Call me a cynic, but when I see a looooooong ad presentation about financial armageddon, I skip right through the stuff about collapse and anguish and falling standards of living and economic crisis, and look for what the ad copywriter is trying to sell.
Because frankly, everyone knows there’s a debt bubble. Everyone knows that after interest rates languish below the rate of inflation for a long time it has to eventually stop. And everyone knows that interest rates that are pushing zero are a lot more likely to be higher than lower in the future.
Unfortunately, no one knows quite when interest rates will go up.
Which is a problem.
Because the financial doomsayers and pundits have been lamenting the ridiculously low and unsustainable interest rates for many, many years. We even saw several teaser pushers talk about the fact that the debt bubble was about to pop and the US dollar collapse back in early 2008, before the financial crisis (a crisis that, as they tend to do, sent investors running for bonds … and brought interest rates down even further).
Over the last three years, the ETF representing 7-10 year treasury notes (ticker IEF) is up about 20% — that’s not as good as the broader market, which is up almost 35% during that time (represented by SPY, the S&P 500 ETF), but it’s certainly not a burst bubble. At least, not yet.
And financial catastrophe is the prediction we’re seeing today from Marc Lichtenfeld as he tries to sell his new newsletter service, which is called The Oxford Income Letter. Let’s see what he’s talking about, shall we?
The armageddon bit is probably going to sound a bit familiar to you, we’ll deal with that first:
“The 3-Minute Event That Will Change Financial History
“A ticking debt bomb buried deep in the world markets is getting ready to blow on Thursday, April 4…”
Oops, I was looking at the earlier version of this ad from a few weeks ago. Sorry, it’s no longer April 4 when the ticking time bomb will blow — which is a relief, because that’s today. It’s now June 12, so back to the spiel …
“A ticking debt bomb buried deep in the world markets is getting ready to blow on Wednesday, June 12…
“… the herd is plowing mountains of money back into stocks, like it was 1999 all over again.
“But what they might not know is this.
“Just over the horizon lies an event that will disrupt this rosy equation.
“Like most ‘black swans,’ only a few brave investors will see it coming and prepare in time.
“It will come suddenly too – like an earthquake – in a single three-minute blast. And it will change everything.
“But what exactly am I talking about?
“We’re about to witness the historic moment when some $93 trillion very suddenly rush out of certain investments, and into others.
“Ironically, the ongoing bull market in stocks will hasten this event’s arrival.
“Some investors will get very rich. Others will get crushed – especially when it comes to their ‘safe’ holdings.
“But you don’t have to be one of them – not this time. I’ve created this report to ensure that you come out on the winning side.”Are you getting our free Daily Update
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What’s he talking about? Well, the $93 trillion number is a reference to all of the Federal, State, Municipal and individual debt in the United States, which is clearly unsustainable for the long run and maybe even unserviceable, eventually, with a GDP that’s in the neighborhood of $15 trillion.
We know that the debt is unsustainable as the debt service becomes an ever larger part of the federal budget and of the economy … so the question is how the markets react to that — we’ve known it to be unsustainable for decades now, and it becomes less so every year that new folks get added to the Social Security and Medicare rolls as recipients rather than payers.
Short term interest rates aren’t going anywhere anytime soon, at least not unless the Federal Reserve smells a real whiff of serious inflation coming, so it would be in the longer-term rates that the problem rears its head first. That means, and I’m paraphrasing Lichtenfeld’s ad here for the most part, that the problem will arise in the benchmark US 10-year note, the note that drives much of the longer-term interest rates around the world.
When we say “problem” regarding bonds, we mean that prices of those bonds drop because the bond buyers (the lenders) start to demand higher interest rates in exchange for the duration and credit risk that they’re taking on. And since Lichtenfeld is trying to sell a newsletter, and his publisher wants you to subscribe right this minute, while you’re thinking of it, there’s some urgency added … in this case, the urgency is that Lichtenfeld says the next Treasury auction of 10-year notes will fail, with the news cascading around the world in three minutes and bringing massive change to the global economy almost in the blink of an eye.
Oh, did I not mention the name of the letter yet? He’s pitching a new letter that they’re launching right now called The Oxford Income Letter. Don’t know anything about it yet, since it’s new, and Lichtenfeld has generally been around the investment newsletter world as more of a biotech guy than a dividends and income guy in my experience, but it’s relatively inexpensive and Oxford certainly has several income investing analysts who are probably involved as well.
Or, in his words:
“The Powder Keg Buried Deep Inside the Global Debt Markets
“The event has nothing to do with Washington defaulting on its $16 trillion debt.
“Nor am I predicting another crash in stocks.
“You might call it a powder keg hidden deep inside the world’s debt markets. The event will occur here, inside this non-descript office building in New York City.
“It will take only three minutes to spread worldwide.
“But its impact will last for generations….
“When bonds tank, interest rates must soar – it’s inevitable.
“But what most folks don’t realize is: This event won’t happen in an orderly fashion….
“The great bond bubble will come with a sudden force, like an earthquake. And only those who have reinforced their portfolios will survive.
“Just days from now, a single three-minute ‘tremor’ will trigger the ‘debt quake.’
“Eight times per year, the Treasury Department holds an auction for 10-year Treasuries.
“Participants include sovereign governments like China and Japan. They also include the big banks and Wall Street institutions, like Bill Gross’s PIMCO.
“The government might auction off $20 billion worth of Treasuries at a time.
“If demand soars, prices for the bonds soar – and the government can get away with paying very low interest rates.
“But if demand plummets, Washington must jack up interest rates to attract enough buyers.
“Until now, that hasn’t been a problem. The world has sought safety first. And Treasuries have enjoyed a 30-plus-year bull market as a result.
“But the biggest bond buyers on earth are getting nervous now.
“Take China, for example.
“China is the single biggest player in the market for U.S. Treasuries.
“During a single nine-month span ending last year, China quietly sold off $136 billion dollars worth of Treasuries.”
(Just to be fair, the chart Lichtenfeld uses to illustrate that China point indicates that Chinese Treasuries holdings topped off in 2011 and are in decline, which they were for several months to end 2011 — the chart is not that much of a straight line right now, both China and Japan hold more in Treasuries in January 2013 than they did in January 2012, though Chinese holdings are still below the peak level, from before they started actively diversifying more.)
So how does this three minutes happen? Here’s how Lichtenfeld puts it:
“The Spark That Will Set the Treasury Tinderbox Ablaze
“The Three-Minute Event will come in the form of a simple announcement.
“What most people don’t realize is: Announcements, more than any other force, impact Treasury prices and interest rates most directly.
“A recent Economic Policy Review study was crystal clear. Each of the 25 sharpest price changes and each of the 25 greatest trading surges can be associated with a just-released announcement.
“The study further states:
“The market’s reactions depend on the surprise component of a given announcement and on conditions of market uncertainty.”
That’s exactly what we’re about to witness inside the benchmark 10-year Treasury market.
“My research indicates something amazing – something not seen in decades, if ever.
“I’m talking about a virtual failure of an upcoming auction for 10-year notes.
“Now let me clarify. I am not saying nobody will show up for this auction.
“I’m saying almost no major players will show up, willing to pay the government’s asking prices.
“The resulting lack of demand will cause bond prices to tank – and interest rates to soar….
“It will trigger a chain reaction of sell-offs from Moscow to London, New York to Beijing.
“In short, the world’s ‘safest’