Original title: Heatwave
Original author: Arthur Hayes, founder of BitMEX
Original compilation: Lynn, Mars Finance
(Any opinions below are the personal opinions of the author and should not form the basis for investment decisions, nor should they be regarded as recommendations or suggestions for engaging in investment transactions.)
boom!
boom!
boom!
This is the sound of my mobile phone reminding me to monitor the snowfall at various ski resorts in Hokkaido at night. While this sound brought me immense joy in January and February, in March it brought nothing but FOMO.
I set out from Hokkaido in early March to spend the past few ski seasons. My recent experience tells me that Mother Nature starts heating up around March 1st. Im a beginner skier who only likes the driest, deepest slopes. However, this season, Gaia has undergone huge changes. There was a brutal warm wave in February that drove away the snow. Cold weather doesnt return until the end of the month. But the cold temperatures are back in March, with 10 to 30 centimeters of fresh pow pow dumped every night. This is why my phone exploded.
Throughout March, I sat in various hot and humid countries in Southeast Asia, stupidly checking apps and ruining my decision to leave the slopes. The April thaw finally really happened, and with it my FOMO came to an end.
As readers know, my skiing experience is a metaphor for my macro and cryptocurrency trading books. I have written before that the termination of the Bank of America Term Financing Program (BTFP) on March 12 will cause global markets to plummet. BTFP was cancelled, but the vicious sell-off in the cryptocurrency space did not occur. Bitcoin decisively broke through $70,000, reaching a maximum of around $74,000. Solana continues to pump along with various puppy and kitten meme coins. My timing was bad, but just like ski season, March’s unexpectedly favorable conditions won’t be repeated in April.
While I love winter, summer also brings joy. The arrival of the northern hemisphere summer has brought about the joy of sports and I have reorganized my time to play tennis, surfing and kitesurfing. Summer will see a new influx of fiat liquidity due to the policies of the Federal Reserve and Treasury.
I will briefly outline my mind map of how and why risk asset markets will experience extreme weakness in April. For those brave enough to short cryptocurrencies, the macro setup is favorable. While I wouldn’t outright short the market, I have closed several shitcoin and memecoin trading positions at a profit. I will be in a no-trade zone from now until May 1st. I hope to be back in May with dry powder ready to deploy and ready for the bull market to really begin.
fraud
The Bank Term Funding Program (BTFP) ended a few weeks ago, but U.S. too-big-to-fail (TBTF) banks have not faced any real pressure subsequently. This is because the high priests of Fugazi Finance have a range of tricks they will use to secretly print money to bail out the financial system. I will take a peek behind the scenes and explain how they are expanding the USD fiat supply, which will support a general rally in cryptocurrencies and stocks until the end of the year. While the end result is always money printing, the process is not without periods of slower liquidity growth, which provides negative catalysts for risk markets. By carefully studying this series of techniques and estimating when the rabbit will be pulled out of the hat, we can estimate when the period will come when the free market is allowed to operate.
discount window
The Federal Reserve and most other central banks operate a tool called the discount window. Banks and other covered financial institutions in need of funds can pledge qualifying securities to the Fed in exchange for cash. In general, the discount window currently only accepts U.S. Treasuries (UST) and mortgage-backed securities (MBS).
Lets say a bank got screwed because a bunch of Pierce and Pierce boomer puppets ran it. The banks holdings of UST were worth $100 when purchased, but are currently worth $80. Banks need cash to meet deposit outflows. Insolvent shit banks could use the discount window instead of declaring bankruptcy. The bank exchanges $80 of UST for $80 of U.S. dollar bills because, under current rules, the bank receives the market value of the pledged security.
In an effort to abolish BTFP and remove the associated negative stigma without increasing the risk of bank failure, the Federal Reserve and the U.S. Treasury are now encouraging troubled banks to take advantage of the discount window. However, under current collateral terms, the discount window is not as attractive as the recently expired BTFP. Lets go back to the example above to understand why.
Remember, the value of UST fell from $100 to $80, which means the bank had an unrealized loss of $20. Initially, $100 of UST is provided by a $100 deposit. But UST is now worth $80; therefore, if all depositors flee, the bank will be short $20. Under BTFP rules, banks receive the face amount of underwater UST. This means that $80 worth of UST will be exchanged for $100 in cash when delivered to the Fed. This restored the banks solvency. But the discount window only provides $80 for UST worth $80. The $20 loss remains and the bank remains insolvent.
