Month: February 2020

This is not a forecast of what will happen, but it is an attempt to make people think more deeply about the financial issues that could arise from the Coronavirus.

Why the 2008 financial crisis may very well be matched and exceeded by the pandemic nature of the Coronavirus.

Remember, the 2008 financial crisis was driven by over leverage, exotic debt and high risk derivatives.

Today, global debt is significantly higher than the total debt that existed in 2008. We unfortunately did not take steps to reduce that 2008 debt level.

The highly levered component of that overall debt, debt that carries very relaxed to no restrictive covenants, is very sensitive to company specific business activity. Should cash flow decline, the ability to service this relatively high interest rate debt becomes problematic. Compounding this potential problem is that the Highly Levered Debt currently on company balance sheets is at an historically high level. Potential defaults by the companies that issued this high interest rate debt would appear to warrant concern for the overall finance industry should a strong economic downturn take hold. Why?

Because the loss of economic value due to a global slowdown of trade and commerce from the pandemic will likely reduce liquidity in the financial markets as banks and others become reluctant to lend further. With economic contraction and the resulting negative impact on employment, the highly-levered loans that now exist in 2020 will be like the Liar Loans, the Collateralized debt instruments, and the derivatives of the 2005-2008 period. Repayment of the outstanding debts in accordance with the terms of the original loan agreements will show increasing signs of instability with the inability to comply. This would occur on a global scale.

Unfortunately, China and the Central Banks are not in the position to pick up the lost demand and re-ignite the financial markets as they did in 2008 – 2019.

It is very likely that the pandemic and its global economic and financial impact will be the catalyst that further moves people to seek out and adopt crypto currencies and crypto assets. Everyone looked for the “Killer” App to be the cause of mass adoption. Sadly, it may be a virus that shakes the foundations enough to drive purchases of alternative means of executing commerce and in storing value that are not based on our existing financial infrastructure.

Bitcoin, Ether and Gold look like interesting asset holdings to be considered for this possible period of instability and disruption.

Today we find the Dow Jones Industrial Average down by 1,000 points, the S&P 500 down by 119 points, and Bitcoin down by $400 per BTC. Why is this occurring?

The stock averages have been out of touch with reality for quite awhile. The valuation measures of Price to CashFlow are reflective of a Bubble. The measures of company Enterprise Value divided by Earnings Before Interest, Taxes and Depreciation/Amortization are at levels that defy historical standards. A return to the mean would result in an additional 25% decline in stock prices, or a further 5,000 point decline in the DJIA and an 800 point decline in the S&P 500. Stocks are and have been in a dangerous place compared to history.

The decline trigger has been the impact of the Corona-virus on psychology and on economic trade.

Why then has BTC declined to the extent it has?

Many high risk investors, those looking to leverage their positions to accelerate gains by buying on margin (taking out loans to buy stocks), need to generate cash to meet margin calls on their equity positions. I posit that these equity holders are also Crypto-asset holders, as the profile of high risk and high reward mindsets would likely see the same holders of both assets, stocks and crypto. In a stock market sell-off, the need to raise cash to pay back loans must come from somewhere or something. I think that something is Bitcoin, and that is why it is being sold-off today, to raise cash. Further, to the extent people have used loans or credit to buy Bitcoin, they also face margin calls on their crypto positions, and the potential for an accelerated decline in Bitcoin is real. If it occurs, I believe it will be an opportunity to reassess the entire asset market for under-valued or Baby out with the bathwater situations. Certain stocks and certain Crypto assets will be in that basket.

Stay Alert and informed.

Tom

In the Charts section are the current graphs of the 200-Day moving averages vs the 50-Day moving averages. The cross-over is typically a very strong sign of continued price changes in the direction of the 50-day MVA.

Below is the LiteCoin #LTC chart. You can see from the past that the blue dotted line continues its path in the direction of the 50-day MVA for an extended period.

LiteCoin

The price movement higher for the crypto-currencies is being matched/exceeded by the growth in value of tokens of non-currency crypto-assets.

While the past five days saw a pull-back in value, the Y-T-D gain of 56.70% remains impressive. Should the signals from the 200-Day and 50-Day moving averages, along with higher new highs and higher new lows, coupled with higher volumes in the Spot and Futures markets, continue to show strength, then it is likely that value in the form of Market capitalization will continue to grow.

Market Cap change of 93 crypto-asset tokens for the year 2020 by week is as follows:

The Crypto-asset market has been exceptionally strong during the first two months of 2020. In many ways this was foreshadowed by the growth in open interest in the Bitcoin and Ether Futures markets. The expansion since October 2019 has been dramatic, as the number of Futures contracts have tripled since Thanksgiving (November 2019).

Bitcoin Futures

Change in Market Cap of tracked 93 tokens (excluding currencies Bitcoin, Ether and LiteCoin)

Across the board all indicators are presenting positive signals

New Highs and Lows for BTC and ETH are rising

Volume in the spot market is rising

Open Interest in the BTC and ETH Futures markets are rising with accelerating growth

The 50-day moving averages of price for BTC, ETH and LTC are bumping up against the 200-day moving average, and look likely to cross-over in the next week.

Go to the Chart section for additional visuals.