Monday, December 1, 2008


As detailed in my book "GREED", I forecast in July 2005 that the massive real estate and credit bubble would "implode endangering the financial security of millions of Americans." Unfortunately, my forecast was accurate.

As I finished writing "GREED" in December 2007, the Dow Jones Industrial Average (DJIA) had declined about 7% from its October 2007 high and I wrote:

"At present the US stock market is overbought and over-valued. There could be a near-term nasty correction of (an additional) 10% to 30% in early 2008..."

As we painfully know the equity market bubble imploded into an all-out-bear market rout which exceeded my estimate.

Now, as all America ponders what's ahead in this "Aftermath of Greed," a third bubble has found helium and will, in your author's opinion, burst in 2009 catching unwary investors unprepared — again.

What is this latest asset bubble? Believe it or not, it's US Treasury debt!

Since this past summer, as the stock market began its precipitous decline and the housing and credit sector worsened, investors sought the safe-haven of US Treasuries, preparing for a recession or even a depression economy. Demand has been so great that yields have reached historic lows. One and two month T-bills pay less than one-tenth of one percent whereas they were about 5% in August 2007! Two year rates are below one percent and the bellwether ten year note currently yields under 3%. Although investors were principally seeking safety, those that bought Treasury debt a year ago have also enjoyed huge realized and un-realized capital gains (as yields decline the principal market value of the bond increases).

BUT — what happens (or perhaps when) the threat of the dreaded "Double D" — Default and Depression — subsides and the signs of recovery are promoted by the talking heads on CNBC? And, what happens when the inevitable whiff of inflation burns the market's nostrils? Billions, yes maybe a trillion will flee from the Treasuries as fast as John's during a raid on a house of ill- repute!

But, alas, there could be a silver lining in this bubble. Where will a large portion of this money go?

First, equities. A dramatic bear market rally could be ahead.
Second, gold. The ultimate money and inflation hedge.
Third, real estate. A surprising rebound could defy all prognosticators.

Most market mavens and economists predict there will be a slow road to recovery in all these sectors. "The Myth Buster" doesn't agree and envisions continued volatility in all markets. But barring a catastrophic event, there could be a decided upside bias in 2009. There isn't an easy way to quantify the amount of capital that will be re-deployed from Treasuries elsewhere, but I suspect that a considerable amount of the multi-trillions is not traditional, patient money. It's "smart money" looking for opportunity and outsized gains.

Where's the downside? At the US Treasury Department. The Government's refinancing needs may exceed $2 Trillion in 2009. Who is going to step up and buy Treasury debt in a rising interest rate environment? And, who is going to invest in a country whose currency is being defaced daily? The US shouldn't count on the Chinese. They're already holding $1.9 trillion US Dollars and Treasury debt and rumors out of China indicate that they're contemplating converting some of these dollars to gold bullion (4,000 tonnes). The reality is that the entire G20 is more than a little concerned about the global imbalances that the US has created.

Stay tuned to "The Myth Buster." Change is coming!

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-- H. L. Quist

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