原作者 | アーサー・ヘイズ (BitMEX co-founder)
Editors note: This article is a new article Water, Water, Every Where published by BitMEX co-founder Arthur Hayes this morning. In the article, Arthur outlines the tendency of US Treasury Secretary Yellen to use Treasury bonds to withdraw the Federal Reserves reverse repurchase funds and bank reserves, and explains how the flow of these funds will improve the market liquidity situation. Arthur also mentioned the impact of this trend on the cryptocurrency market and predicted the markets next trend and the price performance of mainstream tokens such as BTC, ETH, and SOL.
The following is Arthurs original text, translated by Odaily. Because Arthurs writing style is too free and easy, there will be a lot of free play in the text that is irrelevant to the main content. In order to facilitate readers understanding, Odaily will make some deletions to the original text when compiling.
Transfer of the Scepter
In the investment world, liquidity (or “water”) is critical to the accumulation of assets. This is a theme I have mentioned repeatedly in previous articles, but many people tend to ignore its importance and instead focus on the small things that they think will affect their ability to make money.
If you can recognize when, where, why and how to generate fiat liquidity, it will be difficult to lose money in your investment – unless you are Su Zhu or Kyle Davies (both former founders of the bankrupt Three Arrows Capital, with extremely aggressive styles). If financial assets are priced in US dollars and US Treasuries (UST), then the global amount of money and US dollar debt will be the most critical variables.
We can’t just focus on the Federal Reserve (Fed), we have to focus on the U.S. Treasury, which is a viable way for us to confirm the increase or decrease of fiat currency liquidity in an American peace environment.
We need to re-examine the concept of fiscal dominance to understand why US Treasury Secretary Yellen can make Federal Reserve Chairman Powell her little follower. For a detailed analysis of this matter, you can read my previous article Kite or Board , in which I have conducted a more in-depth discussion.
要するに、 during periods of “fiscal dominance”, the need to “subsidize” the state will override any central bank concerns about inflation. This means that bank credit and nominal GDP growth must remain high, even if this may lead to persistently high inflation.
Time and compounding determine when power shifts from the Fed to the Treasury. When the national debt exceeds 100% of GDP, it becomes mathematically clear that debt growth will outpace economic growth. Beyond that point, the institution that controls the supply of debt becomes the “king of decision-making”—because the Treasury can decide when, how much, and for how long. Moreover, since the government is now deeply dependent on debt-driven growth, it will eventually order the central bank to use the printing press to cash the Treasury’s checks in order to maintain the status quo. The Fed’s independence is gone.
Federal Reserve Vault
The outbreak of COVID-19 and the U.S. government’s response (lockdown and economic stimulus) has caused the national debt to rise sharply to over 100% of GDP. This means that it is only a matter of time before Yellen makes a turn.
Before the U.S. enters a phase of high inflation, Yellen can create more credit to stimulate asset markets in a simple way. There are two large sequestered pools of funds on the Fed’s balance sheet that, if released to the market, would encourage bank credit growth and push up asset prices. The first is the “reverse repurchase program” (RRP), where money market funds (MMFs) deposit cash with the Fed overnight and earn interest, which I have discussed in detail before; the second is bank reserves, for which the Fed has similarly paid interest to banks.
As long as the money remains on the Feds balance sheet, it cannot be reinvested in financial markets to produce broad money or drive credit growth. By paying interest on reserves to banks and reverse repo to MMFs respectively, the Feds quantitative easing (QE) program has led to an increase in financial asset prices rather than a surge in bank credit. If QE is not isolated in this way, bank credit will flow into the real economy, pushing up output and raising the price level of goods/services. Given the current high debt ratio in the United States, what the government actually needs is strong nominal GDP growth and goods/services/wage inflation to increase tax revenues and reduce the debt burden. Therefore, Yellen needs to correct this situation.
