Transcription
Repo markets, the American grand strategy, and Bitcoin tying it all together.
[Music]
Welcome back to the Bitcoin Layer. I'm Nick Batia. In today's global macro update, we're going to start off with repo markets, then talk about the big picture and Bitcoin.
Last week, there were some hiccups in the repo market. We promised you we would follow up. So I pulled together some key money markets charts for us to get based in what's going on in repo. What are the problems and what has been solved from last week, if anything?
Now, last week we talked about the spike out to 14 basis points on this spread between SOFR and IORB. So SOFR is the repo rate. IORB is the rate that banks get on their reserves risk-free from the Fed. As this rate goes up, it's an indicator that banks are not lending those reserves out into the repo market, even though the repo market is collateralized by treasuries. So, what are the reasons that a bank would take money out of reserves and lend it into the repo market? The reasons are spread. It is a pickup. We call it a yield pickup. So if you can lend to the Fed at X but get X + 5 in the repo market, you might be attracted to do that if you are a bank. So when this spread goes up, it's an indication of tightness of reserves. Banks that are not willing to lend those reserves out into the repo market. Last week a spike up to 14. This week, through Monday and Tuesday, we see prints that have this rate come back down to a spread of basically nothing. Today, one basis point of spread. That means SOFR is at 4.16, whereas the re uh interest rate on reserve balances is at 4.15. So you see the spread on the bottom pane come back down to one basis point and the spike has now faded. So this is one indication that the tightness in the repo market last week was not an acute crisis.
So let's unpack then what is going on in the repo market. Let's look a little bit deeper into some of the numbers. Next chart here is our Fed policy rate corridor. You see the purple line is the interest on reserve balances that we were just looking at on the previous chart, and SOFR here also in orange at 4.16. Now you see SOFR come back down within the corridor. Last week it was outside of the corridor. That's why we did the uh special repo update for you to flag it. It was something that caught our eye. We will be watching these markets a little bit closer, but I'm going to be focused in on the green line in this chart to show you something. The green line is the effective Fed funds rate. Those reserve balances that are getting 4.15% from the Fed are not being lent out to each other. Meaning banks lend to other banks the reserve balances at the Fed funds rate. Now, the Fed funds market, the volumes are low there, but there's a pickup in the interest rate on those balances.
Now the reason that we watch SOFR and not the effective Fed funds rate as our main indicator of what's going on in repo markets is that SOFR balances, we know are at about 3 trillion. Now this purple number here is the balance of SOFR. It means this is the quantity of treasuries that need to be financed in the market every single night. And those inputs are being measured in terms of measuring that SOFR rate. So that SOFR rate that we're looking at all the time, it's material because it's based on a $3 trillion overnight market. So SOFR is a great rate. It's a it's actually the whole point of killing Libor is to get out of a fixed market, meaning where banks just come together and they decide what the rate is. Now, Libor was based off of market transactions in that Libor was the benchmark for a lot of lending, but banks in the offshore dollar market were fixing the rate where it was most suitable to them. The SOFR market is entirely based off of collateralized lending transactions, treasury-based uh lending in the market. And so the SOFR rate is an excellent replacement to Libor because it takes the rate for benchmarking away from the Eurodollar market, away from a a Libor fix to a rate that is based in the Treasury repo market.
And that's what that is one of the main geopolitical themes that we are talking about at the Bitcoin Layer. It is a it is central actually to the larger theme of the United States taking a route around the previous three decades of globalism. So, we're going to get into globalism a little bit more in today's episode and why the pivot away from globalism is so uh central and such a fixture to capital markets, to the price of Bitcoin directly, to the stock market in the United States. All of these are actually quite related. So, we're going to continue and unpack a lot of these narratives today.
