jakiro
Original title: Water, Water, Every Where
Author: Arthur Hayes, founder of BitMEX; compiled by: Deng Tong, Bitchain Vision
There is water everywhere,
All the boards shrank;
There is water everywhere,
There is no drop of water to drink.
——Collridge, “Ode to the Ancient Boat”
I love specialty coffee, but my home brewed coffee is simply terrible.I spent a lot of money on coffee beans, but the coffee I brewed always tasted worse than the one I drank in a cafe.To improve my coffee, I started to take the details more seriously.I realized that one detail I’ve been overlooking is the quality of the water.
Now I understand how important water is to the quality of the coffee I brew.A recent article published in Standart issue 35 shocked me.
A similar phenomenon occurred during my time as a barista.At that time, I learned that more than 98% of a cup of coffee and about 90% of espresso were water..
This awareness often only occurs later in people’s coffee journey, probably because it is much easier to spend money on a new machine that aims to make better coffee.‘Ah, you have a cone grinder!That’s why your hand-brewed coffee is turbid.Change to a flat knife bean grinder!’ But what if this 2% isn’t a problem?What if focusing on solvents itself can solve our coffee problem?
– Lance Hedrick, On Water Chemistry
My next step is to digest the author’s advice and order a home still.I know a local coffee shop sells mineral concentrates that can be added to your water, which will create the perfect substrate to bring out the expected flavor they roast.By this winter, my morning tea is delicious…I hope so.
Quality water is essential for making delicious coffee.The shift to investment, water or liquidity is important to accumulating Sats.This is a recurring topic in my article.But we often forget its importance and focus on the small things we think will affect our ability to make money.
If you can recognize how, where, why and when fiat currency liquidity is generated, it is difficult to lose money in investment.Unless you are Zhusu or Kyle Davis, founder of Three Arrow Capital.If financial assets are denominated in US dollars, not in US Treasury bonds (UST), then the amount of global currency and dollar debt is the most critical variable, which makes sense.
We should not focus on the Federal Reserve, but on the U.S. Treasury Department.This is the specific way we determine the peaceful increase and decrease fiat currency liquidity under the US rule.
We need to review the concept of “financial dominance” to understand why U.S. Treasury Secretary Yellen regards Fed Chairman Jay Powell as her beta cuck towel bitch boy.During a period of fiscal dominance, the need to fund the state overwhelms any concerns about inflation from central banks.This means bank credit, as well as nominal GDP growth, must be maintained at high levels, even if it causes inflation to continue to be above target.
Time and compound interest determine when power will be transferred from the central bank to the Ministry of Finance.When debt accounts for more than 100% of GDP, debt will grow mathematically much faster than economic growth.After this event horizon, the institution that controlled the supply of debt was crowned emperor.This is because the Ministry of Finance decides when, how much and on what time issuance of debt.also,As the government is now addicted to debt-driven growth in order to survive, it will eventually instruct the central bank to cash the Treasury checks using a money printing machine.The independence of the central bank is going to hell!
The COVID outbreak and the response of the U.S. government to lock people in their homes and pay for their obedience with stimulus checks has resulted in a sharp rise in the debt-to-GDP ratio to more than 100%.It’s only a matter of time before the transition from grandma to bad girl Yellen.
Before the United States gets caught in a complete hyperinflation, Yellen can create more credit and stimulate the asset market in an easy way.The Fed has two sterilized pools of funds on its balance sheet, which, if released into the wild, will generate bank credit growth and increase asset prices.The first fund pool is the reverse repurchase plan (RRP).I’ve discussed this pool of funds in detail, where the Money Market Fund (MMF) deposits cash at the Fed overnight and receives interest.The second pool of funds is bank reserves, and the Fed plans to pay interest on this pool in a similar way.
While the currency is on the Fed’s balance sheet, it cannot be re-collateralized to financial markets to generate broad currency or credit growth.By bribing banks and money market funds with reserve interest and RRP respectively, the Fed’s quantitative easing (QE) program has caused inflation in the price of financial assets rather than surge in bank credit.If quantitative easing is not done in this way, bank credit will flow into the real economy, increasing output and commodity/service inflation.Given the current total debt under the U.S. rule, strong nominal GDP growth coupled with goods/services/wage inflation is exactly what the government needs to increase taxes and deleverage.So Bad Gurl Yellen takes steps to correct this error.
