Arthur Hayes: Super cycle is coming, BTC and cryptocurrency will be the release valve of fiat currency

What a bad week. If you were a fool who didn’t fly to Singapore last week for Token2049, I pray for your soul. Over 20,000 righteous followers praised God in any way they saw fit. I’ve been to almost every Formula 1 race in Singapore since the night races began, and I’ve never seen the city so lively.

Token2049 attendance doubled year-over-year. I heard some lesser-known projects paid up to $650,000 to speak on some of the smaller stages.

The party was packed. Marquee is a club that can hold thousands of people. Looking at this event, the line was over three hours. Different crypto projects or companies book this club every night of the week. The booking fee for Marquee (not including any drinks) was $200,000.

There are a variety of activities to suit all kinds of people.

I'm considering asking Branson Cognac and Le Chemin du Roi to sponsor my next party... In the words of 50 Cent:

Every hotel was full, as was every half-decent restaurant. When the 2024 statistics come in, I suspect we’ll find that the crypto crowd brought more business to airlines, hotels, restaurants, conference venues, and nightclubs than any other event in Singapore’s history.

Thankfully, Singapore tries to remain as geopolitically neutral as possible. This means that as long as you believe in Satoshi, you can come and celebrate with your brothers and sisters in Christ most of the time.

The energy and enthusiasm of the crypto crowd contrasted with the dull and bored demeanor of the attendees at the TradFi conference. The Milken Institute was also hosting a conference the same week. If you walk around the Four Seasons Hotel where the conference was held, you’ll notice that every man and woman looks the same in bland business casual/formal attire. And the TradFi attire and behavior is intentionally calm and unchanging. They want the populace to think “nothing to see here” while they steal human dignity through the inflation their institutions impose on the world. Volatility is their enemy because when things start to change, the common folk look through the looking glass and witness the true depravity of their masters.

Today, we’re going to talk about cryptocurrency volatility and its absence in TradFi. I want to discuss how the elites print money to create a veneer of economic calm. And, I want to talk about how Bitcoin is a release valve for fiat currencies to try to suppress volatility to unnatural levels. But first, I want to illustrate a salient point by reviewing my record from November 2023 to now, which is that short-term macroeconomic forecasts don’t matter.

Review of economic forecasts from last year to date

Many readers and CryptoX keyboard warriors often accuse me of getting everything wrong. How have I fared on important conference calls over the past year?

November 2023:

I predict that US Treasury Secretary bad girl Yellen will issue more T-bills to drain funds from the US Federal Reserve's (Fed) reverse repurchase program (RRP). A drop in RRP will inject liquidity into the system and cause risk assets to rise. I believe that the market will weaken by March 2024 when the Bank Term Funding Program (BTFP) is about to expire.

From November 2023 to March 2024, RRP (white) fell 59%, Bitcoin (gold) rose 77%, the S&P 500 (green) rose 21%, and gold (magenta) rose 5%. Each dataset is indexed to 100.

Victory column: +1.

I added more crypto exposure after reading the contents of the US Treasury Quarterly Refinancing Announcement (QRA). In hindsight, it was a great decision.

March 2024:

I assume that the BTFP will not be renewed, as it clearly has an inflationary component. I do not believe that allowing banks access to the discount window will be enough to avoid another non-Too Big to Fail (TBTF) US banking crisis.

The expiry of BTFP has no material impact on the market.

+1 in the loss column.

I lost money on my small position in Bitcoin put options.

April 2024:

I predicted that US tax season would cause crypto prices to fall as USD liquidity disappeared from the system. Specifically, I said I would hold off on adding any additional crypto exposure between April 15th and May 1st.

From April 15 to May 1, RRP (white) rose 33%, Bitcoin (gold) fell 9%, the S&P 500 (green) fell 1%, and gold (magenta) fell 3%. Each data set is indexed to 100.

+1 in the victory column.

May 2024:

As I head to the northern hemisphere for my summer vacation, I have the following predictions based on several macroeconomic factors:

Did Bitcoin hit a local low around $58,600 earlier this week? Yes.

What is your price prediction? A rebound above $60,000 and then fluctuate between $60,000 and $70,000 until August.

Bitcoin hit a low of around $54,000 on August 5th as USD/JPY carry trades unwound. I was off by 8%.

