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Arthur Hayes: The crypto bull market will come as US dollar liquidity rises | Anue Juheng – Lianwen


Bad girl, sad girl, you”re such a dirty bad girl

Beep beep, uh-huh

You bad girl, you sad girl, you”re such a dirty bad girl

Beep beep, uh-huh

–Donna Summer

The baddest woman in the world, perhaps the real number two of Pax America, looks like a scruffy dwarf. She doesn’t dance anymore, maybe never, she makes money move. I’m talking about U.S. Treasury Secretary Janet Yellen.

Bad girl Yellen, if she wanted to, could unilaterally remove individuals, companies, or entire countries from the U.S. dollar global financial system. Considering that for most people, owning US dollars to purchase primary energy (oil and gas) and food is essential, removal from the peaceful financial system under US rule is tantamount to a death sentence. She calls it a sanction, some call it a death sentence.

From a financial perspective, she is responsible for the rules and regulations that govern how the dirty fiat financial system operates. Since credit makes the world go round, and this credit comes from banks and other financial companies, her wishes have a significant impact on the structure of the global economy.

Her most important responsibility is ensuring that the U.S. government receives funding. When the U.S. government spends more than it collects in taxes, she is required to issue debt in a smart way. Her role is even more important given the magnitude of recent U.S. government deficits.

But not all is well in the world of bad girl Yellen. Her child’s (national) father, US President Slow Joe, is in arrears on child support payments. Slow Joe is not like the typical deadbeat dad who spends his salary on booze and stripping. Slow Joe is obsessed with spending money and blowing up faraway countries in pursuit of…who knows what. He had never seen a conflict that the Empire’s war machine was not supposed to support. Fighting a proxy war in Ukraine against “evil” dictator Putin and the world’s largest commodity exporter? Let’s fucking go! Supporting Bombardier Bibi Netanyahu’s actions to level Gaza, permanently displacing millions, and killing tens of thousands of Palestinians, even if such support could lead to war with the Persians? As expected of America!

Our boss, Yellen, publicly supports her boss, but privately, she’s busy making sure the empire can issue bonds at an affordable price to feed the kids. Who are the children? Baby boomers are getting older, sicker, and needing more and more health care products and other benefits. The military-industrial complex needs ever-expanding defense budgets to produce more bullets and bombs. Interest payments need to be made to wealthy savers so that promises to debt holders can be met.

Yellen may be a badass, but the market isn’t buying it. Yields on long-term Treasuries (maturities >10 years) have risen faster than on short-term Treasuries (maturities <2 years). This has brought a fatal problem to the financial system, known as "bear market steepening." I wrote in my last article, the Periphery, why this is so harmful to the banking system.

What can she do to get the father of her baby back to the welfare office to reapply for benefits in November 2024? She needs to devise a solution to buy the economy time. So, here’s Bad Girl Yellen’s to-do list:

Injecting liquidity into the system makes stocks rise. When the stock market rises, capital gains taxes rise, which helps pay some bills.

Trick the market into thinking the Fed will cut interest rates, thereby removing selling pressure on the stocks of banks that are not “too big to fail” (TBTF), which are all insolvent.

It misleads the market into thinking the Fed will cut interest rates, thereby creating demand for long-term debt.

Make sure the liquidity injection is not so large that it would cause oil prices to spike due to a weaker dollar.

The Fed kept interest rates on hold at its latest meeting and said it would further pause on rate hikes as it continues to assess the impact of its hikes so far. Meanwhile, Yellen said the U.S. Treasury will increase issuance of short-term notes, which is what money market funds (MMFs) want. The MMF will continue to withdraw funds from the Fed’s Reverse Treasury Stock Program (RRP) and purchase Treasuries, which is a net liquidity injection into the market.

The remainder of this article will focus on my perspective on why I believe the above policies will lead to the following outcomes:

1. Inject $1 trillion of net liquidity into global financial markets, equivalent to the size of the current RRP.

(A) This injection of liquidity will drive gains in U.S. stocks, cryptocurrencies, gold, and other fixed-supply financial assets.

(B) All other major central banks such as the People’s Bank of China (PBOC), Bank of Japan (BOJ), and European Central Bank (ECB) will also print money because now that monetary conditions in the United States are easing, they can do so without weakening their currencies printing money.

