A Little Bit of History Repeating

Investors never seem to notice bubbles until their portfolios are in shambles (and then they usually blame someone else). The tech bubble caught Main Street (and many on Wall Street) by surprise, in spite of the fact that the vast majority of so-called "dot-coms" never once approached profitability. The "new elite" claimed that all of us who who were concerned with what appeared to be flawed business models (with poor business plans) were considered to be Luddites who did not understand the "new economy." These avant garde investors soon learned that the new economy was still subject to old math. Of course it was President Bush's fault because he was in office when the economy officially fell into recession or it was Alan Greenspan's fault for changing Fed policy. It was never that most "dot-com" investments were garbage from the beginning.

Not much changed during the housing bubble. Almost anyone who could fog a mirror got a mortgage or mortgages to purchase over valued homes they could not afford. Of course it was the Fed's fault for keeping rates too low for too long (which it did), but the Fed did not twist borrowers' arms and force them to purchase unaffordable properties with poor borrowing vehicles. The Fed did not force lenders to write mortgages with little or now down payments or documentation. Truthfully, arrogant financial institutions thought that only a certain portion of borrowers would default and that they could securitize these dangerous loans in ways that appeared attractive to investors, and besides, they would be off bank balance sheets.

Now we have a bubble in U.S. treasury prices because the Fed has taken the Fed Funds rate too low and there is mass panic among investors. There are bubbles in TIPs and oil because of the weak dollar. A weak dollar which will miraculously strengthen once the Fed stops easing and eventually tighten.. Don't be surprise of your TIPs investment is down 10% (it could happen) and you get a negative return after, inflation, at maturity. Oil at over $119 per barrel practically screams bubble. As a fellow blogger friend of mine stated, if the real price of oil was this high, Wyoming Oil shale would be all the rage. In other words; if $119 was market-driven, instead of speculation-driven, capital would be spent to get oil out of shale in Wyoming (one of the world's largest oil deposits, but expensive to obtain).

In recent editions of the Wall Street Journal, many experts (one of which I am not) debate whether or not the slowing economy will result in lower fuel prices. It's the dollar folks. Strengthen the dollar, fuel prices will fall, all-in inflation will decrease, core inflation will rise, the Fed will tighten, long-term treasury yields will rise and credit spreads in the financial sector will fall.


In the interest of full disclosure I am making it known that I am short the long end of the treasury curve and am going long bank and finance fixed income.