+1 in the loss column.

Bitcoin has fluctuated between approximately $54,000 and $71,000 during this period.

+1 in the loss column.

I did add some shitcoin exposure during the summer weakness. Some of the coins I bought are trading below the price I bought them at, and some are higher.

June and July 2024:

When Japan's fifth-largest bank admitted that it had suffered huge losses on foreign bonds, I predicted that the Bank of Japan would not raise interest rates because it would endanger the banking system. This turned out to be a naive assumption. On July 31, the Bank of Japan raised interest rates by 0.15% and triggered a vicious USD/JPY carry trade unwinding. I followed the USD/JPY carry trade unwinding mechanism.

While USD/JPY proved to be the most important macroeconomic variable, I misunderstood the BoJ's statement. The policy response was not what I predicted. Instead of supplying dollars through the central bank swap line, the BoJ assured the market that it would not raise interest rates or adjust its money printing policy if such increase would lead to increased market volatility.

+1 in the loss column.

August 2024:

Two big events happened this month: the release of 3Q24 QRA by the US Treasury and the payroll data released by Powell at Jackson Hole.

I had predicted that Yellen's renewed net issuance of Treasury bills would provide USD liquidity to the market. But after Powell confirmed the September rate cut, these two forces turned against each other. Initially, I thought that net issuance of Treasury bills would increase liquidity because it would drain the RRP to zero, but then Treasury yields fell below the RRP and I predicted that the RPP would rise and drain liquidity.

I didn't expect Powell to cut rates before the election, risking an outbreak of inflation when voters go to the polls.

+1 in the loss column.

RRP balances increased directly after the Jackson Hole drop and are back on an upward trajectory. Therefore, I still believe that Treasury yields will continue to fall as the market anticipates further rate cuts at the Fed's November meeting, which will be a slight drag on liquidity.

No results; it's too early to tell whether I'm right or wrong.

September 2024:

When I left the Patagonia Mountains, I wrote an article, “The Boom Times… Delayed” and gave speeches at Korea Blockchain Week and Token2049 in Singapore, predicting that the market would react negatively if the Fed cut rates. Specifically, I argued that the narrowing of the USD/JPY spread would lead to further yen strength and reignite the unwinding of carry trades. This would cause global markets, including cryptocurrencies, to fall, and ultimately more money printing would be needed to get Humpty Dumpty back on its feet.

The Fed cut rates and the Bank of Japan kept rates unchanged, which narrowed the interest rate differential; however, risk markets performed well as the yen weakened against the dollar.

+1 in the loss column.

result:

2 correct predictions

6 wrong predictions

So batting average = .250. To the average person, that's pretty bad, but as the great Hank Aaron said, "My motto is to keep swinging. Whether I'm in a slump, feeling bad, or having trouble off the field, the only thing to do is keep swinging." Aaron had a lifetime batting average of .305, and he is considered one of the best baseball players of all time.

Strikeout or not, I’m still making money.

Why?

Big Assumptions

We know that they can’t handle any volatility in financial markets due to the overleverage of the entire post-1971 Bretton Woods trade and financial system. We, and by that I mean the puppets of traditional finance and the believers of Satoshi, all agree that when things get bad, the Brrrr money printing button should be pressed. That’s always the policy response.

If I could predict the trigger a priori, my ego would be boosted and maybe I would get a few extra percentage points of profit for being early, but as long as my portfolio benefits from printing fiat money supply to dampen the natural fluctuations of human civilization, then it doesn’t matter if every one of my event-driven predictions is wrong as long as policy responds as expected.

I’ll show you two charts to help you understand the massive fiat volume needed to suppress volatility at historic lows.

Volatility

Starting in the late 19th century, the elites who run global governments made a deal with the common people. If the common people surrendered more and more freedoms, then the "smart" people who run the country would create a calm universe by controlling entropy, chaos, and volatility. Over time, the role of government in the life of each citizen grew, and as our understanding of the universe continued to increase, it became extremely expensive to maintain increasing order in an increasingly complex world.

