Arthur Hayes, the legendary trader and CEO of BitMEX, said that the banking crisis hasn't dissipated yet. Once the FDIC (Federal Deposit Insurance Corporation) fund is exhausted, it will borrow from the Federal Reserve, which will print money to repay the loans. He predicts that Bitcoin will fluctuate between $60,000 and $70,000. He advises buying in May and waiting for a rebound in August.
Arthur explained that ordinary investors equate quantitative easing (QE) with money printing and inflation, which spells trouble for the elite. Therefore, they need to change the terminology. Reducing the speed of asset shrinkage under the Federal Reserve's quantitative tightening (QT) program may sound harmless, but by reducing QT from $95 billion to $60 billion per month, the Fed has effectively added $35 billion in liquidity each month.
He continued, "When you factor in interest on reserve balances, reverse repo (RRP) payments, and U.S. Treasury interest payments, the reduction in QT has increased the amount of stimulus provided to global asset markets monthly."
The Federal Reserve recently announced that it will cut QT at its May 2024 meeting. "Let's take a handy chart and examine the state of U.S. dollar liquidity before and after the meeting."
"Note that the QT component is based on the Fed's weekly balance sheet report, reflecting the actual average monthly reduction for 2024. As you can see, the Fed failed to meet the $95 billion monthly target. This raises the question: If the target is reduced to $60 billion per month, will the Fed still miss that goal? Failure to meet the target pace is favorable for dollar liquidity."
Arthur emphasized that "high" interest rates require the Fed and the U.S. Treasury to pay interest to the wealthy, which, combined with a slowdown in QT, becomes even more stimulative.
As the U.S. is fiscally dominant, statements by U.S. Treasury Secretary Janet Yellen are more important than those of any other monetary official. Each quarter, the Treasury releases the QRA to guide the market on the amount and type of debt needed to fund the government.
Before the QRA for the second quarter of 2024, Arthur posed some questions:
Will Yellen borrow more or less than last quarter, and for what reasons?
Arthur responded that for the April-June 2024 quarter, the Treasury expects to borrow $243 billion in privately held net marketable debt, assuming a cash balance of $750 billion at the end of June. This borrowing estimate is $41 billion higher than the estimate published in January 2024, primarily due to lower cash receipts, partially offset by higher starting cash balances.
"If you hold Treasuries, this is bad news. Supply will increase, and despite the strong performance of the U.S. economy and stock market, tax receipts remain disappointing. This will accelerate the bond market's spiral, causing long-term interest rates to rise significantly. Yellen's response could be some form of yield curve control, and at that point, Bitcoin will really start to climb to $1 million," he pointed out.
What is the maturity profile of the debt being issued?
According to current fiscal forecasts, the Treasury expects to increase the size of 4-week, 6-week, and 8-week bill auctions in the coming days to meet a week's worth of cash needs around the end of May. Then, before the June 15 non-withholding and corporate tax payment date, the Treasury expects to moderately reduce the size of short-term bill auctions in early to mid-June. Subsequently, throughout July, the Treasury expects to restore the size of short-term bill auctions to the levels of February and March or near their peaks.
Yellen needs to increase the issuance of short-term bills because the market can't handle her response on the long end of the yield curve. Another benefit of increasing bill issuance is that it will clean up reverse repo (RRP), injecting dollar liquidity into the system.
What will be the target balance for the Treasury General Account (TGA)?
In the July-September quarter of 2024, the Treasury expects to borrow $847 billion in privately held net marketable debt, assuming a cash balance of $850 billion at the end of September.
The TGA balance target is $850 billion, which is currently $941 billion, implying a reduction of about $90 billion over the next three months.
The impact of this QRA has a mildly positive effect on U.S. dollar liquidity, but it's not as sensational as the November 2023 announcement that sent bond, stock, and crypto prices soaring. Arthur believes it will help asset appreciation over time.
