A severe correction in the U.S. stock market driven by recession fears is imminent.
Author: Arthur Hayes
Translation and Compilation: BitpushNews
(The views expressed in this article are solely those of the author and should not be taken as the basis for investment decisions, nor should they be interpreted as advice or opinions on participating in investment transactions.)
Keep — It — Simple — Stupid = KISS
Many readers often forget the KISS principle when dealing with the tidal wave of policies from U.S. President Donald Trump.
Trump's media strategy aims to make you wake up every day and say to your friends, partners, or inner monologue: “Oh my God, did you see what Trump/Musk/Little Kennedy did yesterday? I can’t believe they did that.” Whether you are elated or depressed, this farce called "The Emperor's Days" is quite entertaining.
For investors, this continuous state of excitement is detrimental to accumulating Bitcoin (sats). You might buy today and quickly sell tomorrow after digesting the next headline. The market oscillates in this process, and your Bitcoin reserves rapidly diminish.
Remember the KISS principle.
Who is Trump? Trump is a master of real estate performance. To succeed in real estate, you must master the art of borrowing large sums of money at the lowest possible interest rates. Then, to sell units or rent space, you must boast about how impressive the new buildings or development projects will be. I am not interested in Trump's ability to evoke sympathy in global society, but I am interested in his ability to finance policy goals.
I am sure Trump wants to achieve his "America First" policy through debt financing. If not, he would allow the market to naturally clear the embedded credit in the system, leading to an economic depression worse than that of the 1930s. Does Trump want to be known as Herbert Hoover of the 21st century or Franklin Delano Roosevelt (FDR)? American history disparages Hoover because historians believe he printed money too slowly, while praising Roosevelt because his New Deal policies were financed by printing money. I believe Trump wants to be regarded as the greatest president in history, so he does not want to destroy the foundations of the empire through austerity measures.
To emphasize this point, remember that Hoover's Secretary of the Treasury, Andrew Mellon, once said the following about how to deal with the over-leveraged U.S. and global economy after a stock market crash:
“Liquidate labor, liquidate stocks, liquidate farmers, liquidate real estate. This will clear the corruption from the system. The high cost of living and the luxurious lifestyle will decline. People will work harder and live more morally. Values will be adjusted, and the enterprising will pick up the scraps from the less capable.”
Current U.S. Treasury Secretary Scott Bessent would not make such bold statements.
If my view is correct that Trump will achieve "America First" through debt financing, what does this imply for my outlook on global risk asset markets, particularly cryptocurrencies?
To answer this question, I must form an opinion on how Trump might increase the money/credit supply (i.e., print money) and lower its price (i.e., interest rates). Therefore, I must have a view on how the relationship between the U.S. Treasury, led by Scott Bessent, and the Federal Reserve, led by Jerome Powell, will evolve.
KISS Principle
Who do Bessent and Powell serve? Are they serving the same person?
Bessent was appointed by Trump 2.0, and from his past and current interviews, he strongly aligns with this "Emperor's" worldview.
Powell was appointed by Trump 1.0, but he is a capricious traitor who has switched sides to the Obama and Clinton camps. Powell destroyed his remaining credibility when he significantly cut interest rates by 0.5% in September 2024. At that time, U.S. economic growth was above trend levels, and there were still signs of inflation, making rate cuts unnecessary. But the Obama-Clinton puppet Kamala Harris needed a boost, and Powell dutifully cut rates. The results did not work out as expected, but after Trump's victory, Powell announced he would complete his term and once again firmly oppose inflation.
When you are burdened with massive debt, several things happen.
First, interest payments consume most of your free cash flow. Second, you cannot finance additional asset purchases because, given the high debt levels, no one will lend you money. Therefore, you must restructure your debt, which requires extending maturities and lowering coupon rates. This is a form of soft default, as doing so mathematically reduces the present value of the debt burden. Once your effective debt burden is lowered, you can borrow again at affordable prices. From this perspective, both the Treasury and the Federal Reserve play roles in restoring the financial health of the U.S. However, since Bessent and Powell serve different masters, the success of this effort is hindered.
Debt Restructuring
Bessent has publicly stated that the current debt structure in the U.S. must change. He hopes to eventually extend the average maturity of the debt burden, which is known on Wall Street as "debt maturity extension." Various macroeconomic experts have suggested ways to achieve this; I have discussed such solutions in The Genie. However, for investors, the most important thing is that the U.S. will soft-default on its debt burden by lowering its net present value.
Given the global distribution of U.S. debt holders, achieving this restructuring will take time. It is a geopolitical "Gordian knot." Therefore, in the short term, over the next three to six months, this is unrelated to us cryptocurrency inventors.
