The Other Side Of The Bubble

What goes up, can go down.

That seems to be what is happening in the financial world these days.

The front side of the bubble came as the Federal Reserve pumped trillions of dollars into financial markets to ward off the disruptions coming from the spread of the Covid-19 pandemic and the following recession.

Billions of dollars spread into all areas of the financial sector, pumping up asset prices, underwriting new startups and innovative companies, and generating a wealth of new opportunities for those who had access to the Fed’s funds to make millions, even billions, of dollars.

Then late last year it became obvious that the Federal Reserve was moving monetary policy to the other side. Whereas it had been operating according to the principles of quantitative easing, where the Fed bought billions of dollars of securities every month, the Fed now moved to the other side of this kind of program and began to let billions of dollars of securities mature out of its portfolio without being replaced. This is referred to as a policy of quantitative tightening.

And, money began to flow out of these financial markets as interest rates began to steadily rise.

Things happened.

The first of the markets to really experience the deflation taking place in the bubble was the cryptocurrency market.

The price of bitcoin went from over $68,000 in early November 2021, to below $20,000 in late June 2022, and is around $16,000 from early November 2022 and on.

The big corporate crash in this space came to TFX, a cryptocurrency market maker, that failing in in November 2022.

Others have also gone under and many more are expected to fail.

Now, we have a new area of collapse.

Where Are The SPACs Going?

The next big collapse is now being registered in the area of Special Purpose Acquisition Companies.

Now we hear that the creators of these blank-check companies:

“are rushing to liquidate their creations before the end of the year, marking the ugly conclusion to the SPAC frenzy.”

Roughly 70 special purpose acquisition companies have liquidated and returned money to investors since the start of December. That is more than the total number of SPAC liquidations in the market’s history, according to data provider SPAC Research. SPAC creators have lost more than $600 billion on liquidations this month and more than $1.1 billion this year.”

“Many more SPACs have said they would wind down in the coming weeks.”

John Chachas, co-managing principal at Methuselah Advisors, a boutique investment bank who has advised many desperate to find deals:

“Something people thought was going to be a fantastic vehicle for creating wealth is looking increasingly like a poisoned chalice.”

Here is the performance chart.

Quite a shock!!!

What about companies that went public? How are they doing?

Tracking these companies showed that these companies are down more than 70 percent this year.

Dealogic data show that roughly 300 companies have gone public through SPACs in the last two years.

Remaining? Nearly 400 SPACs holding about $100 billion still haven’t found deals.

Michael Ohlrogge, a New York University law school professor, states that if roughly 200 of the SPACs liquidated, the losses for creators would be well above $2 billion.

And, about 150 additional SPACs, holding about $25 billion, have reached merger agreements, but haven’t closed on them.

The criticism of this particular vehicle is now growing exponentially.

SPACs are inefficient, for one.

And, SPACs depend on a lot of money being available, seeking a quick, substantial return.

The Federal Reserve provided this last component, but now they are going away.

And, it looks as if SPACs are going away.

No “POP”

There will be more examples of the “bubble” shrinking.

However, the big fear is that the “bubble” might “pop”!

This is where the possibility of a catastrophe comes into play.

It appears at this time that the asset bubble created by the Federal Reserve is shrinking…not popping.

This is, of course, what the Fed hopes will be the case.

If the bubble shrinks, then ordinary business can continue and there will be no need to react to the “popping” bubble to keep the resulting contagion under control in hopes of minimizing the aftereffects of the bursting bubble.

This, of course, is the ultimate fear.

But, so far, so good.

The problem the Fed faces right now, however, is that there are many more financial markets out there that are in danger. Cryptocurrencies and SPACs are not the only markets that are on or near the edge of collapse.

This is what must be looked out for.

The Federal Reserve, right now, is attempting to fight inflation with its efforts of quantitative tightening.

But, bringing inflation back to a 2.0 percent goal will take some time, and the Fed will need to remove a substantial amount of securities from its securities portfolio.

This process of reducing the Fed’s portfolio could go into 2024.

The Federal Reserve, since early in the pandemic, increased its securities portfolio by around $4.7 trillion, before it moved into the quantitative tightening.

A question still remains open about whether or not the Fed’s current program of quantitative tightening will be enough to reduce the securities sufficiently to return the inflation rate to the Fed’s target goal of 2.0 percent.

There is a real concern that the Fed might never get there.

If there is a major economic or financial market disruption, the Federal Reserve might have to “back off” from its program of quantitative tightening.

If it does, then what happens next?

Of course, if the bubble “pops” then the Fed will reverse itself in order to “save” the economy. No one wants this to happen.

So, we are hoping that the bubble will not “pop.”

But, major amounts of money have been pumped into many financial spaces like cryptocurrency and SPAC investment. And, many of these areas are in very sensitive territories right now.

The other side of the bubble is a very treacherous space.