From Hokkaido's Snow Slopes to Wall Street: How Financial Markets Responded to Trump's "Liberation Day"
Author: Arthur Hayes
Editor’s Note:
Trump's tariff "snow cutting" triggered a financial market avalanche, but it also exposed the bottom line for policymakers in stabilizing the market. In the face of severe volatility in the bond market, the Treasury Department rolled out a "non-quantitative easing" repurchase plan, reminiscent of Yellen's actions in the third quarter of 2022, signaling that a new round of dollar liquidity injection is imminent.
Arthur Hayes, co-founder of BitMEX, boldly predicts in this article that Bitcoin has reached the bottom of this bull market cycle, will break free from its correlation with tech stocks, return to the narrative of "digital gold," and lead the crypto market in the upcoming wave of liquidity. Investors should closely monitor macro policy trends to seize this policy-driven market opportunity.
Here is the main text:
In mid-March this year, my skiing season in Hokkaido came to an end. However, the lessons learned from the slopes can still be applied to President Trump's "tariff tantrum." Each day is different, with so many interacting variables—no one knows which snowflake or ski turn will trigger an avalanche. The best we can do is roughly estimate the probability of an avalanche occurring. A more precise technique for assessing slope instability is "snow cutting."
Before descending, one skier from the team will traverse the starting area, jumping up and down, trying to trigger an avalanche. If successful, how the avalanche propagates across the slope will determine whether the guide thinks the slope is safe to ski. Even if an avalanche is triggered, we might still ski that slope, but we would carefully choose which areas to avoid triggering a larger avalanche than just loose powder snow falling. If we see cracks rapidly expanding or large snow slabs breaking, we need to leave quickly.
The key is to try to quantify the worst-case scenario based on current conditions and act accordingly. Trump's self-proclaimed "Liberation Day" on April 2 is a snow cutting of this steep and dangerous slope for the global financial markets. The Trump team borrowed tariff policies from an economics trade book titled "Balanced Trade: Ending the Overwhelming Costs of America's Trade Deficit" and took an extreme stance. The announced tariff rates were worse than the worst predictions of mainstream economists and financial analysts. In avalanche theory terms, Trump triggered a prolonged weak layer avalanche, threatening to destroy the entire false fractional reserve dirty fiat financial system.
The initial tariff policy represented the worst outcome, as both the U.S. and China took opposing extreme positions. While the severe volatility in financial asset markets led to trillions of dollars in global losses, the real issue was the rising volatility in the U.S. bond market, measured by the MOVE index. This index nearly reached an intraday record of 172, after which the Trump team quickly retreated from the danger zone. Within a week of announcing the tariffs, Trump adjusted the plan, suspending tariffs on all countries except China for 90 days.
Subsequently, Boston Federal Reserve Bank President Susan Collins wrote in the Financial Times that the Fed was ready to take all necessary measures to ensure the normal functioning of the market, just days later when volatility refused to decline significantly. Finally, U.S. Treasury Secretary Scott Basset (BBC) stated in an interview with Bloomberg that his department could significantly increase the pace and amount of Treasury bond repurchases. I describe this series of events as a shift for policymakers from "everything is fine" to "everything is over, we must do something," leading to a market surge, and most importantly, Bitcoin hitting bottom. Yes, I declare a local bottom at $74,500.
Whether you describe Trump's policy changes as a retreat or a clever negotiation strategy, the result is that the government deliberately triggered a financial market avalanche, severe enough that they adjusted their policy a week later. Now, as a market, we know a few things. We understand the situation of bond market volatility in the worst case, we recognize the volatility levels that trigger behavioral changes, and we know what monetary leverage will be taken to alleviate this situation. Using this information, as Bitcoin holders and cryptocurrency investors, we know the bottom has arrived because the next time Trump escalates tariff rhetoric or refuses to lower tariffs on China, Bitcoin will rise, anticipating that monetary authorities will run the printing press at maximum "printing" levels to ensure bond market volatility remains subdued.
This article will explore why the extreme stance on tariffs led to dysfunction in the bond market, as measured by the MOVE index. I will then discuss how Basset's solution—Treasury bond repurchases—will inject a large amount of dollar liquidity into the system, even though technically, issuing new bonds to buy old bonds does not increase dollar liquidity in the system. Finally, I will discuss why this Bitcoin and macroeconomic landscape is similar to the third quarter of 2022, when Basset's predecessor Janet Yellen (bad girl Yellen) increased Treasury issuance to drain the reverse repurchase agreement (RRP). Bitcoin hit a local low after the FTX incident in the third quarter of 2022, and now in the second quarter of 2025, after Basset launched the "non-quantitative easing" quantitative easing rocket, Bitcoin has hit a local low in this bull market cycle.
