The Treasury Bubble Blows On

The Bottom Violation - economy, inflation, stock market, and dollar analysis.

“In the absence of the gold standard, there is no way to protect savings from confiscation through inflation. There is no safe store of value. If there were, the government would have to make its holding illegal, as was done in the case of gold. If everyone decided, for example, to convert all his bank deposits to silver or copper or any other good, and thereafter declined to accept checks as payment for goods, bank deposits would lose their purchasing power and government-created bank credit would be worthless as a claim on goods. The financial policy of the welfare state requires that there be no way for the owners of wealth to protect themselves.” – Alan Greenspan

Before he sold his soul and renounced capitalism, Alan Greenspan was one of my heroes, and the above quote exemplifies why. I’m still in shock; the man spent his entire life championing free markets, only to throw it all away near the end. I don’t see how he sleeps at night, knowing history will see him as a sycophantic coward and a political lackey. But that’s a discussion for another day, because right now, guess what I want to talk about? That’s right. Treasuries.



First, Goldman Sach’s chief interest rate strategist in London, Francesco Garzarelli, believes we are not in a Treasury bubble. Do you know how he reached that conclusion? He did it by "mapping one-year ahead macro expectations to long-dated government yields through {Goldman’s] Sudoku framework.”

Work with me here. Goldman is predicting bond prices and yields by employing a popular number-puzzle found in daily newspapers? Am I missing something? Look, being short Treasuries is a no-lose trade; no matter what happens, rates are going higher.

By the way, I’ve heard any number of analysts suggest that the current Treasury bubble is “different” from other bubbles, because it is driven by fear rather than greed. Now that’s just nonsense. There are plenty of traders out there who will be happy to go on the record that Treasury prices are going higher — mainly because they believe the Fed really is going to continue [trying] to hammer the long end of the yield curve. So, they’re still buying bonds. And I promise you their motives have absolutely nothing to do with safety and fear; they’re buying Treasuries for capital appreciation. And guess what? That’s greed.

It’s a bubble. Of the old-fashioned persuasion. Period.

That’s right, this little bond craze isn’t as tame as some people would have you believe, and when it ends, it’s going to end quickly and painfully for anyone who is stupid enough to hold longer-dated maturities. Can you hear the printing presses churning and grinding? Can you? That’s the sound of pure, unadulterated inflation. And it’s coming soon.

So, I’m going to ask the same question I ask every day: who in the hell is going to keep lending the United States money? The Chinese? The Japanese? The Saudis? Do we really think they’re that stupid? The U.S. is about to print somewhere between $2 and $3 trillion dollars — depending from whom you’re getting information. As Rick Santelli, on CNBC, so eloquently put it this morning, “The dollar really doesn’t stand a chance.”

How do you make something more valuable? You decrease the available quantity, or you increase demand. The U.S. government is clearly not decreasing the number of dollars available. So for all you people out there who think the dollar is going higher, what, exactly, do you think is going to spur demand? Further, what force in the universe is going to create that demand at a rate that outpaces the $2 to $3 trillion that are going to hit the economy in coming months? Please do tell me. I am your eager student, and I await your answer with bated breath.

So, in case you missed it in the passage above, there are already many trillions of dollars in U.S. Treasuries floating around the world. Who is going to buy the manifold trillions of dollars more the United States intends to auction this year? I think the brilliant minds at Treasury have fallen victim to the if-you-build-it-they-will-come affliction. Somebody needs to send them an email and let them know that Kevin Costner is a weenie, and none of his movies should be the basis for projected demand at Treasury auctions. Ever.

Rick Santelli, by the way, is the coolest person on CNBC. They should fire everyone else and just let him talk all day. And they should especially fire his bald, Keynesian nemesis. Whatever-his-name-is-that-I-can’t-remember-right-now.