QT Is Short for…Quandary Today…Do You Stay or Go?

Are you hearing reassuring statements from your financial planner, like:

‘Hang in there. It’s all about TIME IN not TIMING the market.’
‘We’ve been through this before. Things will turn around.’

Talk about the blind leading the blind.

Joe Kennedy Snr (JFK’s father) famously cashed out his shares before the 1929 crash…timing the market to perfection. Had he listened to the ‘shoeshine boys’ and opted for the TIME IN strategy, he’d have lost nearly 90% of his fortune.

With the BNPL (Buy Now, Pay Later) industry teetering on the edge of extinction, I’m guessing the co-founders of Afterpay are also very, very happy with the TIMING of their sale:

‘Nov 4 [2021] (Reuters) — Square Inc (SQ.N) shareholders have approved the issuance of new shares for the U.S. company’s [US] $29 billion purchase of Afterpay Ltd (APT.AX), bringing Australia and the buy now, pay later sector’s largest buyout a step closer to fruition.’

The quandary investors face today is do they stay (TIME IN) or go (TIMING)?

Will things turn around…a repeat of what we’ve seen in recent years?

Don’t bet on it…and folks, ‘bet’ is the operative word.

The decisions you make in the very near term are, in my opinion, destined to have a profound effect on your financial future.

QT (quantitative tightening) is the opposite of QE (Quantitative Easing).

If you accept QE was responsible for pumping up the everything bubble, then, logically, QT must deflate the everything bubble.

Without central banks going into full-on QE mode again, how is it possible to stage (yet another) rapid turnaround in fortunes?

Anyone who thinks ‘they’ve seen this sort of action before’ is deluding themselves.

No one (and I mean, NO ONE) has been through what’s coming.

How can I be so sure?

This is the GREATEST asset bubble…EVER.

It’s a multi-asset (shares, property, bonds, cryptos, private equity, etc.) and multi-generational (boomers, Gen X, and millennials) bubble.
Everyone (well, almost everyone) is into everything.

The Roaring Twenties was a single asset (Wall Street), single generation bubble…and look at the damage that period of excessive exuberance created.

The GFC, compared with what’s to come, was nothing more than a dress rehearsal.

We ain’t seen anything like this before.

Using patterns of behaviour from the last decade as a guide on navigating this bust is about as useful as a 1940’s UBD Sydney street directory.

How people behaved during the GREATEST boom in history is not how they’re going to react as bad news is followed by even worse news and losses mount up.

Greed turns to fear turns to panic…and there’s a lot to be panicked about.

The March 2021 issue of The Gowdie Letter alerted readers to the perils of too much QE and how this episode is reckless in economic management would end:

‘QE…the cure for all economic ills

‘Many a true word is said in jest:

‘Ever since Dr Greenspan took charge of the Fed dispensary; QE has been the go-to elixir for whatever ails the economy.

‘Like all those who become addicted to prescription drugs, it began innocently enough.

‘After the 1987 crash, Greenspan prescribed a very modest dose of QE…with no repeat scripts. Wall Street and the economy perked up.

‘This was the thin edge of the QE addiction wedge.

‘Every crisis since then has required increased quantities of QE to be dispensed.

‘Wall Street is now heavily addicted to the stuff…the mere hint of dialling back the dosage results in a major hissy fit.

‘The Fed’s artificial stimulant has the US market on an upper without historical precedent.

‘But you know what follows an upper don’t you? Yep…the downer.

‘There are those who genuinely believe this three-decade-long addiction to QE won’t result in some pretty nasty side-effects and violent withdrawal symptoms

‘They’re wrong…as proven by the “Tech Wreck” and GFC.

‘This market is now in the manic phase of its upper.

‘The options market is off the charts…Small Trader Call Options (betting on the market going up) — in both contracts issued and premiums paid — dwarf the two previous bubbles:

‘Then there’s the Special Purpose Acquisition Companies (SPACs).

