Volatility Captain

⛈️ The calm before the Fed liquidity storm So, here's the current state-of-play with Net Federal Reserve Liquidity and my expected path from here [chart 1]. During the remainder of September, I'm expecting a fairly significant liquidity drain, as somewhere in the region of $300bn to $550bn is sucked out of markets. Statistics (in comments) show similar "large Net Fed Liquidity drops" in recent times have been generally negative for risk assets (S&P 500, gold and bitcoin) and US treasuries (yields rise). Of course, this doesn't mean all asset prices will definitely fall in the second half of September, but the stats aren't favorable. The expected liquidity drop means a new "lower low" on the Net Fed Liquidity chart, and very likely the lowest reading since March 2023. The liquidity drop will be partially reversed on October 1, but IMO the key detail is that the downtrend that began in April 2024 will continue. This is particularly important for bitcoin, as it appears to be heavily tied to medium-term swings in Net Fed Liquidity [chart 2]. Since 2020, BTC/USD has been flat or down for the full length of every downtrend in Net Fed Liquidity. BTC/USD has only clearly moved to the upside during clear uptrends in Net Fed Liquidity. And I think it's unlikely that this current medium-term Net Fed Liquidity downtrend will end until at least one of the following things happens: 1⃣ A fairly substantial drawdown of the Treasury General Account (which is a decent bet for Q4) 2⃣ Reverse Repo usage falls close to zero (but it's proving "stickier" than expected at current levels) 3⃣ The Federal Reserve stops Quantitative Tightening (will Jerome Powell mention QT at the FOMC on September 18?) 4⃣ Something materially "changes" due to an unforeseen event (another bank bail-out facility, for example) Of course, this medium-term correlation between Net Fed Liquidity and bitcoin can break at any time - but it is has remained strong for four years now. This is what to look out for over the next two weeks: Monday (September 16) is US corporate tax deadline day. I'm expecting this to swell the Treasury General Account by around $100bn to $150bn (liquidity drain). Then, from around the middle of next week, banks will likely begin to shift cash into the Reverse Repo (liquidity drain). This is due to what is known as balance sheet "window dressing" - as banks shuffle balance sheets to meet regulatory requirements. Usage of the Reverse Repo will continue to build until September 30. The total size of this Reverse Repo spike is likely to be somewhere in the region of $150bn to $350bn. Coupled with ongoing Quantitative Tightening, the end result will likely be a total liquidity drain in the region of $300bn to $550bn over 15 days.