Why The Next Great Bubble Is About To Collapse? (TBT, IEF, TBF, TLT, SHY, BOND)
Martin D. Weiss: Senator Orrin Hatch warns that the bubble has the power to “destroy the retirement savings of millions of Americans.”
Famed economist Leonard E. Burman of Syracuse University is warning the U.S. Senate of “disastrous consequences for ourselves and the rest of the world.”
Goldman Sachs … Bank of America … Morgan Stanley … Royal Bank of Scotland … JPMorgan … and Oppenheimer Funds are all warning that it could bankrupt millions of investors.
Congressman Ron Paul says, simply, “this country will be ruined.”
These and many other authorities are talking about the greatest financial bubble in human history:
A bubble that is now more than EIGHT times larger than all the stock exchanges in the United States combined.
A bubble so massive, it is four times larger than the dot-com bubble of the 1990s and the housing bubble of the 2000s combined.
Now that bubble has begun to burst.
As it implodes, it will launch interest rates into the stratosphere … crush the feeble U.S. economy … destroy major U.S. banks and insurance companies … drive your cost of living through the roof, threaten your standard of living and financial security … and push the U.S. government to the very brink of financial collapse.
But the best defense is a strong offense — and this crisis will also create windfall profit opportunities for a select group of investors who make the right moves now.
Just a few days ago, Weiss Research analyst Tom Essaye hosted a special online summit meeting to explain exactly how, and I’ll give you a transcript of the meeting in a moment.
Tom’s career began as a trader on the floor of the New York Stock Exchange for Merrill Lynch, where he regularly traded multi-million-dollar orders from some of the largest mutual and hedge funds in the world.
In early 2005, Mr. Essaye joined a global hedge fund where he invested in precious metals, agricultural commodities, energy, and natural-resource-related equities — placing initial long positions in gold below $500 per ounce and silver below $7.00 per ounce.
More recently, I personally became so impressed with Mr. Essaye’s unique approach to wealth-building that I picked him to call the shots with $1 million of my own, personal money.
In our online summit, he was joined by Safe Money editor Mike Larson and Real Wealth editor Larry Edelson. Here’s the transcript…
The Next Great Bubble about to Collapse
with Tom Essaye, Mike Larson and Larry Edelson — abridged transcript
Tom Essaye: If there’s anyone who knows how to capitalize on bursting bubbles, it’s our firm, Weiss Research.
All of us are extremely proud that in the late 1990s, we were one of the first financial research firms in the world to warn investors that the tech stock bubble was about to burst.
Investors who heeded that warning didn’t have to lose a penny when the Nasdaq index crashed 78% and many tech darlings fell to zero.
Equally important, you could have used our warnings to buy things that soar when stocks sink.
An ordinary leveraged investment vehicle designed to soar when Nasdaq stocks sink, rose 350% in value between March and October of 2000 alone.
A second one jumped 395%.
And a third soared 600% — enough to every $10,000 into $70,000!
We’re also proud that in 2005, we became one of the first to sound the alarm before the housing bust. Mike Larson, who will join me in a moment, even NAMED the companies and stocks that would be hit the hardest well in advance.
Once again, investors who acted on that warning didn’t have to lose a red cent when the S&P plunged 56% in the most painful recession since the Great Depression.
And once again, anyone who acted on that warning could have earned windfall profits.
One simple investment anyone can buy in an ordinary brokerage account generated a 92% gain.
Another jumped 107% — more than a double — as the housing bust unfolded.
And still another soared 225% in value between 2007 and 2009 — enough to multiply your money more than three times over.
For nearly a year now, I’ve been sounding the alarm again; NOT for the bursting of a bubble in the tech sector or housing sector … but in a market that is many times larger than all the stock exchanges in the United States COMBINED.
And as before, I am absolutely convinced that if you heed this warning, you will not only sidestep the costliest economic and financial crisis any of us has ever seen …
You will also have the opportunity to reap windfall profits — even potentially multiply your money many times over.
In fact, this is precisely why I recently asked Dr. Weiss to let me invest an additional $25,000 on top of the $1 million he has already entrusted to me: To stake a claim to truly enormous profit potential as this giant bubble begins to burst.
Even if the coming crash is far less severe than I expect it will be, the bursting of this great bubble could generate a 250% gain, turning Dr. Weiss’ $25,000 into as much as $87,500.
And if my best-case scenario is fully realized, Dr. Weiss’ $25,000 could, over time, be worth as much as $148,500. Unless I miss my guess, this will begin to happen sooner rather than later.
And in just a few minutes, I’m going to name these investments for you so you can grab the same profit potential we have.
It’s no secret that we — all of us — are sitting on a ticking time bomb.
