In mid-April, some degens screamed and shouted “Mayday” as they saw the continuous decline in the cryptocurrency market.
The price trend is in line with my expectations. The US tax season, concerns about the future policies of the Federal Reserve, the implementation of the Bitcoin halving event, and the slowdown in the growth of assets under management (AUM) of the US Bitcoin ETF have all contributed to a much-needed market cleansing in the past two weeks. Speculators or short-term investors may choose to temporarily exit the market and observe the situation. But us hodlers, if possible, will continue to hodl and accumulate more of our favorite crypto reserve assets, such as Bitcoin and Ethereum, as well as high-beta altcoins like Solana, Dog Wif Hat, and, I have to say it, Dogecoin.
This is not a perfectly comprehensive global macroeconomic, political, and crypto article. Instead, I want to emphasize why the US Treasury, the Federal Reserve, and the First Republic Bank’s rescue actions now and in the near future provide avenues for fiat liquidity or increased fiat liquidity. I will quickly go through some charts that support my bullish view.
Quantitative tightening (QT) reduction = QE
When ordinary investors equate quantitative easing (QE) with money printing and inflation, it is trouble for the elite. Therefore, they need to change the terminology and provide a way to administer the financial system’s (tumor) dose of monetary heroin. Reducing the pace of asset reduction under the Federal Reserve’s quantitative tightening (QT) plan sounds harmless. But make no mistake – by reducing the speed of QT from $95 billion per month to $60 billion per month, the Federal Reserve is actually increasing the monthly liquidity of the US dollar by $35 billion. When you combine reserve balance interest, reverse repurchase agreement (RRP) payments, and US Treasury interest payments, the reduction in QT increases the stimulus amount provided to the global asset market each month.
The Federal Reserve announced this week that it will reduce QT at the May 2024 meeting. Let’s take a look at the liquidity situation before and after the meeting using a convenient chart.
Please note that the QT item is based on the Federal Reserve’s weekly report on the balance sheet and the actual monthly reduction amount in 2024. As you can see, the Federal Reserve failed to meet the target of $95 billion per month. This raises the question of whether the target is $60 billion per month and whether the Federal Reserve will also fail to meet this target. A slower pace of progress is favorable for dollar liquidity.
“High” interest rates require the Federal Reserve and the US Treasury to pay interest to the rich. Combined with the deceleration of QT, it becomes more stimulating.
This is the purpose of Fed Chair Powell, but what about his partner Yellen?
US Treasury Quarterly Refunding Announcement (QRA)
As the United States is in a dominant fiscal position, Yellen’s statement is more important than any other currency official’s statement. Every quarter, the US Treasury issues the QRA to guide the market on the amount and types of debt that must be issued to fund the government. Before the Q2 2024 QRA, I have some questions:
1. Will Yellen borrow more or less than the previous quarter, and why?
2. What is the maturity of the debt issued?
3. What will be the target balance of the Treasury General Account (TGA)?
Question 1:
In the April to June 2024 quarter, the Treasury expects to borrow $243 billion of privately held net marketable debt, assuming a cash balance of $750 billion at the end of June. The borrowing estimate is $41 billion higher than the one announced in January 2024, mainly due to lower cash receipts, partially offset by higher cash balance at the beginning of the quarter. This is bad news if you hold Treasury bonds. Supply will increase, and despite the strong performance of the US economy and stock market, tax revenues are still not satisfactory. This will cause a surge in the bond market and a significant rise in long-term interest rates. In response to this, Yellen’s response may be some form of yield curve control, and that’s when Bitcoin will really start to climb to $1 million.
Question 2:
Based on current fiscal forecasts, the Treasury expects to increase the auction sizes for 4-week, 6-week, and 8-week bills in the coming days to ensure meeting our cash needs for one week around the end of May. Then, before the non-withheld and corporate tax payment date of June 15, the Treasury expects to moderately reduce the auction sizes for short-term bills from early to mid-June. After that, for the whole of July, the Treasury expects to restore the auction sizes for short-term bills to the levels seen in February and March or close to the highs.
Yellen needs to increase the issuance of short-term bills because the market cannot withstand her reaction in the long end of the yield curve. Another benefit of increasing bills is that it will clear the reverse repurchase agreements (RRP) and inject dollar liquidity into the system.
