Anatomy of a debt Ponzi collapse

Because the federal reserve conned the market into accepting low interest rates on US debt, dying financial institutions have been forced to look elsewhere for yield.  It's simple really.  Assume you are a fund manager for a big insurance company, CALPERS or some other big institution whose job it is to fund annuities and pensions which contain contractually required rates of growth (usually around 8%).   Let's say that a lot of these promises were made to US boomers while interest rates on treasuries were 6,7,8%.  Back then it would have seemed pretty easy to believe that these funds could meet their commitments. 

Fast forward to the past several years when interest rates on "safe" debt begins to yield approximately zero percent.  How can the fund manager continue to keep his promises (that is, how can he continue to keep his lucrative job...)?  He either goes forward to his investors and says, "guys, I can get you the expected yield but in doing so the risk will begin to climb exponentially".  Or, he can just say nothing because he knows if he makes scary but true statements then he will be replaced with someone who has no morals anyhow and so into the Ponzi he plods with everyone's retirement money in tow.

And so now here we are.  Instead of being loaded up with safer but yield-free debt, the insti manager is loaded up with junk debt.  Not because it was a smart idea but rather because it was the only way to keep his job for a few more years.  The investors under his care have now assumed a ridiculous amount of risk even though they don't understand it.  They still think that money can work for you when in fact only people can work and all future new value can only come from the labor of man.

In essence, like any other Ponzi scheme, much of the principal under management is already lost but the accounting hasn't had to be done yet.  Why is it lost?  Because everyone is piled into the junk and not everyone can get out whole.  We know they are all piled in because the demand for junk has pushed its yields to record lows relative to "safe" treasury debt.  That is what the spreads chart below is telling us.  It charts the difference in interest rates between safer debt like treasuries and junk debt.  You can see how fast people can panic out of junk debt in the 2008 credit crash.  The chart is now telling us that an inclining double bottom is in place and that junk debt is ready to crash in value sending its associated interest rates skyrocketing relative to treasury interest rates.  Another financial panic is built into this chart.

Like any Ponzi, those who get out first can get out whole.  That is why the collapse must happen suddenly: there is not enough value in the system for everyone to get out whole!  So now we have a bunch of institutions, big ones, folks, whose assets are going to plunge in value because the risk built into them will come home to roost.

If UVXY has not gone to a lower low despite the DJIA and S+P hitting a higher high, the above chart is the reason why.  The smart money is beginning to care about insurance again (put options).  One more thing: forget the notion that the US fed can do anything to prevent this!  Their actions are what assure that this will occur!  Don't count on the fox to save the chickens.  Count on the fox to use the coming crisis as a reason to take over major retirement funds and convert them to "safe" US debt so that the government can then inflate away the value.