What’s the next big bubble? Green energy? Gun sales? Food? Nobody knows for sure.

Based on our research, 12 new bubbles already show potential to make and ruin investors. The markets listed below range from bubble-in-the-making to ready to pop:

1. Gun sales

Anticipating anti-gun legislation, certain Americans are snapping up guns to hoard, collect, or safekeep. Some are even stockpiling for investment purposes.

According a gun buyer mentioned in this Wall Street Journal article, a collection of “assault weapons” could triple in value if the federal government re-enacts a ban on their sale. Background checks on potential gun buyers increased by 27% in the past year, according to the article.

Some guns have already appreciated. For example, European-made AK-47s doubled in price between September-December 2008. For savvy buyers, the right to bear arms is also bearing fruit. The question is: When’s this bubble going to burst?

2. Option ARMs

Starting in May 2009, option adjustable rate mortgages (ARMs) have been causing “more delinquencies and foreclosures than subprime mortgages,” according to a Wall Street Journal article written in July.

Option ARMs allow homeowners to pay partial interest on their home loans for a predetermined period of time. In some cases, the unpaid amount of interest is added to the loan’s principal. Once the partial interest window expired, homeowners are left with potentially unaffordable payments.

Combine that with falling property values, and you see yet another loan-inspired disaster. According to the Wall Street Journal,

As of April, 36.9% of Pick-A-Pay loans were at least 60 days past due, while 19% were in foreclosure. In contrast, 33.9% of subprime loans were delinquent, with 14.5% of those loans in foreclosure.

Option ARMs are concentrated in California, Florida, and other hard-hit housing regions, writes the WSJ. Wells Fargo, J.P. Morgan Chase, and the FDIC’s insurance fund hold a large proportion of option ARMs, so a burst bubble will hit them especially hard.

It’s just a matter of time.

3. Cap & Trade

In September, the Senate will vote on the American Clean Energy and Security Act, which should really be called the Clean Energy Securitization Act. The act will create a cap-and-trade market that will create new derivative-friendly asset classes, according to this Christian Science Monitor article.

The government will, if the act passes, activate a market for carbon allowances and carbon offsets. The former are permits allowing companies to pollute; the latter, pollution permits that require companies to offset their carbon emissions elsewhere.

That, writes Mother Jones reporter Rachel Morris, is just the beginning. Once permits hit the market, financial experts will convert them in derivatives with names like “offset futures” and “allowance swaps.”

Bubblemania will ensue if the government shies away from regulation and enables the same kind of chaotic, over-the-counter system that enabled the mortgage-backed securities crisis.

The financial industry is currently lobbying for minimal regulation. If the bill goes through in September, and the government steps back from applying regulation, subprime carbon might not be too far away.

4. Incandescent Light Bulbs (EU)

A pending EU-wide ban on incandescent (traditional) light bulbs is causing consumers to hoard the soon-to-be unlawful products. Manufacturers are enjoying massive sales as a result.

The Spiegel article covering this bright bubble news didn’t mention anything about people hoarding for investment purposes, as they are for guns, but that certainly remains an option. The bubble will burst in September, when stores no longer sell incandescent lighting, and it will really burst when CFL (compact fluorescent lightbulb) technology improves enough to make people toss out their old incandescent.

5. China

Chinese stock markets have been surging, fed by easy credit from government-linked banks. The Shanghai Composite rose 16% in July alone. Banks extended $1.1 trillion in new loans during the first six months of 2009.

What’s more, a Chinese company enjoyed the biggest global IPO of the year. China State Construction Engineering Corp. raised $7.3bn in one day. The Shanghai Composite Index dropped 5% as a result: Investors feared that the same speculation that had increased CSCEC’s stock value by 56% was also overheating the market.

Unfortunately, China’s economy remains export-driven. The numbers are a smokescreen. The Chinese government is powerful enough to “make the right numbers appear” if it thinks the country’s economy needs stimulating, according to Contrarian Edge’s Vitaliy Katsenelson. “(T)he government is more than willing to artificially stimulate the economy, in the hopes of buying time until the global system restabilizes,” he says.