Bad Gurl Yellen doesn’t care about inflation at all.Her goal is to create nominal economic growth so that taxes increase and U.S. debt-to-GDP ratio declines.Given that no political party or its supporters are committed to cutting spending, the deficit will continue for the foreseeable future.Furthermore, due to the large size of the federal deficit, setting a record high since peacetime, she had to use all available tools to fund the government.Specifically, this means drawing as much money as possible from the Fed’s balance sheet and injecting it into the real economy.
Yellen needs to give banks and money market funds something they want.They want a cash-type tool with no credit, minimal interest rate risk, and profitable cash-type tools to replace the earning cash they hold in the Fed.Treasury bills (T-bills) with a term of less than one year and a yield slightly higher than the reserve balance interest (IORB) and/or RRP are the perfect alternative.Treasury bills are assets that can be utilized in the wild and will generate credit and asset price growth.
Is Yellen capable of issuing $3.6 trillion worth of Treasury bills?There must be.The federal government has a $2 trillion deficit every year and must be financed through debt securities issued by the Treasury Department.
Yet, Yellen, who may succeed her in January 2025, does not have to issue Treasury bills to fund the government.She can sell longer-term Treasury bills with poor liquidity and high interest rate risks.These securities are not cash equivalents.Furthermore, due to the shape of the yield curve, the yield of longer-term debt securities is lower than that of Treasury bills.The profit motives of banks and money market funds prevent them from exchanging funds held by the Federal Reserve for anything other than Treasury bills.
Why should we cryptocurrency traders care about the flow of funds between the Fed’s balance sheet and the broader financial system?Enjoy this beautiful chart.
Bitcoin (gold) rebounds from its lows as RRP (white) falls back from its highs.As you can see, it’s a very close relationship.As funds leave the Fed’s balance sheet, it increases liquidity, causing limited financial assets such as Bitcoin to soar.
Why does this happen?Let’s ask the Ministry of Finance’s Borrowing Advisory Committee (TBAC).In its latest report, TBAC clearly states the relationship between the increase in the issuance of Treasury bills and the amount of funds held by money market funds in RRP.
A large amount of ON RRP balances may indicate that the demand for Treasury bills is not met.During the 2023-24 period, ON RRP dried up as money funds turned almost one-to-one to Treasury bills.This rotation promotes a seamless digestion of record-breaking Treasury bill issuances.
– Slide 17, TBAC July 31, 2024
As long as the Treasury bond yield is slightly higher than the RRP, money market funds will transfer cash to Treasury bonds—currently, the 1-month Treasury bond yield is about 0.05% higher than the funds in RRP.
The next question is whether Yellen can coax the remaining $300 billion to $400 billion in the RRP into Treasury bills.If you suspect bad girl Yellen, you will be punished!Ask the poor people from the “junk country” what happens when you can’t get the dollar to buy essentials like food, energy, and medicines.
In the latest quarterly refinancing announcement for the third quarter of 2024 (QRA), the Treasury Department said $271 billion in Treasury bills will be issued from now until the end of the year.This is good, but there is still money left in the RRP.Can she do more?
Let me quickly talk about the treasury repurchase plan.Through the plan, the Ministry of Finance repurchases non-treasury bond securities with poor liquidity.The Ministry of Finance can fund purchases by withdrawing 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 debt, it will increase liquidity in a net manner.Funds will leave RRP, which is good for US dollar liquidity, and as the supply of other types of Treasury bonds decreases, these holders will move to the risk curve to replace these financial assets.
From now until November 2024, the latest repurchase program will total up to $30 billion in non-circulating securities.This amounts to the issuance of another $30 billion in Treasury bills, increasing RRP outflows to $301 billion.
This is a reliable injection of liquidity.But how powerful is Yellen?How much does she hope that minority-American presidential candidate Momalla Harris will win?I say “minority” because Harris changes her phenotype attributes based on the population she targets.This is a very unique ability she has.I support her!
The Treasury could inject huge liquidity by reducing TGA from about $750 billion to zero.They can do this because the debt ceiling will take effect on January 1, 2025, and by law, the Treasury can reduce TGA spending to avoid or prevent the government from shutting down.
From now until the end of the year, bad girl Yellen will inject at least $301 billion, up to $1.05 trillion.Wow!This will create a brilliant bull market for all risky assets, including cryptocurrencies, before the election.If Harris still can’t beat the orange man, then I think she needs to be a white man.I believe she has this kind of superpower.