Maximum Pain
I want to reiterate that Trump's goal is to reduce the U.S. current account deficit to zero. Achieving this quickly requires painful adjustments, and tariffs are his administration's weapon of choice. I don't care whether you think this is good or bad. I also don't care whether Americans are ready to work 8-hour shifts in iPhone factories. Part of the reason Trump was elected is that his supporters believe they were screwed by globalization. His team is determined to fulfill campaign promises, in their words, to elevate the concerns of "Main Street" rather than "Wall Street." All of this assumes that those around Trump can secure re-election through this path, which is not a foregone conclusion.
The reason the financial markets crashed on "Liberation Day" is that if foreign exporters cannot earn dollars or earn less, they cannot buy or buy fewer U.S. stocks and bonds. Moreover, if exporters must change their supply chains or even rebuild them in the U.S., they must fund part of the reconstruction by selling liquid assets (such as U.S. bonds and stocks). This is why the U.S. market and any market overly exposed to U.S. export income collapsed.
At least initially, the bright spot was that panicked traders and investors flocked to Treasuries. Treasury prices rose, and yields fell. The yield on the 10-year Treasury bond fell sharply, which was good for Basset, as it helped him shove more bonds down the market's throat. However, the severe volatility in bond and stock prices increased volatility, which was deadly for certain types of hedge funds.
Hedge funds, sometimes hedging… but always using a lot of leverage. Relative value (RV) traders typically identify the relationship or spread between two assets, and if the spread widens, they leverage to buy one asset and sell another, expecting mean reversion. In general, most hedge fund strategies implicitly or explicitly short market volatility on a macro level. When volatility decreases, mean reversion occurs. When volatility increases, things get messy, and the stable "relationship" between assets collapses. This is why risk managers at banks or trading platforms raise margin requirements for hedge funds when market volatility rises. When hedge funds receive margin calls, they must close positions immediately, or they will be liquidated. Some investment banks are happy to take out clients during extreme volatility through margin calls, taking over the positions of bankrupt clients, and then profiting when policymakers inevitably print money to suppress volatility.
What we really care about is the relationship between stocks and bonds. Due to its role as a nominally risk-free asset and global reserve asset, when global investors flee stocks, Treasury prices rise. This makes sense because fiat currency must be placed somewhere to earn a return, and the U.S. government, with its costless printing press, will never voluntarily go bankrupt under dollar terms. The actual value of Treasury bonds may indeed decline, but policymakers do not care about the actual value of any junk fiat asset flooding the globe.
In the initial trading days after "Liberation Day," stocks fell, and bond prices rose/yields fell. Then, what happened was that bond prices fell along with stocks. The degree of back-and-forth volatility in the yield of the 10-year Treasury bond has not been seen since the early 1980s. The question is, why? The answer, or at least what policymakers believe is the answer, is extremely important. Is there a structural problem in the market that must be fixed through some form of money printing by the Fed and/or the Treasury?
The bottom panel of Bianco Research shows that the degree of change in the 30-year Treasury yield over three days is unusual. The level of change caused by the "tariff tantrum" is comparable to market volatility during financial crises such as the COVID-19 pandemic in 2020, the global financial crisis in 2008, and the Asian financial crisis in 1998. This is not good.
The potential liquidation of RV fund Treasury basis trading positions is a concern. How large is this trading scale?
February 2022 was a significant month for the Treasury market, as President Biden decided to freeze the Treasury holdings of Russia, the world's largest commodity producer. This effectively indicated that, regardless of who you are, property rights are not rights but privileges. Therefore, foreign demand continued to weaken, but RV funds filled the gap, becoming the marginal buyers of Treasuries. The above chart clearly shows the increase in repurchase positions, representing the scale of basis trading positions in the market.
Basis trading explained:
Treasury basis trading occurs when one buys spot Treasury bonds and simultaneously sells Treasury futures contracts. The margin requirements at the bank and trading platform level are important here. The position size of RV funds is limited by the required cash margin. Margin requirements vary due to market volatility and liquidity issues.
Bank Margin:
To obtain cash for purchasing bonds, funds engage in repurchase agreements (repo), where banks agree to provide cash for settlement immediately for a small fee, using the bonds to be purchased as collateral. Banks will require a certain cash margin for the repo transaction.