China is experiencing “asset bubbles that look like economic growth,” writes Bloomberg’s William Pesek. Will China’s market manipulation survive the recession, as the government has planned, or will the bubbles all burst?

6. Gold

To many investors, “quantitative easing” is synonymous with “buy gold as fast as you can!”

The problem is that more money in the mint doesn’t necessarily mean inflation. What if the Fed printed less money than was lost in the financial crisis? What if consumer demand remains low and producers can’t increase their prices? Or if, after banks recapitalize, there isn’t any extra money left? Or electronic money messes up the whole notion of quantitative easing?

Gold will spike when in inflation hits, but if there’s no inflation, speculators will be left empty-handed. Then again, if–as some goldbugs claim–the dollar weakens further, global financial systems collapse, and governments fail, it’ll be nice to have some bullion on hand.

7. Higher Education

Elite schools like Harvard and Yale have frozen some faculty salaries. What gives? It’s a widespread endowment dry-up, according to The New York Times’ Steven M. Davidoff. He explains that in recent years, endowments and tuition hikes have enabled universities to expand buildings, programs, and faculty, as well as increase salaries.

With the economic crash, however, endowments have shriveled. The Harvard endowment, on which certain parts of the university heavily rely, used to enjoy handsome portfolio returns: Its private equity portfolio gained 28% during the past decade. Now, it is facing more than 30% losses, according to Davidoff’s calculations. He estimates that up to 40% of Harvard’s assets are illiquid, meaning that it will have to aggressively raise donations or increase its liquid returns to fund itself and its private equity obligations.

“This results in a spiraling decline in Harvard’s liquid assets as each year they go lower to meet these needs and more and more assets become tied up in private equity,” writes Davidoff. Ouch. Overdependence on endowments and private equity is bursting the higher education bubble, especially at the top tiers.

8. Trustafarianism

Photo By Charles Sykes / Rex

Bubbles can be cultural, too. Just ask the hipsters featured in this New York Times article, who freeze in shock after being informed that full-time jobs last eight hours a day. For many, the parental bailout is a bubble that has either deflated or burst.

9. Alternative Energy

The next decade marks the rising of a Brave Green World. Governments are limiting carbon emissions and pushing large alternative energy subsidies. Peak oil makes the search for alternative energy sources more pressing. Cap-and-trade, if it passes, will create a new market for energy-related derivatives, enabling speculation and asset price inflation.

“There must be significant government involvement designed to focus energy and capital on the specific industry — and clearly that’s already happening,” writes Jeff Brady in this NPR article.

A few pieces still have to fall in place for a bubble to form. These include a massive update of the national energy grid, as well as a new source of credit for green ventures, according to Brady. He says that a grid update is in the works. A new source of credit, in my opinion, is just a matter of time. When that happens, brace yourself for the green market overvaluation—err, revolution.

10. Junk Bonds

In late July, average junk bond yields fell into the single digits for the first time in more than a year, according to the LA Times’ Tom Petruno. The KDP Investment Advisors’ index, which covers 100 junk issues, hit a high of nearly 18% returns last December, Petruno reports. Record bond defaults haven’t deterred investors from loading up on the risky bonds, but they have returns on their sides. Petruno says that “the average junk fund is up 27.2%.”

Those returns out-entice the prospect of massive defaults, which are bound to occur eventually. 42% of junk bond issuers have “highly leveraged balance sheets—much more than in previous years,” according to this CNNMoney article. It’s a good time to be in junk bonds—if you can get out before the bubble bursts.

11. ETFs

Vanguard’s John Bogle calls exchange-traded funds (ETFs) a “disaster waiting to happen.” The reason? Short-term traders are using ETFs to pursue short-term gains, according to this Seeking Alpha article. Passive investors try to jump on the bandwagon by buying into high-performing ETFs, not realizing that they chasing performance could spell speculative doom to their savings accounts. They’re good for long-term investing, Bogle says, but only if you use them right.

Bogle isn’t the only one wary of the ETF craze. The genre is facing oversupply to the point of redundancy. Early ETFs tracked “only the broadest indexes,” according Safe Haven’s Tyler Mordy.