I am talking, of course, about the most colossal mountain of debt in world history:
A bubble of such monumental proportions that it dwarfs the tech stock bubble of the 1990s and the housing stock bubble of the 2000s COMBINED.
The thing about bubbles is, they ALL burst. Without exception.
The bigger they are, the harder they fall; the more damage they inflict on the economy and on unwary investors.
But for sophisticated investors, bubbles create enormous opportunities — and the bigger the bubble, the more money it could make you.
And as we’ll see in a moment, this bubble — the bubble in the U.S. debt markets — is the granddaddy of them all!
Debt is created in the bond market. That’s where the government goes to borrow money. So do states and local governments. Companies, too.
Borrowers sell bonds — or notes and bills — that guarantee investors a certain rate of interest or “yield” over time.
Since the turn of the century, the U.S. bond market has simply exploded in size — adding $20.7 trillion in new debt.
But now, despite massive new initiatives by the U.S. Federal Reserve, the meteoric rise in prices that characterized the debt market since the turn of the century has sputtered, stalled and is now dead in its tracks.
Millions of investors all over the world — including many of the world’s richest central banks — have started to stampede for the bond market’s exit.
And now, we’re beginning to see the first cracks appearing in this massive bubble.
This chart of the PIMCO Total Return Bond Fund is a perfect picture of the bubble in the bond market — and also the beginning of the crash.
On the left side of the chart, you can see the bubble in the bond market being inflated.
On the right-hand side, you can see how prices just plunged well below their support levels.
And just look at this chart of the iShares Municipal Bond ETF: It just fell off the proverbial cliff, giving back every penny it gained since last July!
But this crash has barely begun. The last few Treasury auctions showed that bidding from foreign central banks is plunging to the lowest level in years.
In addition, U.S. investors are starting to turn bearish on Treasuries. A recent report from a top industry watchdog showed that nearly 20% of all Treasury investors have started to cut back their holdings.
Even Fitch — the normally conservative ratings firm — is warning that a massive bubble has been created in the bond market.
This is huge. Bubbles are like an enormous Ponzi scheme: They collapse when the money stops flowing in.
The moment that happens, it’s over. And it’s beginning to happen right now!
As this bubble — the greatest bubble mankind has ever seen — implodes, the consequences will be devastating for millions of unprepared investors, just like the tech bubble was and just like the housing bubble was.
The most vulnerable are those who can least afford to suffer losses: Seniors who are approaching or in retirement, who have shifted large amounts of their money into fixed income investments.
Your tax-free municipal bonds could tank.
Your annuities and other insurance policies could turn to dust.
Your money invested in bank and insurance company stocks could vanish right before your very eyes.
Mike Larson, editor of Safe Money Report, has earned international acclaim as the ONLY analyst to not only forecast the historic housing bust and “Great Recession” of 2008-2009 … but also to NAME each one of the major companies and stocks that were hit hardest.
Let’s go to him now. Mike, please explain why a crash in the bond market is so critical.
Mike Larson: This is a big deal because the bond market is HUGE!
To understand how huge this is, let’s first add up the value of all the stocks of all the listed companies on all the exchanges in the United States: That’s $25.8 trillion, according to the Fed.
Plus, to make sure we’re not missing anything, let’s also add up the value of stock futures, stock options and other stock instruments: According to the U.S. Comptroller of the Currency, that’s another $2 trillion.
Total equities in America: $27.8 trillion.
Now, let’s do the same for bonds and other debt instruments:
The total outstanding debt right now is $55.3 trillion. And that’s already twice as big as all the stock markets combined.
But it’s just the tip of the iceberg. Because in addition, U.S. banks hold a whopping $179 trillion in derivatives that are based on bonds and the like. Grand total of bonds and debt instruments: $234.3 trillion.
That’s 8.4 times the size of all U.S. stock markets combined!
The plain truth is that today’s debt bubble dwarfs the bubble in tech stocks and the bubble in housing stocks combined.
At the peak of the tech stock bubble in 2000, the entire Nasdaq index was worth $5 trillion.
At the peak of the housing bubble in 2007, the entire real estate and financial sectors were worth $8 trillion.
But today’s market in actual debt instruments is $55.3 trillion: That’s FOUR times larger than the tech stock bubble and the housing bubble COMBINED!
Tom: So the bursting of this enormous debt and bond bubble means that anybody who owns bonds, bond funds or derivatives tied to bonds is about to suffer huge losses.
And that includes everyday investors, banks, insurance companies, pension funds, not to mention every government in the world that Washington owes money to.
More to the point, if you own any kind of bond, bill or note, you will suffer huge losses.
If you own stock in a company that holds bonds or debt derivatives, you could suffer huge losses there as well.
