Arthur Hayes Keynote: Boom Times l KBW2024

[Music] sup sup sup how y'all doing 4:30 the bar is probably not open yet so but we'll make this quick in 20 minutes all right boom times I wrote this this uh presentation about four days ago when I was on on the flight from Argentina over here and then I kind of had to change a hard and sort of change things up so yeah I still believe there's a bull market coming it just might take a little a bit longer than I initially thought and I'll lay out some of my thoughts here and see if you like it or you don't and we'll start moving all right so first thing is this is a great chart that I love that uh Luke groman has been sharing a lot and it's the price of gold in German marks during the varar Republic back in the um early 20th century and the message here is that Bitcoin and crypto are [ __ ] volatile don't get shook don't get liquidated stay the course [ __ ] isn't always going to happen the way the people like me or someone else or even yourself think it's going to happen but if you're very patient then hopefully in you know a few years everybody's driving Lambos so just a little disclaimer so basically we've been waiting for this Fed rate cut for I don't know a year and a half now and every few months all the pundits get on TV and on the airwaves and Twitter and whatnot and talk about why there's an imminent fed Ray cut and how it's going to be super bullish for asset prices and and after 18 months we finally got the confirmation that our monetary Masters at the Jackson Hole circle jerk uh in Wyoming decided that it's time to cut rates and we all rejoiced and Bitcoin went up I think to like 64,000 on the day August 23rd and ever since it's kind of been crickets and stuff's down again so I I kind of had a inkling of like why am I have this consensus opinion that a Fed rate cut is positive for risk asset and as I'm on my flight from buenos Series today I pull open my Bloomberg and I thought saw that the reverse repo facility which is essentially just a deposit account at the Federal Reserve the balances were going up when I thought that they were going to go down and I wrote extensively about this about how jenet Yellen and the US Treasury were engineering you know stealth quantitative easing by issuing lots of T bills and getting their reverse repo balances to go down but they're going up so what the [ __ ] is going on and my theory is that t- bill rates are going down because the fed's cutting rates and so money market funds that invest in these things are moving money back into the reverse repo and actually sucking liquidity out of the system and that's negative and the second thing that I thought about a bit was well if the FED in 20123 paused and we had about a 10% correction in the S&P and 10year yields went to 5% and a month and a half later Yellen came in with a pivot in terms of issuing more t- bills to Jack the markets how is it any different than this year when the FED is going to cut rates in the face of large government deficits is the bond market reaction going to do the opposite whatever one thinks and rates go up instead of going down so I'll explore these two things and hopefully maybe have changed your opinion a bit by the end of this all right all right so I love [ __ ] charts here's some chart porn uh this is a chart of the one month thre Monon and six-month T bill so the theory goes if I'm a money money market fund manager my goal is to maximize the amount of yield that I can earn in a safe way I can either put my money at the fed and earn 5.3% which is essentially almost the midpoint of the lower and upper bound of their policy rate or I can invest in the treasury bill Market the risk is the same your counterparty is a US government is just a different type of instrument so if the t- bill rates are higher than the reverse repo I'm going to take my money out of reverse repos and put it into t- bills if the t-b rate is less than reverse repos I'm going to sell t- bills and put it in reverse repo so the horizontal line here is at 5.3% and as we can see rat started collapsing below that line starting in Late July um the 31 six month rate went down a lot farther because of the Yen carry trade unwind again I can't really explain that here it's a bit complicated and takes a lot of time but the one month rate stayed about 5.3% or a little bit above because the market hadn't believed yet that the Fed was going to actually cut rates and the purple magenta line as you can see here is on August 23rd that's the day when JP stood up and said the Fed was going to cut rates because they were afraid that the jobs Market in the US was faltering and as we can see the one-year rate started to gap down and meet the three and six month rate because now in a one month the rate will 25 to 50 basis points lower than it is today so a bond that's going to mature after September 18th should yield close to what the FED funds rate will be at that point in time so what we have now is that the reverse repo is the highest safest rate that you can earn as a money market fund and as such they took money and put it back into that facility and that's what this Charter here is showing this is the reverse repo every day it's published by the New York Federal Reserve and I track this very Clos because Bitcoin responds very favorably or dis favorably to reverse rep balances going down which is liquidity positive or reverse repo balance is going up which is liquidity negative and as we can see starting on August 23rd the exact date when Paulo said that rates were going to come down in one month reverse repo balances started rising to a tune of $120 billion and this coincides with t-bill rates crashing below not crashing below trading below below 5.3% so the cause and effect is direct I've moved t- bill rates below 5.