Things have changed. “The first ETFs…were rather difficult to push around, and so not much given to speculative excess,” write William J. Bernstein of Efficient Frontier. He cites a “mind-boggling” variety of new ETFs—the HealthShares Infectious Disease Index is one example of how specialized the breed has become—as evidence that a new bubble may be on its way. “With each new wave of yet-more-improbable products, the danger grows,” he writes.

“Do we really need nine ETFs that essentially track the same thing?” Asks HS Dent’s Charles Sizemore. He says that specific supply and demand conditions created previous high returns. These returns caused competitors to enter the market, increasing supply, but diminishing the very returns that drove them into the market in the first place. At that point, “weaker competitors and products leave the market. We would expect there to be some kind of shakeout in the ETF sector in the months or years ahead.”

12. Food

Peak oil is so passé. Peak grain, on the other hand, could be the next big thing. Consider these facts:

-The planet doesn’t have enough high-quality arable land to keep up with the growing population. (The world has already consumed more grains than farmers produced during five of the past six years, according to this IPS article.)

-The amount of clean water in the world is decreasing, meaning less water for edible crops.

-Fossil fuels—commonly used as fertilizer—are getting more expensive.

-Climate change will affect crop production.

-The UN expects 12 billion people to inhabit the world by the end of the century.

It’s a simple supply and demand equation. Big demand for food and water, but little supply, means that prices will increase. It’s just a matter of finding the right agricultural

niche to invest in. Right?

Not so fast. A bubble needs more than just supply and demand to foment. In 2008, a commodities

bubble came and went. An increase in oil prices—caused by speculation, no less—drove up transportation prices, which in turn drove up food prices. Investors went on an agriculture/commodities binge, only to find their returns destroyed by falling prices, courtesy of the financial crisis.

This short, dramatic spike was of limited significance. A more sustained food bubble could be a ways off, especially if the government starts regulating commodities speculation. Look for persistent news of food shortages, rumors that you can make money by investing in agricultural stocks based on those shortages, and increasing food prices. At that point, a bigger bubble could be in the making.

Stiglitz Suggests Another Stimulus Even Though It Hasn't Worked Yet 6 comments

by: Kevin Mulhern December 22, 2009    

Kevin Mulhern

Nobel laureate Joseph Stiglitz, professor at Columbia University, told the media in Singapore that the likelihood of the U.S. economy sliding back into recession is "very, very high" in 2010. Stiglitz attributes this risk to the lack of job creation as our so-called "V-shaped" recovery takes place. Stiglitz argues that the U.S. economy must grow at 3% annually in order to create enough jobs for the expanding workforce. The probability that U.S. can sustain a 3% pace of recovery is low.

Interestingly, Stiglitz suggests that the federal government should prepare another stimulus package aimed at providing job growth. This third stimulus bill would inevitably be wracked by the political pork which made the second $787 billion bill a complete waste of tax payer money and Congressional effort. I agree with Stiglitz that the 'jobless' nature of this recovery will not be a benign thing. There is no way that the U.S. economy can increase productivity indefinitely without an expansion in employment and the failure of job growth in the second half of 2010 will likely cause further recession.

With the withdrawal of government spending and the increase in taxes we will likely see, investment will only occur with an expansion of consumption. The W-shaped recession is still a very possible scenario. Nevertheless, I reject Stiglitz's idea that the government can just pass a bill each time the economic situation looks to be worsening in order to forestall a contraction. This tactic did not work in the spring of 2008, nor has the current fiscal stimulus package done much for the monetary-driven recovery we've seen thus far.

Disclosure: None

Stiglitz: The U.S. Will Crash Again Unless We Pass Even More Stimulus

Vincent Fernando | Dec. 21, 2009, 12:17 PM | 1,747 | 11

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Tags: Economy, Financial Crisis, Bailout, U.S. Government, Stimulus, Unemployment

Once again, the U.S. economy faces disaster should we not enact more stimulus. Joseph Stiglitz has warned that the U.S. economy could contract again in the second half of 2010 without additional government stimulus.