New Loans
Powell and the Federal Reserve have broad control over the quantity of credit and its price. The law allows the Federal Reserve to print money to purchase debt securities, thereby increasing the money/credit supply, i.e., printing money. The Federal Reserve also sets short-term interest rates. Given that the U.S. cannot default in nominal dollars, the Federal Reserve determines the risk-free rate of the dollar, which is the effective federal funds rate (EFFR).
The Federal Reserve has four main levers to manipulate short-term interest rates: reverse repurchase agreements (RRP), interest on reserve balances (IORB), the lower bound of the federal funds rate, and the upper bound of the federal funds rate. Without delving into the complex details of the money market, we just need to understand that the Federal Reserve can unilaterally increase the quantity of dollars and lower its price.
If Bessent and Powell serve the same leader, then analyzing the future path of dollar liquidity and how China, Japan, and the European Union respond to U.S. monetary policy would be very easy. Given that they are clearly not serving the same person, I wonder how Trump can manipulate Powell to ease the financial environment while allowing Powell to stick to the Federal Reserve's anti-inflation mandate.
Wrecking the Economy
The Federal Reserve-Recession Law: If the U.S. economy falls into recession, or if the Federal Reserve fears that the U.S. economy will fall into recession, it will cut interest rates and/or print money.
Let’s test this law with recent economic history (thanks to Bianco Research for this excellent chart).
This is a direct cause list of modern U.S. economic recessions post-World War II. A recession is defined as negative quarter-on-quarter GDP growth. I will focus on the period from the 1980s to the present.
This is a chart of the lower bound of the federal funds rate. Each red arrow represents the beginning of a loosening cycle that coincided with a recession. As you can see, it is very clear that the Federal Reserve will at least cut rates during a recession.
Fundamentally, "Pax Americana" and its ruling global economy are financed by debt. Large corporations fund future production expansion and current operations by issuing bonds. If cash flow growth slows significantly or declines completely, the repayment of that debt will ultimately be questioned. This is problematic because corporate liabilities are largely bank assets. The corporate debt assets held by banks support their customers' deposit liabilities. In short, if the debt cannot be repaid, it will call into question the "value" of all existing legal credit bank notes.
Moreover, in the U.S., most households are leveraged. Their consumption patterns are marginally financed by mortgages, auto loans, and personal loans. If their cash flow generation capacity slows or declines, they will be unable to meet their debt obligations. Similarly, the banking system holds these debts and supports their deposit liabilities.
Crucially, the Federal Reserve cannot allow large-scale defaults or an increase in the probability of corporate and/or household debt defaults during an economic recession or before cash flow generation slows or contracts. This would lead to corporate and consumer debt defaults, resulting in systemic financial distress. To protect the solvency of the debt-financed economic system, the Federal Reserve actively or passively cuts rates and prints money whenever a recession occurs or when perceptions of recession risk intensify.
KISS Principle
Trump manipulates Powell to ease the financial environment by triggering a recession or making the market believe a recession is imminent.
To avoid a financial crisis, Powell will subsequently take some or all of the following measures: cut interest rates, end quantitative tightening (QT), restart quantitative easing (QE), and/or suspend the supplementary leverage ratio (SLR) for banks purchasing U.S. Treasury securities.
Here’s a chart from DOGE:
How Trump Can Unilaterally Trigger a Recession?
The marginal driver of U.S. economic growth has always been the government itself. Whether the spending is fraudulent or necessary, government expenditure creates economic activity. Additionally, there is a monetary multiplier effect associated with government spending. This is why the Washington D.C. metropolitan area is one of the wealthiest regions in the U.S., as there are many professional parasites sucking off the government. It is difficult to directly estimate the exact monetary multiplier, but conceptually, it is easy to understand that government spending has a follow-on effect.
According to data from Perplexity:
- The median household income in Washington D.C. is $122,246, far above the national median household income.
- This places Washington D.C. in the 96th percentile among U.S. cities for household income.
As a former president, Trump is well aware of the extent of fraud, waste, and abuse within the government. The establishment of both parties does not want to curb this situation because everyone benefits from it. Given that Trump supporters are outsiders to both the Democratic and Republican parties, they are unhesitant to expose the flaws in government spending programs. Establishing a consulting committee led by Elon Musk, backed by Trump, called the "Department of Government Efficiency (DOGE)," is a core driving force behind rapidly cutting government spending.
How does DOGE achieve this when many of the largest spending items are non-discretionary? Payments can be stopped if they are fraudulent. If computers can replace the government employees managing these projects, human resource costs will plummet. The question becomes, how much fraud and inefficiency is there in government spending each year? If DOGE and Trump are to be believed, the annual amount could reach trillions of dollars.