The greater the bond price volatility, the more margin banks require.
The lower the bond liquidity, the more margin banks require. Liquidity is always concentrated on certain maturities of the yield curve. For the global market, the 10-year Treasury bond is the most important and liquid. When the latest 10-year Treasury bond is auctioned, it becomes the most liquid circulating 10-year bond. Then, over time, it moves further away from the liquidity center and is considered an off-the-run bond. As circulating bonds naturally turn into off-the-run bonds, the amount of cash needed to fund repo transactions increases, while funds wait for the basis to collapse.
Essentially, during periods of high volatility, banks worry that if they need to liquidate bonds, prices will drop too quickly, and the liquidity of market sell orders will be too low to absorb. Therefore, they raise margin limits.
Futures Trading Platform Margin:
Each Treasury futures contract has an initial margin level that determines the amount of cash margin required for each contract. This initial margin level fluctuates based on market volatility.
The trading platform is concerned about its ability to liquidate positions before all initial margins are exhausted. The faster the price changes, the more difficult it is to ensure solvency; therefore, as volatility rises, margin requirements also increase.
Concerns about Liquidation:
The significant impact of Treasury basis trading on the market and the self-financing methods of major participants have been hot topics in the Treasury market. The Treasury Borrowing Advisory Committee (TBAC) provided data in its recent quarterly refinancing announcement (QRA), confirming that since 2022, the marginal buyers of U.S. Treasuries have been RV hedge funds participating in basis trading. Here is a link to a detailed paper submitted to the CFTC, relying on data provided by TBAC in April 2024.
The chain of market events in reflexive cycles amplifies in a terrifying way, as follows:
If bond market volatility rises, RV hedge funds will be required to provide more cash to banks and trading platforms. At some point, funds cannot bear the additional margin requirements and must simultaneously close all positions. This means selling spot bonds and buying back bond futures contracts. Liquidity in the spot market declines as market makers reduce the size of their quotes at specific spreads to protect themselves from toxic one-way liquidity. As liquidity and prices decline together, market volatility further increases. Traders are well aware of this market phenomenon, and regulators and their financial journalist allies have issued warning signals about it. Therefore, as bond market volatility increases, traders preemptively sell to avoid forced liquidations, amplifying volatility in the downturn, causing things to unravel faster.
If this is a known source of market stress, what unilateral policies can Basset implement within his department to maintain the leveraged liquidity of these RV funds?
Treasury Bond Repurchases
A few years ago, the Treasury Department initiated a repurchase program. Many analysts look to the future, pondering how this will assist some money printing schemes. I will present my theory on the impact of repurchases on the money supply. But first, let’s gradually understand how the program works.
The Treasury will issue new bonds and use the proceeds to repurchase illiquid off-the-run bonds. This will lead to an increase in the value of off-the-run bonds, potentially exceeding fair value, as the Treasury will be the largest buyer in the illiquid market. RV funds will see their off-the-run bonds' basis narrow against bond futures contracts.
Basis Trading = Long Spot Bonds + Short Bond Futures
Due to the Treasury's anticipated purchases, off-the-run bond prices will rise, leading to an increase in spot bond prices.
Thus, RV funds will lock in profits by selling off-the-run bonds at higher prices and closing their short bond futures contracts. This releases valuable capital on the bank and trading platform side. Since RV funds are in the business of making money, they will immediately reinvest in basis trading at the next Treasury auction. As prices and liquidity rise, bond market volatility decreases. This reduces the margin requirements for the funds, allowing them to hold larger positions. This is the best pro-cyclical reflexivity.
Now the market will relax, knowing that the Treasury has provided more leverage to the system. Bond prices rise; everything is fine.
Basset boasted about his new tool in an interview, as theoretically, the Treasury could repurchase indefinitely. The Treasury cannot issue bonds without a spending bill approved by Congress. However, repurchases essentially involve the Treasury issuing new debt to pay off old debt, which is already done for the principal payments of maturing bonds. The transaction is cash flow neutral because the Treasury buys and sells bonds with one of the primary dealer banks at the same nominal amount, so there is no need for the Fed to lend it money for the repurchase. Therefore, if the scale of repurchases reduces the market's fear of a Treasury market collapse and leads to lower yields on debt that has yet to be issued, then Basset will go all out on repurchases. It won't stop, it won't pause.
