Nov. 11, 2022

The Crypto Crash

What is happening in the Crypto Markets is simply stunning. Bitcoin, the most widely traded of all the Crypto, had declined by an incredible 96% in just the last six months. It is one of the most significant financial crashes of all time.

It would be easy to dismiss this as simply a fad investment gone wrong. But that would be a mistake. Cryptos are the proverbial "canary in the coal mine," to use a favorite expression of Wall Street.

Just like the miner's canary, which warned that conditions in the mine were unsafe, Cryptos are a harbinger of the future, indicating that something is very wrong in the Global Financial Markets. And like the tiny canary, Cryptos are likely the most vulnerable of investment vehicles. So this recent crash is sending a clear message that things have turned dire.

This Crash is all very reminiscent of the Great Financial Crisis of 2008. The mortgage industry first felt the impending heat of a significant market decline. Major mortgage brokers, like Countrywide Credit, crashed back then. But many ignored their warning, feeling that this event was isolated and would never affect traditional investments such as stocks and bonds. They were wrong.

The contagion from the mortgage-backed markets eventually spread to the entire financial arena. Not because the other markets, traditional stocks, and bonds, had any exposure to mortgages but because the same disease that plagued mortgages also plagued stocks and bonds.

And that disease is leverage.

Our financial world rests upon a literal mountain of debt. Current Household Debt is $4.6 Trillion, Corporate Debt stands at $12.5 Trillion, while Federal Government Debt reached $30.5 Trillion.

When times are good, these levels of debt may be no problem. Everything will be fine if the borrowers can make their interest payments and their collateral for the loan remains solid.

The Federal Government does not have a credit issue; its collateral is the entire country. And its cash flow derives from its unlimited ability to tax you and me. There are other issues with Government debt, but we'll address those in another article.

On the other hand, corporate and personal debt can have significant problems if they need more cash flow to make the debt payments or their collateral declines. In either case, there is the potential for default on their loans.

So, let's examine how this decline in the Crypto Markets may infect the financial system. Most who hold Crypto Currencies consider it money, cash, available to make purchases and invest. I am not aware of anyone using Crypto as collateral. That is, take a loan out against the Crypto position. But I'm sure everyone would include their Crypto holdings in calculating their current net worth.

And why not? Cryptos are an investment like any other.

As Cryptos increased in price, something called the "Wealth Effect" occurred. People, justifiable, felt that they were worth more, that they could spend more and invest more, based on their appreciating Crypto holdings.

Today, the reverse of that is happening. Let's call it the poverty effect. Crypto holders realize they are worth a lot less today than in April. Naturally, they cut back on their spending and perhaps stop investing. If things get tight enough, they may withdraw financially.

Remember that these Crypto investors don't live in a vacuum. Many carry other obligations, such as credit cards, mortgages, and other loans. Those bills still have to be paid. And if they're using Crypto to pay for those expenses, today, they must sell ten times the Bitcoin, for instance, to make the same house payment as they needed to sell in April.

Selling begets selling.

Undoubtedly, a sizable portion of the investment public invests in Cryptos. If these people withdraw from investing, it is bound to impact the financial markets significantly.

So here's today's message. The Crypto Crash may seem far away and removed. But it can spread like wildfire and affect us all. Just because we don't own Crypto, we should not feel immune from its effects.

Our task is to make our investments as "fireproof" as possible.

Econ Briefs


We've had two good news days in a row. Yesterday it was the very positive Inflation Results from the US. Today it appears that China may be relaxing its Covid Policies.

Yesterday, you'll recall the Consumer Price Index at only 7.7%, the lowest monthly rate. And an indication to the market that we may have turned the corner on inflation. A giant market rally ensued, the Dow up 1,200 points, more than 3%, the S&P up more than 5%, and the winner on the day, NASDAQ, 5.5%. Bond also rallied, and even the beleaguered Crypto markets rallied, with all the major Crypto Currencies up more than a percent.

This morning the good times look to continue, as China announced that it is relaxing some of its more strict lock-down policies. Particularly its traveler restrictions, which will have especially pleased business people. Admittedly, these changes are incremental, but China observers are optimistic that this will become a trend.

It will be a real boon to international trade if China returns online. And we see that reflected in Industrial Commodities around the world this morning. Currently, we're seeing West Texas Intermediate oil up 3%, Copper up 2%, Lumber up 3%, and Nickel up 5%. According to Credit Suisse, analysts estimate that if China came online, it would mean an additional demand of half a million barrels of oil per day. That would be excellent news for oil-producing states such as Russia and Saudi Arabia.

On the calendar this morning is the Michigan Survey of Consumer Sentiment. Wall Street expects this measure of the overall economy to show little change.

Reporting later this afternoon will be Baker Hughes's latest count on the number of active oil wells in the country. Last week they said 613 rigs were operating, about a third fewer than our peak oil year of 2019.