2. The market believes that the U.S. Treasury yield curve will steepen in a bull market.

(A) It will prevent the market from selling off all non-TBTF bank stocks.

3. Once the RPP runs out at the end of 2024, the end of the U.S. Treasury market will begin again.

“Duck” and coward

Federal Reserve Chairman Powell is a “duck” and his wife is a bad girl Yellen. You may think that “duck” is a lowly status, but in Hong Kong, “duck” lives a pampered and wealthy life. Many people say Powell is a millionaire. But all the money can’t change the fact that he is, at best, Yellen’s “towel boy.”

This is one of the most important images for understanding the power dynamics at the top of the empire. Slow Joe and Yellen instruct “Duck Powell” to fight inflation at all costs.

The problem with raising interest rates to a level that restricts the economy is that it will destroy the banking system. So the Fed is playing a game where it pretends to fight inflation but is always looking for a way to justify pausing its monetary tightening program. The easiest (and most dishonest) way for them to achieve this is to make up misleading statistics about inflation levels.

The inflation data compiled by the government are all nonsense. It is in the government’s interest to downplay inflation and convince the public that their eyes are deceiving them at the till. The price shock you feel when you buy a loaf of bread is not credible because the government tells you that inflation doesn’t exist. To do this, bureaucrats created these baskets of representative goods to reduce the impact of rising food and energy prices. The misleading inflation statistics are calculated based on price changes in this basket of currencies.

The Fed doesn’t like the high Consumer Price Index (CPI), which includes the food that fills bellies and the gasoline that drives tanks, which leads them to do some fancy calculations. Miraculously, this leads to the creation of core CPI, or “core inflation” as they like to call it. Core CPI excludes food and energy. But core CPI is too high, so the Fed asked staff to remove non-temporary factors from core CPI to obtain a better (i.e. lower) measure of inflation. After doing some more magic math, they created the Multivariate Core Trend Indicator.


The problem is that all of these manipulated inflation measures are above the Fed’s 2% target. Worse, these indicators appear to have bottomed out. If the Fed is truly fighting inflation, then they should keep raising rates until their vague inflation gauge reaches 2%. But suddenly, Powell said at a press conference in September that the Fed would pause raising interest rates to observe the effect of its rate hikes.

My suspicion is that Powell got a little prodding from Yellen and was told that Mom wanted him to pause again and signal to the market that the Fed would hold off on raising rates until further notice. It’s a clever policy response, that’s what I think.

The market wants to believe that a recession will come next year. A recession means the Federal Reserve must cut interest rates to ensure that the dreaded deflation doesn’t happen. Deflation is the result of falling prices due to a decline in economic activity. Deflation is harmful to a dirty fiat system because the value of the assets (collateral) backing the debt decreases. This resulted in losses for creditors (i.e. banks and wealthy individuals). Therefore, the Fed cuts interest rates.

As I explained in my last article, the market will be heavily buying long-dated U.S. Treasuries as economic forecasts weaken. This, combined with a general decline in interest rates as a result of Fed policy, means holders of long-term debt stand to gain. As a result, the yield curve eventually steepens.

The market will be the first to act, buying more long-term bonds rather than short-term bonds. This is because when interest rates fall, long-term bonds are more profitable than short-term bonds. The results of it? The bear market steepening stops, the curve inverts even more, and then when the recession hits in 2024, the bull market curve steepens. The Fed accomplished all this by pausing twice at its meetings in September and November and issuing a forward-looking negative outlook on the economic outlook. This is a win for Powell and Yellen, as no rate cut is needed to achieve a positive market reaction.

I’ll illustrate this process with a few simple diagrams. The longer the arrow, the greater the amplitude.


Figure 1: This is the bear market steepening curve. The curve begins to invert, yields rise across the curve, and long-term interest rates rise faster than short-term interest rates.


Figure 2: This is the final yield curve. As the bear market steepens, you get a positively sloping yield curve at higher rates. This could be the worst possible outcome for bondholders and the banking system. Bad girl Yellen must do everything in her power to prevent this from happening.


Figure 3: If Yellen’s strategy succeeds and the market buys more long-term bonds than short-term bonds, the curve will invert again.


Figure 4: This is the final yield curve. The curve is inverted again, which is unnatural. The market is anticipating a recession, which is why long-term yields are lower than short-term yields.