Canadian Press: "The likelihood of this slowdown is very, very high," Stiglitz told reporters in Singapore. "There is a significant chance that the number will be in the negative range." Stiglitz, a professor at Columbia University, called on Washington to make more funds available to state governments who face a drop in tax revenue. The U.S. economy, the world's largest, must grow at least 3 per cent to create enough jobs for new entrants into the labour force, he said.

...

"If you don't prepare now, and the economy turns out to be as weak as I think it's likely to be, then you'll be in a very difficult position," he said.

Thing is, at the very least, shouldn't we first wait until the majority of current stimulus is spent? The U.S. has barely done 30% so far. The rallying dollar

probably doesn't expect much influence from Mr. Stiglitz next year.

Stiglitz warns US economy may contract in second half of 2010, calls for more stimulus

By Alex Kennedy (CP) – Dec 20, 2009

SINGAPORE — Nobel Prize-winning economist Joseph Stiglitz warned there's a "significant" chance the U.S. economy will contract in the second half of next year, and urged the government to prepare a second stimulus package to spur job creation.

"The likelihood of this slowdown is very, very high," Stiglitz told reporters in Singapore. "There is a significant chance that the number will be in the negative range."

Stiglitz, a professor at Columbia University, called on Washington to make more funds available to state governments who face a drop in tax revenue. The U.S. economy, the world's largest, must grow at least 3 per cent to create enough jobs for new entrants into the labour force, he said.

The unemployment rate fell to 10 per cent in November from 10.2 per cent in October.

"If you don't prepare now, and the economy turns out to be as weak as I think it's likely to be, then you'll be in a very difficult position," he said.

The economy grew at a 2.8 per cent rate in July through September, after a record four straight quarters of contraction.

TAPPER:  Economists like Joseph Stiglitz and Paul Krugman say that they're worried there's going to be -- the economy's going to contract in the second half.  How worried is President Obama about a double-dip recession?

GIBBS:  Well, again, I think -- I would say the president is worried about today and worried about the future.

TAPPER:  Does he think it's likely?  I mean, is he...

GIBBS:  I -- I -- I would simply say the president is -- wakes up concerned every day about where this economy is; understands that millions are hurting, whether they are in last month's job losses or the job losses stretching past those two years since this recession officially began. But understand, people were hurting long before a board said there was a recession in this country.

TAPPER:  Right.  But obviously you plan differently if you expect a, you know, another contraction of the economy coming up, as opposed to the line that we're on right now.

GIBBS:  Well, but I also think that the president -- again, I refer you back to what the president talked about in December:  him not being satisfied with where we were and wanting to change that -- the direction of that line.

TAPPER:  So he is preparing as if there is going to be a contraction.  He is...

(CROSSTALK)

GIBBS:  No, no, no, no. I -- he's not an economic prognosticator.  The president is concerned about the economy; concerned about the stories of people hurting that he has heard for many, many years and is working to do all that we can to create an environment for businesses, small and large, to hire more people.

TAPPER:  The -- the administration this week announced that it was going to temporarily, at least, or for the time being suspend the transfer of detainees from Guantanamo Bay to Yemen.  You did transfer six in December.  Are you -- do you know where those six are?

GIBBS:  I'm not going to get into -- I think Christi (Parsons of the Chicago Tribune) asked these questions the other day and I'm not going to get into discussing transfers.

TAPPER:  OK. Given the need to talk to Congress and get them on board with the transfer of prisoners to the Thomson Correctional Center, the need to convert that prison from a maximum security prison to a super-max, do you have any realistic timetable as to when you think Guantanamo can actually be closed?

GIBBS:  I -- I think Christi also asked that question.  I didn't have a timetable answer. Obviously, we'll work with Congress in the upcoming session on many of the things that you talked about, not just retrofitting, but purchasing a prison on Thomson, as well as other issues relating to the movement of prisoners from Guantanamo to Thomson.

TAPPER:  One last question, I'm sorry.  The -- in recent days, Qais Khazali, who was a member -- the leader of the League of the Righteous in Iraq.  He was arrested by U.S. forces in 2007.  He was responsible for an attack in Karbala that killed five U.S. soldiers.  In recent days, the U.S. military has turned him over to the Iraqis, and the Iraqis have freed him as part of the reconciliation going on there.

