Editor's Note: We're sharing this Private Briefing with you today because there's a situation unfolding on the European markets that could yield some of the biggest profits we've ever seen. Shah and Bill are tracking this by the day, and they have ways for every investor to profit on this coming event…
In Wall Street lore, it's known as the "Greatest Trade Ever."
It's also known as "The Big Short."
In 2006, John Paulson was a relatively unknown hedge-fund manager – just another face in the crowd.
But Paulson was smart, observant – and had the courage of his convictions.
He understood something that most others didn't even suspect. The U.S. housing "boom" was a sham. Especially in the area of "subprime" mortgages.
Paulson was schooled in mergers and acquisitions (M&A), so mortgages weren't at all his bailiwick.
But he believed the mortgage market was poised for a free fall.
He wanted to make a big bet against this market – a "big short." He just wasn't sure how to make that wager…
Paulson and several other renegade investors like Michael Burry and Jeffrey Greene made big bets against the risky mortgages using complex financial instruments known as "credit default swaps," or CDS.
Initially, the trade went against these mortgage doomsayers – putting them tens of millions of dollars in the red as the mortgage market continued to rocket. But instead of closing the trades and accepting the losses, Paulson and these few others effectively doubled down.
By the middle of 2007, the credit markets stumbled and then careened downward.
As the year came to a close, it was clear that Paulson had pulled off "The Greatest Trade Ever," having earned $15 billion for his firm – a total that dwarfed investing icon George Soros's billion-dollar currency play of 1992.
Over time, the Paulson trade gained a second moniker – one besides "The Greatest Trade Ever."
Thanks to a best-selling book about the mortgage crisis that was written by Michael Lewis, the Paulson trade became known as "The Big Short."
I'm telling you this story for a reason. An even "Bigger Short" may be on the horizon, and I'll tell you how to profit from it…
Our Expert Makes a "Big Call"
Capital Wave Forecast Editor Shah Gilani and I were talking about Paulson and his "Big Short" the other day.
For a good reason.
Shah said another trade is brewing – one that he and a few other select experts are predicting will be "The Bigger Short."
I'm talking about the looming collapse of the global bond market.
Shah just told his readers how to play it. And now he's sharing that strategy with us. "Bill, what's important to understand, for starters, is that the bond market – meaning the market for all bonds all around the world – dwarfs the size of all the stock markets in the world combined," Shah explained.
"If you look at the averages over the past quarter century, the bond market has been 79% larger than the stock market – and in 2012, was 104% larger. Over the last eight years, because central banks have manipulated interest rates down to artificially low levels, bond prices have been on the march. Higher bond prices and low interest rates have prompted investors to move out of bonds and into stocks. In fact, bond prices have risen so high that trillions of dollars' worth of bonds actually have negative yields, or interest rates."
Negative yields means, in effect, that investors are loaning money to governments – and are paying the governments for the right to do this.
According to the BlackRock Investment Institute, there are $5.3 trillion worth of bonds today with a negative yield; 60% of those bonds, or $3.18 trillion worth, are European bonds.
About the Author
Before he moved into the investment-research business in 2005, William (Bill) Patalon III spent 22 years as an award-winning financial reporter, columnist, and editor. Today he is the Executive Editor and Senior Research Analyst for Money Morning. With his latest project, Private Briefing, Bill takes you "behind the scenes" of his established investment news website for a closer look at the action. Members get all the expert analysis and exclusive scoops he can't publish... and some of the most valuable picks that turn up in Bill's closed-door sessions with editors and experts.