Arthur Hayes: Don't lose heart, the bull market in the fourth quarter is coming.

23-06-05 21:00
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Original Title: "Patience Is Beautiful"
Original Author: Arthur Hayes
Original Translation: GaryMa, Wu Shuo Blockchain


Patience is essential in the financial market.


Since the outbreak of the US banking crisis this year, I and many others have been stating that the legal currency banking system in the US and globally will be fortunate enough to receive a new round of central bank printing (which will push up the prices of risky assets) for rescue. However, after the initial rise of Bitcoin and gold, these hard currency assets have fallen back somewhat.


As far as Bitcoin is concerned, the volatility and trading volume of spot and derivative products have both declined. Some people are beginning to wonder why Bitcoin did not continue to rise if we are really in a banking crisis. Similarly, why hasn't the Federal Reserve started cutting interest rates, and why hasn't the United States started yield curve control.


My answer to those skeptics is: be patient. Nothing goes up or down in a straight line, we will move forward with twists and turns. Remember: the destination is known, but the path is unknown.


Printing money, yield curve control, bank bankruptcies, and more will happen, starting with the United States and eventually spreading to all major fiat currency systems. The goal of this article is to explore why I believe the real Bitcoin bull market will begin in the late third quarter and early fourth quarter of this year. Before that, stay calm. Take a vacation and enjoy nature and time with friends and family. Because come this fall, you better buckle up and get ready to go TO THE MOON.


As I have said many times before, the price of Bitcoin is a result of fiat currency liquidity and technology. Most of my articles this year have focused on global macro events that affect fiat currency liquidity. I hope during the summer break in the northern hemisphere, I can turn to writing exciting things about the forefront of Bitcoin and cryptocurrency technology.


The goal of this article is to provide readers with a clear roadmap of the evolution of legal currency liquidity and to understand what will happen in the next few months. Once we are satisfied with the expansion of the liquidity of the US dollar and legal currency by the end of the year, we can fully focus on which technical aspects of certain currencies are most exciting. When you combine "the printing press humming" with truly innovative technology, your returns will far exceed the cost of your efforts. This is the goal we have always pursued.


前提


translates to

Premise


in English.

The bureaucrats responsible for central banks and global monetary policy believe they can rule the market of over 8 billion people. Their arrogance is reflected in the way they discuss certainty based on economic theories developed in the academic world over the past few centuries. But whether they want to believe it or not, they have not solved the monetary version of the three-body problem.


When the equation of "debt and production output" loses balance, the economic "law" will collapse. This is similar to the way water changes its state at seemingly random temperatures. We can only understand the behavior of water through post-observation and experimentation, and cannot engage in theoretical speculation in ivory towers. Our monetary rulers refuse to use empirical data to guide their policy adjustments, but insist that the theories taught by their respected professors are correct, regardless of objective results.


In this article, I will delve into why, contrary to common currency theory, raising interest rates due to current debt and production output conditions will lead to an increase in the quantity of money and inflation, rather than a decrease. This will cause inflation to worsen regardless of which path the Federal Reserve chooses, whether it is raising or lowering interest rates, and will trigger a widespread withdrawal from the parasitic legal currency financial system.


As a true believer in Satoshi Nakamoto, we hope to trade as cautiously as possible based on this large-scale evacuation opportunity. I hope to earn substantial profits in fiat currency until it is necessary to sell the US dollar and invest heavily in Bitcoin. Of course, I am also showing some arrogance because I believe that I can predict the most appropriate exit time without self-destruction. But what can I say? At the end of the day, we are all flawed humans, but at least we must strive to understand what the future may look like.


Having addressed this point, let us continue to explore some (controversial) factual statements.


No matter where they are in the economic system, every major legal currency system faces the same problem. That is, they are all heavily indebted, the working-age population is decreasing, and their banking systems' assets are mainly low-yield government and corporate bonds/loans. The rise in global inflation has left the global legal currency banking system in a state of inability to repay.


Due to the role of the United States as the world's largest economy and the issuer of reserve currency, the United States faces these problems more severely than any other country and is in the most dire situation.


The group thinking of central bankers does exist, because all senior officials and employees have studied at the same "elite" universities, where professors teach different versions of the same economic theory.


