Once again, it is the world's biggest bond manager which either is really tempting fate by telling the truth in an increasingly more aggressive manner day after day, or is engaging in the most acute case of reverse psychology ever seen, coming out with the most critical opinion of the Fed's actions on the verge of the Fed's historic first press conference. And this one is truly a stunner, far more real than anything even Bill Gross has said in the past: "Just as Charles Ponzi needed donuts to turn back a suspicious crowd of investors, the Fed needs “donuts” in order to fill the bellies of the literally millions of investors worldwide who worry about the alarmingly large U.S. budget deficit and the impact that the U.S. debt dilemma could have on their Treasury holdings...Their collective buying has created what we believe to be a profit illusion with many investors mistakenly believing they can continuously reap profits from perpetually falling bond yields and rising bond prices, just as they have had opportunity to do over the past 30 years, amid the great secular bull market for Treasuries and the bond market more generally...For many reasons, this “duration tailwind” for Treasuries can’t last, particularly because the United States has reached the Keynesian Endpoint, where the last balance sheet has been tapped."
Summary of "The End of QEII: It’s Time to Make the Donuts"
- ?With quantitative easing the Federal Reserve has in essence picked the pockets of Treasury bond investors throughout the world.
- Ultimately, the U.S. must own up to its past sins and let the deleveraging process play itself out.
- The U.S. must invest in its people, its land, and its infrastructure, as well as promote free trade, to achieve economic growth rates fast enough to justify consumption levels previously supported by debt.
In 1920 the Boston Post contacted Clarence Barron, the founder of Barron’s, to investigate a man who claimed to be racking up remarkable gains for investors in an arbitrage involving the purchase and sale of postal-reply coupons. Charles Ponzi, the developer of the scheme, sought to convince investors that differentials in inflation rates between countries had created an opportunity for investors to purchase the postal-reply coupons on the cheap in one country and redeem them in the United States, an arbitrage that Ponzi said would enable investors to grow their money by several fold if they invested with him.
In fact, there were indeed differences between the prices of postal-reply coupons postage bought in foreign countries and their redemption value in the United States. But there were also substantial barriers preventing any actual arbitrage, including enormous logistical challenges having to redeem the coupons, which were of low denominational value. Ponzi nonetheless started and then perpetuated the scheme.
The problem, however, is that the Fed essentially robbed Peter to pay Paul by pushing yields below inflation and by undermining the value of the U.S. dollar. Peter was the unsuspecting investor in Treasury securities drawn into the Fed’s scheme by the allure of ever-rising Treasury prices; Paul was everyone else invested in everything else.
Across the Pond and Around the World
The Evolution and Ending of QEII
European Central Bank Focus