GIBBS:  I -- let me ask somebody to...

TAPPER: I got this from the Pentagon.

GIBBS:  OK.  Well, let me ask -- let me get some information on the -- on that case.  I don't have anything in front of me.

TAPPER:  Well, this is a general question:  Is it appropriate for the U.S. military to turn...

GIBBS:  Let me -- let me -- other than what you've told me, I'm not overly familiar with the details of the case.

TAPPER:  Just as a general principle?

TAPPER:  Economists like Joseph Stiglitz and Paul Krugman say that they're worried there's going to be -- the economy's going to contract in the second half.  How worried is President Obama about a double-dip recession?

GIBBS:  Well, again, I think -- I would say the president is worried about today and worried about the future.

TAPPER:  Does he think it's likely?  I mean, is he...

GIBBS:  I -- I -- I would simply say the president is -- wakes up concerned every day about where this economy is; understands that millions are hurting, whether they are in last month's job losses or the job losses stretching past those two years since this recession officially began. But understand, people were hurting long before a board said there was a recession in this country.

TAPPER:  Right.  But obviously you plan differently if you expect a, you know, another contraction of the economy coming up, as opposed to the line that we're on right now.

GIBBS:  Well, but I also think that the president -- again, I refer you back to what the president talked about in December:  him not being satisfied with where we were and wanting to change that -- the direction of that line.

TAPPER:  So he is preparing as if there is going to be a contraction.  He is...

(CROSSTALK)

GIBBS:  No, no, no, no. I -- he's not an economic prognosticator.  The president is concerned about the economy; concerned about the stories of people hurting that he has heard for many, many years and is working to do all that we can to create an environment for businesses, small and large, to hire more people.

TAPPER:  The -- the administration this week announced that it was going to temporarily, at least, or for the time being suspend the transfer of detainees from Guantanamo Bay to Yemen.  You did transfer six in December.  Are you -- do you know where those six are?

GIBBS:  I'm not going to get into -- I think Christi (Parsons of the Chicago Tribune) asked these questions the other day and I'm not going to get into discussing transfers.

TAPPER:  OK. Given the need to talk to Congress and get them on board with the transfer of prisoners to the Thomson Correctional Center, the need to convert that prison from a maximum security prison to a super-max, do you have any realistic timetable as to when you think Guantanamo can actually be closed?

GIBBS:  I -- I think Christi also asked that question.  I didn't have a timetable answer. Obviously, we'll work with Congress in the upcoming session on many of the things that you talked about, not just retrofitting, but purchasing a prison on Thomson, as well as other issues relating to the movement of prisoners from Guantanamo to Thomson.

TAPPER:  One last question, I'm sorry.  The -- in recent days, Qais Khazali, who was a member -- the leader of the League of the Righteous in Iraq.  He was arrested by U.S. forces in 2007.  He was responsible for an attack in Karbala that killed five U.S. soldiers.  In recent days, the U.S. military has turned him over to the Iraqis, and the Iraqis have freed him as part of the reconciliation going on there.

GIBBS:  I -- let me ask somebody to...

TAPPER: I got this from the Pentagon.

GIBBS:  OK.  Well, let me ask -- let me get some information on the -- on that case.  I don't have anything in front of me.

TAPPER:  Well, this is a general question:  Is it appropriate for the U.S. military to turn...

GIBBS:  Let me -- let me -- other than what you've told me, I'm not overly familiar with the details of the case.

TAPPER:  Just as a general principle?

GIBBS:  I don't want to -- I don't want to generalize about something with which you've just asked me with great specificity

Pretty speeches can take you only so far. A month after the Copenhagen climate conference, it is clear that the world’s leaders were unable to translate rhetoric about global warming into action.

It was, of course, nice that world leaders could agree that it would be bad to risk the devastation that could be wrought by an increase in global temperatures of more than two degrees Celsius. At least they paid some attention to the mounting scientific evidence. And certain principles set out in the 1992 Rio Framework Convention, including “common but differentiated responsibilities and respective capabilities,” were affirmed. So, too, was the developed countries’ agreement to “provide adequate, predictable and sustainable financial resources, technology, and capacity-building” to developing countries.