Given that the Fed can unilaterally change collateral rules to balance the treatment of assets between the BTFP and the discount window, the Fed continues to engage in stealth bank bailouts by giving the green light to the insolvent banking system to use the discount window. So the Fed essentially solves the BTFP problem; the entire UST and MBS balance sheet of the insolvent US banking system (which I estimate at $4 trillion) will be used to back loans if needed with funds printed from the discount window. This is why I believe the market did not force any non-TBTF banks into bankruptcy after the end of BTFP on March 12th.
bank capital requirements
Banks are often asked to provide funds to governments that issue bonds at yields below nominal GDP. But why would a private for-profit entity buy something with a negative real yield? They do this because banking regulators allow banks to buy government bonds with little or no down payment. When banks with insufficient capital buffers on their government bond portfolios inevitably collapse as inflation sets in and bond prices fall as yields rise, the Fed allows them to use the discount window in the manner described above. As a result, banks would rather buy and hold government bonds than provide loans to businesses and individuals in need of funds.
When you or I buy anything with borrowed money, we must pledge collateral or equity to cover potential losses. This is prudent risk management. But if youre a vampire squid zombie bank, the rules are different. After the 2008 global financial crisis (GFC), World Bank regulators sought to force global banks to hold more capital in order to create a more robust and resilient global banking system. The system of rules that codifies these changes is called Basel III.
The problem with Basel III is that government bonds are not considered risk-free. Banks must commit small amounts of capital to their large sovereign bond portfolios. These capital requirements prove problematic in times of stress. During the COVID-19 market crash in March 2020, the Federal Reserve decreed that banks could hold UST without collateral backing. This allows banks to step in and store trillions of dollars worth of UST in a risk-free way...at least as far as accounting is concerned.
When the crisis abated, USTs supplementary leverage ratio (SLR) exemption was reinstated. Predictably, as UST prices fell due to inflation, banks went bankrupt due to insufficient capital buffers. The Fed comes to the rescue through the BTFP and now the discount window, but this can only make up for the losses caused by the last crisis. How can banks step up their game and absorb more bonds at current unattractively high prices?
The U.S. banking system loudly declared in November 2023 that Bader Yellen couldnt stuff them with more bonds because Basel III forced them to hold more capital in their government bond portfolios. So something has to give because the U.S. government has no other natural buyer of its debt at a time when real yields are negative. Heres how banks politely express their precarious situation.
Demand for U.S. Treasuries may have softened from some traditional buyers. Bank securities portfolio assets have been declining since last year, with banks holding $154 billion less in U.S. Treasury securities than a year ago.
source:Report of the Treasury Borrowing Advisory Committee to the Secretary of the Treasury
Once again, the Fed under Powell saved the day. At a recent U.S. Senate banking hearing, Powell suddenly announced that banks would not be subject to higher capital requirements. Remember, many politicians are calling for banks to hold more capital to avoid a repeat of the regional banking crisis of 2023. Clearly, banks lobbied hard to have these higher capital requirements removed. They have a good argument - if you, Bad Gurl Yellen, want us to buy shit government bonds, then we can only make a profit with infinite leverage. Banks around the world manage all types of governments; the United States is no exception.
The icing on the cake is a recent letter from the International Swap Dealers Association (ISDA) advocating for the exemption of UST from the SLR I talked about earlier. Essentially, if banks are not required to make any down payments, they can only hold trillions of dollars in UST to finance the U.S. government deficit on a future basis. I expect the ISDA proposal will be accepted as the U.S. Treasury ramps up debt issuance.
This excellent chart from Bianco Research clearly illustrates the extent of waste in the U.S. government, as evidenced by record-high deficits. The last two periods of higher deficit spending were driven by the 2008 global financial crisis and the baby-boomer-led coronavirus lockdowns. The U.S. economy is growing, but the government is spending like its a depression.
All in all, the relaxation of capital requirements and the possible future exemption of USTs from SLR is a covert way of printing money. The Fed doesnt print money, instead the banking system creates credit money out of thin air and buys bonds, which then appear on its balance sheet. As always, our aim is to ensure that government bond yields do not rise above nominal GDP growth. As long as real interest rates remain negative, the prices of stokes, cryptocurrencies, gold, etc. will continue to rise in fiat currency terms.
