. public debt stood at $10,620,397,126,433.54 ($10.62 trillion) – and counting.
About the Author
Shah Gilani boasts a financial pedigree unlike any other. He ran his first hedge fund in 1982 from his seat on the floor of the Chicago Board of Options Exchange. When options on the Standard & Poor's 100 began trading on March 11, 1983, Shah worked in "the pit" as a market maker.
The work he did laid the foundation for what would later become the VIX - to this day one of the most widely used indicators worldwide. After leaving Chicago to run the futures and options division of the British banking giant Lloyd's TSB, Shah moved up to Roosevelt & Cross Inc., an old-line New York boutique firm. There he originated and ran a packaged fixed-income trading desk, and established that company's "listed" and OTC trading desks.
Shah founded a second hedge fund in 1999, which he ran until 2003.
Shah's vast network of contacts includes the biggest players on Wall Street and in international finance. These contacts give him the real story - when others only get what the investment banks want them to see.
Today, as editor of Hyperdrive Portfolio, Shah presents his legion of subscribers with massive profit opportunities that result from paradigm shifts in the way we work, play, and live.
Shah is a frequent guest on CNBC, Forbes, and MarketWatch, and you can catch him every week on Fox Business's Varney & Co.
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This story is a credible hypothesis. The other scary story told around is the petrodollar scam, effectively run by the US Government. http://www.scribd.com/doc/7552683/Petrodollar-Warfare-and-Collapse-of-Us-Dollar-Imperialismspecial-Report
William R Clarke paints the picture just as sombre as Shah Gilani here. Look at where the US Treasury fit into both these stories and be scared.
[…] What are the consequences – read this article – Obama’s New Stimulus Plan May Be the Needle That Pops the Treasury-Bond Bubble. […]
Intelligent analysis as always, Shah. Thanks.
To Adam Potgieter above: Please keep your conspiracy theories to yourself.
Yes, it is a credible hypothosis. It's only a hypothosis until it is proved then the frog will be cooked. Always follow the money trail. Who's the boss of the money? A guy interviewed on the radio said, "the government doesn't just create money out of thin air they borrow it from the private sector." We are conditioned to think that means the tax paying public or treasury investors worldwide. Is it? The private sector lender from which we borrow is the Fed because they are the issuer. (The Fed is the one who creates it out of thin air, but they aren't the government). Bill Bonner's book "Mobs, Markets and Messiahs" pointed out that the "job of a central banker is not to protect the currency but to control its destruction." The Fed, like all central banks, are members of World Bank. World Bank is a functionary of the UN. The UN's purpose is world peace. Member nations who have the money to conduct war tend to do so and will continue to have that ability unless they go broke. If they go broke then, the theory is, there will be peace. At least the shooting stops. Its the US who's ruining their own currency and the Fed is letting/facilitating them because peace is paramount. All this has to happen. No, I personally don't think peace will come from this source but that's the UN goal.
Ladies and gentlemen:
"Nobody wants to hear" your message. That's what you say. But you do not reveal, what your message is. Can you tell me?
Yours cordially,
Manfred Nitsch
retired professor of economics
Freie Universitaet Berlin
Dear Mr. Gilani:
I admire your efforts to articulate the Treasury-Bond bubble in your article: “Obama's New Stimulus Plan May Be the Needle That Pops the Treasury-Bond Bubble.”
I agree with you that the Treasury-Bond bubble is developing will grow in magnitude and will [someday] burst. However, we may not see the bubble burst for many years to come… if ever. And Obama’s New Stimulus Plan will certainly not be the needle that pops the bubble. Here’s why…
First, your analysis of Treasury-Bond Bubble is well thought and detailed. However, your analysis approaches the subject issue as a two dimensional model like… action and reaction… supply and demand… price and quantity… money supply and interest rates… and interest rates and Bond bubble. In summary, what your analysis is saying: “The injection of trillions of dollars in the US economy, by the FED, will eventually cause inflation and that in turn will force FED to raise the interest rates causing the Treasury-Bond Bubble burst.”