Okay, back to the corridor. Now, the SOFR rate, which we're watching, came back down inside the corridor. But look at this green line. This is the effective Fed Fed funds rate. So, these banks, they have reserves. They can keep them with the Fed at 4.15. They can lend them out to each other at 4.11, or they can lend them in the repo market at 4.16. These are the alternatives. And I put the corridor on here for you guys and I explained the different rates so that you see that for the banks, it's a tradeoff. There are reserves in the system. In fact, there are 3 trillion in reserves. That number being 3 trillion and the SOFR balance, those volumes overnight being 3 trillion is a pure coincidence, especially because you see SOFR volumes have gone from the you know, basically zero level to 3 trillion over the last few years as SOFR as a benchmark has uh, you know, gotten off zero and now has replaced officially replaced Libor.
Remember that today we're talking about the grand American strategy. So keep that in mind as we go through this transition from Libor to SOFR and the collateralization of treasuries as the benchmark to the functioning of the whole credit system based on the dollar. And what that means is capital is directed into the treasury market and the repo market that funds treasuries as they go from the primary market into private hands. Uh, I'm sorry, into private hands. So the primary market means what? It means the auctioning of treasury securities. And those treasury securities that get auctioned into the market, they're being auctioned at a clip of hundreds of billions notionally every month. Now, yes, there are hundreds of billions of treasury uh securities also maturing every month. And so the net roll is how much the debt increases by. Uh, that number at around 38 trillion today. That 38 trillion goes up as the amount of treasuries auctioned exceeds the amount that matures. Now, just because treasury uh treasury securities are maturing every month doesn't make the auctioning of new securities, whether or not it's a net increase. It doesn't make it smooth automatically. No, you need the repo market to allow treasuries to be funded on an overnight basis before they hit the private hands which are capable of holding those treasuries for a long-term basis, perhaps even to maturity. But the process of getting those securities into the private hands, it takes time and it takes a nightly repo roll in order to get those securities off the treasury into the into the market, basically into the investment world. And the larger the market there is for a short-term roll of the treasury market, and that is happening through the bill market, there is just going to be a fixture of supply in the repo market that must be met with demand for overnight rates. And that demand basically comes from one primary place, and that's money market funds. Money market funds are these pools of capital that are looking for short-term risk-free or low-risk yield. So what Treasury repo allows the money market funds to do is secure yields that are overnight yields guaranteed by treasuries and sometimes at a yield pickup to other risk-free money market instruments such as the reverse repo rate.
Now you can see in our corridor chart that the reverse repo rate is at the bottom of the uh corridor. So this navy blue line at 4%. The uh money market funds can go to the Fed and get 4% overnight. But switch back to our money markets monitor and you can see in red that the usage of reverse repo has fallen to zero. Now why would it fall to zero? Because you have other ways to invest the money. You don't need to get 4% because you can get around 4.16% in the repo market. Now notice earlier in the year, where was SOFR relative to the reverse repo rate? It was just on top of it. You can see even in the May June area that SOFR was tagging the reverse repo rate right on the nose. That means that there was no pickup to go into repo. So why not just keep it at the Fed? And they were doing that. There were still reverse repo balances at that time. Now reverse repo is gone and the the yield pickup that the money market funds have in SOFR has to be compared to other things such as treasury bills. What? Well, where are the yields on treasury bills? Bill yields are going down because the Fed is cutting rates. So money so money market investors are getting ahead of those cuts. They're buying bills, sending the yields lower. And that's the that's the art of a money market fund manager, always trying to lock in the highest yield possible for the appropriate amount of time. Because if you keep your money in repo overnight, all of a sudden the Fed cuts 50 basis points over the next two months and you are now getting 50 basis points lower. But if you bought a T-bill for six months or for 12 months, you would have locked in the yield before it went down and before the Fed cut rates. So that's the arbitrage equation that money market fund investors are trying to do at all times.
