From Arthur Hayes

(Any views expressed in the below are the personal views of the author and should not form the basis for making investment decisions, nor be construed as a recommendation or advice to engage in investment transactions.)

Mayday 

Mayday

Mayday

Some of you degens were screaming “Mayday” as you watched crypto markets puke from mid-April until the present. There was so much pain that momentum-chasing paper hands like Irene Zhao proclaimed that they were “done” with crypto. As if – she will dutifully return posting crypto thirst traps once Bitcoin is back trending up and to the right in short order.

The price action played out as I expected. US tax season, consternation over what the Fed will do, the Bitcoin halving sell the news event, and a slowdown of US Bitcoin ETF asset under management (AUM) growth coalesced over the prior fortnight to produce a well-needed market cleansing. The tourists will sit out the next phase on the beach… if they can afford it. Us hard motherfuckers will hodl, and if possible, accumulate more of our favourite crypto reserve assets such as Bitcoin and Ether, and/or high-beta shitcoins like Solana, Dog Wif Hat, and dare I say Dogecoin (the OG doggie coin).

This is not meant to be a fully fleshed-out global macroeconomics, politics, and crypto essay. Rather, I want to highlight why the US Treasury, Federal Reserve (Fed), and the Republic First Bank bailout provide fiat liquidity or a path to increased fiat liquidity now and into the near future. I will quickly step through a few tables that underpin my boooolishness. 

QT Taper = QE

When the average muppet equates quantitative easing (QE) with printing money and inflation, it spells trouble for the elites. Therefore they need to change up the nomenclature and method of providing the junkie, that is, the fiat financial system, its hit of monetary heroin. Reducing the pace of asset runoff from the Fed’s balance in accordance with their quantitative tightening (QT) program sounds benign. But make no mistake – by reducing the rate of QT from $95 billion to $60 billion per month, the Fed is essentially adding $35 billion per month of dollar liquidity. When you combine the Interest on Reserve Balances, RRP payments, and interest payments on US Treasury debt, the reduction in QT increases the amount of stimulus provided to the global asset markets each month.

The Fed announced this week that it would taper QT by the aforementioned amounts at its May 2024 meeting. Using a handy chart, let us examine the dollar liquidity situation before and after the meeting.

Note that the QT line item is the actual monthly average taper amount in 2024 based on the Fed’s weekly reported balance sheet. As you can see, the Fed has undershot the monthly target of $95 billion. It begs the question of whether the target is $60 billion per month and whether the Fed will undershoot that as well. Undershooting the target pace is positive for dollar liquidity.

“High” interest rates, which require the Fed and US Treasury to hand out interest payment stimmies to rich folks, coupled with a reduction in the pace of QT, are even more stimulative.

Please read “Kite or Board” to understand what each line item means.

That’s what beta cuck towel boy Powell is up to. What about his dominatrix, Bad Gurl Yellen?

US Treasury Quarterly Refunding Announcement (QRA)

Because the US is in the throes of fiscal dominance, Bad Gurl Yellen's pronouncements are more important than those of any other monetary official. Every quarter, the US Treasury publishes the QRA to guide the market as to the quantity and type of debt that must be issued to fund the government. 

Before the 2Q24 QRA, I had questions:

Question 1:

During the April – June 2024 quarter, Treasury expects to borrow $243 billion in privately-held net marketable debt, assuming an end-of-June cash balance of $750 billion.[2]  The borrowing estimate is $41 billion higher than announced in January 2024, largely due to lower cash receipts, partially offset by a higher beginning of-quarter cash balance.[3]

Source: QRA

That’s no bueno if you are a holder of Treasuries. There will be more supply, and tax receipts were underwhelming despite the roaring US economy and stonk markets. This hastens the pace at which the bond market throws a fit and ratchets long-end rates markedly higher. Yellen’s response to that will be some form of yield curve control, and that’s when Bitcoin begins its ascent for realz to $1 million.

Question 2:

Given current fiscal forecasts, the Treasury Department expects to increase the 4-, 6-, and 8-week bill auction sizes in the coming days to ensure sufficient liquidity to meet our one-week cash needs around the end of May.  Then, in anticipation of the June 15th non-withheld and corporate tax date, Treasury expects to implement modest reductions to short-dated bill auction sizes during early to mid-June.  Subsequently, throughout July, the Treasury Department anticipates returning short-dated bill auction sizes to levels at or near the highs from February and March.

