San Diego Housing Bubble News and Analysis

Yep, John. The T-bill bubble bursting is only a matter of time.

I tend to agree that it is a matter of when and not if. However I have been saying that for like 5 years now so I have given up on trying to predict the popping of treasuries. Still though, it seems like it has to happen doesn't it?

How will this bubble popping, that is, interest rates skyrocketing, affect us?
(Other than it being a bad investment for those who bought 30 year bonds.)

I rarely speculate in the markets, but am short treasuries right now. Got them when the yield was 2.56%, which was nice. Am kicking myself for not shorting more at that point. Keep thinking the gov't could start buying as a last ditch effort to keep rates down. If that happens, time to double down.

Big thought I keep having, though...if/when the treasury bubble bursts, does it matter. At that point, is the counterparty risk too high on the short side (fund I am using uses derivatives), and is there anything that is safe...lots of game theory going on in my head.

Stan

I suspect the "missing" $2 Trillion that the Fed refuses to quantify has gone into the stock market and bond market to prop it up.

I don't see any way out of it either. Fed has about shot all all their bullets and don't have the resources to keep buying up the long end of the curve.

John

to SD and John,
How do you see the bond market popping?

This is not a rhetorical question.

I am curious.

The wildcard here is Bernanke's promise to print money and buy treasuries if there is a broad sell-off. But then, choose your poison, a glut of treasuries no one wants, or a glut of greenbacks no one wants. Either way it is inflationary. In fact, it looks like a potential death spiral to me. I think Buffett is way understating this by saying it is on par with the internet and housing bubbles. This is much bigger. It likely will be the complete collapse of the dollar.

On the other hand, of course, if Helicopter Ben does not in fact fire up the helicopter, our government is on the wrong side of the "magic of compound interest". They have the biggest neg-am adjustable rate loan of all time. Every bond that matures and is retired is replaced with a new issue (at today's interest rate). Every penny of interest is being payed by auctioning new issues. AND, more is being borrowed beyond that by the $100's of billions. Compound interest makes the principle grow exponentially. Rising interest rates makes the exponential growth accelerate exponentially. What was $10 trillion yesterday will double to $20 trillion before you know it, then in less time double again to $40 trillion, then 80, then 160... Well, at some point we'll have to be in default. Not good, not good. Really hard to come up with a plausible way out of this....

Urban,

Several options in my mind:

1. Investors start to fully appreciate the fact that the U.S. gov't is already technically bankrupt. Liabilities>Assets on a massive scale when you add in Medicare, S.S., existing debt, bailout, etc. Increasing taxes is not a vehicle to raise the money-we'll hit the wrong side of the laffer curve. Gov't will ultimately decide to screw the debtholders by printing money (already in process???).

2. Economy improves and investors who are currently holding the safest assets they can find (treasuries) become less risk averse. Demand decreases and yield rises.

3. China/Japan/Middle East gov'ts lose their appetite for treasuries do to the need to stimulate their own ecnomies and an increasing appreciation (rationality?) for #1 above. Demand decreases, prices decrease, yields rise.

Scenarios I can come up with where the bubble doesn't burst only hold up for a year or two (continued economic weakness, government buys treasuries, etc.) After that, one of the forces in #1-#3 takes over.

Stan

How do you see the bond market popping?

Net world savings are going to be less than net capital need by U.S. at some point due to increasing deficits. At that point, interest rates will raise till U.S. willingness to pay that interest rate goes away. Going by the historical record of the '80s, this can be as high as 16% for 10 year notes.

underdose has it right - the pressure will be released by increasing inflation. That will lead to a combination of a weaker dollar and higher interest rates. We don't really know if interest rates or the dollar will get hit harder. It's conceivable that only one will get hit at all, but I doubt that.

here;s what im not clear on; what about the dude who is just holding cash dollars in this usa bank acct hoping to buya house someday. is he screed? I mean, "strong dollar" doesn't seem to affect my bank acct. will dollar implosion? betting against the dollar sounds fine if you're looking for an interesting gamble, but what about just from a pure savings perspective, not saving for a trip to the far east, just saving for american stuff....

