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Treasury could ‘break’ market as $1 tn of liquidity is drained, this is how to hedge – James Lavish
(Kitco News, Mon. June 12th, 2023) – As the U.S. Treasury Department refills its General Account by selling assets, $1 trillion in liquidity could be drained from markets, warned James Lavish, co-Managing Partner at the Bitcoin Opportunity Fund and Author of “The Informationist” Substack. This, in turn, could “break” markets and cause a sell-off.
“Any way you look at it, it [the Treasury] is tightening,” Lavish told Michelle Makori, Lead Anchor and Editor-in-Chief at Kitco News. “We could have some sort of liquidity event, some sort of credit event, that causes a sharp sell-off.”
He said that the credit event would be an unexpected “Black Swan,” which would take investors by surprise.
The Treasury Department needs to raise funds to replace its cash balance, which fell from $723.3 billion to $44.8 billion over one year as the Treasury used its funds to fulfill government spending obligations. The Treasury General Account, which is the federal government’s operating account, was used to fulfill these obligations during debt ceiling negotiations in Congress.
The Treasury needs $550 billion by the end of the month, as well as enough cash to fulfill retirement programs and other obligations. In total, Goldman Sachs and JP Morgan estimate that the Treasury needs around $1 trillion by the end of Q3 of 2023. To raise funds, the Treasury intends to sell assets, including short-dated T-bills.
“The worst case scenario would be that we issue so much debt so quickly that the Treasury market locks up, that we don’t have enough liquidity,” Lavish suggested. “I do expect there’s… probably a decent chance that we still have some sort of credit event though.”
To find out how this can affect markets and potentially trigger another banking collapse, watch the video above.
Federal Reserve Policy
As the Treasury causes market conditions to tighten, the Federal Reserve may be forced to “ease up” on its quantitative tightening (QT) program and pause rate hikes, said Lavish.
The combination of the Treasury refilling its General Account, along with the Federal Reserve selling assets to fulfill QT, will have the effect of draining even more liquidity from markets.
“Any way you look at it, it’s tightening,” said Lavish. “They [The Fed] are trying to do QT, quantitative tightening… which is another $90 billion of Treasuries every month. It’s a lot.”
Lavish added that Fed Chair Jerome Powell wants to “keep confidence in the U.S. dollar,” and that Powell is willing to “sacrifice” low unemployment for lower inflation.
“I think that the Fed is going to hold rates here with maybe one more rate raise,” he forecast. “And so I believe we’re going to see a sharp rise in unemployment at some point here, and that could be pretty ugly.”
To find out when Lavish thinks a recession will hit, and whether a soft landing is possible, watch the video above.
Gold and Bitcoin
Suggesting that the Federal Reserve would need to keep monetizing debt in order to fund the U.S. government’s “perpetual deficits,” Lavish claimed that “hard assets” like gold, silver, and Bitcoin are the best way to position oneself.
“I’ve been opportunistically buying Bitcoin and gold as the price has dipped,” he confirmed. “I’m accumulating positions in those and hiding my assets there from the economic turmoil I believe is coming.”
Lavish said that he is especially bullish on Bitcoin as a long-term inflation hedge.
“If we have the money printing that I expect us to have, I would be surprised if Bitcoin does not make new highs on the other side of this,” he forecast.
To find out Lavish’s price forecasts for gold and Bitcoin, watch the video above.
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