Chart 5: When an economic recession comes, or some TradFi companies go bankrupt, the Federal Reserve will cut interest rates, causing short-term interest rates to fall while long-term interest rates remain unchanged. This steepens the curve.


Figure 6: This is the final yield curve. After all these phase shifts, the curve becomes steeper. The curve is positively sloping, which is natural, and the overall level of interest rates has fallen. This is the best possible scenario for bondholders and the banking system.

banks saved

The immediate effect of the yield curve inverting again and the eventual steepening of the bull market is a decline in unrealized losses on U.S. Treasuries held to maturity on bank balance sheets.

Bank of America (BAC) reported unrealized losses in the HTM asset class of $132 billion in the third quarter of 2023. BAC has Tier 1 common equity capital of $194 billion and total risk-weighted assets (RWA) of $1.632 trillion. When you recalculate BAC’s capital adequacy ratio (equity/RWA), by subtracting unrealized losses on equity, it drops to 3.8%, well below the regulatory minimum requirement. If these losses were recognized, BAC would go into receivership, like Silicon Valley Bank, Signature Bank, First Republic and others. The higher long-term bond yields are, the wider the gap becomes. Obviously, this is impossible. There’s one rule for them and another for us.

The banking system is being choked by all the government debt they accumulated in 2020-2022 at record high prices and low yields. Due to its designation as a TBTF, BAC is actually a state-owned bank. But the rest of the non-TBTF U.S. banking system is already insolvent due to unrealized losses on Treasuries and commercial real estate loans.

If Yellen could engineer a policy that would cause bond prices to rise and yields to fall, holders of bank stocks would have no reason to sell. This heralds an inevitable future in which the balance sheets of the entire U.S. banking system will be on the books of the U.S. Treasury Department. This would be extremely bad news for the credibility of the U.S. government, because the government would have to print money to ensure that banks honor deposit withdrawals. In this scenario, no one would want to buy long-term U.S. Treasuries.

Are there any consequences?

The challenge is that if the Fed cuts interest rates, the dollar could depreciate significantly. This will put significant upward pressure on oil prices, since oil is priced in US dollars. While the mainstream financial media and intellectually bankrupt cheerleaders like Paul Krugman try to trick the public into believing that inflation doesn’t exist, any seasoned politician knows that if gas prices go up on Election Day, you’re screwed. That’s why cutting interest rates at this critical moment—when the Middle East is on the brink of war—is tantamount to political suicide. By Election Day next year, oil prices are likely to be close to $200.


Of course, if you exclude all the things people need to live and make a living, inflation doesn’t exist.

But if inflation has bottomed out, will the Fed pause raising interest rates while inflation accelerates? This is a possible outcome, but I believe any dissatisfaction with rising inflation will be drowned out by the strong U.S. economy.

Strong economy

I don’t think there will be a recession in 2024. To understand why, let’s go back to the first principles that drive GDP growth.

GDP growth = private sector spending (net exports and investments are also included) + net government spending

Net government expenditure = government expenditure – tax revenue

When the government spends net through the deficit, it drives a net increase in GDP growth. This makes sense conceptually—the government spends money to buy stuff and pay employees. However, governments take resources out of the economy through taxes. Therefore, if government spending exceeds tax revenues, there is a net stimulus to the economy.

If the government runs a large deficit, this means that nominal GDP will grow unless the private sector shrinks the deficit by an equal amount. Government spending – or any spending for that matter – has a multiplier effect. Let’s illustrate the various conflicts in which the Empire is involved, using an example that Slow Joe gave to the American public in his recent speech.

The U.S. government will increase defense spending. There will be many Americans making bullets and bombs to kill all the terrorists and more civilians around the empire. As long as each terrorist kills no more than 10 civilians, I’m fine with that. This is a “fair” ratio. Those Americans will spend their hard-earned money in their own communities. There will be office buildings, restaurants, bars and more, all built for workers in the defense industry. This is the multiplier effect of government spending as it encourages private sector activity.

Given this, it is difficult to imagine the private sector shrinking enough to offset the net gain in GDP growth contributed by government. In the latest data dump for the third quarter of 2023, US nominal GDP grew by 6.3%, with the annual deficit approaching 8%. If CPI inflation is below 6.3%, everyone wins because real GDP growth is positive. Why would voters be upset about this situation? Given that the CPI inflation rate is at 3, it will take many quarters for inflation to reach a level that exceeds that of the US economy in the minds of voters.

