Arthur Hayes: The encryption market will recover pump in September, and the altcoin season needs BTC to break through $70,000.

Author: ARTHUR HAYES

Compiled by Deep Tide TechFlow

Water, water, everywhere is water,

All the boards have been downsized;

Water, water, everywhere is water,

But there’s not a drop to drink.

• Cole Rule, Song of the Ancient Boatman

I like specialty coffee, but the coffee I brew at home is always a failure. I spend a certain amount of money on coffee beans, but my coffee is always worse than the coffee shop’s. In order to improve my brewing, I started paying more attention to the details. I overlooked an important detail, which is the quality of water.

Water is crucial to the quality of coffee. Recently, an article in issue 35 of Standart had a profound impact on me.

During my time as a barista, I had a similar experience where I learned that over 98% of the components in a cup of coffee and about 90% of espresso are water.

This kind of consciousness often realizes it relatively late, perhaps because the idea of ​​spending money to buy a new machine to improve coffee is easier to come by. ‘Ah, you have a conical grinder! That’s why your brewed coffee is cloudy. Switch to a flat burr!’ But what if the problem is not the components? What if focusing on the solvent itself can solve our coffee problem? - Lance Hedrick, ‘On Aqueous Chemistry’

My next step is to understand the author’s suggestion and order a home distiller. I know a local coffee shop that sells mineral concentrates that can be added to water, which will provide a perfect base for my coffee and highlight the flavor of their roasted coffee. By this winter, my morning coffee will be delicious… I hope so. I pray for those adventurous friends who will taste my ‘black gold’ coffee before climbing Mount Yotei.

High-quality water is crucial for brewing delicious coffee. When it comes to investing, water or Liquidity is also important for accumulating BTC (sats). This is a recurring theme in all of my articles. But we often forget its importance and focus on the trivial matters we think will impact our ability to make money.

If you can identify how, where, why, and when Fiat CurrencyLiquidity is created, it’s hard to lose money when investing. Unless you are Su Zhu or Kyle Davies. If financial assets are priced in US dollars and US Treasury (UST), it can be inferred that the quantity of global currency and US dollar debt is the most critical variable.

What we need to follow is not the Federal Reserve (Fed), but the US Treasury. This will help us determine the specific situation of Fiat Currency Liquidity increase or decrease in Pax Americana.

We need to return to the concept of ‘fiscal dominance’ to understand why US Treasury Secretary Yellen made the Fed Chairman Powell her ‘beta cuck towel bitch boy’. Please read my article titled Kite or Board for a deeper discussion. During fiscal dominance, the necessity of funding the state overrides any concern of Inflation by the central bank. This means that bank credit, as well as nominal GDP rise, must be maintained at a high level, even if this leads to Inflation persistently higher than the target level.

The timing of the transfer of power from the central bank to the treasury is determined by time and compound interest. When the debt-to-GDP ratio exceeds 100%, the debt rises at a much faster rate than the economy mathematically rises. In the aftermath of this event horizon, the institution that controls the supply of debt is crowned as the emperor. This is because the treasury determines when, how much, and when the debt will be issued. In addition, as the government now relies on debt-driven rises to maintain the status quo, it will eventually instruct the central bank to cash the treasury’s checks using its printing press. The independence of the central bank is no longer important!

The outbreak of COVID and the US government’s measures to keep people at home and distribute stimulus checks in exchange for their compliance have led to a rapid increase in the debt-to-GDP ratio to over 100%. It’s only a matter of time before Yellen goes from being a “grandma” to a “bad girl”.

Before the United States enters a full-blown scenario of malignant inflation, Yellen has a simple way to create more credit and boost the asset market. There are two sterilized funds on the Fed’s balance sheet that, if released into the market, will promote bank credit rise and push up asset prices. The first pool is the reverse repurchase agreement (RRP) pool. I have discussed this pool in detail, where money market funds (MMFs) deposit cash overnight with the Fed and earn interest. The second pool is bank reserves, and the Fed plans to pay interest on this pool in a similar way.

When money is on the Fed’s balance sheet, it cannot be repledged into the financial markets to generate Broad Money or a credit rise. By providing incentives to banks and money market funds with reserve interest and reverse repo interest, respectively, the Fed’s quantitative easing (QE) program creates an inflation in the price of financial assets, rather than causing a rapid rise in bank credit. If QE is not sanitized in this way, bank credit will flow into the real economy, increasing the Inflation of output and goods/services. Given Pax Americana’s current total debt, a strong nominal GDP rise coupled with an inflation of goods/services/wages is exactly what the government needs to increase tax revenues and drop leverage. Therefore, “bad girl” Yellen stepped in to rectify the situation.

