Author | Arthur Hayes
Translated by | Wu Says Blockchain
Original link:
https://cryptohayes.substack.com/p/sasa?r=gu0uw&utm_medium=ios&triedRedirect=true
The views expressed in the following are solely those of the author and should not be used as the basis for investment decisions or interpreted as investment trading advice or recommendations.
The backcountry skiing gates at the Hokkaido ski resort provide excellent ski terrain that is mainly accessible by lift. At the beginning of each ski season, the biggest concern is whether the snow is deep enough to open these gates. One issue that skiers face is 'sasa,' which is a Japanese term for a type of bamboo. This bamboo has thin stems resembling reeds, but its green leaves are sharp as knives and can cut the skin if one is not careful. Attempting to ski with insufficient coverage of 'sasa' is very dangerous, as the edges of the skis may slip, leading to what I call 'the struggle between man and tree.' For this reason, if the snow is not sufficient to cover 'sasa,' the backcountry skiing area becomes extremely hazardous.
Hokkaido has seen a rare level of snowfall this year, reaching nearly seventy years of record levels, resulting in unusually deep snow. Therefore, the backcountry skiing gates opened at the end of December, rather than the usual early or mid-January. As we approach 2025, the concern for crypto investors is whether the 'Trump effect' will persist. In my recent article (The Truth About Trump), I pointed out that the market's high expectations for the Trump camp's policy actions could lead to disappointment, and I still believe this is a potential negative factor that could suppress the market in the short term. However, at the same time, I must balance the stimulative factors of dollar liquidity. Currently, as the dollar circulation changes, Bitcoin is responding flexibly. The Federal Reserve and the US Treasury hold the initiative in the supply of dollars in the global financial market, and their policies determine the supply of dollars.
Bitcoin bottomed in the third quarter of 2022 when the Federal Reserve's reverse repurchase agreement (RRP) reached its peak. Under the influence of US Treasury Secretary Yellen ('Bad Girl'), the Treasury reduced the issuance of long-term coupon bonds and instead issued more short-term zero-coupon bonds, which withdrew over $2 trillion from the RRP. This injected liquidity into the global financial markets. As a result, both the cryptocurrency and stock markets, especially large tech stocks listed in the US, performed strongly. The chart above shows the comparison of Bitcoin (left axis, yellow) with RRP (right axis, white, inverted); it can be seen that as RRP declines, the price of Bitcoin rises.
The question I plan to explore is whether the positive stimulus of dollar liquidity can offset the disappointment that may arise from the speed and effectiveness of the Trump administration's so-called pro-cryptocurrency and pro-business policies at least within the first quarter of 2025. If the answer is yes, then the crypto market can confidently add positions, and Maelstrom should increase its risk exposure.
First, I will discuss the role of the Fed, which is a secondary factor in my analysis. Then, I will explore how the US Treasury responds to the debt ceiling issue. If politicians delay on the issue of raising the debt ceiling, the Treasury will draw on its funds in the Fed's general account (TGA), which will inject liquidity into the system and create positive momentum for cryptocurrencies.
For the sake of brevity, I will not go into detail about how RRP and TGA borrowing generate negative and positive dollar liquidity effects, respectively. If you are not a regular reader of my articles, please refer to (Teach Me Daddy) for an understanding of the mechanisms involved.
The Fed
The Fed's quantitative tightening (QT) policy is still progressing at a pace of $60 billion per month, which corresponds to a reduction in its balance sheet size. There has been no change in the Fed's forward guidance regarding the pace of QT. I will explain the reasons later in the article, but my prediction is that the market will peak in mid to late March, which means that from January to March, QT will lead to a reduction of $180 billion in liquidity.
The balance of reverse repurchase agreement (RRP) tools has nearly dropped to zero. To completely clear this tool, the Federal Reserve has been slow to adjust the RRP policy rate. At the meeting on December 18, 2024, the Fed lowered the RRP rate by 0.30%, which is 0.05% more than the decrease in the policy rate, aiming to anchor the RRP rate at the lower limit of the federal funds rate (FFR).