More potential liquidity awaits release
Over the past 18 months, it’s quite impressive to inject $2.5 trillion into the financial markets by draining RRP.But there is more potential liquidity waiting to be released.Can Yellen’s successor (starting in 2025) create a situation where funds are pulled out of the Fed’s bank reserves and inject them into a wider economic sector?
In a period of fiscal dominance, nothing is possible.But how to do it?
As long as regulators treat capital adequacy equally and the latter has a higher yield, for-profit banks will replace one profitable cash instrument with another.Currently, the yield of Treasury bonds is lower than the reserve balance held by the Federal Reserve, so banks will not bid for Treasury bonds.
But starting next year, what happens when RRP is close to zero and the Treasury continues to sell a large number of Treasury bills to the market?Adequate supply and money market funds cannot purchase Treasury bills with funds stored in RRP, meaning prices must fall and yields will rise.As long as the yield of Treasury bonds rises to several basis points higher than the interest rate paid by excess reserves, banks will use their reserves to buy Treasury bonds in large quantities.
Yellen’s successor—I bet Jamie Dimon—will be unable to resist the ability to stimulate the market for the political interests of the ruling party and continue to place Treasury bills into the market.Another $3.3 trillion in bank reserve liquidity is waiting to be injected into the financial market.Cheers with me: Bills, Baby, Bills!
I believe TBAC is quietly suggesting this possibility.Here is another excerpt from the same previous report, marked in [bold]:
Looking ahead, many factors may be worth further study when considering future share of Treasury issuance:
[TBAC hopes the Ministry of Finance will consider the future and how large the issuance of Treasury bills should be.Throughout the speech, they all argued that Treasury bond issuance should hover around 20% of the total net debt issuance.I believe they are trying to illustrate what causes this proportion to increase and why banks buy these Treasury bills.]
– Evolution and ongoing assessment of the banking regulatory landscape (covering liquidity and capital reform, etc.) and the impact on banks and dealers’ meaningful participation in the primary Treasury market for medium-term and warehousing (expected) future Treasury maturities and supply
[Banks do not want to hold more long-term notes or bonds, as these notes or bonds will attract stricter collateral requirements from regulators.They whispered that we will not buy longer-term debts because it will hurt their profitability and be too risky.If the primary dealer strikes, the Ministry of Finance will be over because there is still someone whose balance sheet can absorb huge debts for auction.]
– Evolution of market structure and its impact on elastic measures in the Treasury market, including:
> SEC’s central liquidation rules that require substantial increase in margins provided to regulated liquidation agencies
[If the Treasury market fluctuates on the exchange, traders will need to provide billions of dollars in additional collateral.They cannot afford the consequences of doing so, and the result will be a decrease in participation.]
> Future (expected) Treasury auction size and predictability of cash management and benchmark Treasury bond issuance
[If the deficit continues to remain so large, the amount of debt issued may increase significantly.Therefore, the role of Treasury bills as “shock absorbers” will only become more important.This means more Treasury bills need to be issued.]
> Future monetary fund reform and potential incremental structural demand for treasury bills
[If money market funds return to the market after RRP is completely exhausted, Treasury bill issuance will exceed 20%.]
– Slide 26, TBAC July 31, 2024
Banks have effectively strike to buy longer-term U.S. Treasuries.Yellen and Powell almost caused the banking industry to collapse as they stuffed banks with U.S. Treasury bonds and then raised interest rates between 2022 and 2023…RIP Silvergate, Silicon Valley Bank and Signature Bank.The remaining banks will no longer make trouble, nor will they want to know what will happen if they buy high-priced Treasury bonds in large quantities again.
For example: Since October 2023, commercial banks have purchased only 15% of non-Treasury bonds.2 This is not good for Yellen because she needs banks to step up their efforts as the Fed and foreigners exit the stage.I think that as long as banks buy Treasury bills, they will be happy to perform their duties because the risk profile of Treasury bills is similar to bank reserves, but with higher yields.
Yellen is in the spotlight again
The dollar-JPY exchange rate fell from 160 to 142, bringing an impact on global financial markets.Last week, many people were hit and told to sell what they could.The moment ago, this was still textbook-style relevance.The dollar will reach 100 against the yen, but the next wave of shock will be driven by capital reflux from Japanese companies’ overseas assets, not just hedge fund puppets to lift the yen arbitrage.3 They will sell U.S. Treasury bonds and U.S. stocks (mainly large tech stocks such as NVIDIA, Microsoft, and Google).
