Arthur Hayes revealed that the Fed’s quantitative tightening policy continues at $60 billion per month, which reduces its balance sheet. He predicts that the market will peak in mid to late March, which equates to a removal of $180 billion worth of liquidity due to quantitative tightening from January to March.
The businessman believes that the Fed is exhausting all its tools to bolster demand for US Treasury debt issuance before resorting to stopping quantitative tightening. He argued that the Fed grants a leverage ratio exemption for U.S. commercial banks to resume quantitative easing.
Arthur Hayes believes the markets will peak in mid-march
Arthur Hayes revealed that Bitcoin bottomed in Q3 2022 after the Fed’s Reserve Repo Facility (RRP) peaked. He argued that it’s because the U.S. Treasury Secretary, Janet Yellen, had issued fewer longer-dated coupon bonds and more shorter-dated zero-coupon bills, emptying over $2 trillion from the RRP. He claimed that it resulted in liquidity injection into the global financial market and caused crypto and U.S.-listed big tech stocks to rise as a result.
Arthur Hayes also stated that the Fed cut the RRP rate by 0.30% at its December 18th, 2024 meeting, which was 0.50% more than the cut to the policy rate. He argued that it was to tether the RRP rate to the Fed Funds Rate (FFR) lower bound.
Hayes disclosed that two pools of money will help keep bond yields in check. He argued that the Fed’s 10-year US Treasury yield cannot be allowed to go over 5% because it is a level where bond market volatility explodes (MOVE Index). He also argued that as long as there is liquidity in the RRP and Treasury general account (TGA), the Fed does not have to change its monetary policy and admit that fiscal policy is in play.
The co-founder of BitMEX believes that the RRP will go from ~$237 billion to zero in the first quarter as money market funds (MMF) maximize their yield by withdrawing funds and purchasing higher-yielding Treasury bills (T-bill). He stated that it represents an injection of $237 billion of dollar liquidity in the first quarter.
Arthur Hayes also argued that the Fed will remove $180 billion of liquidity due to QT and encourage an additional $237 billion due to the reduction in RRP balances. He believes it will total a net injection of $57 billion in liquidity.
Arthur Hayes believes the Treasury will affect crypto market developments
The CEO of BitMex also highlighted that Yellen said that she expects the Treasury to begin “extraordinary measures” to fund the USG between January 14th and 23rd. He claimed that the Treasury can either issue debt (dollar liquidity negative) or spend money from its checking account at the Fed (dollar liquidity positive). Arthur Hayes argued that the Treasury can only spend funds from its checking account ($722 billion balance) because the aggregate amount of debt cannot rise until the US Congress increases the debt ceiling.
The American businessman believes that raising the debt ceiling becomes necessary. At the same time, failure to do so would result in a technical default of maturing Treasury debt or a complete government shutdown. He referred to 2024’s receipts and outlays published by the Treasury and determined that such a situation would occur between May and June of this year when the TGA balance would be completely exhausted.
The crypto enthusiast maintained that it’s helpful to visualize the pace and intensity of TGA usage to fund the government and predict when drawdowns will have their maximum effect. He argued that the forward-looking nature of the markets will make the market look for a new source to score a hit of dollar liquidity. Hayes believes that at 76% depletion, March appears to be a time when the market will ask, “What’s next?”.
He disclosed that the sum of the dollar liquidity amounts from the Fed and Treasury until the end of the first quarter is $612 billion.
The chief investment officer of Maelstrom stated that a last-minute deal will be reached once default and shutdown become imminent and the debt ceiling is raised. At this point, he is confident that the Treasury will be free to borrow on a net basis again and must refill the TGA, resulting in negative dollar liquidity.
Arthur Hayes also revealed that the other major date in the second quarter is April 15th, when tax payments are due. He referred to theTGA table and concluded that the government’s finances improved in April, which is dollar liquidity negative. He compared Bitcoin, which hit a local high of ~$73,000 in mid-March last year, then traded sideways and began its multi-month decline on April 11th, right before the 15th tax payment deadline.
Arthur Hayes said that as the chief investment officer of Maelstrom, he will turn the risk dial to DEGEN mode and decide to bet on shitcoin in the rapidly developing decentralized science (DeSci) field, purchasing BIO, VITA, ATH, GROW, PSY, CRYO and NEURON.
This articles is written by : Nermeen Nabil Khear Abdelmalak
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By Nermeen Nabil Khear 