Government deficits are the next black swan

http://www.businessweek.com/investor/content/jul2010/pi2010078_530571.htm

As an analogy: You often have planes landing two hours late. In some cases, when you have volcanos, you can land two or three weeks late. How often have you landed two hours early? Never. It's the same with deficits. The errors tend to go one way rather than the other. When I wrote The Black Swan, I realized there was a huge bias in the way people estimate deficits and make forecasts. Typically things costs more, which is chronic. Governments that try to shoot for a surplus hardly ever reach it.

The problem is getting runaway. It's becoming a pure Ponzi scheme. It's very nonlinear: You need more and more debt just to stay where you are. And what broke [convicted financier Bernard] Madoff is going to break governments. They need to find new suckers all the time. And unfortunately the world has run out of suckers.

Debt is spreading like cancer

http://www.cnbc.com/id/37610064

The economic situation today is drastically worse than a couple years ago, and the euro is doomed as a concept, Nassim Taleb, professor and author of the bestselling book "The Black Swan," told CNBC on Thursday.

"We had less debt cumulatively (two years ago), and more people employed. Today, we have more risk in the system, and a smaller tax base," Taleb said.

"Banks balance sheets are just as bad as they were" two years ago when the crisis began and "the quality of the risks hasn't improved," he added.

The root of the crisis over the past couple of years wasn't recession, but debt, which has spread "like a cancer," according to Taleb, who is now relieved that public attention has shifted to debt, instead of growth.

Taleb is shorting US Treasury bonds

Nassim Taleb, author of "The Black Swan", who predicted the credit bubble and financial crisis in 2007, says the US Treasury bond market is the next to burst. I couldn't agree more, and have been blogging about this for over a year. Who in their right mind would lend money to a broke US government, tying their money up for 30 years, while earning less than 5% interest for the privilege of taking on that risk?

http://www.bloomberg.com/apps/news?pid=20601087&sid=a3E4uC5VIFeo&pos=5

While it's not convenient or prudent for retail investors short US Treasuries in the futures market, the TBT ETF is a possible trade on rising long-dated bond yields. But TBT is not an efficient proxy for shorting Treasury bonds, and tends to underperform in the long-term.

However, home borrowers should lock in a low fixed-rate mortgage to protect themselves from rising yields in the 10-year Treasury bond.

See sidebar for disclaimers.

Disclosure: no position in TBT.