The deficit in 2024 is expected to be between 7% and 10%. The U.S. economy will do well, driven by a spendthrift government. As a result, the median voter will be reasonably satisfied with a rising stock market, a strong economy, and low inflation.


short term bonds

Yellen isn’t all-powerful. If she shoved trillions of dollars’ worth of debt onto the market, bond prices would fall and yields would rise. This would destroy any benefit the financial system gained from the Fed’s pause in raising interest rates. Yellen needs to find a pool of capital that is more than happy to buy a bunch of debt without demanding higher yields.

MMF currently holds approximately $1 trillion in the Fed’s RRP. This means that MMF’s yield is close to the lower bound of the federal funds rate of 5.25%. The yield on 3-month and 6-month Treasury bills is about 5.6%. MMFs park their funds with the Federal Reserve because the credit risk is lower and funds are available overnight. MMF doesn’t sacrifice much yield to reduce risk. But if Yellen can offer more bonds at slightly higher rates, money market funds will shift funds from the low-yielding fixed deposit rate (RRP) to higher-yielding bonds.

In its latest quarterly funding report, Yellen pledged to increase note issuance. One could argue that the sell-off in long-dated Treasuries would have been worse without the $2 trillion in RRP. Remember, Yellen restarted borrowing in early June after U.S. politicians “shockingly” agreed to raise the U.S. debt ceiling, allowing them to spend more. At that time, RRP was $2.1 trillion. Yellen has since sold a record number of notes and the RRP balance has since halved.



Yellen issued $824 billion in notes, reducing RRP by $1 trillion. success!

Please refer to my article on USD liquidity “Teach Me Daddy” to fully understand why USD liquidity increases when RRP balances decrease. It is important to note that if Yellen increases the Treasury General Account (TGA), it will offset the positive liquidity shortfall from the decline in the RRP balance. The TGA is currently about $820 billion, above the $750 billion target. Therefore, I don’t think TGA will rise from here – instead, I think it will likely stay the same or fall.

As the RRP is depleted, $1 trillion in liquidity will be released into global financial markets. It could take six months to fully deplete the facility. This estimate is based on the rate at which RRP falls from $2 trillion to $1 trillion, as well as forecasts for the pace of bond issuance.

Before I continue discussing how these funds will find their way into cryptocurrencies, let me briefly outline how other central banks may respond.

weak dollar

As more dollars flow through the system, the price of the dollar should fall relative to other currencies. This is good news for Japan, China and Europe. These countries are facing fiscal problems. They come in different forms, but ultimately require money printing to prop up parts of the financial system and the government bond market. However, not all central banks are created equal. Because the People’s Bank of China, the Bank of Japan, and the European Central Bank do not issue global reserve currencies, there are limits to how much they can print before their currencies depreciate relative to the dollar. All these central banks have been hoping and praying that the Fed will ease monetary policy so that they can also ease.

These central banks can also ease monetary policy because the Fed’s policies will have the biggest impact because the amounts involved are truly mind-boggling. This means that the impact of any money printing actions by the People’s Bank of China, the Bank of Japan and the European Central Bank will be smaller than that of the Federal Reserve. When translated into currencies, the yuan (China), yen (Japan) and euro (Europe) will strengthen relative to the US dollar. They can print money, bail out their banking systems, and shore up their government bond markets. Finally, energy imports become cheaper in dollar terms. This contrasts with recent developments, where money printing has caused their currencies to depreciate against the dollar, which in turn has increased the cost of energy imports in dollar terms.

The result is that, along with a massive injection of US dollar liquidity, there will also be a corresponding injection of yuan, yen and euro. Between now and the first half of 2024, the total amount of fiat credit available globally will accelerate.

stupid and smart deals

Given all the fiat currency liquidity in global markets, what should one buy to beat currency debasement?