Impode is better term when referencing bond prices. Popping is related to interest rates going up. Different sides of the same coin.

John

More and more people are being converted to the "inflation is coming" camp, and I agree. Everything points in that direction. It may happen in 2009, it may happen in 2012, but it's coming, and I think it will be very high inflation.

With that said, those who were robbed of buying a house the last few years (by the housing bubble) may find themselves robbed again (by the reduced purchasing power of their saved cash) if they aren't careful.

Everything is a gamble of course, but I think 2009 may be as good as it gets, meaning housing has dropped considerably yet mortgage rates are extremely attractive. Once inflation skyrockets, mortgage rates will add hundreds to your potential monthly payment. in my mind, better to lock in 30 yr fixed and buy in 2009.

Personally, if I were renting right now, I would be studying the area I was interested in in very great detail so that this fall I could be making an offer on SOMETHING.

It all depends on how big a gambler you are...

Good luck.

scaredycat, I'm with svelte. I will go so far as to say I am a home owner with a 30 year fixed. My mortgage payments can't go up. Rent, in run away inflation, will. I'm more afraid of rising rent than I am of declining home prices. Really, choose your poison. I anticipate the bottom for real estate in real terms is a ways off, but in nominal terms, who knows. Even Bill Maher is reporting that Chinese tourists are buying real estate in America now. How can we repay the years and years of trade debt if we don't export anything to them? Well, they can just come over, trade all those extra dollars they are holding for something that we can't export (our land), then someday we may be paying skyrocketing rent to Chinese landlords. Maybe that's a doomsday scenario that won't play out, but I don't personally want to risk it.

The other answer is, as Rich, and Peter Schiff, and many many other smart people who correctly identified the housing bubble and crash are saying, is to buy gold as a store of "savings". Arguably a speculative move, hoping that as people lose faith in paper money they will regain faith in metal money. One arbitrary convention for another. If gold really takes off and housing continues to slump (especially if interest rates spike), who knows, you may be able to pay cash for something someday and not care what mortgage rates are. I think trying to time that would require spectacular luck, and I personally don't have that kind of chutzpah.

All I can recommend is do what will help you sleep at night...

With inflation will it not cost more to build a home ???

I know that still sounds cheaper in most SD area's but move out a bit (say T.V.) and then it's going to cost more than today for a home.

Gold hmmm can't eat it, it won't keep you warm etc...

to each their own.

Good post, John. IMHO, this is 'Question of the Year'.

We've got tremendous fiscal stimulus in the short term, immediate attempts at stabilization and also mitigation of unemployment -- then collapse of the currency in the longer-term, debasement of debt and 'reset' of the economy, possibly with broader geopolitical consequences. Only way out as I see it.

Dollar savers will get screwed. And housing won't come back for 20 years, not in real terms. I suspect housing price appreciation will lag inflation for a number of years to come. Property financed on a fixed rate might be a winner. What else? Gold? Commodities? Stocks?

I absolutely agree with that. That's why I said that replacing paper money with metal money is kind of an almost arbitrary thing. But, you can't eat greenbacks any more than you can eat gold, and yet people still accept these silly pieces of paper in exchange for food. The gold bet is, like I said, speculative, hoping that people will accept gold in exchange for food when faith in paper money evaporates. I see the logic of gold bugs, that it's human nature that we are unlikely to go all the way back to the barter system entirely, so some medium of exchange will be needed and gold is the time honored convention. I personally have no faith in gold either, I think it is almost worthless. Kind of pretty, much harder to counterfeit than paper money (in my opinion, Bernanke is currently engaged in counterfeiting), but otherwise largely useless. But if people all jump on board because that's what they do... Oh what the heck.