Título original: Sasa
Autor original: Arthur Hayes
Fonte original: https://substack.com/
Compilado por: Daisy, Mars Finance
Hokkaido está enfrentando fortes nevascas que não eram vistas nos últimos 70 anos, e a neve em pó é surpreendentemente espessa. Portanto, a entrada dos fundos da montanha foi inaugurada no final de dezembro, em vez da habitual primeira ou segunda semana de janeiro. À medida que 2025 se aproxima, a questão que paira na mente dos investidores em criptomoedas é se o “Efeito Trump” continuará. No meu último artigo (Trump’s Truth), argumentei que as elevadas expectativas relativamente às acções políticas da campanha de Trump poderiam desiludir os mercados. Ainda penso que este é um fator negativo que pode pesar nos mercados de curto prazo, mas também é equilibrado em relação ao impacto da liquidez em dólares americanos. Atualmente, a tendência do Bitcoin diminui e diminui com as mudanças na oferta de dólares americanos. Os decisores políticos financeiros da Reserva Federal dos EUA (Federal Reserve) e do Departamento do Tesouro dos EUA, que controlam o poder, determinam a quantidade de dólares americanos fornecidos nos mercados financeiros globais.
Bitcoin bottomed in the third quarter of 2022 when the Fed's reverse repo mechanism (RRP) peaked. Under the influence of U.S. Treasury Secretary Yellen (whom I jokingly call 'bad girl Yellen'), the Treasury reduced the issuance of long-term bonds and increased the issuance of short-term zero-coupon bills, draining more than $2 trillion from the RRP. This injected liquidity into global financial markets. Consequently, cryptocurrencies and stocks (especially large tech stocks listed in the U.S.) surged significantly. The chart above shows the relationship between Bitcoin (left axis, yellow) and RRP (right axis, white, inverted); as you can see, as RRP decreases, the price of Bitcoin rises.
The question I am trying to answer is whether, at least in the first quarter of 2025, the positive dollar liquidity shock can mask the negative impacts arising from the disappointing speed and effectiveness of the implementation of Trump's so-called pro-crypto and pro-business policies. If so, then market risk appetite can continue to increase, and Maelstrom (the assumed investment fund or institution) should increase its risk exposure.
First, I will discuss the Fed, which is a secondary consideration in my analysis. Next, I will explore how the U.S. Treasury responds to the debt ceiling issue. If politicians hesitate to raise the debt ceiling, the Treasury will inject liquidity by consuming its funds in the Fed's General Account (TGA), creating positive momentum for the cryptocurrency market.
Federal Reserve
The Fed's quantitative tightening (QT) policy is continuing at a pace of $60 billion per month, meaning its balance sheet is shrinking. The Fed's forward guidance on the pace of QT has not changed. I will explain the reasons later in the article, but my prediction is that the market will peak between mid and late March, which means QT will remove about $180 billion in liquidity from the market from January to March.
The balance of the RRP (reverse repo mechanism) is nearing zero. To fully deplete the funds of this mechanism, the Fed recently adjusted 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 decline in the policy rate. The purpose of this adjustment is to tie the RRP rate to the lower limit of the federal funds rate (FFR), thereby reducing the attractiveness of holding funds in this mechanism.
If you want to understand why the Fed only realigned rates with the FFR lower limit when the RRP was nearly exhausted, I recommend reading Zoltan Pozar's article (Cheating on Cinderella). My conclusion is that the Fed is exhausting all available tools to enhance demand for U.S. Treasury issuance before it may stop QT and once again provide supplementary leverage ratio exemptions to U.S. commercial bank branches, or even resume quantitative easing (QE), known as the 'printing machine mode.'
