Heatwave -- Arthur Hayes

Bearish until May?

Arthur reflects on his bearish risk assets call (bank term funding program). He is bearish again for the rest of April and goes through his reasoning

What happened to the bearish BTFP call?

• Even though BTFP was cancelled, the Fed was still printing $. How?

• The Fed allows banks to borrow against certain securities, namely treasuries and mortgage backed securities

• This mechanism is known as the “discount window” which allows banks to meet depositor withdrawals while holding these securities

• This basically replaced BTFP, but the issue is that it doesn’t account for losses

  • If banks bought a bond in 2021 for $100, but due to rates moving that bond is now worth $80, the $20 loss is still there

Bank Capital Requirements

• Banks effectively finance government debt at yields are less than the nominal GDP

• Why do this? Because regs are in place so that banks can purchase gov bonds with little to no collateral

• In the case where rates move adversely, the gov can implement a mechanism like BTFP or the discount window

• However, after 2008 GFC, regulators forced banks to hold more capital (rule called Basel III)

• This created a problem so banks can’t just hold unlimited amounts of US treasuries

• This rule went away during Mar 2020, came back after the covid dump but the subsequent set of events eventually led to the regional bank failures of Mar 2023

• As a result, stricter banking capital requirements were favored moving forward

• However, the US gov debt addiction hasn’t gone away – who is going to service their debt if the high capital requirements are still in place?

• It effectively came down to “if you, Bad Gurl Yellen, want us to buy dogshit government bonds, then we can only do it profitably with infinite leverage.”

• Hayes thinks relaxing capital reqs is inevitable for US treasuries (covert QE)

Bad Gurl Yellen

• Yellen was previously draining the reverse repo (RRP), effectively yeeting that $ into risk assets

• RRP is down to 400B which begs the question - where will the next bit of liquidity come from?

• Additionally, Apr 15 is when taxes are due - taxes remove liquidity for obvious reasons. The expectation is that 2023 taxes are on the higher side

• After May 1, the fed is expected to reduce the pace of quantitative tightening by 30B / month - this results in more liquidity within the system

• When the treasury general account (TGA) increases its balance, it removes liquidity, and when it decreases it adds liquidity to risk assets

• When tax payments are received, the TGA increases - TGA should blow up to 750B as tax payments are processed on Apr 15

• It is also an election year, so the base case is that risk assets should rip

• So the tricky period is Apr 15 to May 1 - when tax payments are removed, QT comes back, and before the TGA can be drained

Bitcoin Halving

• Scheduled for Apr 20 - very bullish in the med term

• Hayes is scared this is already well priced in and could dump in the short term “when most market participants agree the opposite usually happens”

• So he thinks, in the short term, prices slump after halving. He has taken profit on MEW, SOL, and NMT

• Halving also occurs during a time when dollar liquidity is tighter than usual (taxes)

• Hence, Hayes is bearish from now until May

---