Bad Gurl Yellen
My article Bad Gurl” An in-depth look at how the U.S. Treasury Department, led by Bad Gurl Yellen, is increasing the issuance of short-term Treasury bills (T-bills) to deplete the trillions of dollars locked in the Fed’s reverse repo program (recommended retail price). As expected, the decline in MSRP coincided with gains in stocks, bonds, and cryptocurrencies. But now that MSRP has dropped to $400 billion, markets are wondering what the next source of fiat liquidity will be to boost asset prices. Don’t worry, Yellen didn’t finish speaking and shouted, “The loot is about to drop.”
RRP balance (white) vs. Bitcoin (yellow)
The fiat flows I will discuss focus on U.S. tax payments, the Federal Reserve’s quantitative tightening (QT) program, and the Treasury General Account (TGA). The timeline in question is from April 15 (the tax due date for the 2023 tax year) to May 1.
Let me help you understand what these three things mean by providing a quick guide on their positive or negative impact on liquidity.
Paying taxes removes liquidity from the system. This is because taxpayers must take cash out of the financial system, such as by selling securities, in order to pay their taxes. Analysts expect tax payments to be higher in the 2023 tax year due to large interest income received and solid stock market performance.
QT removes liquidity from the system. As of March 2022, the Fed has allowed approximately $95 billion worth of UST and MBS to mature without reinvesting the proceeds. This causes the Feds balance sheet to decline, which, as we all know, reduces U.S. dollar liquidity. However, our concern is not the absolute level of the Feds balance sheet, but the rate of its decline. Analysts such as Ned Davis Researchs Joe Kalish expect the Fed to reduce the pace of QT by $30 billion per month at its May 1 meeting. A slowdown in the pace of QT would be positive for USD liquidity as the Feds balance sheet decline slows.
When the TGA balance rises, it removes liquidity from the system, but when the TGA balance falls, it adds liquidity to the system. When tax payments are received by the Treasury, the TGA balance increases. I expect that with tax processing on April 15, the TGA balance will be well above the current level of about $750 billion. This is negative dollar liquidity. Don’t forget this is an election year. Yellens job is to get her boss, the President of the United States,Joe BordenRe-elected. That means she must do everything she can to stimulate the stock market and make voters feel rich, and attribute this great result to the slow-moving “genius” of Biden’s economics. When the RRP balance finally drops to zero, Yellen will spend the TGA, likely releasing an additional $1 trillion in liquidity into the system, which will boost markets.
The period of instability for risk assets is from April 15 to May 1. At this point, the tax would remove liquidity from the system, QT would continue to run at its current higher rate, and Yellen has not yet begun to reduce TGA. After May 1, the QT tempo slowed down and Yellen was busy cashing checks to boost asset prices. If you are a trader looking for the right time to take shameless short positions, April is the time. After May 1, its back to regular programming...asset inflation initiated by the financial shenanigans of the Fed and US Treasury.
Bitcoin Halving
The Bitcoin block reward is expected to be halved on April 20. This is seen as a bullish catalyst for the cryptocurrency market. I agree that it will push prices higher in the medium term; however, the price action before and after is likely to be negative. The argument that halving is good for cryptocurrency prices is well established. When a majority of market participants agree on a certain outcome, the opposite often occurs. This is why I believe Bitcoin and cryptocurrency prices in general will plummet around the time of the halving.
Given that the halving occurs at a time when USD liquidity is tighter than usual, this will add fuel to the frantic sell-off in crypto assets. The timing of the halving further adds to my decision to abandon the trade before May.
To date I have made full profits on these positions MEW, SOL and NMT. Proceeds are deposited into Ethenas USDe and staked to earn huge yields. Before Ethena, I held USDT or USDC and got nothing, while Tether and Circle got the full treasury yield.
Can the market overcome my bearish bias and continue higher? Yes. Ive always been passionate about cryptocurrencies, so I welcome mistakes.
Do I really want to take care of my most speculative junkcoin position when I two-step on Token 2049 Dubai? Definitely not.
Therefore, I sold to clear my position.
There is no need to feel sad.
If the USD liquidity scenario I discussed above comes to fruition, Ill be more confident in imitating all kinds of shit. If I miss out on gains by a few percentage points but absolutely avoid losses on my portfolio and lifestyle, thats an acceptable outcome. Just like that, I bid you farewell. Remember to put on your dancing shoes, we’ll see you in Dubai to celebrate the crypto bull run.