Therefore, no matter what action the Federal Reserve takes, all other central banks will eventually follow.


Remember this, I want to focus on the situation in the United States. Let's quickly understand the various roles in this tragedy.


The Federal Reserve exerts influence through its ability to print money and hold assets on its balance sheet.


The US Treasury Department raises funds by issuing debt to influence the situation and support the federal government.


The US banking system creates credit by taking in deposits and lending them out to exert influence by providing funding for businesses and governments. The system's ability to repay debts is ultimately supported by currency printed by the Federal Reserve and the US Treasury or taxpayer money.


The US federal government exerts influence through its ability to tax and spend on various government programs.


Private enterprises and individuals exert influence through their decisions on where and how to save funds, as well as whether to borrow from the banking system.


Foreign participants, especially those from other countries, exert influence by deciding whether to buy, hold, or sell US Treasury bonds.


At the end of this article, I hope to summarize the main decisions of each stakeholder into a framework, showing how we have reached a situation where each participant has almost no room for maneuver. This lack of flexibility allows us to confidently predict how they will respond to the current US currency issue. Finally, because the financial crisis is still closely related to the agricultural harvest cycle, we can fairly confidently predict that the market will wake up and realize the bad situation at the scheduled time in September or October of this year.


收获


translates to

收获


in English.

Please be patient, because before we dive into the details, I have some groundwork to cover. I will list some basic assumptions that I believe will occur or intensify when autumn arrives.


Inflation will reach a local low point this summer and accelerate again by the end of the year.


I am specifically referring to the US Consumer Price Index (CPI). Due to a statistical phenomenon known as base effects, the high month-over-month (MoM) inflation data in 2022 will be replaced by lower MoM inflation data in the summer of 2023. If the MoM inflation rate for CPI in June 2022 is 1%, and the MoM inflation rate for CPI in June 2023 is 0.4%, then the year-over-year CPI will decrease.


Arthur Hayes:保持耐心,牛市将在四季度启动


As shown in the above figure, some of the highest month-on-month consumer price index (MoM CPI) data from last year (which is taken into account in the current year-on-year data) appeared in May and June. For 2023, the average value of month-on-month CPI is 0.4%, which means that if we only take the average value and replace all the data from May to December 2022 with 0.4%, we will get the following chart:


Arthur Hayes:保持耐心,牛市将在四季度启动


The Federal Reserve does not care about the real inflation situation, they care about the fictional concept of "core inflation", which strips away factors that people actually care about, such as food and energy. The following chart provides the same analysis for the core Consumer Price Index (CPI):


Arthur Hayes:保持耐心,牛市将在四季度启动


The conclusion is that the Federal Reserve will not be able to reach its 2% core inflation target in 2023. This means that if you believe the rhetoric of Powell and other members of the Federal Reserve System, the Fed will continue to raise interest rates. This is important because it means that the interest rates on funds held in the reverse repurchase (RRP) and interest on excess reserves (IORB) facilities will continue to rise. It will also lead to an increase in the interest rates of short-term US Treasury bills (<1 year maturity).


Do not get caught up in why these inflation indicators do not match the price changes you and your family actually feel. This is not an exercise in intellectual honesty - instead, we simply want to understand the indicators that affect how the Federal Reserve adjusts policy rates.


Due to social security spending, the US federal government is unable to reduce the deficit.


The baby boomer generation is the wealthiest and most powerful group of voters in the United States, and they are also increasingly aging and sick. This means that a politician who campaigns on reducing the social security and medical insurance benefits promised to the baby boomer generation will be digging their own grave.


Arthur Hayes:保持耐心,牛市将在四季度启动


HHS (Department of Health and Human Services) + SSA (Social Security Administration) = elderly and medical welfare.


Treasury = interest payments on outstanding debt that have not been paid.


Defence = War


The spending on elderly care, medical welfare, and national defense will only continue to increase. This means that the US government's fiscal deficit will continue to rise. It is estimated that in the next decade, an annual deficit of 1 to 2 trillion US dollars will become the norm. Unfortunately, neither of the two major political parties in the US has the political will to change this trend.


Arthur Hayes:保持耐心,牛市将在四季度启动


The final result is that the market must absorb a continuous stream of enormous debt.


