Forget QE. All hail QT.
Those acronyms stand for “Quantitative Easing” and “Quantitative Tightening.” Or in plain English, easier money versus tighter money. And QT appears to be gaining an even stronger upper hand in the fight I first flagged a month ago.
As a refresher, central banks in developed markets like the U.S., Europe and Japan have been printing money like mad. We all know that, and that it hasn’t done squat for the real economy. But the ocean of cheap money has inflated asset prices, fueled a massive stock buyback boom, and led to the greatest junk bond bubble in world history.
More recently, though, the easing from developed markets has been more than offset by tightening from emerging markets. Countries like China and Saudi Arabia have faced massive currency devaluations, economic weakness, higher inflation, and rising government expenses. Ditto for other Petrodollar and commodity-sensitive nations in Asia, South America and the Middle East.
So the only way to combat those negative forces has been for those countries to spend hundreds of billions of dollars of currency reserves they accumulated during the good times.
We just learned this week that China torched another $43.3 billion in reserves in September, bringing its third-quarter reserve drain to a whopping $180 billion. That’s the biggest decline in history, and it left China’s reserve hoard at its lowest level since July 2013.
Saudi Arabia also continues to bleed money. Its reserve pile shrank several more billion dollars in August, falling to $654.5 billion. That was the lowest level since February 2013.
If you look at a Dow Jones Industrial Average chart, you’ll see the index was going for around 15,000 the last time Chinese reserves were this low. The last time Saudi reserves were this low, the Dow went for around 14,000. That’s far below where stocks were trading this week obviously.
Now, nothing is guaranteed in the markets. But when you combine the technical breakdowns in a wide swath of stocks and sectors … with the bearish action in the junk bond and currency markets … AND you layer this QT news on top of that, you can see why I remain very concerned about the outlook for the major averages.
My advice: Keep playing defense. Use big rallies to lighten up on stock exposure, or add put options and inverse ETFs for the next leg down. That’s what I’ve been doing in my Interest Rate Speculator service, and the strategy paid off this summer with major profit opportunities.
Until next time,