Trish: Too Much Leverage …Thanks to Government’s Free Money… Sparks Major Selloff

The Federal Reserve’s cheap money, and government handouts, may be catching up with us.

The Dow traded down 500 points Tuesday morning as investors contemplated whether valuations were getting too high.

The newest Bitcoin meltdown has wiped out about $600 million in crypto assets and, although I personally see cryptos as a critical part of the world’s financial future, there’s growing concern that cryptos are indicative of too much leverage in the system.

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Bitcoin fell to $35,807 on Wednesday morning. The currency has lost 40% of its value since the record high of $64,000 in February which means it’s effectively back to where it was before Tesla’s entry into the space.

That’s okay. I liked bitcoin before Elon Musk, and I’ll continue to like it with or without him in the future. Whether it’s $1,000 or $100,000 a coin — it represents part of the world’s financial future. And, while I have great admiration for Elon Musk, I could do without the constant tweeting about cryptos and the whip lash it ensues.

But, the crypto meltdown is attention worthy. It seems the bitcoin selloff is carrying over into other parts of the crypto market making it extremely volatile. Dogecoin has lost 32% of its value as Ether has plummeted 42%.

China Contributing to Crypto Sell-Off

Part of the reason for the downside in cryptos stems from a Bank of China announcement reiterating its stance that financial institutions should not deal in cryptocurrencies.

Cryptocurrencies, the BoC stated, are not real currencies and should not be used as currencies in the market.

Some cryptocurrency experts claim that there’s nothing new in this announcement and that the BoC policy was already priced in. I’d agree with them.

And I’d add that we should be clear about what this is really about; China is clearing the way for its own digital currency, the digital yuan, and trying to remove all competition.

Meanwhile, I don’t think China’s efforts in the digital space will ultimately be worthy of investors time and attention. Why would anyone trust the Chinese government with their digital wallet? And, far from helping users protect the anonymity of their transactions, the digital yuan will be a perfect instrument of totalitarian control, potentially including features such as expiry dates to “stimulate” spending. Wow, the Keynesians will love this.

Leverage Fueled Cryptos and Could Damage the Markets as a Whole

But, it’s not just the China news contributing to the overall selloff in cryptos and growing concerns about the markets as a whole… it’s the amount of leverage in the system.

The Fed, through it’s cheap money, has helped create what many believe to be a bubble in crypto assets and other instruments. My friend, the investor, physicist, mathematician, former central banker in Norway, lawyer (yes, just your all-around genius!) Neil Grossman (author of the recent column “The Fed is Dr. Evil”) sent me his thoughts this morning, writing;

“You wonder how much ‘leverage’ has been built up using appreciation of crypto to buy other things… think subprime, or Long Term Capital Management. Bitcoin is down nearly 50%, which probably equates across the crypto universe to 3/4 of a trillion of more in lost value. But, even if it is only $500 billion, it is a lot.”


Neil continues, writing,

“How many overpriced homes, cars, art, NFTs, etc have been purchased with the riches of ether that somehow came, and how much leverage was added to buy more?”

Something to think about… because the current trajectory with mass inflation and free money is increasingly unsustainable.

Markets Drop Due to Inflation Fears, Pandemic Concerns

The Fed’s “stimulus” measures have indeed helped to raise prices – just look at the terrifyingly high consumer and produce price reports over the last three months.

Investors worry the Fed will eventually have no choice but to taper, and so inflation fears are contributing to negative sentiment in the market. together with a spike in global coronavirus cases.

As a result, the S&P 500 is off 1.5%, the Nasdaq down % and the Dow Jones Industrial Average futures fell 1.3% in Tuesday’s early trading. European and Asian stocks both fell as well.

Meanwhile, the economic outlook also affected oil. Brent crude fell by 1.5% to $68 a barrel.

La Niña Threatens Coffee, Sugar, & Oranges Supply

Even with growing market fears, inflation pressures are still there, especially as more and more commodities face supply issues. From microchips to lumber to chicken – commodities are soaring.

The latest that could be hit are Brazil food exports due to the cold weather pattern La Niña. Brazil is facing the worse drought in 20 years during what is supposed to be a rainy season.

Farmers fear they will run out of water for irrigation, causing another supply shortage and increased prices.

Chip Shortage to Lead to Food Shortage? (And More Inflation)

We knew that the microchip shortage would have wide-ranging consequences, but few have imagined that it could seriously affect the food supply.

That is exactly what’s going to happen in the next couple of years, according to Hoosier Ag Today.

The U.S. agricultural sector is highly mechanized, and farm machinery needs microchips to operate. And due to the chip shortage, the agriculture sector can’t meet rising demand. This will inevitably lead to higher prices. Plan accordingly!

Treasuries Up Three Points, Gold Dips

10-year Treasury yields are up by three basis points to 1.66%. The Dollar Spot Index rose 0.2%.

Gold fell 0.5% to $1,861 an ounce.

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