Foreign Participants


As I have written in several articles this year, foreign participants have become net sellers of US Treasuries (UST), and there are many reasons for this, here are a few:


Property rights depend on whether you are a friend or enemy of American politicians. We have seen the rule of law give way to national interests, with the US freezing Russian state assets in the Western financial system. Therefore, as a foreign holder of US Treasury bonds, you cannot be sure if you will be allowed to access your own wealth when you need it.


Compared with the United States, more countries consider a certain Eastern country as their largest trading partner. This means that from a purely trade-driven perspective, it makes more sense to pay for goods with the legal currency of the Eastern country than with the US dollar. Therefore, more and more goods are directly invoiced in this legal currency, leading to a decrease in marginal demand for the US dollar and US Treasury bonds.


Arthur Hayes:保持耐心,牛市将在四季度启动

Arthur Hayes:保持耐心,牛市将在四季度启动


In the past twenty years, US Treasury bonds have lost purchasing power in the energy sector. In terms of energy, gold has maintained its purchasing power. Therefore, in a world of energy supply shortages, it is better to save gold at the margin rather than US Treasury bonds.


TLT ETF (20-year or more US Treasury Bond) divided by WTI crude oil spot price (white line).


Gold divided by WTI crude oil price (yellow line).


Arthur Hayes:保持耐心,牛市将在四季度启动

The total return performance of long-term US Treasury bonds is 50% lower than that of oil prices. However, since 2002, the performance of gold has exceeded that of oil prices by 190%.


This has led to a decrease in foreign holdings of US Treasury bonds. Governments outside of the US are no longer buying newly issued Treasury bonds and are also selling off their existing holdings of US Treasury bonds.


In short, if there is a large amount of debt to be sold, one cannot rely on foreigners to purchase it.


Private enterprises and individuals in the United States - private sector


We are most concerned about how this group will handle their savings. Please remember that during the pandemic, the US government provided stimulus funds to everyone. To combat the devastating economic impact of the lockdown, the stimulus measures provided by the US exceeded those of any other country.


Arthur Hayes:保持耐心,牛市将在四季度启动

These stimulus funds were deposited into the US banking system and since then, the private sector has been spending their discretionary funds on whatever they like.


When the yields of deposits, money market funds, and short-term US Treasury bonds are basically 0%, the US private sector is willing to deposit funds in banks. As a result, deposits in the banking system have surged. However, when the Federal Reserve decides to combat inflation by accelerating the rate hike, the US private sector suddenly faces a choice.


Continue to earn basically 0% returns in banks.



Considering how easy it is to transfer funds from low to zero-yield bank accounts to higher-yielding assets, tens of billions of dollars have flowed out of the US banking system since the end of last year.


Arthur Hayes:保持耐心,牛市将在四季度启动


Since last year, more than $1 trillion has been withdrawn from the US banking system.








Federal Reserve


As mentioned earlier, I have already touched upon a similar topic, but please allow me to expand on the same theme in a more vivid and illustrative manner.


Imagine two politicians.


Oprah Winfrey hopes that everyone can be happy and live their best life. She ensures that everyone has food on the table, cars in the garage filled with gasoline, and the best healthcare until they pass away. She also stated that she will not raise taxes to pay for these benefits. She will borrow money from other parts of the world to achieve this goal, and she believes it can be done because the United States is the global reserve currency issuing country.


Scrooge McDuck is a miser who hates debt. He hardly provides government welfare because he doesn't want to raise taxes or borrow money to pay for things the government can't afford. If you have a job that allows you to buy a full fridge of food, a pickup truck, and top-notch healthcare, that's your business. But if you can't afford these things, that's your own business too. He doesn't believe it's the government's responsibility to provide these things for you. He wants to maintain the value of the dollar and ensure there's no reason for investors to hold other assets.


Arthur Hayes:保持耐心,牛市将在四季度启动


Imagine that you are in the late stage of an empire where income inequality is rapidly increasing. Mathematically speaking, the majority of people will always have incomes below the average level, so who will win? Oprah Winfrey always wins. By using a currency printing machine and receiving free items paid for by others, she always comes out on top.


The primary job of politicians is to win elections. Therefore, regardless of which political party they belong to, they will always prioritize spending money they don't have in order to win the support of the majority of people.