Currently, there are two pools of funds that can help curb rising bond yields. For the Fed, the 10-year U.S. Treasury yield must not exceed 5%, as this level would trigger high volatility in the bond market (MOVE index). As long as the RRP and TGA (Treasury General Account) have liquidity, the Fed does not need to make significant changes to its monetary policy nor acknowledge that fiscal dominance is occurring. Fiscal dominance means that Powell will become the 'bad girl Yellen' and the 'weak vassal' of Scott Bessent after January 20, 2025. I haven't thought of a suitable nickname for Scott yet. If he could devalue the dollar against gold and make me a modern-day 'Scrooge McDuck', I would flatter him a bit when choosing a nickname.
Once the TGA (Treasury General Account) is depleted (bringing positive dollar liquidity) and then replenished due to reaching and raising the debt ceiling (bringing negative dollar liquidity), the Fed will lose its means to curb the rising yields through expediency. This situation arose after the interest rate cut cycle began last September. However, this has little impact on the dollar liquidity situation in the first quarter; it is merely an idea about how the Fed's policy might evolve later this year if yields continue to rise.
Comparing the upper limit of the FFR (Federal Funds Rate) (right axis, white, inverted) with the 10-year U.S. Treasury yield (left axis, yellow), it can be clearly seen that while the Fed is cutting rates and facing inflation rates above the 2% target, bond yields are rising.
The real question is the speed at which the RRP (reverse repo mechanism) declines from about $237 billion to zero. I expect this process to be completed in the first quarter as money market funds (MMFs) withdraw funds and purchase higher-yielding short-term Treasury bills (T-bills) to maximize returns. It should be clear that this will inject $237 billion in dollar liquidity into the first quarter.
After adjusting the RRP rate on December 18, short-term Treasury yields with maturities of less than 12 months have exceeded 4.25% (white), which is also the lower limit of the FFR.
The Fed will remove $180 billion in liquidity through quantitative tightening (QT) while injecting an additional $237 billion in liquidity due to the adjustment of the RRP reward rate leading to a decrease in the RRP balance. The net result is an increase of $57 billion in liquidity in the first quarter.
Treasury Department
'Bad girl' Yellen signaled to the market that she expects the Treasury to begin taking 'extraordinary measures' to fund the U.S. government between January 14 and 23. The Treasury has two ways to pay government bills: one is to issue debt (which brings negative dollar liquidity), and the other is to use funds in its checking account at the Fed (TGA, which brings positive dollar liquidity). Since the total debt cannot increase before Congress raises the debt ceiling, the Treasury can only use funds from its TGA account. 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 test of Trump's support among Republican lawmakers. Remember, his governing majority advantage—the Republican seats in the House and Senate relative to the Democrats—is very slim. There is a faction within the Republican Party that emphasizes the importance of reducing the size of government in every discussion about the debt ceiling, insisting on not raising the debt ceiling unless their constituencies can gain some benefits. Trump previously failed to persuade these lawmakers to stop the spending bill for the end of 2024 unless the debt ceiling is raised. Democrats, having suffered a disastrous defeat over 'gender-neutral bathrooms' in the last election, have no interest in helping Trump unlock government funds to achieve his policy goals. As for the Democratic presidential candidate in 2028, could it be Harris? Actually, it's more likely to be that 'silver fox' Gavin Newsom.
Therefore, to advance matters, Trump would wisely exclude the debt ceiling issue from any legislation he proposes, only bringing it up when absolutely necessary.
The necessary time point for raising the debt ceiling is when failing to do so would lead to a technical default (i.e., inability to pay maturing Treasury bonds) or a complete government shutdown. Based on the revenue and expenditure data released by the Treasury for 2024, I estimate that this situation could occur during the May to June period this year, when the TGA balance will be completely exhausted.
To intuitively understand the pace and intensity at which TGA (Treasury General Account) funds the government, and to forecast the maximum impact when it is depleted, can help us understand the market direction. The market is forward-looking. Given that this data is all public, and we know how the Treasury operates when it cannot increase the U.S. total debt and the account is close to depletion, 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 will ask, 'What’s next?'
