First principles – Part two

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Yesterday I said I have woken up like a bear with a sore head. Today I woke up like a frightened bear.

I will leave commentary on the trade war to those who change their views on short term news. Let’s get back to first principles.

I have been following some of the biggest $BTC.X (1.72% ) cheerleaders on X to help me balance some of my views. The positive spin is torrential and quite impressive. I am always bemused by how some analysts, shills, and HODLers put a precise number on the price of Bitcoin a year from now or a decade out.

Let me put aside my sarcasm or perhaps my sour grapes and share an insight that many seem to ignore.

If Bitcoin rises from $100,000 to $250,000, that’s a 150% increase in price. In market cap terms, it means Bitcoin would grow from roughly $2 trillion to $5 trillion. That’s a $3 trillion increase in perceived wealth. But have you stopped to consider — where does that $3 trillion come from?

There are only a few possibilities:

• Rotation out of other assets — such as equities, bonds, or real estate. This is essentially a zero-sum game: money flows into Bitcoin, and other assets fall in value to compensate.
• Creation of new credit or liquidity — either through central bank money printing or private credit expansion. This represents monetary inflation: more money chasing the same goods, causing the value of each unit of currency to fall.
• Deployment of existing cash reserves — institutions or households move idle cash into Bitcoin. This shifts the composition of wealth without immediately impacting other asset prices, though it still reflects a reallocation of purchasing power.

The only way this $3 trillion gain doesn’t lead to either asset deflation elsewhere or inflation more broadly is if Bitcoin somehow drives a $3 trillion improvement in productivity — which, at present, is a stretch.

If Bitcoin were to hit $250,000 — let alone $1 million, as some of its most vocal proponents suggest — the implications could be severe. Without offsetting productivity gains, we could see significant monetary inflation and rising social tensions, as wealth becomes increasingly concentrated and real living standards erode for many.

That might sound bleak, but it’s difficult to see how such a dramatic revaluation happens without real economic consequences.

S2N observations

We have consensus that we are officially in a bull market in the S&P 500, Dow & Nasdaq if being above the respective 200-day moving average is a criterion. I will let the news traders enjoy their moment. I would take this as an opportunity to further lighten up exposure.

The purple line is the Treasury General Account (TGA). This is the US government’s transaction banking account at the Fed. You can see it was heading down until the April tax receipts came in, which boosted the TGA up to around $600 billion. Treasury says they like to keep this round at $600-800 billion. As the debt ceiling is only likely to be finalised in July, it is likely that we will see this TGA balance head downwards, which means liquidity is being pushed into the economy.

The blue line is the Reverse Repo market which has come down from $2.5 trillion to $154 billion. This is where money market funds parked their excess liquidity. Draining this balance is what has been called QT (quantitative tightening). There is not much left to drain at the moment.

In summary, what this all means is that as the government cannot issue more debt at the moment and the TGA is being spent, with little RRP to run off, the economy will be riding a bit of a liquidity wave, which may make the pain for bears like me a little bit more uncomfortable, as risk assets enjoy the splash from cash over the next 3 months.

I will leave it there for today, as the day has run away from me and these are quite challenging concepts to grasp, so I will let you chew on it.

S2N screener alert

With all eyes on the stock market, $GLD ( 2.82% ) was actually the “star” of the show, dropping a massive 6 sigma to the downside.

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