But let's tie it back to the Fed reserves and are we in a repo crisis or not? Now, to me, the one basis point spread today versus 14 basis points last week of SOFR to IORB, it is calming and so definitely not an acute crisis. But what is the prediction here from TBL on the Fed's balance sheet? It comes down to the quantity of reserves and then taking that quantity and relating it to GDP, US GDP. So, we're going to do that in a second, but first I want to bring up Fed reserve liabilities. This is a chart you guys are familiar with. You can see that the repo quantity has gone down as RRP has gone away. The green line is uh the green area is now basically only foreign users of the Fed's repo facility. That's where foreign central banks and governments are allowed to come and post treasury collateral and borrow Fed balances against that collateral. So there are still repo balances there, but the orange area is where I want you guys to focus. Right around 3 trillion. That 3 trillion has been flat for most of QT, which is due to the fact that reverse repo was the area that was drained from the Fed's balance sheet through QT. Now, it's going to hit reserves. That's why you hear the Fed saying, "We're going to stop QT." They know that they can't let reserves fall. But why? Just looking at the reserve balances by themselves doesn't tell us anything. We have to learn to get data on a scale that makes sense.
So, we relate the Fed reserves to GDP on this next chart. Now, this is a 20-year chart. So, I want to describe a few things here. This is a ratio of that orange area we showed you on the last chart, Fed reserves, divided by GDP. So the ratio is Fed reserves divided by GDP. GDP right now in the United States around 30 plus trillion. So 3 trillion divided by 30 trillion gets you 10%. So that's the starting point here. You see 10.6% on your chart. That's taking again Fed reserves and dividing it by US GDP. 3 trillion divided by 30 trillion. Now, let's go back to the beginning of this chart because you can see that in 2007 and 2008, we had a zero percentage of Fed reserves to GDP. It means that the reserve balances themselves weren't really a function of the Fed's operational policies. That that's actually why Fed funds used to be targeted because it was a small market that was on the margin for lending and measuring what was happening in the money market. When banks actually lent those uh scarce reserves to each other, it was a good measure of what was happening at the fringes of the money market and what the Fed wanted to control. Now we have this quantity of reserves in a new regime. And it's this abundant reserves, ample reserves framework that the Fed has been working with. It's their excuse for QE. Why they need to why they needed to print money. They needed to inject reserves so that reserves were abundant and it weren't and you didn't have a funding crisis where banks wouldn't lend to each other.
But what we discover is that, and you can look at the corridor to confirm this, banks don't even lend to each other if there is a yield pickup. Just because Fed funds are where they are doesn't necessarily mean that a bank will lend to the neighbor bank. Why? Because the banks need reserves to settle interbank settlement and treasury securities when they go to when they send at the Fed their reserve balances into the TGA. Let's bring up their Fed liabilities chart one more time. This is basically the red area and the orange area interacting. If a bank decides to buy bills, it will swap orange for the it will swap orange, which is the bank's asset. It will swap orange for a T-bill. And on the other side, the Fed swaps red swaps orange for red because it debits the reserve. The reserve is turned into a T-bill for the buyer. It debits the reserve and credits who? The government. That's T for Treasury, the TGA, the Treasury General Account. So, a bank needs reserves to buy bills because if it doesn't have reserves, how can the Fed swap orange to red? It it can't. So, a bank needs reserves. And we can talk about interbank settlement all we want, but thinking about just buying T-bills is enough to make you understand that the banks need reserves today. There are too many bills. The whole thing works off of SOFR. So you have to have bills to secure overnight financing in the first place. O in SOFR is for overnight. So if a bank wants overnight financing, it must own treasuries. That's the only way to secure the financing. And the only way that the financier, the money market fund will lend funds is if the money market fund gets treasury as collateral from the bank. Sometimes the dealer, sometimes the bank. There are all sorts of participants in the repo market.