Yellens decision
Yellen doesn’t really care about inflation; her goal is to promote nominal growth in the economy, thereby raising tax revenues and reducing the debt-to-GDP ratio. Since no political group or its supporters are willing to cut spending, fiscal deficits are expected to continue. Moreover, since the federal deficit has hit a peacetime peak, she must use all the tools at hand to raise funds for the government. Specifically, it is to introduce as much of the money that the Fed has left on its balance sheet as possible into the real economy.
Yellen needs to give banks and MMFs something they want. They want an instrument that is cash-like, generates income, has no credit risk, and has minimal interest rate risk to replace the income-generating cash they hold at the Federal Reserve Bank. Treasury bills (T-bills) with maturities of less than one year and a yield slightly higher than the interest on reserve balances (IORB) or reverse repurchase agreements (RRP) are the perfect substitute. Treasury bills are an asset that can be leveraged in the market, which will promote the growth of credit and asset prices.
Yellen has the ability to issue $3.6 trillion worth of Treasury bills? The federal government is facing a $2 trillion annual deficit, which must be solved by the Treasury Departments debt financing.
Yet Yellen, or whoever might succeed her in January 2025, doesn’t have to issue Treasuries to raise money. She or he could also choose to sell longer-dated, less liquid bonds with higher interest rate risk, but these are not cash equivalents and, because of the shape of the yield curve, long-term Treasury bonds will generally yield less than Treasuries. Banks and MMFs, by their nature of seeking profit, probably won’t swap the money they hold at the Fed for anything other than Treasuries.
The cryptocurrency opportunity
Why should cryptocurrency investors care about the flow of money between the Federal Reserve’s balance sheet and the broader financial system? See the chart below.
As the size of the reverse repurchase agreements (white line) has fallen from its highs, the price of Bitcoin (yellow line) has also risen from its lows. As you can see, there is a very tight relationship between the two. As money leaves the Federal Reserves balance sheet, it increases market liquidity, which drives the price of financial assets like Bitcoin soaring.
Why did this happen? Let’s look at what the Treasury Borrowing Advisory Committee (TBAC) has to say. In its latest report, TBAC clearly lays out the relationship between the growth in Treasury bill issuance and the amount of money market funds hold in reverse repurchase agreements.
“Large ON RRP balances may indicate insufficient demand for Treasuries. ON RRPs saw a run on funds in 2023-2024 as money market funds moved almost one-to-one into Treasuries. This rotation smoothly absorbed record Treasury issuance.”
Money market funds will put money into Treasuries as long as the yield on Treasuries is slightly higher than the yield on reverse repurchase agreements – currently, the yield on one-month Treasuries is about 0.05% higher than the yield on funds in reverse repurchase agreements.
The next question is whether Yellen can attract the remaining $300 billion to $400 billion in reverse repurchase agreements into Treasury bills? In the recent Q3 2024 Quarterly Funding Announcement (QRA), the Treasury said it would issue $271 billion in Treasury bills by the end of the year. This is good news, but there is still some money left in the reverse repurchase agreements. Can Yellen do more?
Let me quickly talk about the Treasury repo program. Through this program, the Treasury can repurchase illiquid non-Treasury bonds. The Treasury can finance this purchase by drawing on its general account (TGA) or issuing Treasury bills. If the Treasury increases the supply of Treasury bills and reduces the supply of other types of bonds, it will actually increase market liquidity. Funds will leave the reverse repo agreement, which is beneficial to the growth of US dollar liquidity; at the same time, as the supply of other types of bonds decreases, their holders may also turn to risky assets.
The recently released repo schedule shows that the U.S. Treasury will repurchase a total of $30 billion in bonds between now and November 2024. This is equivalent to issuing an additional $30 billion in Treasury bills, increasing outflows from reverse repurchase agreements by $30.1 billion.
The Treasury could also choose to inject a massive liquidity injection by reducing the TGA from around $750 billion to zero. They can do this because the debt ceiling goes into effect on January 1, 2025, and the law states that the Treasury can use TGA funds to avoid or delay a government shutdown.
