Quantum Wealth Summary
- We have enjoyed the longest economic boom since the Second World War. This was fuelled by record-low interest rates and burgeoning asset prices.
- But the wild party is over. It’s now payback time. Inflationary pressure means that most central banks in the Western world are determined to hike rates aggressively.
- As the market flounders for direction, is going short on government bonds the way to hedge against fear?
- One inverse ETF for bonds is up over 29% this past year. This has benefited speculators with a contrarian outlook. Is there more juice left in the tank?
- As a bonus: we also reveal our Weekly Top 5 Quantum Trends. These are the most impactful global opportunities that we are currently watching this week.
There’s no hiding it: we’ve had one hell of a good time this past decade.
From 2009 to 2021, we experienced an unprecedented bull run.
Stocks. Crypto. Property. Everything was going up, up, up. And every man, woman, and child (along with their dog, cat, and goldfish) seemed to throw caution to the wind.
They engaged in full-blown greed. They borrowed and speculated. Then they borrowed and speculated some more.
Well, just look at what the Federal Reserve in America did to interest rates:
Source: Visual Capitalist
Well, it’s a given. Where America goes, the rest of the world follows. Two fear events — the Global Financial Crisis and Covid — encouraged central bankers to loosen monetary policy. Both times, they used it like a defibrillator to shock the global economy back to life. By all accounts, it worked. Maybe a bit too well:
- As interest rates fell back, the supply of cheap money surged. People happily took on more debt, and asset prices exploded accordingly.
- The situation reached its apex during the Covid pandemic.
- Here in New Zealand, we saw house prices skyrocket by over 40% in just two years — rising to over 10 times the country’s median income.
The mania was extraordinary. Most people couldn’t wait to jump on board this runaway freight train. But they didn’t pay attention to the fact that the engine was overheating — and a painful reckoning was due.
Say hello to inflation.
There are four key reasons why inflation is hitting us so hard now:
- Lingering supply chain issues due to Covid.
- An increase in household demand, post-lockdown.
- The presence of a strong labour market, post-lockdown.
- The uncertainties arising from the ongoing conflict in Ukraine.
There’s no easy fix for these issues. They are complex moving parts. But Jerome Powell, the chairman of the Federal Reserve, has declared that he will be uncompromising in his effort to fight inflation:
‘These lessons are guiding us as we use our tools to bring inflation down. We are taking forceful and rapid steps to moderate demand so that it comes into better alignment with supply, and to keep inflation expectations anchored. We will keep at it until we are confident the job is done.’
In other words, Powell and other central bankers will be relentless in pushing up interest rates. There’s a sense of urgency in delivering this bitter medicine now:
‘While higher interest rates, slower growth, and softer labor market conditions will bring down inflation, they will also bring some pain to households and businesses. These are the unfortunate costs of reducing inflation. But a failure to restore price stability would mean far greater pain.’
Now, of course, this isn’t necessarily the message that folks want to hear. Borrowers have had it so easy this past decade that a sudden tightening of the belt is bound to hurt.
This is why the market has been floundering for a sense of direction lately.
Stocks. Crypto. Property. Everything has been dipping. And every man, woman, and child (along with their dog, cat, and goldfish) seem to be gripped by existential terror now.
The cost of borrowing is escalating.
Debt will keep on getting more expensive.
But wait. Hold on. To be fair, this isn’t actually the end of the world. It’s just a return to normal. ‘Normalising’ interest rates after a period of being so low. If we put our emotions aside, this new policy sounds reasonable. Maybe even desirable.
Interestingly enough, one group of speculators are feeling optimistic about the way things are going. As interest rates climb, government bond yields will also climb, which means that government bond prices will tend to fall.
So these speculators have embraced a contrarian investment strategy, trying to take advantage of this bearish trend. They are going short and betting against government bond prices. Their instrument of choice is an inverse ETF that’s up over 29% this year.
Can these gains continue? Is there more juice left in the tank? Well, let’s find out…