3% money market funds responded by putting money back into the reverse repo and when money at is in this facility at the FED it's sterilized it's not used to leverage throughout the financial system it doesn't allow our assets to pump like it has done since September 30th of 2022 when we went from Two and a Half trillion do in the reverse repo facility down to now about 400 billion and we know the result in terms of the amazing returns that crypto and other assets have had since then and so since August 23rd what has Bitcoin done we had this initial euphoric yes rate courts [ __ ] yeah by the [ __ ] dip you know $64,000 Bitcoin now we're I don't know 59,000 58,000 whatever it is but we've almost got a one for a straight line down so this is a inverse the Gold Line is the inverse of the reverse repo it's falling meaning the balances are rising and the Bitcoin price is falling along with it and so my theory is that this will continue so long as t- Bill rates are below the reverse repo so what can we expect between now and any eventual change in policy is that Bitcoin and crypto will be a bit weak because we're removing liquidity from the system because now all these depositors are flooding the FED back with money because the FED currently at 5.3% is the best rate in town so that's one pillar of General weakness and how I explain to myself why you know Bitcoin and crypto hasn't responded the way we all thought the second is inflation and so the FED if we remember from 2022 in March to July of 2023 Rose hiked rates at the fastest Pace since the 1980s why because the US was experiencing 40-year highs in inflation so that's the white line here you see it starting in March of 22 at about 9% and going down about 3% now the bond market wants to see the FED being serious about fighting inflation so if the FED is hiking rates then the bond market doesn't have to do it for the fed and so as we see here the 10-year yield never crossed over 4% even though we had at 1.9% levels of inflation and this is of highest in 40 years but the bar Market was content that the Fed was serious about raising rates to curtail economic activity make finances more expensive so that inflation would eventually come down therefore yields didn't have to spike that was in 2023 but what happened about a year ago in August of 2023 again we have the Jackson hall meeting and what did the FED do the FED pivoted it said okay we're done raising rates we're going to pause rates and every yeah [ __ ] yeah we we're you know on the way to cutting rates just like we did this year but what happened the market did the exact opposite 10-year yields started rising and they went all the way up to 5% the stock market which is evidenced in white S&P 500 uh no sorry that's uh that's CPI inflation is at 3% so at 9% inflation 10 year yield was 2% but at 3% inflation the 10-year-old is rising to 5% why because the market is not happy that the FED is not serious about fighting inflation and it believes that there is still inflation in the system that needs to be expunged and the result from August 23rd of 2023 until November 1st when Yellen came in and saved the day was a market meltdown S&P dropped 10% Regional Banks started being afraid that they would fail again because their treasury portfolios were showing losses because yields were backing up to 5% on the 10year treasury and so what happened as with anything in this you know fake Financial system that rules the world whenever there's a problem the authorities respond with printed money yelen came in and for the first time I guess in US Treasury history gave forward guidance that she would issue a certain amount of treasury bills to drain the reverse repo and inject liquidity into the system this was announced on November 1st of 2023 and that sparked a General market rally Bitcoin went from about I don't know 30,000 to 73 3,000 74,000 in March the S&P went to all-time highs 10e yields fell from 5% down to below 4% the banks um rose again because now their treasury portfolios were showing unrealized profits instead of losses so the response was hey we're not going to fight inflation at the FED instead of saying we're going to raise rates again Yellen swoops in and offers more liquidity to pump the markets and so back to what the market is really afraid about inflation so this was a study that was released by MIT recently and they studied during the covid pandemic response what was the biggest contributor to inflation in the United States and it's government spending but government spending isn't slowing down state and local government spending in the United States is at the highest in peacetime history the only other two highest periods are 2008 during the financial crisis and Co itself so the US government is spending more money than world wars and the Civil War on a relative basis that's why inflation is so high in the United States now obviously the government can either borrow money or it can raise taxes but politicians want to get reelected they don't like raising taxes taxes are not popular so the government continues to run massive deficits and so in my mind I'm like well the setup of this year is the same as last year last year the Fed was doing the right thing they were raising rates and then they stopped and the market said [ __ ] you to 5% 10-year treasury yields government spending is keeps growing you the FED are supposed to raise the cost of funds to stop these politicians from spending so much money and they didn't do it but this time around the US government is spending more money than they were last year yet the FED is continuing now to cut rates and so I believe that the market is going to do something similar to what it did last year and say [ __ ] you to the FED we're going to take rates higher and cause some pain and so this is you know rip me a new Jackson Hole this is the 10year yield post the Federal Reserve rate pivot and you would expect that the 10year yield is going to go down as the FED has announced its first rate cut in 18 months but the tenear yield is trading higher than it was when the FED began now we only have a week's worth of data so we're going to see how September plays out in terms of how tenure yields trade my prediction and how I'm going to play my portfolio and I'm not training rates in itself but I believe that tenure yields are going to go quickly from the 4% isue level that we are today to four and a half to 5% and that's going to trigger a policy response and never again and that's what we want we want them to come in with printed money and pump our [ __ ] bags so again who's coming to the rescue bad girl y her job is to get Camala Harris reelected you can't have a falling stock market and a rising bond market one month before a general election so what are the policy responses that are available to her and Powell so Powell can stop quantitative tightening which means he can start increasing the amount of bonds that the Federal Reserve is buying which decreases bond prices and the treasury can run down its checking account it can spend the roughly 750 billion that it has with the FED instead of issuing more bonds which is direct injection of liquidity into the system so the goal of this is to increase the supply of money so that bonds can be purchased to amarate this Fed rate cut in the in the face of highend rising government deficits and sticky inflation now this has to be much larger than the effect of the reverse repa Rising due to people dumping treasury bills so I believe that this sort of response is going to happen late September or October assuming that we get this sort of Market dislocation between now and then so crypto obviously what are we doing between now and then Bitcoin is down 10% from the poile pivot I think we go sideways for a bit altcoins are contining to get their [ __ ] you know asses handed to them I don't think that's going to stop I like that because I'm just going be buying stuff that I think is uh very cheap and continue to increase my positions with no leverage but I think that the intervention has to come in late September or October again general election is the first week of November in United States and if the politicians want to get reelected they need a strong stock market the public believes that the economy is doing well if the stock market's doing well and if you have a bacon crisis because rates are at 5% that's also not good you don't want your local bank down the street to be going bust and getting sold to JP Morgan one week before the election it's just not good politics so that's why I'm betting we have a strong policy response in a similar fashion to what we have in 2013 in November in 2014 2024 in October and we get what we always want the resumption of the crypto bull market starting in late Q3 or late Q4 and transitioning into the first quarter of next year so that's all I got for you [ __ ] thank you very much [Music]