Okay. Now, let's bring back the Fed reserves as a percentage of GDP. The thesis here is that the Fed wants this around 11, 12, 13%. They've written about this in papers. You can see this ratio reached as high as 17% in the early part of this decade and as low as 7% in the era that was just around the time and just after the 2019 September repo crisis. So the Fed cannot allow this number to shrink too far, or you get a repo crisis. And what the Fed wants to do is keep it stable. So as GDP grows, reserves must grow. If GDP grows and reserves don't grow, this ratio will fall. If this ratio falls, they'll run into a repo crisis. Simply out of functioning of the financial system, you need reserves. Especially when banks hoard their reserves, which is what I'm trying to teach you guys today. The banks hoard their reserves. Even if they get a yield pickup, they don't lend them out. They don't want to get in trouble. They don't want to have to go to the discount window. They don't want a Bloomberg headline. It if you get a Bloomberg headline about a bank, it can fail extremely quickly. We saw that in 2023. Regional banks are already in the headlines today. I'm I looked at the chart of the index as a whole. I'm not ready to uh necessarily make any comment there about the regional banks, but a Bloomberg headline or two can make it turn south very quickly for these banks. So why wouldn't you hoard your reserves in that type of environment where nobody is really sure the capital position based on what based on the assets which are loans to the private sector. So some of those lo some of those loans might not have the mark meaning the price on the books that they actually deserve. And that's the big that's the big banking dance that equity investors are always uh engaged in when they invest in a bank.
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Now, what we believe is that the Fed will make an announcement at some point here in the next couple meetings about how it wants reserves to interact with GDP or in a grow in a growth setting so that reserve scarcity doesn't bubble up to the top. And it must be looking at the SOFR spread last week, a little bit worried. We will continue to watch SOFR versus interest on reserve balances and monitor any reserve scarcity at the margin. Of course, you can go to the bitcoinlayer.com/subscribe, become a TBL Pro, gain access to our incredible dashboard, and monitor these charts yourself, automatically updating for you on your dashboard. So I believe this purple line will have to fix steady somewhere above 10% and I believe possibly in that 12% area. So the Fed will need to introduce reser more reserves to the system. It will do that through a ve a process very similar to the quantitative easing that we have seen in years past. Just the quantity won't be as much. But let's watch for that, especially in a growing supply of treasuries. With a growing supply of treasuries, you simply have a larger need for financing overnight. That large need for financing overnight requires a large stock of reserves in the system, especially as banks hoard reserves.
Now, I know that was a long money markets update. There's lots more to talk about on the markets, geopolitical, and Bitcoin front. We're going to get to that. But I do know from the interaction with you guys, the viewers and the listeners and the readers, that there's not a lot of high-quality money markets commentary that gets into some of these metrics in the way that TBL provides. So, we're happy to do that. We come from a repo desk. This is a security treasury repo that I traded uh in large quantities uh with all the biggest broker dealers from Goldman Sachs, JP Morgan, Bank of America, Merrill Lynch, City, Bank of Montreal, Nomura, just a lot of desks that I traded with uh repo with uh back when I was on a trading desk. So, I'm happy to bring this knowledge to you guys and please keep sending us your questions and consider becoming a TBL Pro today.
Now, later in the video, I'm going to explain to you why I'm so bullish on the long-term strategy and capex boom and what that means for financial markets. But I want to show you the other side where some of the risks might be. We see rates going down when 10-year yields go down, especially without any sort of steepening involved. This is not some sort of bull steepening, but and it's not really a bull flattening. The curve isn't really getting that much flatter, but it's but the curve hasn't gone anywhere. In fact, let's bring up the yield curve right now. You can see here, this is a three-year look at the 210 yield curve. The 210's yield curve is flatlining at around 50 basis points and has done so for most of the year. This this lack of steepening is and then yields going lower. You know, uh, you all know that Treasury yield 10-year yields have been heading lower for the last few weeks and are now below 4%. That this is a sign that overall growth and inflation expectations are slowing and that there's a slowing bias to the economy uh out there. Now, this doesn't mean recession, but there is a slowing impulse on rates and a lack of steepening in the yield curve is a signal to us that there's something going on at the margins slowing things down.