Question 3:
In the July to September 2024 quarter, the Treasury expects to borrow $847 billion of privately held net marketable debt, assuming a cash balance of $850 billion at the end of September. The target balance for the TGA is $850 billion. The current balance is $941 billion, which means a decrease of approximately $90 billion over the next three months.
The impact of this QRA has a slight positive effect on dollar liquidity. It is not as sensational as the announcement in November 2023, which caused a surge in bond, stock, and crypto prices. But it will slowly help increase the value of our investments over time.
First Republic Bank
Have you heard of this small, worthless bank? I had never heard of it before it collapsed. The failure of another too big to fail (TBTF) bank is not worth noting. But what is important is to grasp the response of US monetary officials.
The US government (through the FDIC) insures deposits in any US bank, up to a maximum of $250,000. When a bank fails, uninsured depositors should be left with nothing. However, in an election year, this is politically unacceptable, especially if those in power have been assuring the public that the banking system is healthy.
Here are some excerpts from the FDIC:
As of January 31, 2024, First Republic Bank had total assets of approximately $60 billion and total deposits of approximately $40 billion. The FDIC estimates that the cost to the Deposit Insurance Fund (DIF) associated with the failure of First Republic Bank will be $667 million. The FDIC determined that the acquisition of First Republic Bank by Fulton Bank is the least costly resolution to the DIF compared to other alternatives. The DIF is an insurance fund established by Congress in 1933, managed by the FDIC, and designed to protect deposits in the nation’s banks.
To explain what happened in plain language, you need to read between the lines.
Fulton agreed to acquire First Republic and ensure that all depositors are fully protected, provided that the FDIC provides some cash. The FDIC insurance gave Fulton $667 million to ensure that all depositors of First Republic are fully protected. Why use the insurance fund for all deposits when some deposits are not insured?
The reason is that if all deposits were not covered, the bank would collapse. Any large depositor would immediately move funds to a TBTF bank, which has full government guarantees on all deposits. As a result, thousands of banks across the country would fail. In a democratic republic that holds elections every two years, this is not a good scenario. Once the public knows that bank failures are entirely due to the policies of the Federal Reserve and the US Treasury, some overpaid idiots will have to find real jobs.
Rather than facing setbacks during elections, the authorities essentially guarantee all deposits in the US banking system now. This effectively adds $6.7 trillion to the Federal Reserve’s balance sheet, as reported by the Federal Reserve Bank of St. Louis, which is the amount of uninsured deposits.
This leads to money printing because the FDIC’s insurance fund does not have $6.7 trillion. Perhaps they need to seek advice from CZ because the funds are not safe. Once the fund is depleted, the FDIC will borrow money from the Federal Reserve, which will print money to repay the loan.
Like other implicit money printing policies discussed in this article, there is no massive liquidity injection today. But now we can be fully confident that trillions of dollars in potential liabilities have been added to the Federal Reserve’s balance sheet, which will be financed through money printing.
Buy in May and hodl
The gradual increase of billions of dollars in liquidity each month will suppress negative price volatility in the future. Although I don’t expect the cryptocurrency market to fully realize the inflationary nature of the recent US monetary policy announcements immediately, I expect prices to bottom out, oscillate, and slowly rise.
As the summer in the northern hemisphere approaches, some cryptocurrency investors will feel the market’s activity and may feel that they have already pre-gained wealth, so they will spend time in some popular places and enjoy life. Of course, I won’t always be staring at the Bitcoin price, I can go dancing. The recent intense sell-off has provided an excellent opportunity for me to unlock my USDe and spend synthetic dollars on high-beta junk coins.
I will buy Solana and related dog coins for momentum trading. For longer-term altcoin holdings, I will increase my allocation to Pendle and find other “discount” currencies. I will use the rest of May to increase my position. Then it’s hodling and waiting for the market to realize the inflationary nature of the recent US monetary policy announcements.
For those who need my predictions, here are the key points:
1. Did Bitcoin touch a local low around $58,600 earlier this week? Yes.
2. What is your price prediction? A big rise to above $60,000, followed by price fluctuations between $60,000 and $70,000 until August.
3. Are the recent Federal Reserve and Treasury policy announcements a form of implicit money printing? Yes.