The Biggest Bubble of Them All—Right Before Our Eyes
There’s an organization that’s been around for about 235 years. It’s more like a business today, taking in money and paying its bills.
After World War II, this business really got into high gear. It started exporting its goods all over the world. It actually lent money to its trading partners. Business was booming.
But then something happened. The business got too big. Too many managers were hired with their own agenda. The business started paying its people too much. Its trading partners caught on quickly, as they saw the big business getting bloated, and the trading partners started making their own goods.
The partners simply copied the manufacturing practices of the big business. And since the smaller trading partners had access to much cheaper labor costs, the small trading partners have become big suppliers over the past 20 years.
The big business went from being a company that lent money to its trading partners (customers) to a business that needed to borrow money from its suppliers in order to stay a float.
In regular business, it doesn’t matter if you have been around for 235 years. You go to a bank because you need money and, unless you meet the bank covenants, you will not be able to get a loan. This means that, unless you make money, you are out of business.
The big business I’ve described above is called the United States of America. It’s bankrupt. Its staff members, called politicians, spend more money than they take in. But, unlike a real business, the United States has a line of people (investors, domestic and foreign) who want to lend money to it.
And this is where this storyteller gets stuck. Why are people lining up to buy U.S. government debt? Would you invest your money in a 10-year bond that yields 2.2% per year (less than inflation) issued by an entity that has the world’s single biggest debt burden?
There’s an obvious answer. People are flocking to U.S. Treasuries because they see security in them compared to other government-issued debt. But, on the contrary, I see other governments implementing austerity measures to balance their budgets in two to three years. I fail to see this with the United States.
In this day and age, nothing is guaranteed. No, the U.S. will not file for bankruptcy or default on its debt. But it will pump the system with more U.S. dollars in a desperate effort to increase inflation—making the debt that investors and foreigners have bought worth less and less as time goes by.
Bill Gross, head of PIMCO, and the world’s biggest bond fund, was right when he said earlier this year that he was avoiding U.S. Treasuries because the returns could be risky. He was just too early in his opinion.
Never underestimate the length of time it takes to create a bubble, because we are living through one o the biggest bubbles ever created—U.S. Treasuries.
Michael’s Personal Notes:
Housing prices aren’t just falling in the United States…
This morning, it was reported that house prices in the United Kingdom fell in August the most they have in 10 months.
The Nationwide Building Society, based in Swindon, England, said that the average cost of a home in the U.K. fell about half of one percent in August from July. Most economic research reports on U.K. house prices for the remainder of this year are negative despite the prediction that the Bank of England will keep its benchmark interest rate at 0.50% until mid-2012.
The only major industrialized country left where housing is booming (yes, booming) is Canada. Canadian house prices continue to reach new record highs each passing month. In Toronto, Canada’s financial center, builders can’t put up condo buildings fast enough. Demand outweighs supply. Building cranes can be seen all over the skyline.
While economists in the U.K. have flatly blamed the slowing economies in the Unites States and major European countries for the U.K. economy stalling, Canada’s largest trading partner is also the United States. Add to that the fact that the Canadian economy actually contracted in the last quarter (negative GDP), and the only question that remains is not if, but when will the balloon pop for the Canadian housing market?
Where the Market Stands; Where it’s Headed:
As I had predicted, we closed out August in not-so-bad shape. The Dow Jones Industrial Average officially closed the eighth month of the year up half a percent for 2011. What started out looking like a catastrophe in the first couple of weeks of August was actually a buying opportunity.
I feel sorry for the thousands of investors who pulled money out of the stock market when the Dow Jones Industrials was having those 400- and 500-point daily drops. At the risk of sounding arrogant, I’m pleased we stuck to our guns, as many of our paid-for financial newsletters recommended buying equities when the Dow Jones Industrials fell below 10,800 in early August.
The bear market in stocks that began in March of 2009 enters its 31st month today.
What He Said:
“Despite all my ‘yelling’ and ‘screaming’ about gold, I believe only a few of my readers and a small fraction of the general public have taken a position in gold. Why? Because gold’s not trendy…buying condominiums for investment is! If you are an investor, you need to seriously look at investing in gold stocks because gold bullion prices will likely continue to rise.” Michael Lombardi in PROFIT CONFIDENTIAL, September, 21, 2005. Gold bullion was trading at under $300.00 an ounce when Michael first started recommending gold-related investments. Many gold stocks recommended by Michael’s advisories gained in excess of 100%.
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