And this headline from from Bloomberg, it comes out of the Bank of England, but we're seeing similar narratives here in the US. Uh, BOE's Bailey warns of financial crisis echoes in private credit. And the headline here is that the Bank of England warned of parallels between the private private credit boom and subprime debt crisis. Now, there those alarm bells that they're talking about that are ringing in the sector. Those alarm bells are actual credit losses that are coming up to the surface. That's something that we can see, but we also are able to measure GDP and don't see the attract uh the contraction happening. We also don't see it in the stock market. And so when we look at a headline about private credit losses and what those could bring, we're wary and we attribute perhaps some of the move in rates to that type of activity. But I do want to get a little bit out of looking at the next three, six months of economic activity. Perhaps some defaults in private credit. Perhaps some problems in the regional banks here in the United States from some of the credit losses that might be similar in risk to the private credit losses. Not necessarily the same place in the balance sheet or uh in the fin uh in the same place in the financial sector. Meaning those invested in private credit are not necessarily the same as those invested in the equity of regional banks.
But I want to zoom out a little bit and talk about the grand American strategy. All of these headlines and press conferences that I'm seeing over the last week, they all count toward this one thesis, which is a capital expenditure boom in the United States. The funding currency for that capex is US dollars. So some of the capex, we've talked about this with MicroStrategy, even some of the capex is going to come from existing capital savings. Savings equals investment. However, some of it is going to come from freshly written credit. We're going to talk about JP Morgan as well in this episode. Freshly written credit is credit creation. It's dilution of the dollar as credit is created. It's a one-for-one equation and it will lead to greater aggregate demand for a scarce supply of goods, especially materials, commodities. It will lead to an inflation, a sustained inflation environment. I don't know, I don't have a great read on what that's going to be, whether it's 2, 3, 4, 5% inflation. The bond market certainly doesn't think it's 5% inflation. I will tell you that much. We know that TIPS price in the difference between what the nominal yield is and the inflation breakeven, meaning what those TIPS holders believe they will get as their coupon in years forward. Inflation protected securities. TIPS means that you buy a security that gets a yield that is unknown to you today, but will you will only know once CPI is measured in years forward. Now the breakeven yield between TIPS and nominals is only around 2%. So the expectation in the market is not for runaway inflation. But what I'm trying to explain to you guys, the thesis is that whether it's two, three, four, or five, that inflationary impulse due to credit creation, due to the capex boom is to me this is a lock and it's the most important overall investment theme that will dominate stock markets. It will dominate flows into Bitcoin. Bitcoin is becoming almost a passive flow asset in that no matter what credit creation comes into the system, a portion of it finds its way into Bitcoin as an excellent scarce digital commodity in the sea of investment assets that people can buy, whether it's stocks or gold.
Now, gold, even though the metal itself is not liquid, GLD is plenty liquid. And that's the way people are thinking of ETFs like IBIT and FBTC. Plenty liquid ETFs that allow Bitcoin and gold to play in the same asset class as stocks. When it comes to receiving that passive liquidity at the Bitcoin Layer, we have our own index. It's called TBL Liquidity. It measures this creation impulse in the market. How easy is it for banks to create credit? Are they doing it? We measure banking assets and the stability of treasury collateral. These are the underpinnings of credit creation. So when TBL Liquidity is high, Bitcoin and stocks both do well. That is the relationship that we care about and want to point out and teach to you. So when we think about what's the major theme for the markets for the next 10 years, this this capex boom, this capex boom is going to lead to supportive liquidity conditions and that expansion, that expansion of the credit system that will come as a result of the capex boom is what we believe is the highest signal out of everything that we're thinking about today.
