‘The biggest Ponzi scheme in history’: This CEO warns that the Fed’s strategy has created a giant bubble in housing. Here’s what he likes for protection

"The Greatest Pyramid Scheme in History": This CEO warns that the Fed's strategy has created a huge housing bubble. Here's what he likes to protect
The Fed has a dual mandate: to ensure price stability and to seek maximum employment.
But according to Dan Morehead, CEO of crypto hedge fund giant Pantera Capital, there's a third thing the Fed has done -- a Ponzi scheme.
In his latest blockchain letter, Morehead says the Fed's "manipulation of the Treasury and Mortgage Bond markets" is "the greatest Ponzi scheme in history."
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The veteran investor even issued a warning to CNBC last week, saying it's likely a "recession is imminent."
Let's take a closer look at what he means.
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policy rate
Morehead argues that the Fed made a major policy mistake by keeping the federal funds rate far too low.
“The gap between inflation (their mandate) and their policy tool (the Fed fund) is far greater than at any time in history—including the disastrous 1970s,” he writes.
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“They left interest rates at zero. Fed funds were at 1.55% before the pandemic. They just brought overnight interest rates back to pre-pandemic policy levels when inflation was only 2.30%.”
As we now know very well, inflation is no longer at 2.30%. The latest Labor Department report showed that consumer prices rose 8.6% yoy in May, the largest increase since December 1981.
And even that official figure wasn't accurate because it doesn't measure real-time housing inflation, Morehead argues.
Instead, the official CPI measures housing inflation using what's known as owner-equivalent rent -- how much it would cost a homeowner to live in their home if they came to rent -- and that metric rose just 5.1% year over year.
If you've been to the market to buy or rent a property, you know that prices have risen a lot more. The government says it uses the owner's equivalent rent because it is only trying to measure the change in housing costs while eliminating the investment aspect of buying a home.
Morehead instead considers the S&P CoreLogic Case-Shiller U.S. National Home Price Index, a leading measure of US home prices that can be viewed as a barometer of the housing market. It's up 20.6% year over year, and Morehead says if we used that instead of the owner's equivalent rent to calculate inflation, the CPI would have risen 12.5%.
To tame rising inflation, Morehead says the Fed still needs to raise interest rates "by three or four hundred basis points."
Manipulation of the bond market
While the low interest rate policy was a mistake, Morehead says, it is "dwarfed" by the Fed's manipulation of Treasury and mortgage bond markets.
He suggests the Fed previously let free-market players like pension plans, mutual funds, and insurance companies do the lending — but things changed in 2020.
“[When] the Fed got into the mortgage lending business, they really got into it. They have completely supplanted all other lenders.”
And that led to a huge increase in real estate prices.
“They forced 30-year mortgage rates to 2.68% and basically challenged people not to buy a house (or two or three), which would obviously lead to a housing bubble, which itself contributed to a labor shortage, since two Millions of Americans took early retirement or otherwise left the workforce.”
Officials argue that the Fed's asset purchases have been essential to "keep markets afloat" and "send to the public that the Fed is ready to support key parts of the financial system" during the pandemic.
But if you can borrow money at 2.68% to buy properties that are increasing in value at an average of 20% a year, both homeowners and investors will go for it, Morehead explains.
"Over the past two years, the Fed has purchased Treasury and mortgage bonds representing over 200% of all mortgage lending in the US."
While that's not the exact definition of a Ponzi scheme, Morehead argues that the Fed's easy-money policies have created a huge housing bubble.
Crypto to the rescue?
All of this does not bode well for the US economy.
Many pundits - including Morehead - are calling for a recession. But investors are already feeling the pain. With the S&P 500 down 20% year-to-date, many stocks are already in bear markets.
The Fed, on the other hand, is more optimistic. Last month, Fed Chair Jerome Powell said the US economy was in "strong shape" and "overall, the US economy is well positioned to withstand tighter monetary policy."
Morehead expects rate hikes to affect bonds, stocks and real estate. But there are asset classes that are less correlated to interest rate markets.
“I can easily imagine a world in say, a year where stocks are down, bonds are down, real estate is down, but crypto is recovering and trading on its own — much like gold or soft commodities like corn, soybeans are doing all very good.”
Morehead's Pantera Capital specializes in blockchain technology. It launched the first cryptocurrency fund in the US in 2013.
However, Morehead noted that crypto is "highly correlated with risky assets."
Bitcoin -- the world's largest cryptocurrency -- is down 57% year-to-date but is still down over 900% over the past five years.
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This article is informational only and should not be construed as advice. It is provided without any guarantee.

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