Arthur Hayes -- Bad Gurl
He's talking about Janet Yellen lol
Hayes goes over why Yellen and Powell are stuck between a rock and a hard place in the current state of the global financial markets. To make matters worse, we are a few months from the election year and Biden wants to optimize for happy citizens to get re-elected.
Biden needs to:
Keep US equity markets up. More capital gains, more taxes, less government debt
Mitigate the issue with losses on US bank balance sheets
Ensure that oil prices don’t go parabolic
To do this, Hayes thinks Yellen will:
Rotate all of the US reverse repo liquidity into short term treasuries, injecting liquidity into the global financial system
As a result, long term debt will catch a bid. Long term rates come down, and as a result, US banks balance sheets are saved
But once all the RRP liquidity has been drained, we will get our day of reckoning. Hayes thinks this is the end of ‘24
I split his essay into 4 parts:
US gov: stuck between a rock and a hard place
Economy will stay strong
T-bills and a Weak(er) Dollar
How to profit
Stuck between a rock and a hard place
The US gov initially stated that they would raise rates as an effort to bring inflation down to 2%
But with the banks balance sheets in their current state, raising rates would cause these banks to go under
Fed is playing a game where they want to appear to be fighting inflation, but are looking for ways to bail out the banks
Even though inflation (even within the US government’s definition) hasn’t come below 2%, they’ve paused rate hikes for 2 months now
We’ve just seen a bear steepener which is a no-no for the banks. Yellen basically wants to create scenario where:
We get a re-inverting of the yield curve (long end rates come down relative to short end)
She does this by pausing, telling the Fed to give negative forward guidance of the economy, and causing demand for long end debt to rise (more demand for LE bonds, long end rates down)
This keeps the banks safe
If you look at Bank of America, they have 132B losses in their held to maturity assets
If you subtract their equity capital with these losses, they fall below the capital adequacy ratio. Now if they were forced to recognize these losses, they’d end up in the same spot as SVB, First Republic
Economy stays stronk
But Yellen knows she also can’t print too aggressively and cause oil prices to moon. It’s extra tricky given Israel v. Hamas situation in the Middle East right now
Hayes does think in either way (oil prices up or down relative to USD), we will end up with happy citizens – if down, people think inflation is quelled. If up, its because the US gov will end up printing $ more and everyone’s portfolios will be mooning
So Hayes doesn’t think we’ll get a recession in ‘24. A recession is negative GDP growth
GDP growth = Private sector spending (Net exports, including investments) + net gov spending
Net gov spending = Gov spending - taxes
Gov spending always has a multiplier effect, so every $ they spend ends up increasing private sector spending
US gov net spending was 6.3% of GDP this year, and is projected to be 7-10% next year
This will be quite positive for the US economy
T-bills and a Weak(er) Dollar
After raising the debt ceiling back in June, Yellen has mandated the US reverse repo liquidity be rotated into short term t-bills
US reverse repo is overnight lending, and is yields on the lower end of the Fed rates (5.25%)
Since then the RRP has been drained from 2.1T -> 1T. Hayes thinks Yellen will drain it all
The 3-6 month t-bills come at not much more risk yet they yield 30-35 BPS more
But once the RRP is drained the $$ rotated into t-bills ends up with the US gov, which they spend (net gov spending is positive) aka more $ into the economy
With another 1T USD of liquidity injections, this gives permission for other central banks to start printing
Previously, these other central banks were hesitant given the strong US dollar and devaluing their currencies relatively
But in this scenario, they can print, barely impact their import/exports and keep their citizens happy
Lots of fiat will be injected in the first half of 2024
How to profit
Don’t purchase long term bonds
Maybe long short term debt with leverage? Druckenmiller went long 2Y treasuries
Big tech is also not bad, anything AI related will probably catch a pump
Long crypto (BTC + ETH, shitcoins if you dare) is the best trade
Hayes will be watching RRP - TGA (Treasury General Acct) balances to determine if/when liquidity is hitting the markets
Ultimate wildcard is price of oil + Hamas v Israel
If Iran is pulled in, there will be a lot of pressure on oil prices – this could mean Fed gets more involved, raising rates to combat high oil prices
The other view is that if this happens, the Fed will cut rates given war time
In either case, if war escalates, uncertainty rises. BTC is the way to go even if there’s an initial dip, it’s narratives + catalysts are too strong