21 Weeks Later

Good fucking morning, everybody. I hope everyone is kind of sober after a weekend in Vegas.

​

I finished ski season, and there is a bit of a lull before heading to the beach for another three months. I thought I needed to have a mental update on what I think about the markets. I recently watched the 28 Days Later zombie movie, and that was the inspiration for the title. You'll see what I mean in a second.

​

Basically, I had to think for a few days about how I think monetary policy is going to evolve, taking into account what's going on in AI, what's going on in Iran with the war, and out came this presentation. Obviously, I've turned a bit more bullish, and I'll explain why over the next 15 minutes.

​

We can't ignore that there is a war going on right now. I have to make a few assumptions before I get to my eventual thesis. Number one, I hope that we're all not going to die in a nuclear holocaust. If we do, it's not investable, so it doesn't fucking matter anyway. Let's put that particular worry to the side.

​

Number two, the markets are going to look through this event as something short-term-ish, whatever that means. It is time to think about money creation and money printing and what that means for Bitcoin.

​

Every morning I get up, and if I want to dissect what's actually happening, at least for my portfolio in reference to the war, I pull up this chart on Bloomberg that I created. It is the six-month futures contract on WTI oil minus the front month. I'm really interested in the spread and the evolution.

​

All I care about is whether there are enough commodities and oil flowing through the Strait. Irrespective of the propaganda that I read from Donald Trump or from the Iranian side on what's actually going on in the Strait, I just look at the prices. As we see, it's kind of improved, meaning that front-end prices are tending toward the back end, which says, yeah, shit is fucked up, but it's not super duper fucked up. So I can ignore it and continue thinking about other things.

​

Whenever I get on stage, I'm always talking about money printing. The evolution of my thinking from the last essay that I published about four weeks ago is that, on a medium-term basis, liquidity is going to turn positive.

​

If we think about the negative side of things, there is AI deflation. People have been talking about all of the knowledge workers who have lost or will lose their jobs because of very efficient and cheap models that can do knowledge work. I wrote an essay a few months ago about my expectations of what these losses could be. I'll put some charts up in a second. But that's on the negative side. I think that could be a multi-hundred-billion-dollar issue for the banking system.

​

On the Fed side, I'll get into this in a bit. There is a lot of consternation in the markets about the Fed chairperson-to-be, Kevin Warsh, and whether or not he is a hawk or a dove. I'm going to put his comments into perspective and basically say that they're neutral. They're neither good nor bad for liquidity. The people who are getting all freaked out about Warsh as a super hawkish Fed chairperson are not really reading the tea leaves as they should be.

​

Finally, commercial bank lending. Why is it going to increase? The war economy in the United States and abroad is going to drive banks to issue more loans to people involved in the production of all sorts of armaments and the things that go into making those weapons. Finally, banking regulation changes will allow banks to increase leverage on their balance sheets.

​

This is a chart that I've been looking at since October of last year. The magenta line is the Nasdaq. Gold is the Bitcoin price, and white is the U.S. tech SaaS stock ETF. Most people believe, at least institutional investors, that Bitcoin is high beta Nasdaq, and it has behaved that way pretty much over the past four or five years.

​

But since the October all-time high in Bitcoin at $126,000 to the present, it's down about 50%, while the Nasdaq has been flat. Broad-based big tech has held up okay. But if you take a look at the type of tech stocks that have gotten clobbered, it's all of the SaaS companies, companies that produce a product that now an AI can do for $10 a month, while they are charging $10,000 a seat, or some ridiculous amount of money. These stocks got hammered.

​

I think that pointed to a credit deflationary event that was not being recognized by central banks. They weren't printing enough money, and Bitcoin followed suit. This is prewar, so I ended this chart on February 28th.

​

This is another wish of mine: I want to fire all of my human accountants and lawyers. I spend way too much money on this shit. I can't wait for Claude to take over. That is going to have a very bad impact on anyone who has loans out to these folks who earn very, very good salaries.

​

This is basically my thought process on AI being the new subprime and what that could be for the commercial banking system. I think this narrative drove Bitcoin lower from October until the U.S.-Iran war started in late February.

​

But since the war started, Bitcoin has outperformed. It has outperformed Nasdaq in magenta and outperformed the SaaS stocks. Basically, I think Bitcoin is now focusing on wartime inflation. What is going to change now that there is an explicit admission by the United States and a lot of other countries that they're on a wartime footing, their defense spending is inadequate, and they need to print more money to build more bombs?

​

Putting AI to the side, moving on to the Fed. When Kevin Warsh was nominated, I think it was in January of this year, everybody started freaking out. In his tenure from when he was a governor, I think during the financial crisis and after, until the present, he's been very critical about the Fed's very large balance sheet. He has gone on record saying that he believes the Fed balance sheet is too large, that he is going to find a way to shrink it, and alongside that, he'll be able to lower interest rates.

​

If you read my essays, you know that I am a big proponent of the idea that the quantity of money is more important than its price. I care more about what he says about the balance sheet than where short-term interest rates go. If the market believes there is going to be less dollar liquidity floating around the system because of what Warsh will do with the Fed, then they'll be bearish on Bitcoin and other risk assets. This is what we've seen in the media talking about this hawkish Fed that's going to come into place after May when Warsh takes over.

​

I don't believe that's the case. I believe that essentially the Fed will swap reserves and Treasury repos and put them on the commercial banking system. They'll do that with the help of new regulations in terms of how banks are allowed to hold assets on the balance sheet and how much capital they have to have against those.