Clarification on Treasury Supply
Deep down, Basset knows that at some point this year, the debt ceiling will be raised, and the government will continue to spend at an increasingly reckless pace. He also knows that due to various structural and legal reasons, Elon Musk cannot quickly cut spending through his Department of Government Efficiency (DOGE). Specifically, Elon's estimated savings this year have dropped from $1 trillion annually to a trivial (at least considering the massive scale of the deficit) $150 billion. This leads to an obvious conclusion that the deficit may actually widen, forcing Basset to issue more bonds.
As of now, the deficit for fiscal year 2025 as of March is 22% higher than the same period in fiscal year 2024. Give Elon a little trust—I know some of you would rather listen to Grimes burn in a Tesla than do this—he only cut for two months. More concerning is the business uncertainty regarding the severity and impact of tariffs, combined with the decline in the stock market, which will lead to a significant drop in tax revenues. This points to structural reasons for the deficit to continue widening, even if DOGE successfully cuts more government spending.
Basset is deeply worried that due to these factors, he will have to raise this year's borrowing estimates. As the large supply of Treasuries approaches, market participants will demand significantly higher yields. Basset needs RV funds to step up, using maximum leverage to buy heavily into the bond market. Therefore, repurchases are necessary.
The positive impact of repurchases on dollar liquidity is not as direct as central bank money printing. Repurchases are budget and supply neutral, which is why the Treasury can conduct repurchases indefinitely to create significant purchasing power for RV funds. Ultimately, this allows the government to finance itself at affordable rates. The more debt issued, not purchased with private savings but bought through leveraged funds created by the banking system, the greater the increase in the money supply. Then we know that when the amount of fiat currency rises, the only asset we want to hold is Bitcoin.
Clearly, this is not an infinite source of dollar liquidity. The number of existing off-the-run bonds is limited. However, repurchases are a tool that allows Basset to alleviate market volatility in the short term and finance the government at manageable levels. This is why the MOVE index has decreased. And as the Treasury market stabilizes, the fear of a complete system collapse also diminishes.
Layout
I compare this trading layout to that of the third quarter of 2022. In the third quarter of 2022, the suitable white boy Sam Bankman-Fried (SBF) went bankrupt; the Fed was still raising rates, bond prices were falling, and yields were rising. Bad girl Yellen needed a way to stimulate the market so she could pry open the throat of the market with her red-soled high heels and dump bonds without triggering a gag reflex. In short, just like now—due to the shift in the global monetary system leading to increased market volatility—this is a bad time to increase bond issuance.
Reverse repurchase balances (white) vs. Bitcoin (gold)
Just like today, but for different reasons, Yellen could not count on the Fed to ease because Powell was on a juggling moderation tour inspired by Paul Volcker. Yellen, or some clever staffer, correctly deduced that the sterile funds held in reverse repos by money market funds could be lured into the leveraged financial system by issuing more Treasury bonds, which these funds were happy to hold because their yields were slightly higher than reverse repos. This added $2.5 trillion in liquidity to the market from the third quarter of 2022 to early 2025. During that time, Bitcoin rose nearly sixfold.
This is a rather bullish layout, but people are afraid. They know that high tariffs and the U.S.-China trade war are detrimental to stock prices. They think Bitcoin is just a high-beta version of the Nasdaq 100. They are bearish, not understanding how a seemingly innocuous repurchase plan could lead to an increase in future dollar liquidity. They stand by, waiting for Powell to ease. He cannot ease directly or provide quantitative easing in the way previous Fed chairs did from 2008 to 2019. Times have changed, and now the Treasury is responsible for a lot of money printing. If Powell truly cared about inflation and the long-term strength of the dollar, he would offset the effects of Yellen's and now Basset's Treasury actions. But he didn't then, and he won't now; he will sit in the dominated chair, dominated.
Just like in the third quarter of 2022, people thought Bitcoin might drop below $10,000 as unfavorable market factors converged after a cycle low of $15,000. Today, some believe we will drop below $74,500, falling below $60,000, signaling the end of the bull market. Yellen and Basset are not playing around. They will ensure the government is funded at manageable rates, and bond market volatility is suppressed. Yellen issued more notes than bonds to inject limited reverse repo liquidity into the system; Basset will maximize the RV funds' ability to absorb the increased bond supply by issuing new bonds to buy old bonds. Neither of these is the quantitative easing that most investors know and recognize. Therefore, they miss the opportunity, and once the breakout is confirmed, they have to chase the price higher.
