Contagion Tracker 2022-23

Contagion Tracker 2022-23

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.

Eurodollar University on Eurodollar #5

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:

AssetRiskDescriptionStatus
CryptoTerra LUNA/USTAlgorithmic Stable CoinCollasped
CryptoTetherAsset-Backed Stable CoinLow of $0.92
CryptoDeFi LendingCredit Risk/Possible PonziBifinex rates up to 30%
CryptoMicrostrategyMargin call at Bitcoin $21KBTC low of $25K
ForexTRYUSD Quasi Peg≈16, previous high 17
ForexHKDUSD Range Peg (7.75-7.85)HKMA Buying HKD
ForexSARUSD Peg (3.75)Unchanged
ForexRMBChina DevalDevalued to 6.8
CreditChina PropertyGhost Cities/DemographicsProperty Developers Failing
CreditNZ PropertyFloating Rate Property BubbleTriggered BIS Warnings
CreditJGB Yields10Y capped at 25bpYen at 130
CreditUS CorporatesUS corporate debt bubbleHigh Yield Spreads 4.77