Unfortunately it is not that simple and it’s not just you, but most everyone approaches the “supply and demand” as a two dimensional economic model. The two dimensional approach to analysis seemed to have worked fine in the past because, even though the third dimension [demand destruction] existed in the past, its impact was not huge [because of population growth, immigration and rise in living standards from much lower levels] and it was not realized for a long period of time due to slow consumer reaction to changes. And when the impact of this third dimension [demand destruction] was realized, it had arrived slowly and since its impact was not felt immediately… it was, therefore, considered as the result rather than the cause in the economic models. In summary let me explain…
There is a third dimension [demand destruction] that needs to be considered in any economic model in this day and age… the age of instant communications and the Internet. This third dimension is the “permanent demand destruction” from today’s informed consumer… the buyer of products and services who is also motivated [now] with the desire to store money, in one form or the other, for the future. When you enter the permanent demand destruction in to the equation, your argument of money supply… inflation… higher interest rates… Bond bubble burst scenario will not hold in the near future. In my humble opinion, this time it will play-out differently from the conventional wisdom…
Permanent Consumer Demand Destruction for Products and Services:
When you permanently destroy huge demand [by the consumer], the supply side [businesses] make adjustment to their business model by cutting production, cutting CAPX, cutting operating cost and letting employees go. In this scenario when there is less demand from consumers [and businesses] for both cash and credit… the risk of Bond bubble bust is delayed if not mitigated altogether. The argument in favor of consumer driven demand destruction is as follows…
The consumer of today recognizes that the trillions of dollars poured into the US [from all over the world] and that is what supported their credit binge to spend and spend. The [almost] free money pushed the consumers to rush into buying products and services they did not really need, rush into tech stocks, then the rush into real estate, then the rush into commodities, and then rush into U.S. government bonds. Over the years all of these asset classes [except the U.S. Government Bonds for now] have blown-up in the consumers face. Not only that, the financial machinery that funneled trillions of dollars of the free worlds savings [from across the globe] into the US financial system has now blown-up as well and the money velocity has come to a screeching halt. Banks are over leveraged, they don’t trust each others financial health and they are not lending.
Consumers are not borrowing either; they are downsizing and cutting cost…
• Banks are not lending to qualified consumers… but that could change;
• Consumers has little or no equity to borrow against… not going to change anytime soon;
• Days of free money are gone forever… because the savers from all over the world are now wise to the financial shenanigans of American financial wizards and are not looking to send their life savings to America any time soon;
• Consumers are now motivated, by the blow-up of almost all asset classes in their faces, to start saving money for their future commitments and retirement… going from negative savings to almost over 6% now;
• Consumers finally realize that they don’t really need three of everything [homes, cars, jewelry, minks/furs, TVs, cell phones, computers, and electronic gadgets].
• Consumers finally realize that they don’t need to buy a Hummer or new model car every other year;
• Consumer finally realizes the rising cost of energy for driving, heating and cooling… the present drop in cost is temporary we all know;
• Consumer finally realizes that the increasing cost of real estate taxes even though their homes are 40% less in value to-day… taxes always go up and not down;
• Consumers finally realize that they don’t need to re-model every five years and buy new appliances every three years;
• Consumers finally realize eating home can save them thousands of dollars over the course of the year;
• Consumers are loosing jobs left and right in all sectors of our economy… there are no safe heaven… not even in the health and consumer goods;
• Consumers are de-leveraging en-masse and there are no asset classes worth investing [speculating] at this time… and perhaps for a long time.
The studies indicate that by the end of year 2008, there will be over 1 billion Internet users. That means, most all of the educated population of the world, will be globally connected by the Internet. And the boundaries of time and space will disappear. People will gather in public forums of their common interests to network and share information. These people will be the consumers, investors, vendors, partners, friends, enemies, management, or employees of the public companies. In a public forum like this, that allows us to maintain our anonymity, there will be no place to hide for the incompetent or the unscrupulous.