The failure of Copenhagen was not the absence of a legally binding agreement. The real failure was that there was no agreement about how to achieve the lofty goal of saving the planet, no agreement about reductions in carbon emissions, no agreement on how to share the burden, and no agreement on help for developing countries. Even the commitment of the accord to provide amounts approaching $30 billion for the period 2010-12 for adaptation and mitigation appears paltry next to the hundreds of billions of dollars that have been doled out to the banks in the bailouts of 2008-09. If we can afford that much to save banks, we can afford something more to save the planet.

The consequences of the failure are already apparent: The price of emission rights in the European Union Emission Trading System has fallen, which means that firms will have less incentive to reduce emissions now and less incentive to invest in innovations that will reduce emissions in the future. Firms that wanted to do the right thing, to spend the money to reduce their emissions, now worry that doing so would put them at a competitive disadvantage as others continue to emit without restraint. European firms will continue to be at a competitive disadvantage relative to American firms, which bear no cost for their emissions.

Underlying the failure in Copenhagen are some deep problems. The Kyoto approach allocated emission rights, which are a valuable asset. If emissions were appropriately restricted, the value of emission rights would be a couple trillion dollars a year -- no wonder that there is a squabble over who should get them.

Clearly, the idea that those who emitted more in the past should get more emission rights for the future is unacceptable. The “minimally” fair allocation to the developing countries requires equal emission rights per capita. Most ethical principles would suggest that, if one is distributing what amounts to “money” around the world, one should give more (per capita) to the poor.

So, too, most ethical principles would suggest that those that have polluted more in the past -- especially after the problem was recognized in 1992 -- should have less right to pollute in the future. But such an allocation would implicitly transfer hundreds of billions of dollars from rich to poor. Given the difficulty of coming up with even $10 billion a year -- let alone the $200 billion a year that is needed for mitigation and adaptation -- it is wishful thinking to expect an agreement along these lines.

Perhaps it is time to try another approach: a commitment by each country to raise the price of emissions (whether through a carbon tax or emissions caps) to an agreed level, say, $80 per ton. Countries could use the revenues as an alternative to other taxes -- it makes much more sense to tax bad things than good things. Developed countries could use some of the revenues generated to fulfill their obligations to help the developing countries in terms of adaptation and to compensate them for maintaining forests, which provide a global public good through carbon sequestration.

We have seen that goodwill alone can get us only so far. We must now conjoin self-interest with good intentions, especially because leaders in some countries (particularly the United States) seem afraid of competition from emerging markets even without any advantage they might receive from not having to pay for carbon emissions. A system of border taxes -- imposed on imports from countries where firms do not have to pay appropriately for carbon emissions -- would level the playing field and provide economic and political incentives for countries to adopt a carbon tax or emission caps. That, in turn, would provide economic incentives for firms to reduce their emissions.

Time is of the essence. While the world dawdles, greenhouse gases are building up in the atmosphere, and the likelihood that the world will meet even the agreed-upon target of limiting global warming to two degrees Celsius is diminishing. We have given the Kyoto approach, based on emission rights, more than a fair chance. Given the fundamental problems underlying it, Copenhagen’s failure should not be a surprise. At the very least, it is worth giving the alternative a chance.

Jan. 7 (Bloomberg) -- Nobel laureate Joseph Stiglitz said investors are “talking up” signs of a global economic recovery in a bid to boost equities.

“Wall Street is talking up the recovery because it would like to sell stocks,” Stiglitz told reporters at a conference in Paris today.

The MSCI World Index of stocks has surged 73 percent since its low of last March even while the economies of advanced nations grow below their potential rates following the worst recession since the Great Depression.

Stocks are rallying because interest rates are low and companies have been cutting costs by reducing payrolls, factors that suggest economies remain weak, said Stiglitz, a professor at Columbia University in New York.

“Whenever rates are low, stock markets are often high,” he said. By contrast, economists are “almost universally pessimistic.”

Speaking at the conference, Stiglitz said U.S. regulators haven’t done enough to address the risks posed by large banks, derivatives and executive compensation.