All in all, Yellen will inject at least $301 billion into the market by the end of this year, and as much as $1.05 trillion. This will create a brilliant bull market for all types of risk assets, including cryptocurrencies.
The same thing is expected to happen with another “vault”: bank reserves. Currently, Treasury bills earn less than the yield on bank reserves held by the Fed, so banks will not bid for Treasury bills.
But what happens next year when reverse repo is close to zero and the Treasury continues to dump T-bills on the market? The continued supply and reduced demand (money market funds can no longer use reverse repo funds to buy T-bills) means that the price of T-bills must fall, which in turn means that the yield will rise. Once the yield on T-bills is able to exceed the interest on bank reserves, banks will start using their funds to absorb T-bills. This means an additional $3.3 trillion of bank reserve liquidity is waiting to be injected into the financial market.
The meaning of liquidity
Without water, people will die; without liquidity, the market will be finished.
Why have the cryptocurrency risk markets been moving sideways or even down since April this year? Most tax revenues come in April, which reduces the Treasury’s borrowing needs. We can observe this in the number of Treasury bills issued between April and June.
Since the issuance of Treasury bills is in a net reduction state, liquidity is being taken out of the system. Even if the government is increasing its borrowing overall, the reduction in cash-like instruments provided by the Treasury will take liquidity out of the market. In simple terms, cash remains trapped on the Federal Reserves balance sheet (i.e., the reverse repo market) and cannot drive growth in financial asset prices.
This chart of Bitcoin (yellow) and reverse repurchase (white) clearly shows that: from January to April, when Treasury bills were in a net issuance state, the scale of reverse repurchase decreased and the price of Bitcoin would rise; from April to July, when Treasury bills were in a net reduction state, the scale of reverse repurchase increased and Bitcoin was in a sideways state, accompanied by several sharp declines during the period.
If you believe Yellen, we will see $301 billion in net Treasury issuance between now and the end of the year. If this correlation holds, Bitcoin will quickly recover from the plunge caused by the appreciation of the yen. The next target for Bitcoin is $100,000.
Hope for altcoins
Altcoins are Bitcoins with higher beta values. In this cycle, BTC and ETH have structural support due to the launch of ETFs.
Since April, although BTC and ETH have both pulled back, there has not been a massacre like the shitcoins. Only after BTC and ETH break through $70,000 and $4,000 respectively, will the shitcoin market return. SOL will also climb above $250 by then, but due to the difference in market share, the impact of SOLs pull on the overall market is far less strong than that of BTC and ETH. At the end of the year, with the increase in US dollar liquidity, the prices of BTC and ETH may rise further, which will lay a solid foundation for the return of the shitcoin market.
My (Arthur Hayes) 戦略
As Treasury bills are issued and repurchase programs are implemented, liquidity conditions in the market will improve. If Harris is shaky and needs to use a strong stock market as political capital, Yellen will use the Treasurys cash account balance (TGA). Whatever the case, I expect cryptocurrencies to end their current sideways or downward trend starting in September. Therefore, I intend to use this last period of market weakness in the late northern hemisphere summer to actively increase my holdings of risky crypto assets.
The US presidential election will be held in early November. October will be Yellens peak trading period, and there will be no better liquidity opportunity this year. Therefore, I plan to sell some assets when the market is strong. I do not plan to liquidate, but to profit from more speculative dynamic trading and invest part of the capital in sUSDe of Ethena, an arbitrage protocol.
As the crypto market rises, the probability of a Trump victory also increases. The outcome of the election is unpredictable, and I prefer to watch the fight from the sidelines and re-enter the market after the US debt ceiling is raised. I expect this to happen in January or February.
Once the US debt ceiling issue is resolved, a lot of liquidity will flow from the Treasury and possibly the Federal Reserve to help the market get back on track. Thats when the real bull market will begin, and $1 million Bitcoin remains my bullish target.
This article is sourced from the internet: Arthur Hayes new article: The Feds Treasury, Yellens Decision, and the Crypto Bull Market Schedule
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