Now, when we think about how how we derive that signal or specifically how we derive the thesis that the capex boom is coming and that it's going to be financed by the credit creation machine, which is a dollar diluted dilutive effect and will drive dollar assets higher, especially US stocks. And I really do want to throw Bitcoin in there because that's the quantitative uh quantitative relationship that we are measuring. So, what is the thesis here based on? I'll give you three reasons, but you'll only need one. It's China. The response specifically of the United States to the rise of China. I'm going to give a quick summary of this story so that we can catch up quickly. The rise of China was driven by Chinese self-interest to come up and express power in the world. That is a story that is independent of the US reaction. Now, the US sponsored in many ways the rise of China with the opening up of China during the 70s, Nixon, and then of course the introduction of China into the World Trade Organization and then the policies of the government and corporations as a joint force to outsource manufacturing from the United States to China across several sectors. That's an old story. So, is it the fault of the US that China wanted to secure a better future for itself? Of course not. Is the United States complicit in letting China pass it by in many key sectors as well as contributing to a deindustrialization effect in the United States that leaves it wholly dependent on Chinese supply chains? Yes, the United States the United States is guilty of that. So the current policies must be looked at as a reversal of those policies that I just described, and that's the context with which we have to think about China and the United uh states policy toward China going forward. So everything is about going away from the outsourcing of things to China, away from the over-reliance on Chinese supply chains, and back toward reliance on domestic supply chains and specifically trying to get back some of the processes that we outsourced wholly to China. And so it's it's the same it's the same story, the US wanting to re-industrialize and also claw back parts of the supply chain that it cannot be wholly dependent on China for.
Now perhaps the most important headline that I read over the last few days. Nvidia CEO touts new AI industrial revolution, praises Trump tariffs for role in chip production. I I know that Jensen Huang is a supporter of the current administration's policies. Not only a supporter, but Jensen has worked very closely with the administration. He is also the subject of a lot of the debate around the taco narrative, which is Trump always chickens out, which is that yes, he's going to impose these tariffs, but in reality, if we are dependent on China, we cannot put we cannot shoot ourselves in the foot by paying more for products that we absolutely need and cannot produce ourselves. With all that being said, what Jensen said in the media recently really took me by surprise because I didn't know how fast some of this production might be and it accelerated my narrative around the capex boom and the timing of it. It really is happening now. It's already started. And so when we think about stocks at all-time highs, we must start attributing it attributing it to this capex boom. Quote, "This last week was a historic week. We manufactured the most advanced AI chips in the world in the most advanced fab in the world here in America for the first time. All of this started with President Trump wanting to re-industrialize the United States. His tariffs were a pressing agent in making this possible at the speed that we're doing. And now, just shortly after less than a year, we're now manufacturing the most advanced chips for AI here in the United States. This is just the beginning of it." I couldn't I actually couldn't believe uh what I was hearing here. I don't think that this is hype. Jensen Huang is the head of a $5 trillion empire now. He's not just going to spew a bunch of BS about the manufacturing of these chips themselves happening in the United States. When he said this is just the beginning, think about how much equity Nvidia has to monetize. This is wealth that hasn't even been created yet, guys. And it's good collateral against which banks can introduce credit into the system and finance this capex boom. To think that it's only going to be trillions is thinking too small because actually the trillions of capex are they already exist, that those trillions of wealth and ready to invest that already exists out there on corporate balance sheets. It's the financing, the next layer of credit created, the bonds that are issued, the bank loans that will be issued. We're going to talk about JP Morgan. I promise you that those bank loans that itself could be another several trillion to finance factories, fabs, and the processes, especially the energy buildout, the electricity buildout, all that is needed to bring United States up to par with where China has gone. I believe there is a path to peace between these two nations that it doesn't end up in war over Taiwan, for example. But actually, the the belief that we have a path to peace suggests that we need to spend all of this money instead of throw a Hail Mary, which is fight a war with China. That surely the United States cannot win in any sustained sort of theater. Jensen continues, "We're going to have to build these magnificent factories. Magnificent factories for chips, for packaging, for these AI supercomputers, but also for these factories that are producing digital intelligence. All of these factories require extraordinary skilled craft. This is something that our country needs to really, really celebrate. The skill craft professions are severely underresourced. We just don't have nearly enough of them. Plumbers, electricians, technicians, networking technicians building out these incredible factories. We need a lot of them. Hundreds of thousands of them, maybe even millions of them. So, the United States needs people. They need skills. They need to invest in these industries. And this investment and these people, it doesn't just appear overnight. The banks have to finance it. The equity investors have to come off of the sidelines. The investment needs to be made in the education that a and the retraining. And it might also mean bringing people into the country that have these skill sets from around the world. So all of these ingredients will be necessary to bring the United States again up to par for where China has risen to."