Add to this Internet phenomenon the instant communications afforded by the TV, and its producer’s desire to provoke debates on issues, that in the end, when all is said and done, informs and educates the public at large. What you have is a well informed, wiser and more responsible consumer that is all set to “destroy demand” for the un-necessary, unscrupulous and the irrelevant.
Permanent Businesses Credit Demand Destruction:
Businesses now see this consumer demand destruction as a clear reality and are adjusting their business models accordingly by cutting production, cutting CAPX, cutting operating costs, de-leveraging finances and letting employees go. And as such, eventually, after the initial denial period to accept demand destruction, there will be less demand for cash and credit from these businesses.
On surface it seems that if these businesses could borrow money earlier, like in the August/September time frame, they might have postponed downsizing and waited a little longer before letting employees go. However, that window of opportunity is gone and the reality of wide spread “demand destruction’ has become a reality. The reality of demand destruction is apparent in thousands of employees being laid-off by bellwether companies like Microsoft, Google, JP Morgan and the like.
Granted, that in due time the wealthy consumers and businesses will come back into the credit markets to borrow so they can speculate in products, plants, production, stocks, commodities and real estate. But that time is years away, when there are clear signs of stability and growth in any of the known asset classes for investment.
Permanent Destruction of Asset Values at the Financial Institutions:
To this witches brew, let’s add the cause of our current credit crises and see what it means for the free supply of money in our financial system. I’m sure you and I both have our own set of facts, analysis and opinions. But the core fact that no one denies is: “the leverage used at financial institutions world-wide and lack of regulatory oversight was the main cause for this global credit crises.”
The regulatory oversight, or lack of it, will be debated and some day there will be rules and regulations in-place to prevent future systemic met-down and risks. In the meantime, however, either because of banking laws or because of banks own desire to mitigate risks in this financial environment, the banks and financial institutions out there are busy trying desperately to de-leverage. This means banks [and financial institutions] will first try to shore-up their equity/debt ratios before lending out the money received from TARP and other FED bailouts. There is, by the last estimates, over $3 trillion dollar in systemic losses in the US alone. The money losses did not change hands… it just vanished in thin air. What’s left behind, however, is the un-acceptable levels of leverage, risk and vastly impaired equity/debt ratios at US financial institutions.
In summary, before we see inflation we will first see deflation due to permanent demand destruction for products, services, and credit. If we are lucky and the trillions of dollars in FED money does work, in the best case scenario, we may see stagnation and not reach full-fledged deflation. That is our hope!
Inflation in the short term does not seem possible in view of huge permanent demand destruction for products, services and credit. The 10 year note is currently trading at 2.67% yield. That doesn’t sound any inflation bells in my congregation.
Anant Goel
the thought process and the understanding is the best i've seen on the internet including dr.doom untill you got to the dollar. your assumption that the dollar will devalue doesn't take into consideration that the rest of the world lags us and we must recover before they do so our dollar will remain strong untill we have recovered a while before the world which will give us a head start on raising interest rates which will keep the dollar strong. you did a little dance around the dollar to get back to inflation is comiing and it is but not till the world reaches bottom.
dear m?. goel,
i agree with the demand destruction concept – babyboomers will not buy more harley's or attend as many football weekends or nascar races. mr. gilani did not carry his thought process through the macro part but then he is trying to sell fear and how to get rich. mr scott if not for conspiracy theorists, soap box prognosticators, snake oil salesmen, and me there wouldn't be enough people on the internet for google and if m?. goel is correct google is in trouble, isn't their stock down a lot….
[…] Money Morning: Obama's New Stimulus Plan May Be the Needle That Pops the Treasury-Bond Bubble […]
I'm confused. I thought that production was supposed to shift from consumer goods (private sector) to infrastructure maintenance and repair (public sector) when the business cycle goes into recession. So why worry about the demand for treasury notes when all they have to do is crank up the printing presses? If all the new money goes into the hands of hungry people in need of consumer goods where's the problem? Well duh…
I receive a number of investment letters and one things seem to be consistent…that the US$ is likely to weaken with all the money the US government will be printing when the stimulus plan kicks in.