Yellen doesn’t care about Inflation. Her goal is to create nominal economic rise to increase tax revenue and drop the US debt-to-GDP ratio. Given that no party or their supporters are committed to cutting spending, the deficit will continue to exist in the foreseeable future. In addition, as the federal deficit is the largest in peacetime history, she must use all the tools available to finance the government. Specifically, this means transferring as much funding as possible from the Fed’s balance sheet to the real economy.

Yellen needs to give banks and money market funds what they want. They want a credit-free, lowest-risk, interest rate return cash tool to replace the interest-bearing cash they hold at the Fed. Treasury bills with maturities of less than one year, which yield slightly higher than Interest on Reserves (IORB) or Reverse Repurchase Interest Rate (RRP), are perfect substitutes. Treasury bills are assets that can be leveraged in the market, which will generate credit and asset price rise.

Can Yellen issue $3.6 trillion worth of treasury bonds? Of course. The federal government is running a $2 trillion annual deficit and must finance it through the issuance of debt securities by the Treasury Department.

However, Yellen’s successor in January 2025 may not necessarily issue Treasury bonds for government financing. She could sell long-term bonds with poorer liquidity and higher interest rate risk. These securities are not cash equivalents. In addition, due to the shape of the yield curve, the yield on long-term debt securities is lower than that of Treasury bonds. The profit motive of banks and money market funds makes it impossible for them to use funds held by the Fed to exchange for anything other than Treasury bonds.

So why do we encryption traders care about the flow of funds between the Fed’s balance sheet and the wider financial system? Look at this beautiful chart.

As the reverse repurchase plan (RRP) (white line) falls from its high, BTC (gold) rebounds from its low. As you can see, this is a close relationship. When funds leave the Fed’s balance sheet, it increases liquidity, leading to a pump in the prices of limited financial assets such as BTC.

Why does this happen? Let’s consult the Treasury Borrowing Advisory Committee (TBAC). In its latest report, TBAC clearly explains the relationship between increasing Treasury bill issuance and funds held by money market funds (MMFs) in the RRP.

Large overnight reverse repo balances may indicate strong demand for treasury bills. Between 2023-24, overnight reverse repo funds almost one-to-one shifted to treasury bills. This rotation facilitated the smooth absorption of record-breaking treasury bill issuance. - Slide 17, TBAC July 31, 2024

As long as the yield of treasury bonds is slightly higher than the reverse repurchase rate, the money market fund will transfer cash into treasury bonds - currently, the yield of 1-month treasury bonds is about 0.05% higher than the funds in RRP.

The next question is whether the bad girl Yellen can redirect the remaining 300-400 billion dollars from RRP to Treasury bills. If you suspect the bad girl Yellen, you may face sanctions! Ask those poor souls from developing countries what happens when you lose the opportunity to get dollars to buy basic necessities such as food, energy, and medicine.

In the recent Q3 2024 Quarterly Financing Announcement (QRA), the Ministry of Finance stated that it will issuance 2710 billion US dollars of treasury bonds by the end of this year. This is good, but there is still funding in RRP. Can she do more?

Let me quickly talk about the Treasury repurchase program. Through the program, the Treasury repurchases non-Treasury security debt securities with insufficient liquidity. The Treasury can provide funds for purchases by reducing its general account (TGA) or Treasury issuance. If the Treasury increases the supply of Treasury securities and reduces the supply of other types of debt, it will net increase liquidity. Funds will leave RRP, which is positive for USD liquidity, and holders will turn to the risk curve to replace these financial assets as the supply of other types of government bonds decreases.

As of November 2024, the latest repurchase plan will purchase $30 billion worth of non-Treasury securities. This is equivalent to an issuance of $30 billion in Treasury securities, bringing the total amount of funds flowing out of RRP to $301 billion.

This is a robust Liquidity injection. But how powerful is the bad girl Yellen? How much does she want minority US presidential candidate Kamala Harris to win? I call her a ‘minority’ because Harris changes her appearance based on the audience in different occasions vesting. This is the unique ability she possesses. I support her!