Now in a recent research piece that we sent out to all of our TBL Pros, TBL thinks JP Morgan to invest 1.5 trillion in US companies. We get into the heart of the matter of credit creation. Now TBL thinks is a series that we've been writing for quite a long time. It's written by my amazing wife, who is a fantastic researcher and goes really in-depth into these companies and what is happening on the geopolitical front as it relates to the United States re-industrializing and rebuilding. That is the theme of these TBL thinks research pieces. Now she writes about JP Morgan's investment into key industries and these 27 industries, they're really fascinating to go through. These industries are going to be the basis for this capex boom that I have been describing. JP Morgan is going to be the financier in a lot of these transactions. So they have to understand where the United States is going on a policy basis. Now I found it a little bit interesting here that JP Morgan didn't get so uh as Jensen said, pro-Trump and have a lot of these the administration is leading our charge. No, Jensen went that way. JP Morgan did not go that way. Now, JP Morgan specifically wants to make money off of lending. So, it wants to lend into industries that it believes that the government is going to be behind and that the government is going to sponsor in, whether it's through direct capital, research and development, or policies that favor American producers of uh these certain products and services.
Now I'll go through the sectors here that she wrote about. Advanced bulk materials, nano materials, and micro electronics materials. Uh critical materials mining, shipbuilding, command and control tech, which is systems managing military operations and assets, spacecraft, space launch, unmanned systems, which are drones and robots used for commercial and military tasks. So these are just and I'll just mention a couple more. 6G and mesh networks, which is a phenomenon that is known to some Bitcoiners here as mesh networks allow to uh decentralize the architecture for connectivity. So definitely check out TBL thinks. It's an excellent series and it's part of what we offer at TBL Pro, which includes all of our quantitative research and a really great dashboard that you can monitor charts from across macro and Bitcoin that update automatically.
Now, one more TBL thinks that I want to throw in here. It's the one that was written this week. Now, Cheney writes about rare earths. This is a topic that is right at the center of the US-China evolution. Rare earths. She writes, this is this was the most fascinating part of the post that 90% of the global refined supply rare earth mineral supply chain is China dominated. 90%. If there is a sector that is so important to those 27 industries that JP Morgan has outlined, then where is the United States going to go to get this? It has to start doing deals and finding its way to these rare earths. She actually writes that the United States was the leading supplier of rare earths as recently as 1991, thanks to a large California mine called Mountain Pass. Now, this the Wall Street Journal covered this and what she's telling us here is that the United States had the capability to do all of this and was actually the leader. So, it is the United States that is at fault here for letting China pass it by. And we see now some of the headlines this week tie in directly to that. I'm pointing to the United States recent deal with Australia over rare earths. This is a mega deal. The United States going outside of the Chinese supply chain, making sure that it can secure its future, whether it's domestically produced or from parts of the supply chain that are not China dependent.
