Sunday 20 May 2012

The Giant Ponzi Scheme.

Black swan of the financial world really exists. No, it has nothing to do with Euroland. Not even coming failure of Spain or Italy. Euro-Zone will survive even if Greece or Portugal exits. It will lurch from one crisis to another and it is not going to get any better either. This is the new normal with Europe. The panic will continue at different levels and TBTF Banks will use that panic to milk money out of the Fed.  Greece going out of Euro will not be the end of it or end of the world. The financial illusion of the world and US of A is actually running on another giant Ponzi scheme. When this Ponzi scheme comes undone, that will be the day of Armageddon. That will be the day when US $ will lose its reserve currency status and the collapse of capitalism will be upon us. The financial system that we know today will be changed forever on that day. Trillions of dollars of assets will be gone in a moment. That Ponzi scheme is called the “US Treasury Market”. Problem with Europe may take DOW to 10,000 but when the US Treasury Ponzi ends, DOW will be at 3000 and SPX at 400.

The primary dealers (Too Big To Fail Banks) borrow money from the Fed at overnight rate of 10 basis points and then invest in 10 year treasury for 200 basis points. Then they put these treasuries up as collateral and borrow again. Do you see the never ending circular loop? In this scheme, the Fed is able to keep the interest rates down, (backdoor monetization of debt which is illegal under US Constitution) politicians are able to borrow from the future and TBTF Banks are free to take risky bets and make profit out of nothing. Even if something blows up once in a while, they don’t really care because their skin is not in the game. Nobody owns the treasury bonds (except retail and pension funds) and the whole scheme is running on REPO. They make money as long as the prices of the bonds are rising or stable. The day the interest rates starts going up the scheme starts to unravel. This massive REPO scheme, which will make the Lehman REPO appear as a grain of sand in comparison, where debt is fueled by more debt, will go on, till it does not.  It makes Madoff looks like an amateur.  Like it happened in country after country in Europe, it is going to happen here. When that will happen I do not know. But just be aware that the timer is ticking.  The result of this endless circular loop is the ever increasing balance sheet of the Fed. From $ 900 billion in Sept. 2008, today it stands at over $ 3 trillion, just to keep things stable where they were. On16rd May 2008, SPX was at 1425. On 16th May 2012 SPX was at 1304. So with all these trillions, they have lost only 120 points. Not bad Mr. Chairman. Now shall we sell Everything?

 I think by end of the year the Fed’s Balance Sheet will be near $ 4 trillion just to take back SPX near its all time high of 1565. Will they succeed in doing that? Difficult but not impossible because they seriously believe “deficit does not matter”.  At what point of time the balloon burst? I do not know. But I am ready to run. Three horsemen of Apocalypse are in view. Expiration of Bush Tax cut, expiration of extended unemployment benefit and debt ceiling issues forcing spending cuts. All three arriving at the same time in 2013.

I do not believe in the growth story. But I do not under-estimate the power of the central banks either. They can keep the ponzi going much longer than you and I can remain short in the market.  Now we have a correction on hand. Do you think they will let it run its course? More so, when a Presidential election is round the corner! You are kidding, right? So I am ready for a bounce anytime now. If the bounce comes just because of fancy words like growth and stability and strong resolve, then we will sell that bounce. When we see money actually coming in, we will buy that correction. Wash, rinse and repeat.

This is the end game. This is the black swan Taleb was talking about and it is very much out there. I can almost see it. By the way, be aware that there are different frames. The end may well be six to eight months away. If you have any questions, feel free to email me. Please re-tweet this post to someone who might like it and follow me in Twitter @ BBFinanceblog. Thank you for reading


  1. thanks for your straight words! what would you recommend putting your $$ in once the situation starts deteriorating?

    1. Thanks Ringo. It is still little early to decide where to put the money because these guys will possibly print non stop when the time comes. Best is to raise cash but you also have to be careful which bank you are using because I think we will have a huge banking crisis as well.
      The purpose of this post is to draw your attention to the danger. But it does not mean that it will happen tomorrow. So we should be flexible and not invest in things which are illiquid or momo stocks which will drop 50% over night.

  2. Hey... The last 2 articles (The Giant Ponzi Scheme and Someone Is Lying) were awesome reading... I know you're currently in cash and waiting (I'm in a similar position as I agree with your view on the markets)... If the markets are "made" to rally between July and Oct then are you expecting some sort of crash soon going in to June and early July (allowing Big Ben to react)??

    Starting now is it possible for you to share the approx time lines of how you see the market reacting over the next 3 - 5 months? :)

    1. It will be mere speculation to talk of a road map for the next 3-5 months. Times are more difficult than we care to appreciate. It is the end game and therefore the policy response from the world powers are also unprecedented. They would not hesitate to throw trillions in a flash and the market would rally now new high. So it is better to be in cash and take opportunities as they come on both sides.Just do not get married to an idea and be ready to be opportunistic.

  3. "Seneca effect"
    Interesting observation on drops and a good story, historically speaking it does also apply to markets.

    And peoples lives.
    “It occurs at first very slowly, then all at once.” -Hemingway

    thanks for a fantastic blog.

    all the best