Collapse of First Republic Bank
Arthur mentioned, "Have you heard of this tiny, worthless bank? I hadn't before it went under. Another non-TBTF (Too Big To Fail) bank failing isn't noteworthy, but it's crucial to understand how U.S. monetary officials are controlling the situation."
The U.S. government, through the FDIC, insures deposits at any American bank up to $250,000. When a bank fails, uninsured depositors should get nothing. However, this is politically unacceptable in an election year, especially when those in power have assured the public that the banking system is healthy.
As of January 31, 2024, First Republic Bank had approximately $60 billion in total assets and $40 billion in total deposits. The FDIC estimates that the Deposit Insurance Fund (DIF) will incur a cost of $667 million due to the collapse of First Republic Bank. The FDIC deemed that Fulton Bank's acquisition of First Republic was the least expensive solution for the DIF compared to other alternatives. DIF, established by Congress in 1933 and managed by the FDIC, aims to protect national bank deposits.
Arthur stated, "Fulton agreed to acquire First Republic and ensure that all depositors are fully covered, provided the FDIC provides some cash. The FDIC granted up to $667 million in insurance to Fulton so that all First Republic Bank depositors could be fully covered. Why is the insurance fund being used for all deposits when some weren't insured?"
"The reason is that if all deposits aren't covered, the bank will collapse. Any significant depositor will immediately move their funds to a TBTF bank with government guarantees for all deposits. Then, thousands of banks nationwide will fail. In a democratic republic with biennial elections, that's not a good look. Once the public realizes that bank failures are entirely due to Federal Reserve and Treasury policies, some overpaid individuals will have to find real jobs."
He pointed out that rather than face setbacks at the polls, those in charge are effectively guaranteeing all deposits in the U.S. banking system. This implicitly increases the Federal Reserve's balance sheet by $6.7 trillion because that's the amount of uninsured deposits reported by the St. Louis Federal Reserve Bank.
"This amounts to money printing because the FDIC's insurance fund doesn't have $6.7 trillion. Once the fund runs out, the FDIC will borrow from the Federal Reserve, which will print money to repay the loans," Arthur emphasized.
He said, "Like other implicit money printing policies discussed in this article, there's no large-scale liquidity injection today. But we can be sure that trillions of dollars of potential liabilities have been added to the Federal Reserve's balance sheet, which will be funded through money printing."
Klaros Group, a financial advisory firm, found that of the 4,000 U.S. financial institutions, 282 banks are facing a crisis of potential collapse. The report noted that high Federal Reserve interest rates are causing a bad debt storm, intensifying bank capital pressures, and potentially triggering a new wave of failures.
Bitcoin Strategy Signals: Buy in May, Hold, and Wait for a Rebound in August
Arthur wrote, "Adding billions in liquidity each month will curb negative price fluctuations. While I don't expect cryptocurrencies to fully recognize the inflationary nature of recent U.S. monetary policy announcements immediately, I anticipate prices will bottom out, oscillate, and slowly rise."
"As summer approaches in the northern hemisphere, some crypto investors will feel the market's vibrancy. They may feel as though they've gained wealth in advance and will spend time in trendy places, enjoying life. Of course, I won't always be staring at Bitcoin's prices; I can go dancing instead. The recent sharp sell-off provides a fantastic opportunity for me to unlock my USD stablecoins and spend synthetic dollars on high-beta junk coins."
"I'm going to buy Solana and related dog coins for momentum trading. For long-term altcoin holdings, I'll increase my allocation to Pendle and identify other 'discounted' coins. I'll use the remainder of May to increase my positions. Then it's just holding coins and waiting for the market to recognize the inflationary nature of recent U.S. monetary policy announcements."
Arthur also addressed three major questions:
- Did Bitcoin reach a local low of around $58,600 earlier this week? Yes.
- What's your price forecast? A significant rise above $60,000, followed by fluctuation between $60,000 and $70,000 until August.
- Are recent Federal Reserve and Treasury policies implicit forms of money printing? Yes.
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