If you want to know why the Fed waited until the RRP was nearly depleted to realign its rate with the lower limit of the FFR, thus reducing the attractiveness of depositing funds in this tool, I strongly recommend reading Zoltan Pozar's article (Cheating on Cinderella). My interpretation is that the Fed is exhausting all means to support the issuance demand for US Treasuries until it has to stop QT, once again providing supplementary leverage exemptions to US commercial bank branches, and may even restore quantitative easing (QE), i.e., 'the money printer is on.'
Currently, there are two pools of funds that will help control bond yields. For the Fed, the 10-year US Treasury yield cannot exceed 5%, as this level would lead to volatility (MOVE index) in the bond market. As long as there is liquidity in RRP and the Treasury General Account (TGA), the Fed does not need to make significant adjustments to monetary policy, thus avoiding acknowledging fiscal dominance. Fiscal dominance essentially confirms Powell's subordinate status, making him a 'tool' of Treasury Secretary Yellen, and after January 20, this role may be replaced by Scott Bessent. I haven't thought of a fun nickname for Bessent yet, but if he makes me the modern 'Scrooge McDuck' by devaluing the dollar against gold, I will choose a more likable nickname.
When the Treasury General Account (TGA) is depleted (creating a positive effect on dollar liquidity) and subsequently replenished after the debt ceiling is reached (creating a negative effect on dollar liquidity), the Federal Reserve will face a lack of options to respond to rising bond yields. Following the rate-cutting cycle that began last September, the continued rise in yields will become inevitable. This is not important for the dollar liquidity conditions in the first quarter, but it may indicate the direction of the evolution of Fed policy later this year.
The comparison chart of the 10-year US Treasury yield (left axis, yellow) vs. the upper limit of the federal funds rate (FFR) (right axis, white, inverted) shows that when the Fed lowers rates in the face of inflation rates above the 2% target, bond yields actually rise.
The key issue is the speed at which RRP balances decline from about $237 billion to zero. I expect that this balance will approach zero at some point in the first quarter, as money market funds (MMF) will maximize returns by extracting funds and purchasing higher-yielding short-term T-bills. Specifically, this will inject $237 billion in dollar liquidity during the first quarter.
After the adjustment of the RRP rate on December 18, the yields on T-bills with maturities of less than 12 months have exceeded 4.25% (white), which is the lower limit of the FFR.
Overall, the Fed will remove $180 billion in liquidity in the first quarter through quantitative tightening (QT), but due to the reduction in RRP balance, its tinkering operations will inject an additional $237 billion in liquidity. This amounts to a net injection of $57 billion in liquidity.
Treasury
Treasury Secretary Janet Yellen indicated to the market that she expects the Treasury to begin taking 'extraordinary measures' to fund the US government between January 14 and 23. The Treasury has two options to pay the government's bills: either issue debt (which is unfavorable for dollar liquidity) or draw on the Federal Reserve's checking account balance (which is favorable for dollar liquidity). Since Congress must raise the debt ceiling to increase the total debt, the Treasury can currently only draw on the funds in its Treasury General Account (TGA). The current TGA balance is $722 billion.
The first important assumption is when politicians will agree to raise the debt ceiling. This will be the first critical point to test Trump's support among Republican lawmakers. Keep in mind that his governance advantage in Congress—the very slim Republican majority in the House and Senate—is very weak. There is a faction within the Republican Party that enjoys vocally claiming to care about reducing the size of the bloated government every time the debt ceiling is discussed. They will insist on not supporting an increase in the debt ceiling until they have secured enough benefits for their constituencies. Trump previously failed to persuade them to obstruct a spending bill for the end of 2024 unless the debt ceiling was raised. After suffering a setback in the last election, the Democrats will have no interest in helping Trump unlock government funds for his policy goals. How about a Harris presidential campaign in 2028? In fact, the Democratic presidential candidate may be 'Silver Fox' Gavin Newsom. Therefore, to move things forward, Trump will wisely exclude the debt ceiling issue from any proposed legislation until absolutely necessary.
When failing to raise the debt ceiling would lead to a technical default on US Treasuries or a full government shutdown, raising the debt ceiling becomes necessary. According to the 2024 revenue and expenditure data published by the Treasury, I estimate this situation will occur between May and June of this year, when the TGA balance will be completely depleted.