One potentially obvious example is the Social Security Administration (SSA) sending checks to whom. If we believe DOGE's claims, the department is issuing nearly a trillion dollars to deceased individuals and those whose identities have not been properly verified. I do not know the truth of this claim. But imagine you are a SSA welfare fraudster and know that Elon and the "big shots" are delving into the data, potentially uncovering fraudulent payments you have received over the years and submitting them to the Department of Justice. Would you continue your scam or flee? The key is that the mere threat of discovery could lead to a reduction in fraudulent activities. As the old Chinese saying goes, "Kill the chicken to scare the monkey." Therefore, while the establishment media is trying to fool Elon and DOGE, I believe that even if it is not a trillion dollars, it is certainly hundreds of billions.
Next, let's talk about the human resources aspect of the government spending equation. Trump and DOGE are laying off hundreds of thousands of government employees. Whether the unions have enough power to legally challenge the mass purge of "useless" government workers remains to be seen. But the consequences are already evident.
DeAntonio explains: "The layoffs we have seen so far may just be the tip of the iceberg. The scale and timing of future layoffs will determine whether the labor market can remain stable. We currently expect that due to ongoing hiring freezes, delayed resignations, and layoffs initiated by DOGE, the number of federal government employees will decrease by about 400,000 by 2025."
Even though Trump 2.0's presidential term has just begun a little over a month ago, the impact of DOGE is already evident. The number of unemployment claims in the Washington D.C. area has surged. Housing prices have plummeted. And consumer discretionary spending, arguably driven by massive fraud and abuse within the U.S. government, has disappointed financial analysts' forecasts. The market is starting to talk about the word "recession."
A new analysis from real estate trading platform Parcl Labs shows that housing prices in Washington D.C. have dropped 11% since the beginning of this year, tracking the impact of the Department of Government Efficiency (DOGE) on the city's real estate market.
– Newsweek
Rothstein posted on Bluesky that due to the massive layoffs in government departments and the sudden cancellation of federal contracts, the U.S. is almost certainly heading toward severe economic contraction.
The word "recession" is an economic stigma. Powell does not want to become a modern-day Hester Prynne (and face public humiliation and condemnation), so he must respond.
Powell Turns Again
How many times has Powell turned since 2018? He must be feeling dizzy. The question for investors is whether Powell will act preemptively to save the financial system from collapse or wait until a major financial institution goes bankrupt before responding. The path Powell chooses is purely political. Therefore, I cannot predict.
But what I do know is that there is $2.08 trillion in U.S. corporate debt and $10 trillion in U.S. Treasury debt that must be rolled over this year. If the U.S. is on the brink of recession or in a recession, the cash flow shock will make rolling over these massive bonds at current interest rate levels nearly impossible. Therefore, to maintain the sanctity of the "American peace" financial system, the Federal Reserve must and will take action.
For us cryptocurrency investors, the question is how quickly and to what extent the U.S. will release credit? Let’s break down the four main measures the Federal Reserve will take to turn the tide.
Interest Rate Cuts
It is estimated that for every 0.25% reduction in the federal funds rate, it equates to $100 billion in quantitative easing or money printing. Assuming the Federal Reserve lowers rates from 4.25% to 0%.
This amounts to $1.7 trillion in quantitative easing. Powell may not lower rates to 0%, but you can be sure Trump will allow Elon to continue cutting spending until Powell brings rates down to an acceptable level. Once an acceptable interest rate level is reached, Trump will have his "mad dog" under control.
Stop Quantitative Tightening (QT)
The recently released minutes from the Federal Reserve's January 2025 meeting detail that some committee members believe quantitative tightening must end at some point in 2025. Quantitative tightening is the process by which the Federal Reserve reduces the size of its balance sheet, thereby decreasing the amount of dollar credit. The Federal Reserve is currently conducting $60 billion in quantitative tightening each month. Assuming the Federal Reserve begins to take action in April, stopping quantitative tightening will inject $540 billion in liquidity compared to previous expectations.
Restart Quantitative Easing (QE) / Supplementary Leverage Ratio (SLR) Exemptions
To absorb the supply of U.S. Treasuries, the Federal Reserve can restart quantitative easing and grant banks supplementary leverage ratio exemptions. Through quantitative easing, the Federal Reserve can print money and purchase Treasuries, thereby increasing the amount of credit. Supplementary leverage ratio exemptions allow U.S. commercial banks to use unlimited leverage to purchase Treasuries, thereby increasing the amount of credit. The key is that both the Federal Reserve and the commercial banking system are allowed to create money out of thin air. Restarting quantitative easing and granting supplementary leverage ratio exemptions are decisions that only the Federal Reserve can make.