There is no reason not to adopt a "free goods" based platform unless the long-term debt market or malignant inflation gives severe accusations. This means that from now on, I do not expect to see any substantial changes in the usual spending habits of the US federal government. As for this analysis, trillions of dollars will continue to be borrowed each year to pay for these benefits.


American Banking System


In short, the banking systems in the United States and other major countries are facing difficulties. I will quickly review the reasons.


Due to the stimulus measures provided by governments around the world, there has been an asset inflation in the banking system. Banks lend these deposits to governments and businesses at very low interest rates. This works for a while because the interest rate on bank deposits is 0%, but their lending rates to others through longer-term loans are 2~3%. However, inflation then occurs, and all major central banks (with the Federal Reserve being the most active) raise short-term policy rates significantly higher than the yields on government bonds, mortgages, corporate loans, etc. Depositors can now earn higher returns by purchasing reverse repurchase agreements (RRPs) or short-term US Treasury money market funds invested in the Federal Reserve. As a result, depositors begin to withdraw funds from banks to earn better returns. Banks cannot compete with the government because it would undermine their profitability - imagine a bank with a loan rate of 3% but a deposit rate of 5%. One day, the bank will go bankrupt. Therefore, bank shareholders begin to sell bank stocks because they realize that these banks cannot profit mathematically. This leads to a self-fulfilling prophecy, with the solvency of some banks being questioned as their stock prices plummet.


During my recent interview about Bitcoin in Miami, I asked Zoltan Pozar for his views on the US banking system. He replied that the system is fundamentally sound, with only a few bad apples. This is consistent with the statements made by various Federal Reserve chairs and US Treasury Secretaries, including Janet Yellen. I strongly disagree.


The Bank of America now faces two choices:


Option 1: Sell assets (such as US Treasury bonds, mortgage loans, auto loans, commercial real estate loans, etc.) at a huge loss, and then raise deposit rates to attract customers back to the bank.


This option means acknowledging the implicit losses on the balance sheet while ensuring that the bank cannot sustain profitability. The yield curve is inverted, which means that the bank will pay higher short-term deposit rates but will not be able to lend these deposits at higher rates for long-term loans.


The yield spread between the 10-year and 2-year US Treasury bonds.


Arthur Hayes:保持耐心,牛市将在四季度启动


Banks cannot purchase long-term government bonds because it would result in losses - very important!


The only thing that banks can purchase is short-term government bonds, or deposit funds with the Federal Reserve (IORB) and receive slightly higher interest rates than deposits. With this strategy, it is difficult for banks to achieve a net interest margin (NIM) of more than 0.5%.


Option 2: Do nothing and exchange your available assets with the Federal Reserve for newly printed US dollars when the depositor withdraws.


This is essentially the role of the Bank Term Funding Program (BTFP). I discussed this issue in detail in a previous article. Don't worry about whether the assets held by banks on their balance sheets meet the eligibility requirements of the BTFP - the real problem is that banks are unable to expand their deposit base and then use these deposits to purchase long-term government bonds.


US Department of the Treasury


I know that the media and the market are both concerned about when the US debt ceiling will be reached and whether the two parties will find a compromise to raise the ceiling. Ignore this circus show - the debt ceiling will be raised (as usual, considering more severe alternatives). And when it is raised, around this summer, the US Treasury Department will have some work to do.


The US Treasury Department must issue trillions of dollars in debt to fund the government. It is important to pay attention to the maturity structure of the debt issued. Obviously, it would be great if the Treasury Department could issue trillions of dollars in 30-year bonds, as the yield on these bonds is nearly 2% lower than short-term bonds with a maturity of less than 1 year. But can the market bear it? Absolutely not!


Arthur Hayes:保持耐心,牛市将在四季度启动


Maturity Structure of US Treasury Debt


Arthur Hayes:保持耐心,牛市将在四季度启动


From now until the end of 2024, the amount of debt that needs to be extended is about 9.3 trillion US dollars. As you can see, the US Treasury is unwilling or unable to issue most of its long-term debt and instead finances itself with short-term debt. Oh no! This is bad news because short-term interest rates are higher than long-term interest rates, which increases interest expenses.