He recommended a tax be introduced on financial speculation as a way of generating revenue and forcing investors to focus on the longer-term.

The next bubble to burst

"Find the trend whose premise is false, and bet against it."
- George Soros

It didn't used to be this way. Back in the days of Bretton Woods, and a gold-backed currency, the financial markets were relatively stable. If you wanted to make money you had to do it over a long period of time.
In the post-Bretton Woods era, and especially in the last decade, market bubbles and crashes happen every few years. An investor with a keen eye and an open mind can spot golden investment opportunities, or at least avoid the fallout from the bubble bust.

We are about to see the bursting of the next bubble...and its going to be a doozy.

With President-elect Barack Obama and congressional Democrats considering a massive spending package aimed at pulling the nation out of recession, the national debt is projected to jump by as much as $2 trillion this year, an unprecedented increase that could test the world's appetite for financing U.S. government spending.

For now, investors are frantically stuffing money into the relative safety of the U.S. Treasury, which has come to serve as the world's mattress in troubled times. Interest rates on Treasury bills have plummeted to historic lows, with some short-term investors literally giving the government money for free.

But about 40 percent of the debt held by private investors will mature in a year or less, according to Treasury officials. When those loans come due, the Treasury will have to borrow more money to repay them, even as it launches perhaps the most aggressive expansion of U.S. debt in modern history.

You can always spot a bubble by the irrationality of the investment near the top. For instance, in 2005 people were offering tens of thousands of dollars above asking price for homes because they were "afraid they would be priced out of the market" and never be able to afford a home.
In other words, it was panic buying - paying premium prices for an asset irregardless of its long-term investment value. A sure sign of a bubble.

We are seeing this same dynamic today in treasury bonds.

It isn't just short-term treasuries. The 30 year treasury bond yields just 2.83%. Does anyone really think that inflation in the next 30 years will never surpass 2.83%?

The flight to U.S. Treasuries is an Armageddon trade. It reflects investors’ panicked attempts to seek safety amid plummeting stock markets, collapsing property values and more than $1 trillion in losses and write-offs by banks worldwide.

There never was, and never will be, justification for yields on any bond to be negative. What it means is that people are paying the government to lend it money.
It makes no economic sense at all. Shoving your cash into your mattress is a better investment than that. Like the housing bubble and the Dot-Com bubble, this illogical panic buying will end poorly as well.

The treasury bubble isn't just a bad investment because the investor knowingly looses money. It's a bad investment because the fundamentals of the asset are deteriorating.
Note the Washington Post article above. The federal government isn't just adding $2 Trillion in new treasuries to the market this year, but another $6 Trillion is maturing this year. That $6 Trillion in existing debt will need to be rolled over (because we have no intention of ever paying it down). Thus we need to borrow $8 Trillion just this year, almost all of that from foreigners (because we don't save money in America. We spend it on imports from those same foreigners).
So then the question is: how likely are foreigners to loan us the money? Let's look at the trend of their recent appetite for our debt.

Net purchases of the U.S. long-term securities declined from $65.4 billion (revised down from $66.2 billion) in September to 1.5 billion in October. That’s quite a disastrous result, considering the foreign purchases barely cover the domestic sale, while the markets expected a value close to $40 billion for October net purchases.

It's important to note that the treasury and the dollar are joined at the hip. Any blow to confidence in one, hits the other just as hard. Here's a quick list of items to look for in the coming year:

1) The global recession is forcing nations to sell their currency reserves (which are usually dollars) to protect their own currency. India and Russia have already been doing this.

2) Selling treasuries are the equivalent of promises to print money. More dollars being printed means a weaker dollar in the future.

3) Foreign sovereign-wealth funds took a beating in late 2007 and early 2008 when they bought into Wall Street banks. They will be much more cautious buying dollar assets in the future.

4) The bailouts aren't over. The states are asking for a $1 Trillion bailout. The Pension Benefit Guaranty Corporation will need a bailout this year of tens of billions. The bailouts of AIG, Fannie Mae and Freddie Mac keep getting more costly. The automakers will need more money as well.

5) The economy could be even worse than expected, thus causing a shortage of tax revenue.

