If I were to put the blame of this current financial crisis squarely on the shoulders of one individual, hands down, Easy Al Greenspan would be in the middle of my cross-hairs.  Through the combination of his loose monetary policy, praise of exotic financial derivative instruments, and encouragment of living beyond our means has directly resulted in the current financial mess.

The root of these issues can all be traced back to the growth of money and credit that made all of this possible.  When money and credit are created, the most common vehicle to get the fiat garbage into the economy is financial markets.

When the money enters via financial markets, it has to find a home.  This is exactly how growth in the monetary base results in inflation of asset markets.  Unfortunately this sort of Keynesian based economic policy, if allowed to run its course, results in a sort of inflation/deflation cycle.

Blowing Bubbles

First was the Dot Com bubble.  Once that bubble burst, deflation ensued as markets declined.  Greenspan and company reacted by lower interest rates to negative real levels and pumping up the money supply.  The deflation, followed by reflation, is the exact thing that is occurring now, but on a much smaller scale.

You see, Keynesian economics can’t go on forever.  The notion of wealth creation through debt creation is SIMPLY FALSE, but that’s the world we live in.

Anyways, Easy Al’s reflation following the Dot Com bubble required more money and credit to keep afloat than it took to cause the tech bubble.  Once again, we had massive money and credit entering the economy via financia markets.  This time it took some more creative thinking to get that money behind an asset; hence the creation of the now infamous exotic mortgages.

As we are all well aware of at this point, that bubble has burst too.  What we are realizing, and it’s an important part of the Keynesian process, is that this bubble was much larger and affected a lot more people. 

That’s how Keynesian economics works.  Growth in money and credit can go on for some time and actually appears as economic growth in the short run.  That is why these policies are enacted.  All policy makers care about is the short run and reelection, and that also happens to be why Greenspan lasted so long. 

Eventually the monetary base wants to contract and revert to the mean.  The only way to prevent this is to flood the economy with more money and credit.  The problem is that each contraction of money and credit is significantly larger than the prior one.  What that means is that it will take more money and credit to prevent it from deflating; and what that means is another bubble, but on a larger scale.

Popped Bubbles

This next bubble will be the last bubble of this economic cycle, and with it will come the death of Keynesian economics as a respectable school of economic thought.  Let’s think about this.

Right now we are reflating on a level that dwarfs the reflation that resulted in the housing bubble.  As a direct result, I PROMISE YOU THAT THERE IS CURRENTLY A BUBBLE THAT DWARFS THE MORTGAGE MELTDOWN THAT IS ABOUT TO BURST.

I’m referring to long dated U.S. Treasuries.  I know I’ve mentioned this in recent posts, but I wanted to take the time and look specifically into how it has formed, and give you some sort of comparison as to the size of this thing.  More importantly, I’ve recently come across a way to play this bubble that should not be overlooked.

I’m not going to get into the fundamental weakness that will result in the inevitable popping of this bubble.  I have covered these issues in my most recent B&B articles.  You can find them by clicking here.

Understand Bubble Finance

The problem with going short long dated treasuries is that there are very few financial instruments to play this trend.  In fact, until very recently, I was under the impression that the only plausible way to short government debt was through the futures market.  Futures markets are definitely not ideal for the average investor, especially with current market volatility.

Then I stumbled across a little something called the Profunds Rising Rates Opportunity Fund (RRPIX).  This fund is like an inverse ETF, but in bond form.  Here’s how this works;  The fund represents 125% the inverse daily price movement of the most recently issued 30-year notes.  DO I NEED TO REPEAT MYSELF.  This is EXACTLY what the doctor ordered.
I really want to put this into perspective for you.  I’ve talked to several of my close friends and family about this issue.  I usually describe it in one of two ways: 

Getting short long dated government debt right now is like getting long gold in 2000.  Gold had to move 150% before people stopped calling me crazy.  This, like gold in 2000, is a serious contrarian play.  The main stream media won’t pick up on this and/or will consciously not cover this trade until a lot of money has already been made.

The other comparison I make is, imagine getting short the mortgage market 16 months ago.  Multiply that trade several times over, and that’s what were looking at with this last great bubble.  Please consider this trade, and don’t find yourself playing the would of should of game. 

And one last thing, I’m not a change the world kind of guy.  I don’t write my public servants about current financial socialism and other issues, because I don’t really care.  You may hate me for it, but it’s that attitude that makes me darn good at what I do.  By staying emotionally detached to political/economic current events I can take a non-biased approach that allows me to identify key money making opportunities.  That doesn’t mean I’m a heartless individual either.  I am spreading the word of the "Last Great Bubble" to the people I care about.  That’s how I make a difference and I encourage you to do the same before it’s too late.

Nicholas Jones
Analyst, Oxbury Research