Let's take a look. The following is a table of the main potential buyers of US Treasury bonds, bills, and notes:


Arthur Hayes:保持耐心,牛市将在四季度启动


No major buyer is willing or able to purchase long-term US Treasury bonds. Therefore, if the US Treasury Department attempts to flood the market with trillions of dollars in long-term debt, the market will demand higher yields. Imagine if the 30-year yield rose from 3.5% to 7%, this would cause bond prices to plummet, signaling the end of many financial institutions. This is because these financial institutions were encouraged by regulatory agencies to use almost unlimited leverage to purchase large amounts of long-term debt. That's definitely a disaster!


US Treasury Yield Curve


Arthur Hayes:保持耐心,牛市将在四季度启动


Yellen is not stupid. She and her advisors know that issuing debt at the long end of the yield curve is impossible. Therefore, they will issue debt where demand is very strong: the short end of the yield curve. Everyone wants to earn high short-term interest rates, which may rise further later this year as inflation picks up.


With the US Treasury selling $1-2 trillion in debt, short-term interest rates will rise. This will further exacerbate the problems of the banking system, as depositors turn to the government for better terms on borrowing rather than borrowing from banks. This in turn ensures that banks cannot profit from buying long-term bonds. The vicious cycle is rapidly approaching its end.


Federal Reserve


In this final section, the situation in Powell's hands is quite chaotic. Each stakeholder is pulling his central bank in different directions.


降息


translates to

Interest Rate Cut


The Federal Reserve controls/manipulates short-term interest rates by setting the rates for RRP and IORB. Money market funds can earn profits through RRP, while banks can earn profits through IORB. Without these two tools, the Federal Reserve would be unable to control interest rates according to its own wishes.


The Federal Reserve can significantly lower the interest rates of these two tools, which will immediately steepen the yield curve. The benefits will include:


Banks are profitable again. They can compete with the interest rates offered by money market funds, rebuild their deposit base, and begin providing long-term loans to businesses and governments. The US banking crisis is over. The US economy will thrive as everyone can once again access cheap credit.


The US Treasury Department can issue more long-term debt because the yield curve is positively sloped. Short-term interest rates will decrease, but long-term interest rates will remain unchanged. This is desirable because it means that the interest expense on long-term debt remains constant, but the attractiveness of that debt as an investment increases.


The downside is that inflation will accelerate. Currency prices will fall, and the prices of things that voters care about, such as food and fuel, will continue to rise at a rate higher than wages.


加息


translates to

Interest Rate Hike


If Powell wants to continue fighting inflation, he must continue to raise interest rates. For economic experts, according to the Taylor rule, US interest rates are still deeply negative.


Arthur Hayes:保持耐心,牛市将在四季度启动

Here are the negative consequences of continuing to raise interest rates:


The private sector continues to prefer borrowing from the Federal Reserve through money market funds and RRP rather than depositing funds in banks. As a result of the decline in deposit base, US banks continue to fail and receive bailouts. While the Federal Reserve's balance sheet may not be holding these bad debts, the Federal Deposit Insurance Corporation (FDIC) is now full of bad debt loans. Fundamentally, this is still inflationary as depositors will be repaid in full in printed currency, and they are able to earn more interest income by borrowing from the government rather than from banks.


The yield curve continues to invert, making it difficult for the US Treasury Department to issue long-term debt at the desired scale.


I want to further elaborate on the view that raising interest rates can also lead to inflation. I agree that the quantity of money is more important than the price of money. What I am focusing on here is the amount of US dollars injected into the global market.


As interest rates rise, there are three ways for global investors to earn income in the form of printed US dollars. The printed currency can come from the Federal Reserve or the US Treasury. The Federal Reserve pays interest to holders through reverse repurchase agreements and bank reserve requirements. Please note: if the Federal Reserve wants to continue manipulating short-term interest rates, it must have these tools.


If the US Treasury issues more debt and/or raises interest rates on new debt, it will pay more interest to debt holders. Both of these things are happening.


Considering all factors, the interest paid by the Federal Reserve through RRP and IORB, as well as the interest paid on US Treasury debt, have a stimulative effect. However, isn't the Federal Reserve supposed to reduce the quantity of money and credit through the Quantitative Tightening (QT) program? Yes, that is correct, but now let's analyze the net effect and how it will develop in the future.