If the federal deficit remains in the range of $1 trillion to $2 trillion per year, and the Federal Reserve or banks absorb half of the newly issued amount, it means that the money supply will increase by $500 billion to $1 trillion each year. A 50% participation rate is conservative, as during COVID-19, the Federal Reserve purchased 40% of the newly issued amount. Nevertheless, by 2025, major exporting countries (China) or oil-producing countries (Saudi Arabia) may have stopped or significantly slowed their purchases of Treasuries with dollar surpluses; thus, the Federal Reserve and banks have more room to maneuver.
Let’s do some calculations:
Interest Rate Cuts: $1.7 trillion
+
Stop Quantitative Tightening: $0.54 trillion
+
Restart Quantitative Easing/Supplementary Leverage Ratio Exemptions: $500 billion to $1 trillion
=
Total = $2.74 trillion to $3.24 trillion
COVID-19 vs. DOGE Money Printing
In the U.S. alone, the Federal Reserve and the Treasury created approximately $4 trillion in credit between 2020 and 2022 in response to the COVID-19 pandemic.
The scale of money printing inspired by DOGE could reach 70% to 80% of the COVID-19 levels.
With $4 trillion printed in the U.S. alone, Bitcoin surged about 24 times from its low in 2020 to its high in 2021. Given that Bitcoin's market cap is now much larger than it was then, let’s be conservative and call the increase from the U.S. printing $3.24 trillion a 10-fold rise. For those asking how Bitcoin could reach $1 million during Trump's presidency, this is the answer.
Several Key Assumptions
Even with the current market in disarray, I have painted a very bright future for Bitcoin. Let’s look at my assumptions so readers can judge for themselves whether these assumptions are reasonable.
Trump will achieve "America First" through debt financing.
Trump is using DOGE as a means to clear out political opponents addicted to fraudulent revenue sources, cut government spending, and increase the likelihood of a recession triggered by a slowdown in U.S. government spending.
The Federal Reserve will implement a series of policies before or after a recession to increase the money supply and lower the price of money.
Based on your worldview, it is up to you to decide whether this is reasonable.
U.S. Strategic Reserves
Waking up on Monday morning, I saw that Trump market had launched. On Truth Social, Trump reiterated that the U.S. would establish a strategic reserve filled with Bitcoin and a bunch of junk coins. The market surged significantly due to the "news." This is nothing new, but the market took Trump's reaffirmation of his cryptocurrency policy intentions as an excuse for a violent dead cat bounce.
If this reserve is to have a positive impact on prices, the U.S. government needs to have the ability to actually purchase these cryptocurrencies. There are no secret piles of dollars waiting to be deployed. Trump needs the help of Republican lawmakers to raise the debt ceiling and/or revalue gold to match current market prices. These are the only two ways to fund the cryptocurrency strategic reserve. I'm not saying Trump won't keep his promise, but the timeframe for when purchases might begin could be longer than leveraged traders can hold out before being liquidated. Therefore, take profits on the highs.
Trading Strategy
Bitcoin and the broader cryptocurrency market are the only truly global free markets that exist today. The price of Bitcoin tells the world in real-time how global society views the current liquidity situation of fiat currencies. Bitcoin reached a high of $110,000 just before Trump's coronation in mid-January and hit a local low of $78,000, a drop of about 30%. Bitcoin is screaming that a liquidity crisis is imminent, even as U.S. stock market indices remain close to all-time highs. I believe in Bitcoin's signals, therefore, a severe correction in the U.S. stock market driven by recession fears is imminent.
If Bitcoin leads the market down, it will do so on the way up as well. Given that minor financial turmoil can quickly escalate into full-blown panic due to the massive leverage embedded in the system, if my overall prediction is correct, we won't have to wait long for the Federal Reserve to take action. Bitcoin will drop first and then rebound first. As for those rotten traditional financial systems led by U.S. stocks, they will lag behind in starting to rise but will first have to experience a round of sharp declines before chasing the rally.**
I firmly believe we are still in a bull market cycle, so the worst-case bottom will be the previous cycle's historical high of $70,000. I'm not sure if we will drop that low. A positive signal for dollar liquidity is that the U.S. Treasury's general account is declining, which serves to inject liquidity.
Based on my confidence in Trump as a financier type and his ultimate goals, when Bitcoin trades in the $80,000 to $90,000 range, Maelstrom increases its risk exposure. If the current situation is just a "dead cat bounce" (a brief rebound followed by further declines), I expect Bitcoin may test the low around $80,000 again.
If the S&P 500 or Nasdaq 100 index drops 20% to 30% from historical highs, coupled with a major financial institution on the brink of collapse, we could see a comprehensive linkage in global markets. This means all risk assets will be hit simultaneously, and Bitcoin may drop below $80,000 again, even testing the $70,000 mark. Whatever happens, we will cautiously build our positions gradually during the downturn, without using leverage, in anticipation of a global (especially U.S.-led) fiat financial market re-expanding after the eventual collapse, pushing Bitcoin to $1 million or even higher!
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