First, the stupidest thing one can do is buy long-term bonds with a buy-and-hold mentality. This positive liquidity situation will continue as long as RRP > 0. When RRP = 0, the problem with all long-term bonds reappears. The last thing you want is to be unable to profit from any form of illiquid long-term debt when liquidity conditions change. So the stupidest way to trade this is to buy long-term bonds, especially government bonds, and be mentally prepared to hold them. Today you will experience a market-to-market gain, but at some point the market will start to price in further declines in RRP balances and long-term bond yields will slowly rise, meaning prices will fall. If you are not a skilled trader, you will smash your golden eggs with your diamond hands.

A moderately smart trade is to go long short-term debt using leverage. Macro trading god Stan Druckenmiller recently told the world in a Robinhood interview with another god, Paul Tudor Jones, that he buys the ultra-long 2-year public bonds. Great deal, bro! Not everyone is interested in the best expression of this kind of transaction (hint: it’s cryptocurrency). So if all you can trade are manipulated TradFi assets, like government bonds and stocks, then this is a good option.

A trade that’s a little better than a middling EA (but still not the smartest trade) is going long large technology companies, especially those that have anything to do with artificial intelligence (AI). Everyone knows that artificial intelligence is the future. This means anything related to artificial intelligence will boom because everyone is buying into it. Tech stocks are long-term assets and will benefit from cash becoming junk again.

As I mentioned above, the smartest trade is to go long cryptocurrencies. Nothing outpaces the growth of central bank balance sheets more than cryptocurrencies.


Here’s a chart of Bitcoin (white), Nasdaq 100 (red), S&P 500 (green) and gold (yellow) divided by the Fed’s assets and liabilities indexed to 100 starting in March 2020 Table chart. As you can see, Bitcoin beats all other assets (+258%) on the impact of the Fed’s balance sheet expansion.

The first stop is always Bitcoin. Bitcoin is money and only money.

Next stop is the ether. Ether is the commodity that powers the Ethereum network, the best computer on the Internet.

Bitcoin and Ethereum are the reserve assets of cryptocurrencies. All others are junk coins.

We then move onto other layer-1 blockchains that claim to be improvements over Ethereum. Solana is an example. These were all beaten badly during the bear market. As a result, they will rise from extremely low prices, providing huge returns for brave investors. However, they are still both over-hyped and cannot surpass Ethereum in terms of active developers, dApp activity, or total value locked.

Finally, a variety of dApps and their respective tokens will be launched. This is the most interesting because down here is where you get the 10,000x return. Of course, you’re also more likely to be strong, but without risk there’s no reward.

I like shit coins, so don’t call me maxi!

way forward

I’m paying close attention [RRP – TGA] network to determine whether dollars are flooding into the market. This will determine whether I accelerate Treasury sales and Bitcoin purchases as my confidence grows in anticipation of increased USD liquidity. But I will stay nimble and flexible. The best laid plans of rats and humans often fail.


Since Yellen was allowed to borrow again in June 2023, the Fed has injected a net $300 billion. This is a combination of a decrease in RRP and an increase in TGA.

The final uncertainties are oil prices and Hamas’ war with Israel. If Iran is drawn into a war, then we should consider that there will be some disruption to oil supplies flowing to the overleveraged West. This makes it politically difficult for the Fed to adopt a hands-off monetary policy. They may have to raise interest rates to combat higher oil prices. But on the other hand, one might argue that the economy will be in recession due to war and rising energy prices, which will give the Fed license to cut interest rates. In either case, uncertainty will rise and the initial reaction will likely be a sell-off in Bitcoin. As we have seen, Bitcoin has proven to outperform bonds during times of war. Even if there is an initial period of weakness, I will buy the dip.


Since the start of the Ukraine/Russia war, the U.S. Long-Term Treasury Bond ETF (TLT) is down 12%, while Bitcoin is up 52%.


Since the start of the Hamas/Israel war, TLT is up 3%, while Bitcoin is up 26%.

If lowering RRP is bad girl Yellen’s goal, it will only last so long. All of the worries in the U.S. Treasury market that caused U.S. Treasury yields to surge in a bearish way in 2010 and 2030 will return, putting pressure on the financial system. Yellen has yet to convince her baby daddy to stop drinking, so after the lull, Bitcoin will return to serving as a real-time scorecard for the health of the wartime fiat financial system.

Of course, if those responsible for Pax Americana are committed to peace and global harmony, I’m not even going to finish the thought. These mofos have been waging war since 1776 with no signs of stopping.

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