Source: QRA

Yellen needs to increase the issuance of short-dated bills because the market couldn’t handle it if she swung her BSD at the long end of the curve. The added benefit of issuing more bills is that it drains the RRP, which adds dollar liquidity to the system. To understand why, please read “Bad Gurl”.

Question 3:

During the July – September 2024 quarter, Treasury expects to borrow $847 billion in privately-held net marketable debt, assuming an end-of-September cash balance of $850 billion.

Source: QRA

The TGA balance target is $850 billion. It currently stands at $941 billion, which equates to a roughly $90 billion reduction over the next three months. To understand why, please read “Bad Gurl.”

The impact of this QRA is mildly dollar liquidity positive. It is not a bombshell like the November 2023 announcement, which sent bond, stonk, and crypto prices flying. But it will help pump our bags slowly over time.

Republic First Bank

Have you ever heard of this tiny, piece-of-shit bank? I hadn’t, until they went bust. The fact that another non-Too Big To Fail (TBTF) bank failed is not noteworthy. But what is important is the response of the monetary mandarins in charge of the Pax Americana.

The US government (via the FDIC) insures deposits in any US bank up to $250,000. When a bank fails, uninsured depositors should get zeroed. However, that is politically unpalatable in an election year, especially if the powers that be have continuously assured the public the banking system is sound.

Here is an excerpt from the FDIC:

As of January 31, 2024, Republic Bank had approximately $6 billion in total assets and $4 billion in total deposits.  The FDIC estimates that the cost to the Deposit Insurance Fund (DIF) related to the failure of Republic Bank will be $667 million. The FDIC determined that compared to other alternatives, Fulton Bank’s acquisition of Republic Bank is the least costly resolution for the DIF, an insurance fund created by Congress in 1933 and managed by the FDIC to protect the deposits at the nation’s banks.

Understanding what happened in plain speech requires reading between the lines. 

Fulton agreed to purchase Republic First and ensure all depositors were made whole only if the FDIC ponied up some cash. The FDIC insurance gave Fulton $667 million so that all Republic First depositors were made whole. Why is the insurance fund being used for all deposits when some deposits were not insured?

The reason is that if all deposits weren’t covered, then a bank run would start. Any large depositor with a non-TBTF bank would instantly transfer money to a TBTF bank, which sport a full government guarantee of all deposits. Subsequently, thousands of banks would go under across the country. That is not a good look in a democratic republic with elections every two years. Once the public is educated that the bank failures are 100% due to Fed and US Treasury policy, some overpaid idiots will have to get real jobs.

Rather than suffer at the ballot box, those in charge essentially now guarantee all deposits in the US banking system. That is a stealth addition of $6.7 trillion, as this is the amount of uninsured deposits as reported by the St. Louis Fed.

This leads to money printing because the FDIC’s insurance fund doesn’t have $6.7 trillion. Maybe they need to ask CZ for advice because funds ain’t SAFU. Once the fund is exhausted, the FDIC will borrow money from the Fed, which will print money to satisfy the loan.

Like the other stealth money printing policies discussed in this essay, there is no massive liquidity injection today. However, we now know with full confidence that trillions of contingent liabilities have been added to the Fed’s balance sheet, which will be funded with printed money.

Buy in May, Go Away!

The slow addition of billions of dollars of liquidity each month will dampen negative price movement from here on out. While I don’t expect crypto to fully realize the recent US monetary announcements' inflationary nature immediately, I expect prices to bottom, chop, and begin a slow grind higher. 

As the northern-hemispheric summer kicks into full gear, crypto muppets will be out enjoying being pre-rich at all the usual hot spots. I see you at DC10, Scorpios, Chiltern … I see you playa. I certainly won’t be babysitting Bitcoin when I could be two-stepping. The recent intense puke out provides an excellent opportunity to unstake my USDe and spend synthetic dollars on high beta shitcoins. 

I’m buying Solana and doggie coins for momentum trading positions. For longer-term shitcoin positions, I’m upping my allocations in Pendle* and will identify other tokens that are “on sale.” I will use the rest of May to increase my exposure. And then it’s time to set it, forget it, and wait for the market to appreciate the inflationary nature of the recent US monetary policy announcements.

同志们好

China is not to be forgotten. The CNY will be devalued, but it won’t be against USD; rather, it will be against gold and Bitcoin. I will explain this theory in an in-depth essay later this summer. 

For those of you who need bullet points on my predictions, here you go:

Yachtzee!!

*Disclaimer: I am an advisor to and investor in Pendle, and have received Pendle tokens as compensation for my advisory services.