The Fed Is Broke, Cannabis Treats Autism and More…

Today we’re going to examine a number of important news stories. Let’s get started…

The Fed Is Technically Insolvent. Should Anybody Care?

When the Federal Reserve bailed out banks, it lent them untold gobs of money. It also bought a lot of their worst mortgage bonds. Now we’re beginning to see the effects these assets are having on the Fed’s balance sheet, and it ain’t pretty.

Alex J. Pollock of R Street Institute has done an excellent job assessing the implications:

The Fed disclosed in December that it had $66 billion in unrealized losses on its portfolio of long-term mortgage securities and bonds (its quantitative easing, or QE, investments), as of the end of September. Now, $66 billion is a big number – in fact, it is equal to 170% of the Fed’s capital. It means on a mark-to-market basis, the Fed had a net worth of negative $27 billion.

If interest rates keep rising, the unrealized loss will keep getting bigger and the marked-to-market net worth will keep getting more negative. The net worth effect is accentuated because the Fed is so highly leveraged: Its leverage ratio is more than 100 to 1. If long-term interest rates rise by one percentage point, I estimate, using reasonable guesses at durations, the Fed’s mark-to-market loss would grow by $200 billion more.

So technically, the Fed is already insolvent and will only become more so in the future. Most economists say it doesn’t matter because the Fed can always just print more money.

This shortsighted view sums up much of what is wrong with the current system. The Fed took on bad investments that banks who created them should have been forced to deal with. Inevitably, its plans always require the creation of more money and debt. This institution is slowly throwing away its credibility.

AngelList’s 2018 Year in Review

AngelList, a platform where accredited investors can invest in startups, just posted an impressive 2018 update.

The company now has 23 “unicorns” (tech startups with $1 billion-plus valuations) in its portfolio. These unicorns include Robinhood, Lime, Opendoor and many more.

In 2018 alone, 1,133 startups were funded on AngelList. The platform now has investments in 38 countries. Most deals are in the U.S., but AngelList is rapidly expanding in India, Canada and Europe. It now has more than $1 billion of assets under management, an incredible feat in the early-stage funding world.

AngelList has been operating since 2009 but only started allowing direct investment on the site in 2013. In essence, it had a three-year head start on equity crowdfunding (startup investing for all, not just accredited investors).

While it’s unfortunate that only accredited investors can invest on AngelList, its success suggests that the broader equity crowdfunding market (including its spin-off Republic, where anyone can invest) has a bright future.

Fire the Fed?

Former congressman and longtime Fed opponent Ron Paul does a nice job breaking down the Fed’s shortcomings in this recent article:

Many “Audit the Fed” supporters have no desire to give Congress or the president authority over any aspect of monetary policy, including the ability to set interest rates. Interest rates are the price of money. Like all prices, interest rates should be set by the market, not by central planners. It is amazing that even many economists who generally support free markets and oppose central planning support allowing a government-created central bank to influence something as fundamental as the price of money.

Those who claim that auditing the Fed will jeopardize the economy are implicitly saying that the current system is flawed. After all, how stable can a system be if it is threatened by transparency?

If this line of thinking intrigues you, I strongly recommend reading Ron Paul’s excellent book End the Fed and G. Edward Griffin’s masterpiece The Creature From Jekyll Island.

CBOE Exchange Withdraws Proposal for VanEck-SolidX Bitcoin ETF

In a disappointing move, VanEck’s bitcoin exchange-traded fund (ETF) has been withdrawn. It appears the government shutdown is the likely culprit – Securities and Exchange Commission staffers have not been able to work on the proposal.

Fortunately, the setback is temporary. I expect this ETF will be approved eventually, but we’re waiting on the government here – so expect a long wait. It will be a huge surprise if something happens sooner.

It’s also fortunate that steady progress is being made on other ways for institutional investors to enter the crypto market. Bakkt recently announced a massive $182 million round of funding and is hard at work preparing its launch. Fidelity’s crypto operation will also be a major positive force in markets once it opens this year.

The government shutdown may be slowing these efforts, but there’s zero chance of stopping them in the long run.

Parents Again Call on Colorado to Legalize Medical Marijuana for Autism

One of the most promising treatments for autism is cannabis. A local CBS affiliate in Denver explains:

Last year, CBS4’s Rick Sallinger visited with families of autistic children around the state who were allowed to use marijuana due to other disabilities. All spoke of great improvements, such as calming and ability of the children to become verbal.

A boy named Kolt’s family in Pueblo West makes their own recipe, which includes the psychoactive ingredient THC. He vaped it and later took marijuana tinctures, according to his mother Jamie Kropp.

“There was a little boy lost inside, and since coming to Colorado, we’ve gotten our family back,” she said.

This is yet another reason we must force the federal government to back down on its prohibition on cannabis. The possible medical applications boggle the mind. And we can’t let Big Pharma stand in the way of progress because marijuana disrupts its business.

Good investing,

Adam Sharp
Co-Founder, Early Investing