Visualizing the rhythm and intensity of TGA (Treasury General Account) usage for funding the government helps predict when its spending will have the most impact. The market is forward-looking. Given that this data is public and we understand how the Treasury operates when it cannot increase the total US debt and the account is nearly depleted, the market will look for new sources of dollar liquidity. When the TGA is depleted by 76%, March seems to be the time when the market starts to ask, 'What happens next?'
If we add up the total dollar liquidity from the Fed and the Treasury before the end of the first quarter, it amounts to $612 billion.
What will happen next?
Once default and government shutdown loom, a last-minute agreement will be reached, and the debt ceiling will be raised. At that point, the Treasury will be able to resume net borrowing and will need to refill the TGA, which is negative for dollar liquidity.
Another important date in the second quarter is April 15, which is the tax deadline. From the table above, it can be clearly seen that the government's fiscal situation will significantly improve in April, which is also negative for dollar liquidity.
If the factors affecting the TGA balance are the only variables determining cryptocurrency prices, then I expect the market to reach a local peak by the end of the first quarter. In 2024, Bitcoin reached a local peak of around $73,000 in mid-March, then consolidated sideways, and began a multimonth decline on April 11, just before the tax deadline on April 15.
Trading strategy
The problem with this analysis is that it assumes dollar liquidity is the most critical marginal driver of the total liquidity of global fiat currencies. However, there are also some other considerations:
• Will China accelerate or slow down the creation of renminbi credit?
• Will the Bank of Japan start raising policy rates, thus pushing up the dollar to yen exchange rate and unwinding leveraged arbitrage trades?
• Will Trump and Bessent engage in a massive overnight devaluation of the dollar against gold or other major fiat currencies?
• How efficient will the Trump team be in rapidly cutting government spending and passing legislation?
These major macroeconomic issues cannot be known a priori, but I am confident in the mathematical logic of changes in RRP (reverse repurchase agreements) and TGA balances. The market performance since September 2022 has further strengthened my confidence: the increase in dollar liquidity (due to the decrease in RRP balance) directly drove the rise of cryptocurrencies and stocks, even as the Fed and other central banks raised interest rates at the fastest pace since the 1980s.
The upper limit of the FFR (federal funds rate) (right axis, green) vs. Bitcoin (right axis, magenta) vs. the S&P 500 index (right axis, yellow) vs. RRP (left axis, white, inverted). Bitcoin and stocks bottomed in September 2022 and rose with the decline of RRP, injecting over $2 trillion in dollar liquidity into global markets. This was an intentional policy by Yellen, who reduced RRP by issuing more short-term Treasury bills (T-bills). Powell's attempts to combat inflation by tightening financial conditions were completely offset.
Despite various constraints, I believe I have answered the initially posed question. Even if the Trump team disappoints in its proposed support for cryptocurrency and promotion of business legislation, this impact can be overshadowed by an extremely favorable dollar liquidity environment. In the first quarter, dollar liquidity is expected to increase by up to $612 billion. Almost like in previous years, the late first quarter will be the right time to sell, after which one can choose to wait on the beach, at clubs, or at ski resorts in the southern hemisphere for the re-emergence of positive fiat liquidity conditions in the third quarter.
As the Chief Investment Officer of Maelstrom, I will encourage risk-takers in the fund to turn the risk dial to DEGEN mode. We have taken the first step by deciding to bet on the rapidly developing decentralized science (DeSci) field's shitcoins. We are optimistic about those undervalued dogshit projects and have purchased $BIO, $VITA, $ATH, $GROW, $PSY, $CRYO, and $NEURON. If you want to understand why Maelstrom believes the DeSci narrative is poised for repricing and significant upside, please read (Degen DeSci).
If things develop according to the high-level logic I described, I will pause basic trading sometime in March to enjoy the market rhythm. Of course, anything can happen, but overall, I remain optimistic. Have I changed my views from previous articles? Perhaps. Maybe the so-called 'Trump sell-off' actually occurs at the end of 2024 instead of mid-January 2025. Does this mean I sometimes fail to predict the future accurately? Yes, but at least I can absorb new information and perspectives and adjust before they lead to significant losses or missed opportunities. This is precisely the charm of investing as an intellectual game.
Imagine if every time you hit the ball, you could make a hole-in-one, every basketball shot was a three-pointer, and every billiard break led to a clear table; life would be incredibly boring. Fuck perfection! Give me failure and success, with the hope that success outweighs failure just a little.
