Juggling Dynamite

The crypto space has seen one of history’s most giant and iconic financial bubbles. The circle of leverage on leverage, interconnectedness and mental illness are all classic, as are the predictable aftermath of missing and frozen funds with fleeing founders and a daisy bankruptcy chain.

Cryptocurrency prices have crashed in the last few months as the industry enters a new “crypto winter.” Crypto has seen this before, most recently in 2018. But things are different this time. CNBC’s Arjun Kharpal reports on the factors that have driven the price plunge in the most recent crypto cycle. Here is a direct video link.

Quote of the year: “One thing we can say is that this cycle has been characterized by poor risk management and some unsustainable business models.”  And how!

Read more about the madness in The ‘crypto winter’ is different from the last; here’s why.

Understanding the link between ultra-loose financial conditions over the past few years and the tech sector boom, jobs, housing, the stock market, and economic growth is key to anticipating the bust contagion. This video segment connects the dots well.

Companies like Tesla, JP Morgan, and Zillow have announced layoffs in the last 30 Days. In particular – the CEOs of the companies think the Recession and Market Crash are going to get worse. Elon Musk predicts that: “the US is already in Recession. And that it could last 18 Months”. He also thinks a lot of companies will go bankrupt. That would be why Tesla just announced layoffs for 10% of its salaried workforce.

Despite this surge in layoffs, the US Unemployment Rate is still at a near record low 3.6%, while Initial Jobless Claims are also low. That means, unfortunately, that the Stock/Housing Market bottom has not yet occurred. And that more job losses/layoffs will be coming in 2022. Here is a direct video link.

The Bank of Canada hiked base rates a whole percentage point yesterday–its most significant one-time increase since 1998–now at 2.5% from .25% four months ago in March. Futures are pricing in a 84% chance that the US Fed will follow suit with its own 1% increase at its next policy meeting on July 27.

These are huge increases in a short time frame. The Canadian prime lending rate now jumps to 4.7%, and most home equity lines of credit (HELOCs) to 5.2%, while conventional variable rate mortgages are in the 3.85 to 4.2% range. Federal rules require borrowers to prove they can make their mortgage payments at an interest rate at least two percentage points above their offered mortgage rate. With a five-year fixed rate mortgage near 5%, borrowers would have to prove they can make mortgage payments with a notional interest rate near 7%–a rate level not seen since the year 2000. Meanwhile, the average Canadian home price was $164,000 in 2000 compared with $816,720 in February 2022.

As the pool of able buyers shrinks, home prices have already declined by double-digit percentages in some areas. While impossible for most to fathom, a 40% drop would only bring home prices back to where they were in 2020. And given the extreme magnitude of Canada’s late great housing bubble, a 40% decline would be a reasonably modest outcome.

Suffice to say, this mean-reversion cycle, while necessary, is set to be painful for many.