Research Summary
The report discusses the significant influence of Janet Yellen, the U.S. Treasury Secretary, on the global financial system. It highlights her role in setting financial rules and regulations, ensuring the U.S. government’s funding, and managing the impact of President Joe Biden’s spending habits. The report also delves into the market’s skepticism towards Yellen’s efforts, the expected liquidity injection into the financial markets, and the potential consequences of these actions on the economy, inflation, and various financial assets.
Key Takeaways
Yellen’s Influence on the Global Financial System
- Yellen’s Power: As the U.S. Treasury Secretary, Janet Yellen has the ability to remove entities from the dollar global financial system, a power that can have severe consequences. Her role in setting financial rules and regulations significantly impacts the global economy.
- Government Funding: Yellen’s primary responsibility is to ensure the U.S. government is funded, especially given the large deficits it has been running. However, concerns exist about President Joe Biden’s spending habits and their impact on the government’s ability to issue debt affordably.
- Market Skepticism: The market shows signs of skepticism towards Yellen’s efforts, as long-term treasury yields are rising faster than short-term yields, creating a “bear steepener” problem for the financial system.
- Liquidity Injection: Yellen’s task list includes injecting liquidity into the system to boost stock prices and generate capital gains taxes, while also creating the perception that the Fed will cut rates to support non-TBTF banks and generate demand for long-term debt.
- Oil Prices: Yellen needs to ensure that the liquidity injection does not lead to a significant increase in oil prices due to a weaker dollar.
Expected Liquidity Injection and Its Impact
- Net Liquidity Injection: A net liquidity injection of $1 trillion into the global financial markets is expected to power a rising U.S. stock market, crypto, gold, and other fixed-supply financial assets.
- Central Banks’ Actions: Major central banks like the People’s Bank of China (PBOC), Bank of Japan (BOJ), and European Central Banks (ECB) are likely to print money as well, taking advantage of the loosening U.S. monetary conditions.
- Yield Curve: The market anticipates a bull steepening of the U.S. Treasury yield curve in the future, which will prevent a market fire sale of non-TBTF bank stocks.
- Recession: The market believes a recession is coming next year, which would require the Fed to cut rates to prevent deflation.
- Investors’ Actions: Investors are expected to pile into long-term U.S. Treasury debt, resulting in a bull steepening of the yield curve.
Inflation and the Fed’s Role
- Inflation Fight: The Fed plays a game of pretending to fight inflation while looking for ways to justify pausing its monetary tightening program.
- Inflation Statistics: Government-produced inflation statistics are considered misleading and downplay the effects of inflation to convince the public that it is not a significant issue.
- Inflation Metrics: The Fed has created various inflation metrics, such as core CPI and Multivariate Core Trend, to manipulate and lower the measure of inflation. These manipulated inflation metrics are currently above the Fed’s target of 2% and show no signs of decreasing.
Impact on Financial Assets
- Bitcoin: The smartest trade is going long on cryptocurrencies, as they have outperformed the increase in central bank balance sheets. Bitcoin is the first stop, followed by Ether, which powers the Ethereum network.
- Other Cryptocurrencies: Other layer-one blockchains like Solana may provide good returns but are unlikely to surpass Ethereum in terms of developer activity and total value locked.
- Decentralized Applications: Various decentralized applications (dApps) and their tokens have the potential for significant returns, although they also come with higher risks.
Actionable Insights
- Monitoring Liquidity: The net of [RRP – TGA] will determine if dollars are flooding the markets, influencing the pace of T-bill sales and Bitcoin purchases. Since June 2023, a net of $300 billion has been injected into the market through a reduction in the RRP and an increase in the TGA.
- Geopolitical Factors: The price of oil and geopolitical events like the Hamas v. Israel war are wildcard factors that can impact market dynamics. The potential involvement of Iran in a war could disrupt the flow of oil to the overleveraged West, leading to higher oil prices.
- Bitcoin as a Hedge: Despite any initial weakness, there is a belief that buying dips in Bitcoin could be a profitable strategy. The long-term US Treasury bond ETF (TLT) has fallen 12% compared to Bitcoin’s 52% increase since the start of the Ukraine/Russia war.
