Signposts -- Arthur Hayes

Jan 05, 2024

“I am preparing for a vicious washout of all the crypto tourists in March of this year”

Arthur goes through the bear case, and outlines how he is positioning for it. I split his essay into four sections:

The three variables that are in play here are: the RRP balance being drained, Bank term funding program renewal, and rate cuts.

Reverse repo purchase (RRP) balance

RRP is an overnight lending facility - think of the liquidity in the RRP as outisde the system
Recently, the Feed announced that they will shift their borrowing to being on the shorter end of the yield curve
As a result liquidity from MMFs started shifting to T-bills (and out of the RRP)
As the RRP gets drained more, we will hit a point where its liquidity is exhausted. Once that happens, what will be the next liquidity source to keep the party going?

Bank Term Funding Program (BTFP) Renewal

March 12 will be the anniversary of the bank collapses of 2023
That is also when the BTFP program ends
BTFP was put in place to fill the gap on bank’s balance sheets due to the losses from holding long term debt (long term debt value sinks rapidly as rates go up)
If the BTFP isn’t renewed, these banks will once again be on the hook

Rate cuts

If a combination of these go wrong, Arthur thinks we are going to have a correlation one event aka everything nukes
We wipe out the tourists, then we resume up only
Watch out for: BTFP ends March 12th, Fed rate cut decision is March 20th. Position cautiously for the 6 trading days between

Arthur recognizes he could be wrong. You could have a situation where:
- RRP declines slowly, Yellen communicates BTFP extension well before deadline
- March meeting is then irrelevant then since a lot of net new liquidity is hitting the market
Yellen communicating the BTFP extension is the invalidation for Arthur

China

Taiwan elections could result in a pro China candidate winning. If this happens, Xi will turn on the money printing taps
This is one ex factor to look out for - a gush of yuan credit could offset the three horsemen
If this is the case, Arthur will no longer be bearish

Japan

BOJ is allowing JP bond yields to rise
This means Japanese financial institutions will likely shift capital to bid their own bonds
Since BOJ holds a lot of US treasuries, this will have upward pressure on US yields (sell US treasuries → buy JP bonds)
This is an additional risk factor that would suck liquidity out of the US system

BTC / ETH are 70% of Arthur’s portfolio. He prefers to hedge via BTC options since risk is defined (option premium) and liquidity is decent
Arthur will buy BTC puts that:
- Expire in June (best trade-off between time decay and delta/gamma exposure)
- 20-25% OTM to be exposed to the gamma squeeze
Arthur’s base case is a 20-30% correction in March. In the case where BTC trades up to 60-70K the correction will be even more severe (30-40%)
If the BTC ETFs are already trading, the correction will be worse
Arthur will buy puts expiring June, he will also be buying OTM puts to be exposed to the gamma squeeze
When all is said and done, he will exit his puts and go back to bidding BTC
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