QT is short for…Quandary Today…do y ou stay or go?

Tuesday, 21 June 2022 — Cap Ferret, France

[8 min read]

Dear Reader,

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 responding 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

Dear Reader,

It was a bold move. Perhaps unhinged. But not completely crazy. Michael Saylor’s business, MicroStrategy, was getting dim…neither growing nor profitable. Bitcoin [BTC] — and the whole archipelago of cryptos and blockchain stars — were shining bright.

Solution: Use the public company, with its easily bought and sold shares, as a way for people to get in on the crypto boom.

Like so many other things in life, unlikely marriages…unprofitable businesses…unwinnable wars…it worked, until it didn’t work. And today, we peek at a few more of the naked swimmers. They’re beginning to crowd the beach, a grotesque sight.

‘Crypto contagion’ it’s called. One failure leads to many failures. It’s like the bank runs of yesteryear; we have a personal grudge against them. Our grandfather put the family fortune in a Baltimore bank. In the early 1930s, banks were failing. Prudently, he wanted to take at least some of his money out. But he was a director of the bank. How would it look if he took out his money? There would be a run…and the bank might fail.

As it turned out, there was a run anyway. Our grandfather lost everything. And your editor grew up as child labour on a tobacco farm.

No bid

Runs are contagious. People lose money in one bank. Other people fear their money could be in jeopardy, too. Another run begins.

Today, the runs have already begun — in the crypto, tech, blockchain sector. A lot of people thought they had a lot of money. Now, they’re discovering that they have less than they thought…and maybe none at all. Their cryptos go ‘no bid’. Their zombie companies disappear. Their tech billions are here today…but gone tomorrow.

They stop spending. They stop investing. They start looking at the right side of the menu again. And perhaps looking for a new job.

Let’s recall Chris Mayer’s presentation in Ireland last week.

Chris doesn’t buy stocks. He buys companies. His investors go swimming in three-piece suits.

MicroStrategy is a company that Chris wouldn’t touch. In the fourth quarter of 2012, the company reported actual revenue of US$164 million. In the last quarter of last year, it reported revenue of US$134 million, with a loss of US$10 a share.

But the share price was a whole different story. In 2012, you could buy the stock for US$100. By the autumn of 2021, the price had gone to more than US$700. That was when Saylor was buying bitcoin…and the price of bitcoin was reaching more than $50,000.

The micro-strategy worked…for a while. Bitcoin is now at less than US$21,000, considerably below what is believed to be Saylor’s average purchase price — US$30,000.

‘Buying MicroStrategy’, Chris might say, ‘is not investing. It’s gambling on the price of bitcoin’.

Whale tails

Of course, MicroStrategy was not the only casino in town…and Saylor was not the only whale in it. There was also Alex Mashinsky at Celsius Networks.

His idea was also fairly simple. Cryptos were going up. Gamblers wanted to speculate on them…and with them. Why not make it easier for them?

Matt Levine describes the business model:

‘…the basic idea of Celsius is that you can deposit your cryptocurrencies with Celsius — essentially, lend them to Celsius — and it will pay you a pretty high interest rate, or an even higher interest rate if you’ll accept payment in its own CEL token. Or you can borrow cryptocurrencies from Celsius and pay it interest.’

How was it possible for Celsius to pay such a high rate of interest — up to 17%? Or, to put it another way…if the company could earn so much on borrowed (crypto) money, why bother with the hassle of depositors and creditors? Why not just borrow money on the junk bond market — at 3% interest — and pocket the difference?

Whatever Celsius was paying its depositors it wasn’t ‘interest’. Interest presumes credit checks and collection services. It bespeaks solidity, reliability…money on deposit that can be withdrawn…borrowers with business plans, collateral, and decent loan-to-income ratios.

The courts will sort out what Mashinsky was up to…and whether calling it ‘interest’ was a fraud on depositors…but for our purpose, we merely note these guys needed some Speedos.

The way of the world

As the crypto currencies lost value, speculators became worried that Celsius would be unable to return depositors’ money. But Mashinsky reassured them last week.

‘Do you even know one person who has a problem withdrawing from Celsius?’ he asked.

Then, the company explained that it was ‘unfortunate’ that a few people were spreading ‘misinformation’:

‘We at Celsius are online 24–7. We’re working around the clock to continue to serve our community. Celsius has one of the best risk management teams in the world. Our security team and infrastructure is second to none. We have made it through crypto downturns before (this is our fourth!). Celsius is prepared.’

Whenever a company says it is ‘serving the community’, watch out. It’s a scam; we want companies that make money, not those that try to make the world a better place. Celsius continued:

‘We have a fortress balance sheet and exceed our regulatory requirements for capital and liquidity, as you can tell from our quarterly financial statements.’

Then, on Sunday evening came a further announcement. Bloomberg reported:

‘Celsius Network Ltd., one of the biggest lenders in crypto and a key player in the world of decentralized finance, said late Sunday that it was pausing withdrawals, swaps and transfers following weeks of speculation over its ability to make good on the outsize returns it offered on certain of its products, including yields as high as 17%. The move effectively halted a platform with registered entities across the globe and billions of dollars’ worth of digital coins under management, accelerating a selloff in the broader market that was already in progress on concern over prospects for tightening monetary policy ahead of a Federal Reserve meeting this week.’

Well, there you have it. The way of the world. It worked…until it didn’t.

Regards,

Bill Bonner,
For The Daily Reckoning Australia