The Bank of Japan tried to raise interest rates and the global market was furious.They succumbed and it was impossible to announce a rate hike.From the perspective of fiat liquidity, the worst case scenario is that the yen is sideways consolidation without the use of cheap yen to fund net new positions.With the threat of lifting the yen arbitrage trading past, bad girl Yellen’s market manipulation has once again become the focus.
No liquidity = bankruptcy
Without water, you will die.Without liquidity, you will go bankrupt.
Why has the crypto risk market been consolidating sideways until decline since April this year?Most tax revenues occur in April, which requires the Treasury to reduce borrowing.We can observe this from the number of Treasury bills issued from April to June.
Liquidity disappears from the system due to net reduction in outstanding Treasury bills.Even if the government borrows more funds overall, the net reduction in cash-like instruments provided by the Ministry of Finance will eliminate liquidity from the market.As a result, cash is still stuck on the Fed’s balance sheet RRP and cannot generate growth in financial asset prices.
This chart of Bitcoin (gold) and RRP (white) clearly shows thatFrom January to April, when Treasury bonds were net issued, RRP fell and Bitcoin rose.From April to July, when Treasury bills were withdrawn from the market, RRP rose, Bitcoin was sideways, with several sharp drops in the middle.I stopped on July 1 because I wanted to show the interaction between the U.S. dollar and yen from 162 to 142, which led to a general sell-off of risk assets.
Therefore, according to Yellen,We know that from now until the end of the year, the net issuance of Treasury bills will reach $301 billion.If this relationship holds true, Bitcoin will quickly give up the selloff caused by the appreciation of the yen.The next stop for Bitcoin is $100,000.
When will the altcoin season be ushered in?
Altcoins are Bitcoin cryptocurrencies with higher beta values.But during this cycle, Bitcoin and now Ethereum present structured buying in the form of net inflows into U.S. listed exchange-traded funds (ETFs).Although Bitcoin and Ether have been recalled since April, they escaped the massacre experienced by the altcoin market.Altcoins will return only after Bitcoin and Ethereum break through $70,000 and $4,000, respectively.Solana will also climb above $250, but considering its relative market capitalization, the wealth effect of Solana’s surge on the entire cryptocurrency market is far less powerful than Bitcoin and Ethereum.The rebound of Bitcoin and Ethereum inspired by US dollar liquidity will lay a solid foundation for the return of the sexy altcoin party.
Future market trading advice
As Treasury bond issuance and repurchase plans are running in the backend, liquidity situation will improve.If Harris is swaying and needs to get more firepower from the stock market, Yellen will cut TGA.anyway,I expect cryptocurrencies to exit the horizontal downward trajectory starting in September.So I will take advantage of the weakness in the late summer of the Northern Hemisphere to increase cryptocurrency risks.
The U.S. election will be held in early November.Yellen will reach a manipulation peak in October.There is no better time for liquidity this year than now.Therefore, I will take advantage of the opportunity to sell.Instead of liquidating my entire crypto portfolio, I profited from my more speculative momentum transactions and deposited funds into the pledged Ethena USD (sUSDe).The cryptocurrency market has risen, increasing Trump’s chances of winning.Trump’s odds peaked after assassination attempts and Biden’s poor debate performance, Kamala Harris is a top-notch political figurehead, but she is not a vegetable in her eighties.That’s all she needed to beat Trump.The election is a coin toss, and I would rather watch the chaos off the court, returning to the market after the U.S. debt ceiling is raised.I expect this to happen sometime in January or February.
Once the U.S. debt ceiling farce is over, liquidity will surge out of the Treasury Department and the Federal Reserve, bringing the market back on track.Then, the bull market will really begin.$1 million in Bitcoin is still my basic situation.
Note: Once bad girl Yellen and towel boy Powell join forces, China will eventually release its long-awaited bazooka fiscal stimulus.The crypto bull market in China and the United States will be brilliant in 2025.
Yachtzee!
Comments
1. This is the total bank reserves held by the Federal Reserve and RRP.
2. According to the H.8 Fed report, from the week ended September 27, 2023 to July 17, 2024, commercial banks purchased US$187.1 billion worth of U.S. Treasury bonds.I assume that during the same period, money market funds purchased 100% of all Treasury bills issued.During the same period, the Ministry of Finance issued debt securities other than $1778 billion worth of Treasury bills.Banks account for 15% of them.
3. Japanese companies include Japanese insurance companies, pension funds, enterprises, families and Japanese banks.
