U.S. Treasurys are a ‘Ponzi market’: Guggenheim’s Minerd

thenews 2013.06.13 14:02

There’s no shortage of descriptions out there for central-bank policies — past favorites have included allusions to mad scientists and heroin treatment programs.

But Scott Minerd, global chief investment officer at Guggenheim Partners, may take the prize for the most gutsy portrayal of monetary-easing policies. In a note released on Wednesday afternoon, Minerd says the central bank has effectively turned the U.S. Treasurys market into a “Ponzi market’.

A Ponzi scheme involves the fraudulent act of repaying one investor’s money with the principal of another, thereby over-inflating the value of assets until the bubble finally pops. (If you need a refresher, we suggest you check out MarketWatch’s recent interview with infamous Ponzi schemer Bernie Madoff.)

The crux of Minerd’s argument is that the Federal Reserve’s bond-purchase program, known as quantitative easing, has introduced false confidence into the market because investors believe Treasury investments will continue to increase in price. Just like a Ponzi scheme, the value of Treasury assets has become disconnected from its underlying value. Here’s what he wrote:

“The U.S. Treasurys market could now be described as a Ponzi market. The only reason investors would buy Treasuries today is that they expect the Federal Reserve will buy them at higher prices in the future. This reasoning will come unstuck, however, once the Fed curtails its asset purchase program. We do not know when the Fed will taper QE, but the longer its expansionary policy continues, the more volatility-inducing pressure will build. That means stock and bond markets appear to be in for a rough ride over the next six months or so.”