​

Finally, what I think is most important to understand about what Warsh will or won't do at the Fed is that he has a very material binding constraint. He needs to work alongside Scott Bessent at the Treasury to make sure that whatever he does with the Fed's balance sheet does not impair the ability for Bessent to go out and sell billions of dollars of bonds.

​

Here is a very simple balance sheet. There are no numbers, because I know that's a little bit complicated for some people. On the asset side, Treasuries, mortgage-backed securities, and repos. These are the things that help people finance the purchase of Treasuries. On the liability side, there are bank reserves, the Treasury General Account, which is the checking account of the government, and currency in circulation.

​

Essentially, from 2008 to the present, the Fed boosted its liabilities in terms of bank reserves and bought assets from the banking system: Treasuries, mortgage-backed securities, and repos. When Warsh says that the balance sheet is too large, he says that the Fed owns too many of these debt securities and he wants to be able to reduce that balance sheet.

​

Again, he could sell bonds. That's very disruptive to the market. Or, what I think and what has been hinted at, is that he'll do a swap with the U.S. banking system.

​

The commercial banking balance sheet has Fed reserves as an asset, something like three-ish trillion that they have on deposit at the Fed. They have loans. On the funding side, deposits and shareholders' equity. For a certain size of balance sheet, you have to have a certain amount of equity against it, and that's capital adequacy ratios.

​

What needs to happen is that the Fed and the banks need to swap. The banks need to get rid of the reserves, have a lesser demand for reserves, and replace those reserves with Treasuries and repos. This is what is being pushed with deregulation of the U.S. commercial banking system.

​

Whenever you hear Bessent and any other monetary officials of the United States government talk about deregulation, what they mean is: we want to allow the banking system to absorb all of this debt that we're creating and take it off the balance sheet of the Fed.

​

Again, the end state is that U.S. commercial banks take over the money creation baton from the Fed, and you have Treasuries and repos on their balance sheet and, on the liability side, deposits and shareholders' equity.

​

The point of all this is that the net effect to dollar liquidity is neutral. There's nothing being sold. There's nothing being bought. It's just a swap. It's purely regulatory fiction in terms of who is allowed to hold what. But at the end of the day, Warsh can get up and tell people that he has engineered a smaller Fed balance sheet. In reality, for us as investors, all we care about is the net effect. The net effect is nothing.

​

Furthermore, Warsh is not going to get into a fight with Bessent. I had this photo with Jerome Powell's face before; we'll just replace it with Warsh. At the end of the day, you've issued $38 trillion of debt and you need to fund the government. The Federal Reserve will do what it's asked to do, which is make sure that the market is orderly so that people can buy this debt.

​

Looking at spending, this is a chart of the fiscal year, October to September. As we can see, deficits from the COVID period to the present are the largest peacetime deficits in United States history, and fiscal year 2026 is slightly tracking as a larger deficit than 2025.

​

The point of all of this is that the U.S. Treasury is not going to spend less money. Donald Trump is not talking about how he's going to reduce spending in a dramatic fashion. That DOGE thing happened last year. It's all forgotten about. It's all about wartime spending. His new defense budget is something like 50% over the previous one and $1.5 trillion. That does not sound like a Treasury or politicians coming together to reduce spending so that the Fed can reduce its balance sheet.

​

All this talk about the Fed shrinking its balance sheet makes no sense, because the politicians and the Treasury that funds them are continually increasing the amount of debt that's out there.

​

Here's another graphic: who is buying the debt? Foreigners are not buying as much debt as they used to. I excluded countries that are usually used for hedge fund balance sheets for the basis trade. What you can see here is that 25% foreign ownership has flatlined while the amount of debt has gone up a lot, which basically means there needs to be a new price-insensitive buyer for all that debt, and that is the U.S. commercial banking system.

​

The banking system can increase the amount of debt because of new regulations that went live on April 1st of this year, called the Enhanced Supplementary Leverage Ratio. It basically allows banks to hold less capital against the loans and other things they have on their balance sheets. This means that large banks like JPMorgan and Citibank can onboard more Treasuries and repos in the market and take that rollover from the Fed.

​

For smaller banks, the engine of lending within the United States economy, they can increase the amount of commercial and industrial loans that are out there. S&P Global estimates that this ESLR balance sheet reduction will generate $1.3 trillion of new loans.

​

Why will banks have demand for loans? One of the criticisms about this analysis from some of my other macro friends is that they claim the banking system is not creating enough loans, or there's not enough demand. Well, we have a great source of demand, and that is the U.S. Department of War. They not only will put equity into certain deals, they'll guarantee offtake production. Banks, seeing that companies have a guaranteed customer that has a government that can print money, will lend to them.

​

They'll also lend to the resource miners who are mining the critical resources that go into making bombs. Finally, all of the AI capex is now a national security concern. When a hyperscaler runs up against the ability to finance their debt out of free cash flow and they go to the market, they will find willing large banks with massive balance sheets to fund that debt.

​

Monitor commercial and industrial loans. You can get it, I think, on a weekly basis from the Fed. This is just a chart from Bloomberg. The credit must flow.

​

The great thing about bank lending is that it has a higher multiplier than central bank lending, at about three empirically. That's about $4 trillion that's created, which means that it's larger than the amount of credit that could be destroyed by AI taking people's jobs, which is why I've turned more bullish on Bitcoin.

​

I've got a few seconds left. Again, my liquidity chart bottomed back in November of last year, around the same time that Bitcoin did. I think we've had a bit of a chop. We've had a bit of a war. Now it's time to break out. That's why I believe Bitcoin is going higher. I think my end-of-year target is like $125,000. Whatever, it doesn't fucking matter. I'm long anyway. Thank you very much, everyone.