If your pension fund or retirement plan invests in bonds, it could suffer huge losses.
And there’s another reason why this bubble impacts almost every investment and business in the world:
When bond prices fall, interest rates rise.
Higher interest rates would sabotage the housing market, undermine corporate profits, drive your cost of living through the roof and virtually snuff out any whiff of economic growth that remains in the air.
So the big lesson here is that when bond prices collapse, interest rates go through the roof. And if bonds fall in half, their interest rates DOUBLE.
And there’s more.
Look. When stocks fall, they fall. Investors lose money.
When bond prices collapse, like they’re beginning to now, investors also lose money.
PLUS, when bonds crash, interest rates shoot the moon, which would be a death sentence for an economy on life support like ours is now.
Worse, foreigners own enormous amounts of U.S. debt. So this time around, the U.S. dollar will also get clobbered! Your buying power could plunge. Your cost of living could soar. When the bond market crash accelerates, millions of people will be pushed to the brink of bankruptcy and beyond.
Let’s go to Larry Edelson, reporting from Los Angeles today. Larry has the distinction of being one of the very first analysts to forecast a massive new bull market in gold and natural resources all the way back in the year 2000 — when gold was selling for under $300 per ounce.
Larry, you’re Weiss Research’s inflation and bullion specialist; explain why a crash in the bond market pretty much guarantees our cost of living will explode.
Larry Edelson: It’s actually pretty simple. It’s because you can’t buy U.S. bonds without using the U.S. dollar.
Before a foreign investor can buy a Treasury bond … a municipal bond … or a corporate bond in the U.S. bond market, he must first exchange his yuan, his yen or his euros for U.S. dollars.
So as the bond market bubble was growing … demand for U.S. dollars was also growing!
But when foreigners sell U.S. bonds, the opposite happens. They have to sell U.S. dollars, too!
They cash in their bonds for U.S. dollars — and then EXCHANGE those dollars back into their home currencies.
That drives the dollar down — and the price we pay for just about everything straight UP.
Tom: And in turn, the falling dollar causes more declines in bond prices. Explain how that happens.
Larry: Sure. Investors are not stupid. They know the low inflation numbers Washington reports are pure baloney, 100% baloney.
And they’re right. John Williams, an expert economist who tracks inflation the way Washington used to back in 1980 before they started manipulating the numbers, reports that the true inflation rate today is now well over 10%.
Every year, the value — the buying power of our money — is falling TEN FREAKING PERCENT!
At that rate, prices double every seven years!
Worse, it means that buying a bond GUARANTEES you a loss in real terms.
True inflation is now running more than THREE TIMES what the 30-year Treasury is paying …
SIX TIMES more than what the 10-year Treasury pays …
And a whopping 14 TIMES what the five-year Treasury pays …
And 40 TIMES more than what the two-year Treasury pays!
The same is also true with municipal and corporate bonds.
And even most junk bonds — the riskiest bonds on the market — are paying far less than the true inflation rate!
When adjusted for inflation, the ridiculously low rates the bond market is paying now virtually GUARANTEES you will get poorer very quickly.
That means, as true inflation continues to rise, the likelihood of a massive bond market crash also rises.
Tom: Exactly. It’s like a downward death spiral: Falling demand for bonds crushes the dollar … and the falling dollar cuts bond demand — and prices — even more!
Ultimately, you have a collapse that crushes investors, companies, and potentially the entire U.S. economy. And the ironic thing is, the Fed did it. The U.S. Federal Reserve.
Larry, your home is in Bangkok, Thailand. You have a unique perspective OUTSIDE of the United States. How have the Fed’s actions been seen by foreign investors?
Larry: The folks at the Fed have sent a clear message to investors all over the world:
They have proclaimed that U.S. Treasuries are the ONE investment being directly supported, even jacked up in value by the largest, most powerful, richest central bank on the entire planet.
Mike, what are your thoughts on this?
Mike: None of this should come as a surprise to anybody. We all know the Fed under Alan Greenspan, and now Ben Bernanke, is a serial bubble blower.
It has repeatedly created bubble after bubble with reckless easy money policies. The only thing that changes is the asset class. First, it was the dot coms … then it was housing … and now it’s bonds!
We’ve seen this kind of mania blow up in our faces not just once but twice in the past 12 years! And investors have made the same mistakes each time:
Just as they did during the tech bubble, they’ve made high-stakes, low-intelligence investments in lousy companies …
And just like they did during the housing bubble, they’re buying the same kinds of crappy “alphabet-soup” investment products that caused hundreds of billions of dollars in losses just a few short years ago!
Tom: Let’s recap: We have established that the bond market is an enormous bubble. There’s no doubt about that. We have shown that it is many times larger than any bubble any of us has ever seen. There is no doubt about that either. And we know that all bubbles burst. Zero exceptions.