If we add the total amount of dollar liquidity from the Fed and the Treasury before the end of the first quarter, the total is $612 billion.
What will happen next?
Once default and government shutdown are imminent, both sides will reach a last-minute agreement to raise the debt ceiling. At that time, the Treasury will be able to net borrow again and must replenish the TGA account. This will negatively impact dollar liquidity.
Another important date in the second quarter is April 15, the tax payment deadline. As can be seen from the table, the government's fiscal situation significantly improves in April, which is also a negative impact on dollar liquidity.
If changes in TGA balances are the only factor determining cryptocurrency prices, 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, and began a months-long downward trend on April 11 (just days before the tax deadline).
Trading Strategy
The issue with this analysis is that it assumes dollar liquidity is the most critical marginal driver of total global fiat liquidity. However, the following other factors also need to be considered:
Will China accelerate or slow down the pace of renminbi credit creation?
Will the Bank of Japan start raising policy interest rates, thereby pushing up the dollar-yen exchange rate and unwinding leveraged arbitrage trades?
Will Trump and Bessent carry out a large-scale overnight devaluation of the dollar against gold or other major fiat currencies?
How efficient is the Trump team in rapidly cutting government spending and passing legislation?
These major macroeconomic issues cannot be known in advance. However, I am confident in the mathematical model of RRP (reverse repo mechanism) and TGA (Treasury General Account) balances over time. This confidence is further supported by the fact that from September 2022 to now, the increase in dollar liquidity due to the decline in RRP balances has directly driven the rise of cryptocurrencies and stocks, despite the Fed and other central banks raising interest rates at the fastest pace since the 1980s.
FFR upper limit (right axis, green) vs Bitcoin (right axis, magenta) vs S&P 500 Index (right axis, yellow) vs RRP (left axis, white, inverted)
Bitcoin and stocks bottomed in September 2022 and began to rise as RRP decreased, injecting more than $2 trillion in dollar liquidity into global markets. This was a deliberate policy choice by 'bad girl' Yellen to drain the RRP by issuing more short-term Treasury bills (T-bills). This completely offset Powell's efforts to tighten financial conditions to combat inflation.
After considering all the constraints, I believe I have answered the initial question I posed: The disappointing 'bamboo shoots' (risks) of the Trump team in its support for cryptocurrency and business legislation can be masked by an extremely positive dollar liquidity environment—liquidity growth of up to $612 billion in the first quarter. As planned, just like almost every year, it’s time to 'sell and rest' in the later stages of the first quarter. Whether on the beach, in nightclubs, or at ski resorts in the Southern Hemisphere, one can wait for the positive fiat liquidity conditions that will reappear in the third quarter.
As the Chief Investment Officer of the Maelstrom Fund, I would encourage the fund's risk-takers to adjust the risk dial to DEGEN (extreme speculation). The first step toward this direction is deciding to venture into the emerging field of decentralized science (DeSci). We like undervalued 'junk coins,' so we have purchased $BIO, $VITA, $ATH, $GROW, $PSY, $CRYO, and $NEURON. If you want to delve into why Maelstrom believes the DeSci narrative has significant revaluation potential, please read (Degen DeSci). If the overall development unfolds as I described, I will 'switch benchmarks' in March and swing along with the high note of 909.
Of course, anything can happen, but overall, I remain bullish. So, did I change my viewpoint from the last article? One could say yes. Perhaps the 'Trump sell-off' will not happen in mid-January 2025, but rather continue from mid-December 2024 to the end of the year. Does this mean I am sometimes a bad predictor? Yes, but at least I adjust based on new information and perspectives in a timely manner to avoid significant losses or missed opportunities. That’s why investing in this game is so intellectually appealing.
Imagine if every golf swing resulted in a hole-in-one, every basketball shot hit a three-pointer, and every billiard shot cleared the table; life would become incredibly dull. Damn it, a life of alternating failure and success is interesting, with the hope that success slightly outweighs failure.