‘Here’s the official definition from Investopedia:

“A special purpose acquisition company (SPAC) is a company with no commercial operations that is formed strictly to raise capital through an initial public offering (IPO) for the purpose of acquiring an existing company. Also known as ‘blank check [cheque] companies’, SPACs have been around for decades.”

‘Unofficially, SPACs are an opportunistic grab for money by “fund managers” with questionable morals, to capitalise on investor greed.

‘Investors hand over a “blank cheque” to these “managers” to do with it what they will and according to research from Renaissance Capital, they don’t do very well:

“Of the 313 SPACs IPOs since the start of 2015, 93 have completed mergers and taken a company public. Of these, the common shares have delivered an average loss of -9.6% and a median return of -29.1%, compared to the average aftermarket return of 47.1% for traditional IPOs since 2015. Only 29 of the SPACS in this group (31.1%) had positive returns as of Wednesday’s close.”

‘When I say “don’t do very well”, I meant for the investor. The managers, however, make off like bandits. They earn fees upon fees upon fees.

‘Why do people fall for the SPAC scam?

‘In a word…greed.

‘This unethical and (ultimately) capital destructive investment product thrives on greed…the greater the greed, the more this rubbish is peddled to the investing public.

‘However, as the next chart shows, when fear (or caution) exists, this product doesn’t see daylight:

‘This type of manic investor activity is a direct result of popping way too many QE pills on a daily basis.

‘The Fed’s abuse of QE has put it in a ‘damned if they do and damned if they don’t’ predicament.

‘If the Fed does succeed in unleashing inflation and stimulating economic growth, then interest rates must surely rise.

‘Rising rates + Rising inflation = An easing back on QE

‘Less QE = Falling share prices

‘Falling share prices = Recession/Depression (as the loss of wealth effect works its way through the economy)

‘Recession/Depression = More QE

‘OR

‘The Fed maintains the current QE dose.

‘Leading to even more risk taking and speculation, which results in market forces (eventually prevailing, and) taking share prices lower.

‘Either way, the US market is headed for a fall.

‘But how far will it fall?

‘There are basically three schools of thought (with degrees of variance in each grouping).

‘Using the Bell Curve theory, my guess (based on reader emails, research, and industry commentary), is the majority of people are in “the Fed will cushion the fall” group:

‘No prize for guessing where I sit on the curve.

‘My school of thought has been shaped from life experiences, history…’

This bear is stalking the easy prey

As we’re now seeing, the Fed was forced into easing up on QE…and asset prices are tresponding accordingly…deflating.

And the deflation in SPACs has been anything but a soft landing.

The Defiance Next Gen SPAC Derived ETF [NYSEARCA:SPAK] makes a sales pitch that sounds awfully familiar…hmmm, isn’t this the same hip language of the crypto crowd?

Here’s how all that ‘ambition’ and ‘innovation’ has performed since March 2021…down 56%…and there’s more to go:

The key to why the future is not going to be anything like the recent past is in the SPAC ETF sales pitch…next-generation investor.

A generation of investors is going to be blown to smithereens by SPACs, meme stocks, IPOs, loss-making tech stocks and, yes, you knew it was coming…cryptos and NFTs.

This BEAR market is just getting started.
For now, it’s stalking the easy prey.

The overhyped; the ‘never should have been financed’ into existence in the first place; the frauds and pyramid schemes are its early quarry…but it’s not going to stop there.

Due to its egotistical incompetence, the Fed is between the Devil and the deep blue sea.

Stop QT and start QE? What happens to inflation if they do that…especially with Biden facing mid-terms in a few months?

Keep going with QT? Raising debt servicing cost (not good for the Zombies) and withdrawing liquidity at precisely the time when nervous (but not yet panicked) investors are seriously considering cashing up.

Those investors who don’t act on the quandary they have today, will have another QT…a quandary tomorrow…what are we going to cut back on to fund our retirement?

Regards,

Vern Gowdie,
Editor, The Daily Reckoning Australia