If the definition of a Ponzi scheme is “Borrowing from one source to pay for another in a seemingly endless loop until no one is left to feed new money into the system at which point the system collapses” , then a number of government programs approach shadowy reflections of a Ponzi scheme. It is something very similar to the Treasuries market where, in the words of Rick Santelli, “The Treasury issues paper and the Fed basically buys the paper and the intermediation of this is 22 primary dealers like in ‘Bonfire of the Vanities,’ basically knows that the Fed will always be well bid for the paper.”

Meet Scott Minerd, Chief Investment Officer of Guggenheim Partners who made the comparison of the Treasury Market to a Ponzi scheme and agrees that it hinges on the definition.

Mr. Minred refers to the philosophy of Hyman Minsky, the famous economist “Who basically, under his theory says that government programs designed to stabilize the economy are ultimately destabilizing. That is, markets that are being managed through a policy mechanism that provides stability which is not at equilibrium ultimately have to come undone once the policy is removed.” Could this be the reason the markets tremble every time Mr. Bernanke suggest the withdrawing of QE?

His reaction to the opinion of many that we will see a tapering of Quantitative Easing this year, Mr. Minerd responds, “I am actually in the camp that I think there’s probably at least a 50% chance that we’re not going to taper this year, and let me tell you why. When you look at how much interest rates have moved, even before we had this massive backup in rates of 50 basis points which is about, you know, 25% given the level of interest rates we started at. We are starting to see housing activity stall out. Mortgage applications dropping off and refinancing applications dropping off, and housing is in and of itself directly and indirectly contributing to about two-thirds of GDP. So when you see the last GDP number at 2.4% and you consider that housing is at least 1.5% of that, if housing stalls out, and I’m not talking about it falling off a cliff, I’m talking about just the activity, flattening out where we don’t have any home price appreciation or growth in construction, then what we’re going to start to see is that the economy is going to stall, and if the economy starts to stall rates are going to come down, and I think the dialogue before the end of the summer is going to be what, not about tapering, it’s going to be about increasing the size of QE or extending QE because of housing.”

Mr. Minerd’s outlook for the remainder of the year is something less than bright: “Over the next few months, on top of the market volatility that we are currently experiencing around the QE debate, until this thing gets a little better resolved, I think uncertainty will remain high, uncertainty is not good for asset prices and I think we are in for a rough summer.”

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