This CEO warns that the Fed’s strategy has caused a massive housing bubble. This is what he wants for protection


'The biggest Ponzi plan in history': This CEO warns that the Fed's strategy has caused a huge housing bubble.  This is what he wants for protection

‘The biggest Ponzi plan in history’: This CEO warns that the Fed’s strategy has caused a huge housing bubble. This is what he wants for protection

The Fed has a dual mandate: to ensure price stability and to maximize employment.

But according to Dan Morehead, CEO of crypto hedge fund giant Pantera Capital, there is a third thing the Fed has done: run a Ponzi scheme.

In his latest Blockchain letter, Morehead says the Fed’s “manipulation of the government and mortgage bond markets” is “the largest Ponzi scheme in history.”

The expert investor even warned on CNBC last week, saying it’s likely a “recession is coming.”

Let’s take a closer look at what he means.

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Federal Funds Rate

Morehead argues that the Fed has made a major policy mistake by keeping federal fund rates far too low.

“The difference between inflation (their mandate) and their policy tool (fed funds) is far greater than at any time in history – including the disastrous 1970s,” he writes.

“They left the rates at zero. Fed funds were at 1.55% before the pandemic. They just got the overnight rates to get back to where they were before the outbreak of the pandemic policy when inflation was only 2.30%.”

As we know very well by now, inflation is no longer at 2.30%. The latest Labor Department report found consumer prices rose 8.6% in May from a year ago, the largest increase since December 1981.

And even that official reading wasn’t accurate because it doesn’t measure housing inflation in real time, Morehead argues.

Instead, the official CPI measures home inflation using something called the owner’s equivalent rent — how much it would cost a homeowner to live in their home if they rent — and that statistic rose by just 5, year over year. 1%.

If you’ve been in the market to buy or rent a property, you’d know that prices have gone up a lot more than that. The government says it uses owner’s equivalent rent because it’s only trying to measure the change in the cost of lodging while eliminating the investment aspect of buying a home.

Morehead instead looks to the S&P CoreLogic Case-Shiller US National Home Price Index, a leading measure of US home prices that can be seen as a barometer of the housing market. It was up 20.6% year over year, and Morehead says if we used that instead of owner’s equivalent rent to calculate inflation, the CPI would have increased 12.5%.

To contain rising inflation, Morehead says the Fed still needs to raise interest rates by “three or four hundred basis points.”

Bond market manipulation

While the low-rate policy was a mistake, Morehead says, it’s dwarfed by the Fed’s manipulation of government and mortgage bond markets.

He suggests that the Fed previously let free market actors such as pension plans, mutual funds and insurance companies make the loans — but in 2020 the situation changed.

†[W]When the Fed got into the mortgage market, they really went for it. They have completely displaced all other lenders.”

And that led to a huge rise in house prices.

“They forced the 30-year mortgage rate to 2.68%, in fact they were challenging people not to buy a house (or two or three), which would obviously cause a housing bubble, itself contributing to a labor shortage as two million Americans retired early or otherwise left the workforce.”

Officials argue that the Fed’s purchases of securities were essential to “keep the markets working” during the pandemic and “transmit to the public that the Fed is poised to shut down key parts of the financial system.”

But if you can borrow money at 2.68% to buy homes that increase in value on average 20% per year, homeowners and investors alike will go for it, explains Morehead.

“Over the past two years, the Fed has bought up Treasury and mortgage bonds equivalent to more than 200% of all US mortgages”

While that doesn’t match the exact definition of a Ponzi scheme, Morehead argues that the Fed’s easy money policy has sparked a massive housing bubble.

Crypto to the rescue?

All this does not bode well for the US economy.

Numerous experts – including Morehead – are arguing for a recession. But investors are already feeling the pain. With the S&P 500 down 20% this year, many stocks are already in a bear market.

The Fed, on the other hand, is more optimistic. Last month, Fed Chair Jerome Powell said the US economy is in “strong shape” and “overall, the US economy is well positioned to withstand tighter monetary policy.”

Morehead expects interest rate hikes to affect bonds, stocks and real estate. But there are asset classes that are less correlated with the interest rate markets.

“I can easily see a world in, say, a year where stocks fall, bonds fall, you know, real estate falls, but crypto rises and trades on its own — just like gold, or soft commodities like corn, soybeans do. all very good.”

Morehead’s Pantera Capital specializes in blockchain technology. It launched the first cryptocurrency fund in the US in 2013.

That said, Morehead noted that crypto is “highly correlated with risky assets”.

Bitcoin – the world’s largest cryptocurrency – has fallen 57% so far, but has still bounced back more than 900% in the past five years.

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This article provides information only and should not be construed as advice. It comes without any kind of warranty.

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