In response to the pandemic in 2020, central banks around the world added large amounts of liquidity to the financial system in an attempt to soften the economic fall out of lockdowns and a slower economy. Additional credit at a time when the supply of goods and services was constrained led to high inflation and asset bubbles in the following years. The Federal Reserve is currently attempting to control inflation by tightening financial conditions. However, there is the risk and the precedent that they will over-tighten and cause collapse in areas of financial weakness.
The first of these seems to have been the collapse of the algorithmic stable UST and it’s corresponding protocol coin LUNA. While the idea may have only worked while LUNA was increasing in price, it shows that the conditions are amenable to trigger collapses in areas of weakness.
The Fed are likely only to reverse course if something breaks in US credit markets. While there is a large debt load, arguably things are worse in other countries, and the outsized stimulus of the US relative to others, may mean that something beaks outside of the mainstream US financial system before the Fed begin to ease again. The recent devalue of the RMB in what Jeff Snider (Alhambra Investments) calls Eurodollar Event #5 (see video), may show that this is already beginning to occur. The table below will attempt to identify and track potential areas of weakness and contagion:
| Asset | Risk | Description | Status |
|---|---|---|---|
| Crypto | Tether | Asset-Backed Stable Coin | Low of $0.92 |
| Crypto | Microstrategy | Margin call at Bitcoin $21K | BTC low of $25K |
| Forex | TRY | USD Quasi Peg | ≈16, previous high 17 |
| Forex | RMB | China Devaluation | Devalued to 6.8 |
| Forex | HKD | USD Range Peg (7.75-7.85) | HKMA Buying HKD |
| Forex | SAR | USD Peg (3.75) | Unchanged |
| Credit | China Property | Ghost Cities/Demographics | Property Developers Failing |
| Credit | NZ Property | Floating Rate Property Bubble | Triggered BIS Warnings |
| Credit | JGB Yields | 10Y capped at 25bp | Yen at 130 |
| Credit | US Corporates | US corporate debt bubble | High Yield Spreads 4.77 |
Crypto Leverage Update:
| Asset | Risk | Description | Status |
|---|---|---|---|
| Crypto | Nexo | DeFi lending | Liquidity Questioned |
| Crypto | Tether | Asset-Backed Stable Coin | Low of $0.92 |
| Crypto | Microstrategy | Margin call at Bitcoin $21K | BTC low of $25K |