Arthur Hayes:保持耐心,牛市将在四季度启动


As we can see, the effect of QT has been completely offset by the interest paid through other means. Despite the Fed's reduction of its balance sheet and increase in interest rates, the quantity of currency continues to increase. However, this situation will continue to occur in the future, and to what extent? Here are my thoughts:


1. Private sector and US banks prefer to deposit funds with the Federal Reserve, so the balances of RRP and IORB will increase.


2. If the Federal Reserve wants to raise interest rates, it must raise the interest rate on funds held in RRP and IORB.


3. The US Treasury Department will soon need to provide financing for a deficit of 1 to 2 trillion US dollars in the foreseeable future, and must do so at high and continuously rising short-term interest rates. Considering the maturity of the total US debt, we know that actual monetary interest expenses can only rise mathematically.


Combining these three factors, we know that the net effect of US monetary policy is currently stimulative, with the printing press producing more and more fiat currency. Please remember that this is because the Federal Reserve is raising interest rates to combat inflation. However, if raising interest rates actually increases the money supply, it can be inferred that raising interest rates will actually increase inflation. Mind-boggling!


Of course, the Fed can accelerate the speed of QT to offset these effects, but this would require the Fed to ultimately become a direct seller of US Treasuries and Mortgage-Backed Securities (MBS), in addition to foreign investors and the banking system. If the largest debt holder is also selling (the Fed), the dysfunction of the US Treasury market will increase. This will cause panic among investors, leading to a surge in long-term yields as everyone rushes to sell their bonds before the Fed starts selling.


Trading Related


If you are a believer of Satoshi Nakamoto, time will be on your side. If you choose to join hands with the traditional financial devil, a timed bomb is ticking...


Between now and the autumn harvest, some important things will happen.


First of all, the US debt ceiling will be raised this summer. This will allow the US Treasury to begin issuing debt to fund the government. As the Treasury pays off maturing debt and issues new debt, the net effect will be more outstanding debt and higher interest rates. The issuance of debt may temporarily put pressure on US dollar liquidity, as the Treasury General Account (TGA) increases. However, over time, as the Treasury spends money, the TGA will decrease and US dollar liquidity will increase.


Secondly, as I have previously stated, inflation will bottom out and begin to slowly rise. This means that the Federal Reserve may pause its rate hikes in June and only reignite the flame at the July meeting to raise rates. By the end of August's Jackson Hole central banker gathering, policy rates may be close to 6%. Higher rates will increase the amount of interest paid on RRP and IORB balances.


Finally, the depositor will continue to transfer funds from non-systemically important banks to systemically important banks, or to money market funds. Money market funds deposit funds in RRP, while systemically important banks deposit funds in IORB. In both cases, the balances of RRP and/or IORB will increase. Systemically important banks have a large amount of cash, which is why they pay little or no interest on deposits and deposit any excess funds with the Federal Reserve System (thus increasing IORB). This increases the amount of currency issued by the Federal Reserve to pay for funds held in these facilities.


In summary, the amount of USD liquidity injected into the system will continue to increase on a daily basis. The rate of change in USD liquidity injection will also accelerate, as the larger the balance, the more interest paid. Compound interest is a type of geometric series.


Bitcoin has experienced a roughly 10% pullback from its high point in April. All of these payments are actually a stimulus plan for wealthy asset holders. When they have more funds than they need, wealthy asset holders will purchase risky assets. Gold, Bitcoin, and AI tech stocks will all benefit from the "wealth" issued and distributed by the government.


I expect Bitcoin to remain stable here. I don't believe we will retest $20,000 or near that price. As funds gradually flow into the global risk asset market, a strong support base will form. During the summer in the northern hemisphere, volatility and trading volume are usually disappointing, so I'm not surprised that adventurers who are bored have temporarily left cryptocurrency trading. I will use this calm period to gradually increase my Bitcoin allocation after replenishing at TGA.


As more and more experts begin to discuss the billions of dollars issued by the Federal Reserve and the US Treasury as interest payments, people will once again realize that the printing press is constantly running. And as the printing press hums, Bitcoin will prosper!


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