The Canadian dollar has been at par with the USD in the past two years but has slid to around .80USD recently.
If one were to invest say $80,000 in any investment denominated in CDN$ and what all the US pundits are forecasting for the US$ happens, the math is simple…when the US$ falls to parity once again(or beyond) that investment is now worth $100,000US$ or more once the Canadian $ is once again worth as much or more than the USD. With no appreciation in the underlying investment that implies a gain of 25% to the US investor.
I have many years experience selling real estate in the resort municipality of Whistler..North America's #1 ski resort (see Ski magazine and Skiing….both US publications). This is not some fantasy….over the past 5 years we saw the Canadian dollar go from .64USd to over 1.00USD and back down to where it is now at around .80USD. We have many American visitors and real estate owners in our resort who have taken the ride. Some savvy investors bought low and sold high and made returns exceeding 50% in a time where prices have not been rising..ie when the dollar went from .64 to .96 that meant a 50% gain.
Think this is not a great time to invest in real estate?…think again.
Whistler is a unique resort and will be hosting the 2010 Winter Olympics. It will be viewed on approx 3 billion tv sets around the world. Money normally cannot buy that kind of publicity and we are just one year away from that reality. All venues have been completed and we have been hosting World Cup Nordic events since last winter. The rinks for figure skating and hockey have been built as has the sliding centre for luge, skelton and bobsled events.
We are seeing European, Asian and US athletes here in anticipation of next winter.
If the Park City 2002 Winter Games is any example we will see a strong real estate market going forward. Within two years after those games the volume of real estate sales in Park City doubled.
I know, I know…I sound like the president of the Chamber of Commerce. The truth is we see legions of US visitors from Washington, Oregon, California, Chicago, Texas, Florida, Alaska and many others.
After Prince Phillip and his sons visited us a few years back visits from the UK soared so just imagine what 2010 will do for us.
One of our legacies will be a new $600-800,000,000 highway from Vancouver to Whistler. Construction is going on apace and is due to complete by the end of next summer.
As well, the New York investment firm who owns our ski operations has just spent $52million on a spectacular new lift which soars from one mountain to the other. It is the highest and longest unsupported span in the world..at one point you are over 1400 feet above the valley below…in a word…amazing!
Just a thought, but let me sum up by saying that if you bought a $800,000USD home pre-Olympics and the dollar does go to parity you will realize a 25% gain of $200,000USD. I won't even conjecture about the likely rise in real estate values by 2012.
Sincerely,
Ed Styffe
Whistler, British Columbia
Canada
You know, I sit back and watch this scenario unfolding like it was something that wasn't predictable. I saw this collapse coming about the time of our last real serious Canadian recession in 1990. I saw Canadians conservatively begin to cut back for a few years and governments real in spending. However I watched as the US economy coniued to form one vast bubble after another in tech stocks, equities and finally real estate. Never really allowing the country to purge itself of errors and weak businesses. Relying solely on appreciating assets to drive the economic engine. I mean for crying out loud a five year old could have told most people that when you have nothing of value to sell you can't expect your wealth to increase.
Now in Canada we have accepted the new policy to spend ourselves happy again by running an 89 billiob dollar deficit over five years which when all is said in done will likely be three or four times that amount when true devaluation takes place of assets.
The pain we all have to go through was brought on by none other than ourselves and our lust for riches. Rather than help our fellow man we opted to shaft him. We spent money we did not have at a cost to everyone else and now we will reap the seeds we sowed and no amount of foolish government spending will stop it. We need to stop the mind set that wrong is right because quite simply they mean two different things.
[…] Obama’s New Stimulus Plan May Be the Needle That Pops the Treasury-Bond Bubble […]
I would like a complete pack of stimulus bill and the bond investment
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