The Treasury could inject massive liquidity by bringing the TGA down from around $750 billion to zero. They can do this because the debt ceiling goes into effect on January 1, 2025, and by law, the Treasury can spend down the TGA to avoid or delay a government shutdown.

Bad girl Yellen will inject at least $301 billion and up to $10.5 trillion by the end of the year. Boom! This will create a glorious Bull Market, covering all types of risk assets, including Cryptocurrency, just in time for the election. If Harris still can’t beat that orange guy, then I think she needs to become a white male. I believe she has the superpower within her/his ability.

Grenade

In the past 18 months, it has been very impressive to inject $25 trillion into the financial markets through the reverse repurchase agreement (RRP). But there is still a lot of dormant Liquidity waiting to be released. Can Yellen’s successor create a situation after 2025 that will draw funds from the bank reserves held by the Fed and inject them into the broader economy?

During a financially dominant period, everything is possible. But how to do it?

Profit-oriented banks will swap one income-generating cash tool with another in terms of capital adequacy, as long as the regulatory treatment of the two is the same and the latter has a higher yield. Currently, the yield of treasury bonds is lower than the reserve balance held by the Federal Reserve, so banks will not purchase treasury bonds.

But what will happen when the reverse repurchase is almost zero next year, and the Ministry of Finance continues to dump a large amount of treasury bonds into the market? Adequate supply and money market funds (MMFs) cannot use funds parked in reverse repurchase to purchase treasury bonds, which means prices must fall, and yields will rise. Once the yield of treasury bonds is a few basis points higher than the excess reserve Intrerest Rate, banks will use their reserves to buy a large amount of treasury bonds.

Yellen’s successor - I bet it’s Jamie Damon - will be unable to resist the ability to continue dumping Treasury bonds into the market for political gain of the ruling party. There are also 3.3 trillion dollars of bank reserves Liquidity waiting to be injected into the financial market. Join me and shout: Treasury bonds, baby, Treasury bonds!

I believe TBAC is quietly hinting at this possibility. Here is another excerpt from a previous report, with my comments highlighted in [bold]:

Looking ahead, many factors may need further research to consider the future issuance of treasury bonds:

[TBAC hopes that the Ministry of Finance will consider the future and the size of the issuance of Treasury bills. Throughout the report, they argue that the issuance of Treasury bills should be maintained at around 20% of the total net debt. I believe they are trying to explain what would cause this ratio to increase and why banks would become the main buyers of these Treasury bills.] - TBAC July 31, 2024, Slide 26

[Banks do not want to hold more long-term notes or bonds with stricter collateral requirements. They are quietly indicating that they will no longer buy long-term debt because it will hurt their profitability and the risks are too great. If the main trading houses go on strike, the treasury will be in trouble because who else has a balance sheet to absorb huge debt auctions.]

The evolution of market structure and its impact on the resilience initiative of the government bond market, including,

• SEC’s central clearing rules, which will require a large amount of Margin to be posted in covering clearing institutions
• [If the government bond market shifts to the exchange, it will require traders to issue billions of dollars in additional collateral. They cannot afford such costs, resulting in a decrease in participation.]
• The future (expected) size of US Treasury bond auctions and the predictability in cash management and benchmark Treasury bond issuance
• [If the deficit continues to be so large, the debt of issuance may increase significantly. Therefore, the role of treasury bonds as a “buffer” will become increasingly important. This means that a higher issuance of treasury bonds will be needed.]
• [If the money market fund returns to the market after the reverse repurchase is completely withdrawn, the issuance of treasury bonds will exceed 20%.] - TBAC July 31, 2024, Slide 26

The banks have effectively gone on strike and stopped buying long-term national debt. Bad girl Yellen and Powell almost caused a banking system collapse by filling the banks with national debt and then raising the Intrerest Rate from 2022 to 2023…Rest in peace, Silver Gate Bank, Silicon Valley Bank, and Signature Bank. The remaining banks do not want to take any more risks and see what happens if they greedily buy high-priced national debt again.

Example: Since October 2023, U.S. commercial banks have only purchased 15% of non-treasury bond securities. This is very bad for Yellen, as she needs banks to step up when the Fed and foreign countries exit. I think as long as banks buy treasury bonds, they will be happy to fulfill their responsibilities, as the risk characteristics of treasury bonds are similar to bank reserves, but with higher yields.