Now, whether the United States can do a deal with China that allows them to procure goods, materials that it cannot produce itself and find a way to a friendly relationship where the United States is both rebuilding its supply chain, rebuilding those factories that Jensen Huang is talking about, still with maintaining some of the current supply chain that it imports from China. Is there a path to that? Nobody can know that. It's something that we don't even try to speculate about at the Bitcoin Layer. Rather, we just document the evolving relationship. We do see a path to peace in terms of not going to war over Taiwan. We are not security experts, so we can't make that prediction. Rather, we we see a path there. And that's the going thesis that we're going to use. And what we see is the capex boom continuing as a response, no matter what happens. And JP Morgan confirms it for us that they will be sponsoring a lot of the buildout of the these key industries that the United States needs. So if you want to check out those 27 key industries, definitely check out the TBL thinks post. We'll link that in there for you guys.
We talked about Bitcoin and how it will benefit from these passive credit creation flows over the coming years, but I want to zoom in a little bit on the Bitcoin volatility which we have seen pick up. So, we've been noting that the Bitcoin volatility in terms of a 30-day realized volatility has been in a structural decline for the last several years and even in the middle of 2025 hit some lows that we really have never seen for Bitcoin and a uh, you know, a pegged 100k consolidation sort of range for Bitcoin that it was in for a lot of the year. But now you can see that volatility has picked back up for Bitcoin. We've seen a quite large single-day move uh over the last couple weeks here. And Bitcoin's price has been uh definitely chopping around a few thousand a day, more so than it has been uh over the last couple well, I would I would just say than a lot of this year. Obviously, the spike in volatility that you see at the beginning of the year was due to the April Liberation Day tariffs, the initial speech at the Rose Garden, and the subsequent speech from Dr. Steven Myron, who's now a member of the Federal Reserve. At the time he was the head of the President's Council of Economic Advisers, and he laid out the game plan, which is the United States is attacking the dual p the overutilization of the dual public good, which is defense and the US dollar system. The defense is being addressed through the United States getting other countries to commit to larger military budgets. The US dollar system is being addressed through a variety of methods, but number one, it's the dollar. It's the dollar and its relationship versus these foreign currencies. The United States is entering these trade negotiations with a main point. Do not devalue your currency versus the dollar, which means the US dollar will be allowed to devalue. That was the theme for most of the year. The dollar has gone sideways. I want to pull up a DXY chart real quickly here for you guys. I have daily candles here for you because this chart does require a little bit of a zoom in. You can see the dollar has been in a declining wedge all year, popped up above it, failed at around that 100 level, and is now still trading above this declining trend line. The dollar is something we're watching very closely. If it picks up, it's going to be trouble for risk assets, we believe on the margin. So we want to see the dollar stay steady and we do believe the administration is focused on not allowing this dollar to rise, but instead forcing it lower over the coming years as part of the American grand strategy. Re-industrialize through production, but also by making the United States goods and services more attractive overseas, which means, yes, a cheaper dollar. That cheaper dollar, it it leads to a higher TBL liquidity index reading. So, when we're thinking about our index, the dollar is one of those contributors. It's an inverse contributor in that when the dollar goes down, our index goes up.
Real quickly to bring back Bitcoin's volatility. Volatility on the rise for Bitcoin. This can be this can come with up or downside volatility. So, we will finish with the Bitcoin chart. Now, we're here recording this on Tuesday, October 21st. The price is just below 112,000. The block height 920,148. What do I see on the Bitcoin chart? Well, there's this little green trend line that I drew last week was violated. Bitcoin has since popped back above it. We have a 108 to 112 range that we've been talking about for several months. Bitcoin is right back inside of that. So, again, in the consolidation, but a widening of the range and that widening of volatility can be very good. Of course, it can be very dangerous of uh for Bitcoin to the downside. I see support there in the mid-90s. That would be quite crucial if Bitcoin can't hold the 108 area. But the expansion of volatility that we see right now in Bitcoin is something to note. We'll continue to follow it.
Thanks for sticking with us today at the Bitcoin Layer for this global macro update. I'm Nick Batia. We'll catch you guys next time.
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Okay. Heat.