So here’s the $64 million question: Why NOW? Why is this great bursting of the bond market bubble happening now?
The reason is that the Fed has fired all its bullets. And now, it is out of ammo. It has lowered interest rates all it can. They can’t go any lower than zero. That means there’s only one way for interest rates to go now and that’s UP!
Plus, the Fed has printed more than $2.8 trillion since 2007 and used most of that money to buy bonds. But now, they’ve printed so much money, more printing no longer has any impact on bond prices or the price of other risky assets.
Last month, the Fed announced “QE-Infinity+1,” saying it’s going to print 45 billion ADDITIONAL dollars every month and use them to buy long-term Treasuries.
That’s in addition to the $40 billion per month in purchases of mortgage-backed securities, another type of bond. Combined, those moves are enough to expand the Fed’s balance sheet from about $2.9 trillion now to as much as $4 trillion in the future.
These were the biggest, most beyond-the-pale moves we have EVER seen from the Fed.
But what happened in response? Outright SELLING of the bond market!
Several bond market ETFs plunged below critical support levels, while yields spiked. So not only did the Fed’s announcement of more money printing and more bond buying UTTERLY FAIL to drive bond prices higher … it actually caused them to fall.
If that isn’t a clear indication that this bubble is bursting, I don’t know what is!
Plus, never forget: A crash in bond prices means a crash in the U.S. dollar.
So in addition to watching your fixed-income investments go up in smoke as bonds crash …
In addition to suddenly having to pay much more interest on every credit card you have and every new loan you need …
You’re ALSO going to see inflation accelerate like there’s no tomorrow.
As the dollar dives, your cost of living could soar. The price you pay for the food and fuel you need could potentially skyrocket.
For folks on fixed incomes, this is the worst situation imaginable; caught between a rock and a hard place. Hopelessly trapped between declining income and rising cost of living.
So how much money could you make if you make the right moves now? Well, as we’ve already seen, in just the last few weeks, a few very tiny, minuscule fissures in this massive bubble have opened — and one very liquid, easy-to-buy, leveraged investment has already risen in value by 75% in just 38 days …
Another leveraged investment surged 141% in just 21 days …
And a third soared 156% in value in a mere 22 days — enough to turn a $10,000 investment into $25,600 in less than one month.
And as this crash accelerates in the days ahead, your profits could be far greater over time.
Plus, history offers some important clues to how large this crash and interest rate explosion will be.
Between 1979 and early 1981, the price of 30-year Treasury bonds fell from about 92 to 62 — a 30% decline: Long-term Treasuries lost almost one-third of their value in just eight months!
Then in 1994, bonds tanked from around 122 to 96 — a 21% decline. Rates surged from 5.9 percent to 8.13 percent.
And between December of 2008 and June of 2009, Treasury bonds plunged 30% and interest rates almost doubled.
But remember: We have never seen a bond market bubble that even comes close to what we have today. Bond prices have never been more inflated. Interest rates have never been this ridiculously low.
So this time all bets are off as to how high — and how quickly — interest rates could explode.
But we do know one thing for sure: Interest rates can NOT decline any further. They are effectively at zero.
There’s only one direction they could possibly go from here: UP.
So brace yourself for the consequences and stand by for our recommendations on how to protect yourself!
Related Tickers: ProShares UltraShort 20+ Year Treasury ETF (NYSEARCA:TBT), iShares Barclays 7-10 Year Treasury Bond Fund (NYSEARCA:IEF), ProShares Short 20+ Year Treasury ETF (NYSEARCA:TBF), iShares Barclays 20+ Year Treas Bond ETF (NYSEARCA:TLT), Barclays 1-3 Year Treasury Bond ETF (NYSEARCA:SHY), PIMCO ETF Trust (NYSEARCA:BOND).
Money and Markets (MaM)is published by Weiss Research, Inc. and written by Martin D. Weiss along with Nilus Mattive, Claus Vogt, Ron Rowland, and Michael Larson. To avoid conflicts of interest, Weiss Research and its staff do not hold positions in companies recommended in MaM, nor do we accept any compensation for such recommendations. The comments, graphs, forecasts, and indices published in MaMare based upon data whose accuracy is deemed reliable but not guaranteed. Performance returns cited are derived from our best estimates but must be considered hypothetical in as much as we do not track the actual prices investors pay or receive. Regular contributors and staff include Andrea Baumwald, John Burke, Marci Campbell, Selene Ceballo, Amber Dakar, Maryellen Murphy, Jennifer Newman-Amos, Adam Shafer, Julie Trudeau, Jill Umiker, Leslie Underwood and Michelle Zausnig.
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