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Market Lab Report - Premarket Pulse 3/4/19 - The QE Inflationary Debt Spiral - QEFinity?

by Dr. Chris Kacher


The market made lows in late December during one of the only Christmas crashes of all time, with major averages dipping for a couple of days into bear market territory with the major averages off more than -20%. But then a bounce, highly questionable at first due to the still hawkishness of the U.S. Federal Reserve, began. Fed Chair Powell then told the market what it wanted to hear, and other central banks have echoed similar sentiments, essentially that QE will come to the rescue should economies falter. As a consequence, the uptrend has been firmly in place with the markets banking on central banks including the U.S. Federal Reserve, the Bank of England, the ECB, and the Bank of Japan to continue to print should things go economically pear shaped. This calmed fears spurred by the latest GDP reports out of major countries such as Germany which is nearing recession, and Italy which is already in recession. It is therefore unlikely the U.S. Federal Reserve will be able to unwind its balance sheet by any measure but instead may have to go the other direction once again. This will only serve to increase debt interest payments that will grow with increasing national debt. This could potentially wind up as a viciously perpetual money printing spiral with little end in sight. So while the uptrend remains intact, various headwinds and digestion of sharp gains since the end of December can create shorting opportunities as nothing goes up in a straight line.

How Did We Get Here?

QE exists because of the structure of political systems. Voting across various jurisdictions in most free countries occurs typically every 2 to 6 years, so those in power want the voters to be happy in the short run out to a few years to secure reelection, but this often makes things worse for all in the long run. Thus QE is a temporary bandage that stems the bleeding, provides an infusion, and makes the patient feel better for the time being. 

A number of legendary investors have chimed in their dissent with what central banks around the world have been doing since the financial collapse of 2008. 

Bill Gross: “…unprecedented bond-buying programmes pursued by central banks after the global financial crisis had created a ‘supernova that will explode one day’.”

Ray Dalio: https://www.businessinsider.com/ray-dalio-bridgewater-debt-crisis-downturn-coming-about-two-years-2018-9 

Jim Rogers has forewarned of a crash that will be “the biggest in my lifetime” (he is 76): https://www.nytimes.com/2018/12/10/style/2019-financial-crisis.html 

Paul Tudor Jones has warned that “some really scary moments” in the swelling corporate debt market [due to years of QE] could precipitate another financial crisis: https://www.ft.com/content/d48d3b10-e8f7-11e8-885c-e64da4c0f981 

Stanley Druckenmiller: https://www.sovereignman.com/trends/billionaire-druckenmiller-can-we-try-capitalism-real-capitalism-give-it-a-chance-23982/ 

While some may think these guys are wrong about their views on QE, and that QE was actually necessary, this is only a partially correct assessment. I’m in agreement that a number of bubbles have been created as a consequence of QE, but certain few key factors that will be discussed in the next section that can provide a major counterbalance to all this money printing/bond buying/QE/call it what you will are being overlooked. 

But regardless of any counterbalances at hand, if countries such as Sweden in the early 1990s are any example, QE and central banks have gone the wrong direction since QE was launched in late 2008. Economic austerity works but it doesn’t win votes. Sweden went through a period of austerity or roughly 2 years of hard living to correct their fiscal imbalances. They did not rescue their zombie banks or businesses on the basis of being “too big to fail” as such is a mirage. Here is an excellent piece on austerity vs. the Keynesian stimulative approach: https://mises.org/library/real-austerity

Not All Is Lost

But despite the wrongheaded approach of printing fiat which has only kicked the can down the road a bit longer, making everything seem “alright”, exponential growth technologies carry a massively positive impact. They start small and insignificant, but the exponential effect eventually takes over. Just as with duckweed in pond ecosystems that doubles each day, the first 10 days go unnoticed. But by day 30, the amount of duckweed is pronounced. Ed Seykota in Govopoly has equated this to overreaching government regulation which is strangling businesses across the globe. 

But exponential growth technologies are on the other side of the spectrum as they can help push productivity to new heights thus act as a counterbalance against government bureaucracy. One could therefore argue that such gives the Fed and other central banks headroom to print since such technologies help the bottom line. 

The internet in all its permutations, blockchain/crypto, virtual reality, artificial intelligence, and other S-curve technologies are and will continue to make a bigger difference going forward as we move up the steeper part of the parabolic curve. 

Further, while the current debt to GDP seems insurmountable and ever-growing, the debt-to-GDP post World War II was even greater than it is today. But the U.S. was able to grow out of such heavy debt burdens through advancements in technology. That said, global interest rate levels were higher overall back then than they are today, so there was more fuel in the interest rate tank at that time. 

Of course, should tech save the day once again, historians, mainstream media, and others can simply say, “See? QE saved the day.”  The more complex a circumstance, the easier it is to misinterpret events. Furthermore, complexities to a situation enable bad actors to create false flag events to support their own narratives as we have seen recently with Jussie Smollett being charged with faking an attack on himself. But the Smollett event is just the ice cube on the iceberg.


We send out a spreadsheet of all the names added since the bounce. Some comments:

EXEL- it had an undercut & rally back up through its 50-dma. Those who bought and held or bought then sold could have either added to or renewed their position. 

DXCM- gapped higher then had a hard reversal on volume after a weak earnings report. Those who bought when we first mentioned the stock on January 7 were sitting on a nice profit. But on earnings day, expect volatility, so using the 620 5-minute bar chart can be helpful in helping one lock in profits should things turn sour.

The situation between the U.S. and China may be coming to a positive resolution. Chinese stocks are well up off their lows. HUYA has shot about 20% higher from when we sent out a report on February 19 observing its pocket pivot. MOMO was included in the same report and has also moved higher. Partial profit taking can be wise due to potential volatility in the offing as the situation is still in flux to some extent thus heavily news driven. 

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