America's GDP is only about $13 Trillion. Does it sound even remotely logical and sustainable for a nation that produces $13 Trillion a year to be borrowing $8 Trillion in a single year?

So what does it mean for the treasury bubble to pop?
For starters, because it is a bubble, millions of investors would lose money, which might cause a selling panic (bursting bubbles are always messy).

Second, it might threaten Treasuries’ status as the global “risk-free asset” and would damage the international stature of the U.S. Foreigners, who own about half of all Treasuries, might stop funding the country’s growing trade and budget deficits without an increase in U.S. interest rates.

Finally, a busted Treasury-market bubble could undermine the dollar’s global reserve-currency status, which in turn would spell higher U.S. interest rates, undercutting economic growth.

Basically what I am saying is sell your treasuries now if you have any. They are overvalued and have nowhere to go but down, and when it goes down it will take the dollar with it.

PARIS — Five prominent economists who correctly predicted the 2008 world economic meltdown say the crisis is only going to get worse.

"Beware the happy talk from those who say we are 'turning the corner,'" writes Dean Baker of the Washington, D.C.-based Center for Economic Research. "Ignore the daily ups and downs of the market and tighten your belts. This is going to hurt."

Canada wasn't spared in the dire prognostications Monday in the latest online edition of Foreign Policy magazine.

New York University economist Nouriel Roubini, dubbed "Dr. Doom" in an August profile in a New York Times Sunday Magazine, said the crisis is still in its early stages.

"As the U.S. economy shrinks, the entire global economy will go into recession. In Europe, Canada, Japan and the other advanced economies, it will be severe," according to Roubini.

"Nor will emerging-market economies — linked to the developed world by trade in goods, finance, and currency — escape real pain."

Roubini, who was speaking publicly about an impending disaster in 2006, added: "The bubbles, and there were many, have only begun to burst."

He predicted the U.S. recession will last at least two years and could drag on as long as the one that plagued Japan in the 1990s.

He said hedge funds are being forced to sell their assets at fire-sale prices while some financial institutions will go bust, and some governments in emerging economies could default on their debt.

Morgan Stanley Asia chairman Stephen Roach said Asian economies will suffer from being overly dependent on exports to the U.S. and on their own undervalued currencies.

"A similar verdict is likely for the commodity-producing regions of the world, not just the oil-dependent Middle East, but also the resource-intensive economies of Australia, Canada, Brazil, Russia and Africa," Roach writes.

"As global growth slows, so does the demand for economically sensitive commodities, resulting in a sharp correction in the bubble-distorted commodity prices and growth rates of the major commodity producers."

Yale University economist Robert J. Shiller, author of the 2008 book The Subprime Solution, was one of several who cited the example of Japan.

"History tells us there is some precedent for a protracted, weak housing market. After the last housing boom in the United States peaked in 1989, it took a typical city five years to hit bottom," he writes.

"This time, prices have only been going down for two years. We might look with caution to Japan, where urban land prices fell for 15 consecutive years, from 1991 to 2006."

The least pessimistic is International Economy magazine editor David Smick, who predicts that U.S. president-elect Barack Obama's first budget deficit will surpass $1.5 trillion US as he faces demands to stimulate the economy, enacts his own spending and tax-cut initiatives, and faces a mountain of bailout demands from state governments, private pension funds and other ailing institutions.

Internationally, Smick said export-dependent developing countries, and the western banks that financed their growth, are particularly vulnerable.

"If too many of these emerging markets go down, the IMF (International Monetary Fund) lacks the necessary resources to mount rescue operations," writes Smick, author of the 2008 book The World Is Curved: Hidden Dangers to the Global Economy.

"To put things in perspective, Austrian banks have emerging-market financial exposure exceeding $290 billion. Austria's GDP is only $370 billion."

Smick's optimism emanates from the oceans of cash sitting on the world economy's sidelines, including $6 trillion in money market funds alone

"The faster Obama and his global counterparts can fashion credible financial reforms that enhance transparency while preserving capital and trade flows, the sooner that sidelined capital will re-engage," he writes.

"In the end, markets crave certainty — in this case, certainty that our leaders have a credible game plan. That plan is not yet in place."