Validation
For the repurchase to have a net stimulative effect, the deficit must continue to rise. On May 1, through the U.S. Treasury's quarterly refinancing announcement (QRA), we will know the upcoming borrowing plans and how they compare to previous estimates. If Basset must or expects to borrow more, it means tax revenues are expected to decline; therefore, the deficit will widen under unchanged spending.
Then, in mid-May, we will receive the official April deficit or surplus from the Treasury, containing actual data on tax revenues as of April 15. We can compare the year-on-year changes for fiscal year 2025 so far to see if the deficit is widening. If the deficit rises, bond issuance will increase, and Basset must do everything possible to ensure RV funds can increase their basis trading positions.
Trading Strategy
Trump performed a snow cutting on the dangerous steep slope, triggering an avalanche. We now know the level of pain or volatility (MOVE index) that the Trump administration can tolerate, and adjustments will be made before policies that negatively impact the foundation of the fiat financial system are implemented. This triggers a policy response, the effects of which will increase the legal dollar supply available to purchase Treasuries.
If the frequency and scale of repurchases are insufficient to calm the market, then the Fed will ultimately find a way to ease. They have already stated they would do so. Most importantly, they slowed the pace of quantitative tightening (QT) at the recent March meeting, which is a positive factor for dollar liquidity in the long run. However, the Fed can also do more, going beyond quantitative easing. Here is a list of some procedural policies that are non-quantitative easing but increase the market's ability to absorb increased Treasury issuance; one of these may be announced at the Fed meeting on May 6-7:
Exempt Treasuries from the Supplementary Leverage Ratio (SLR). This allows banks to use unlimited leverage to purchase Treasuries.
Conduct quantitative tightening distortions, reinvesting cash raised from maturing mortgage-backed securities (MBS) into newly issued Treasuries. The size of the Fed's balance sheet remains unchanged, but this will add $35 billion of marginal buying pressure to the Treasury market each month for years, until the total stock of MBS matures.
The next time Trump presses the tariff button—he will do so to ensure countries respect his authority—he will be able to demand additional concessions, and Bitcoin will not be crushed alongside certain stocks. Bitcoin knows that given the insane levels of current and future debt required for the dirty financial system to operate, deflationary policies cannot be sustained in the long term.
The skiing cut on Sharp World Mountain triggered an avalanche in the secondary financial market, which could quickly escalate to the highest level, Level 5. But the Trump team reacted, changing course and placing the empire in a different light. The foundation of the slope is solidified on the dry powder snow made from the crystal-clear dollar bills provided by Treasury bond repurchases. It’s time to transition from the difficult ascent with a backpack full of uncertainty to jumping into the powder snow pillow, cheering for how high Bitcoin will rise.
As you can see, I am very bullish. At Maelstrom, we have maximized our cryptocurrency exposure. Now is the time to buy and sell different cryptocurrencies to accumulate satoshis. During the drop from $110,000 to $74,500, the most purchased coin was Bitcoin. Bitcoin will continue to lead the way as it is the direct beneficiary of future liquidity injections, which are aimed at softening the impact of U.S.-China trade. Now the global society views Trump as a madman wielding tariffs like a blunt weapon, and any investor holding U.S. stocks and bonds is looking for anti-establishment value. Physically, that is gold. Digitally, that is Bitcoin.
Gold has never been considered a high-beta version of U.S. tech stocks; therefore, as the market generally collapses, it performs well as the oldest anti-establishment financial hedge. Bitcoin will break free from its association with tech stocks and rejoin gold's "only up" embrace pool.
What about altcoins?
Once Bitcoin breaks through the previous high of $110,000, it could soar, further increasing its dominance. Perhaps it will just barely reach $200,000. Then the rotation from Bitcoin to altcoins will begin.
Aside from those shiny new altcoin tokens, the best-performing tokens will be those associated with projects that both generate profits and return profits to staked token holders. There are only a few such projects. Maelstrom has been diligently accumulating positions in certain qualifying tokens and has not yet finished buying these treasures. They are treasures because they were hit hard in the recent sell-off just like other altcoins, but unlike 99% of altcoin projects, these treasures actually have paying customers. Due to the large number of tokens, it is difficult to persuade the market to give your project another chance after launching tokens in a "only down" mode on centralized exchanges (CEX). Altcoin divers want higher annualized staking yields (APY), and these returns come from actual profits, as these cash flows are sustainable.
Article link: https://www.hellobtc.com/kp/du/04/5756.html
Source: https://mp.weixin.qq.com/s/x3c9a9L7sl-ViFeKtqoUPQ
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