“The Next Great Investment Bubble is about to Explode”

By Travis Johnson, Stock Gumshoe, January 28, 2009

Ian Cooper’s Options Trading Pit newsletter is out with a new ad, in a letter from Brian Hicks, that tells us that the biggest investment bubble is about to explode … and that Ian’s got the trades to tell you about that will help you profit from this explosion.

They don’t hide the “bubble” they’re talking about — that’s not the tease today — they just tease us that they’ll share the best trade to profit from this bubble’s burst, but only after you subscribe to this options trading service (it’ll cost you a “discounted” $799, FYI).

So what is the bubble? It’s the bubble in US Treasury Bonds, as you might have guessed. There was a short time, during the heat of the panic, when short term treasury debt even traded with a negative yield, meaning that at least one person was willing, albeit briefly, to pay the US government to hold his money for him.

For those who are unfamiliar with bonds, we’re talking here just about the sovereign debt of the United States — the bonds issued by the Treasury Department. They are sold in many different loan periods (3 month bills, 10 year bonds, etc.), and are considered by most people to be the only truly risk-free investment (at least, free of risk of default), because they are backed by the tax-collecting ability of the United States. Interest rates are extremely low right now, which is quite handy because the government is going to have to borrow a lot more money to help finance bailouts and keep the government running as tax receipts dip in this recession.

There are a few main reasons (in my opinion) why many folks believe that US government bonds will see this bubble burst as they fall in value (which would mean that interest rates are going up — the bond’s price moves opposite the interest rate).

First is that foreign governments will stop buying these bonds — a growing percentage of treasuries are in foreign hands right now, particularly in the hands of large exporters like Japan and China. If they stop buying (or worse, start selling), because they have less money now, too, the demand will drop and prices will have to drop (meaning yields go up) to bring in more demand. Of course, if they do this and bring prices down then their massive portfolios of these bonds lose value, too.

Second is that supply is increasing dramatically with the expectation of trillion dollar deficits this year and in the near future. And if supply increases without an increase in demand, again, the price will have to drop to bring in more demand.

And third is that the inflation picture might change dramatically in the near future. While we’re currently experiencing some “disinflation” and the Federal Reserve is fighting the prospect of deflation, the inflation hawks and gold bugs believe that the Fed’s attempt to increase the money supply will lead to inflation, and possibly to hyperinflation. Bonds are great investments in deflationary times, but they are awful to own if inflation takes off (except, arguably, for inflation-adjusted bonds).

The ads say that “This next bubble isn’t just going to pop… it’s going to explode,” using as examples some previous bubbles (real estate and internet stocks). Maybe so.

Here’s a little hint of the hyperbole for you:

“Ian – the man who called the sub-prime collapse back in February 2007 – has just issued his latest – and MOST URGENT – warning:

“‘The U.S. Treasury bubble–very soon–is going to burst wide open.’

“And as the Treasury bubble explodes, Ian and his small but wildly successful group of investors will be getting rich… by effectively shorting the U.S. Government… taking lightning-fast profits on the order of 86%… 138%… 140%… and 220%.

“Here’s how it’s going down:

“As you know, Ben Bernanke, Henry Paulson and the boys at the Fed and Treasury are flooding the financial system with cash. They’re slashing interest rates… and they’re bailing out seemingly every big corporation that raises a hand.

“It’s almost as if Bernanke and Paulson are openly begging for inflation.”

So that’s part of the argument — the ad also goes on to say that the next big leg down for the economy will begin in April, 2009, and that this will allow for a second opportunity to profit from these strategies. That time period argument is based on the