Widow Maker

The movement of the USD-JPY currency pair from 160 to 142 has caused a severe reaction in the global financial markets. Many people were reminded last week to sell what they could. That moment was a textbook correlation. The USD-JPY will reach 100, but the next wave will be driven by the repatriation of foreign capital by Japanese companies (Japan Inc.), not just by hedging fund investors’ breakeven yen arbitrage trades. They will sell US government bonds and US stocks, primarily large tech stocks like NVIDIA, Microsoft, and Google.

The Japanese Central Bank tried to raise interest rates, and the global markets reacted strongly. They compromised and announced that raising interest rates is not under consideration. From the perspective of legal currency Liquidity, the worst case scenario is the yen trading Sideways, with no new low-cost yen positions being established. As the threat of yen Arbitrage trading recedes, the market intervention of the bad girl Yellen once again becomes the focus.

Dehydration

Without water, you will die. Without Liquidity, you will face collapse.

Why has the Cryptocurrency risk market been sideways or down since April this year? Most of the tax revenue was generated in April, leading to the need for the Treasury to reduce borrowing. We can see a decrease in the issuance of treasury bonds between April and June.

Due to the net decrease of Treasury securities, the Liquidity in the market is removed. Even if the overall government borrowing increases, the net decrease in cash-like instruments provided by the Treasury Department will also lead to a decrease in Liquidity. Therefore, cash is still trapped on the Federal Reserve’s balance sheet and cannot drive the rise in financial asset prices in the reverse repurchase agreement (RRP).

This chart of BTC (gold) and RRP (white) clearly shows that from January to April, when the net issuance of treasury securities, RRP decreased, BTC rose. From April to July, when the net withdrawal of treasury securities from the market, RRP rose, BTC traded sideways, accompanied by several sharp declines. I stopped on July 1st because I wanted to show the interaction of the USD-JPY from a strong 162 to a weak 142, which led to a widespread dumping of risk assets.

Therefore, according to the words of the bad girl Yellen, we know that the Treasury will net issuance 3010 billion US dollars between now and the end of the year. If this relationship holds, BTC will quickly fill the dumping caused by the appreciation of the yen. The next target for BTC is $100,000.

When is the season for AltCoin?

AltCoin is a high Beta BTC encryption play. However, in this cycle, BTC and Ethereum are now structurally bought into the exchange-traded funds (ETFs) listed in the United States. Although BTC and Ethereum have experienced a pullback since April, they have escaped the disastrous defeat in the AltCoin market. The AltCoin season will only come back after BTC and Ethereum respectively break through $70,000 and $4,000. Solana is also expected to exceed $250, but considering the relative market capitalization, Solana’s pump will have far less impact on the overall wealth effect of the encryption market compared to BTC and Ethereum. By the end of the year, the rebound of BTC and Ethereum driven by USD liquidity will lay a solid foundation for the return of the sexy AltCoin party.

Trading Settings

With the issuance and repurchase plans of Treasury Bills running in the background, the liquidity situation will improve. If Harris wavers, more firepower will be needed to pump the stock market, and Yellen will reduce the funds of TGA. In any case, I expect Cryptocurrency to break away from the sideways downward trajectory starting in September. Therefore, I will take advantage of the weakness at the end of this summer in the northern hemisphere to increase investment in encryption risks.

The US election will take place in early November. Yellen will reach the peak of manipulation in October. There is no better Liquidity opportunity this year. Therefore, I will take advantage of the situation. I will not liquidate my entire encryption portfolio, but will profit from more speculative momentum trading and hold capital in stake of Ethena USD (sUSDe). The encryption market pumps, increasing the chances of Trump’s victory. Trump’s chances of winning peaked after the assassination attempt and Slow Joe’s disastrous debate performance. Kamala Harris is a first-class political puppet, but she is not an octogenarian vegetable. That’s all she needs to defeat Trump. The election is a coin toss game, and I prefer to watch the chaos from the sidelines and re-enter the market after the US debt ceiling is raised. I expect this to happen between January and February.

Once the farce of the US debt ceiling ends, Liquidity will flood out from the Treasury and the Fed to restore the market to normal. Then, the real Bull Market will begin. $1 million BTC is still my basic prediction.

P.S.: Once the bad girl Yellen and the towel boy Powell join forces, China will finally release its long-awaited fiscal stimulus. The 2025 bull market in crypto between China and the United States will be magnificent.