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Well a bomb went off in markets this week when respected chief investment officer of Guggenheim partners called the current treasury market quote a Ponzi scheme.
Taking a whole bond market bubble talk a whole new level up so what does he mean and how should investors prepare for changes if he's right we decide as the man himself Scott miner -- his.
Partners global chief investment officer and he joins us now Scott thanks for coming itself.
Exactly tell us how has the treasury market become -- Ponzi scheme.
Well David I I have to say that -- been up I've been quoted a little out of context what I said is that I was referring to a Ponzi market.
And there is a difference -- Ponzi scheme is something where someone's intentionally trying to profit by driving prices all right that's that's very long what's going on him.
That's right Bernie that this is different -- how was this different explain how this worked so well not a lot of us I was referring to -- men's ski and economists work where he says.
Bit of it that's the bill -- they're sorry that stability.
Is fundamentally the stabilizing.
And that is when government straw -- to stabilize the economy.
By distorting markets and maintaining artificially high prices.
That at the end it becomes to stabilize and when you attempt to leave and when you look at treasury securities today and given the rate of return on treasury securities.
They barely cover inflation.
And that's a good investment vehicle they don't make a whole lot of sense so the only reason you would purchase -- treasury security today.
-- because you believe that later on somebody is going to be willing to pay you a higher price for it.
And what you paid.
And that's the definition of a Ponzi market -- so treasuries today don't make a whole lot of sense and that's an investment vehicle and people should probably be looking elsewhere.
Well I think of it pretty simply as a matter supplied event because of all this all is fed buying of treasuries treasuries have been high because the government.
Has been reducing their supply right -- government has been buying an all out.
That's exactly right David and and that is.
The the intentional policy of the Federal Reserve.
To keep mortgage interest rates down by purchasing mortgage securities and treasuries that the long -- -- the mark OK so what happens when the Fed starts to taper off these purchases.
Well I tell as its interest thing I don't even think we have to start tapering -- we have to do is start thinking or talking about it and we see what happens.
Interest rates are up about a half a percent over the last month herself.
And it's already cascading into the housing market we're seeing mortgage applications fall we're seeing financing and refinancing applications fall.
Since housing is such a pivotal piece of the economy right now.
Our estimates are that it's contributing about two thirds of the growth of the -- the economy if we knock housing now by just.
Not having it grow any further because mortgage rates rise -- economy is gonna slow dramatically.
Probably not going to a recession but ultimately lead to the possibility of actually increasing -- extending -- quantitative -- OK let's -- exact thing they'd like to get.
-- let's look at the general stock market beyond just housing itself and how that affects the economy.
If in fact the Fed that doesn't buy as much and interest rates have to go up.
In order to sell off some of these bonds because that's the only way they're going to be able attract investors.
That means that companies borrowing costs will go up that has been one of the great reasons why the profits have been coming out been churning out of these companies because.
They're borrowing costs are so low because money's been so cheap so once their profits go down does that mean -- stock market's gonna go down.
I think so and I I would make the connection a little even more tightly David and that is.
The feds pump enough liquidity and then of course the Bank of Japan pumping in so much money.
Is pushing equity prices higher.
So when the Fed starts to try to taper all that money is going to -- the flow was going to disappear and equity prices are gonna have to fall.
So I think -- in for -- pretty rough fraud over the next six songs you already have such as if if we have a crash in the bond market if we have the stock market coming down to crash in the housing markets that may -- crashes too strong -- -- But a downturn and all of these markets.
Won't the Fed just get back in and and -- are buying up bonds again.
Well then that's exactly why I think that dialogue over the next six months is gonna shift from tapering.
To actually possibly talking about increasing quantitative easing.
And extending it further than people currently think and that might lead to bigger inflation right.
But in the long run but you know the academic work on inflation tells us.
That it takes about a decade after the Fed begins to expand its balance sheet dramatically so we may have -- a fairly long period of low inflation had Scott minor please come back and -- that was very interest and appreciate you really stirred the markets this week from Guggenheim partners Scott -- never great Father's Day Scott.
Thank you David -- real well.
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