It used to be that books written by a handful of people were the authoritative source of truth about how the universe works. They killed or ostracized anyone who did science. But as we freed ourselves from the constraints of organized religion and thought critically about the universe we inhabit, we realized we knew nothing and that things were far more complicated than you imagined when you read the Bible, the Torah, or the Quran. So it’s understandable that people flocked to politicians (mostly men, a few women) who replaced priests, rabbis, and imams (always men, never women) with a prescriptive lifestyle that promised security and rules for understanding how the universe works. But whenever volatility spikes, the response is to print money and cover up whatever problems are plaguing the world, lest they admit that no one knows what the future will hold.

Just like if you hold an inflated ball underwater, the deeper you push the ball, the more energy it takes to keep it in place. The distortions on a global scale are so extreme, especially for Pax Americana, that the amount of money printing required to maintain the status quo is growing exponentially every year. That’s why I can confidently say that the amount of money printed between now and the final system reset will far exceed the total amount of money printed from 1971 to date. It’s just math and physics.

The first chart I'll show you is the MOVE Index (white), which measures the volatility of the U.S. bond market relative to the federal funds cap rate (green). As you know, I believe volume is more important than price, but using price in this case paints a very clear picture.

Some of you remember the rise and burst of the tech bubble in 2000. As you can see, the Fed pricked the bubble by raising interest rates until it burst. Volatility in the bond market spiked in 2000 and spiked again in 2001 after the 9/11 attacks. Once volatility spiked, the Fed cut rates. Volatility fell, the Fed thought it could normalize interest rates, and boom, they broke the subprime mortgage market, which triggered the 2008 Global Financial Crisis (GFC). To curb volatility, interest rates were quickly cut to zero and stayed there for nearly 7 years. It was time to normalize interest rates again, and then COVID happened, which caused the bond market to collapse and volatility to spike. The Fed cut interest rates to zero in response . Inflation caused by COVID stimulus measures caused bond market turmoil starting in 2021, which increased volatility. The Fed raised interest rates to curb inflation, but had to stop raising interest rates around the non-TBTF banking crisis in March 2023. Finally, the current Fed easing cycle occurred at a time of increased volatility in the bond market. If you consider 2008 to 2020 to be “normal” times, then current bond market volatility is approaching double our guru’s comfort level.

Let's add a proxy for the dollar amount. The red line is an approximation of the total stock of bank credit. It is a combination of excess bank reserves and other deposits and liabilities (ODL) held by the Fed, and is a good proxy for commercial bank loan growth. Remember from Econ 101, the banking system creates money by issuing credit. As the Fed engages in quantitative easing, excess reserves increase, and as banks make more loans, ODL increases.

As you can see, 2008 was a watershed moment. The financial crisis was so severe and the credit-based money was spewing out on a scale that even overshadowed what happened when the tech bubble burst after 2000. No wonder our God and savior Satoshi Nakamoto created Bitcoin in 2009. Since then, the total amount of bank credit has never been fully reduced. This fiat credit cannot be eliminated or the system will be overwhelmed and collapse. Moreover, in every crisis, banks must create more credit to suppress volatility.

I could show a similar chart to show FX volatility against government debt levels, central bank balance sheets, and bank credit growth for USDCNY, USDJPY, EURJPY, etc. They are not as clear cut as what I just showed you. Pax Americana cares about volatility in the bond market because it is the asset that backs the global reserve currency, the USD. All other allies, vassals, and enemies watch the volatility of their currencies against the USD because it affects their ability to trade with the world.

reaction

All of this fiat money has to go somewhere. Bitcoin and crypto are the release valve. The fiat money needed to keep volatility at subdued levels will go into crypto. Assuming the technical soundness of the Bitcoin blockchain, Bitcoin will always benefit as the elites continue to try to break the laws of physics. There has to be a balancer; you can’t create something out of nothing. For every action, there is a reaction. Bitcoin happens to be the most technologically sound way to balance the profligacy of the ruling elite in this modern digital world.

As an investor, trader, and speculator, your goal is to acquire Bitcoin at the lowest possible cost. Maybe that means pricing your hourly labor in Bitcoin, diverting excess cheap energy to Bitcoin mining, borrowing fiat at low rates and buying Bitcoin (call Michael Saylor), or buying Bitcoin with some of your fiat savings. The volatility of Bitcoin vs. fiat is your asset, don't waste it by using leverage to buy Bitcoin to hold for the long term.

Are there any risks?

Speculating on short-term price movements is hard to profit from. As you can see from my record, I’m 2 for 6. If I had been long and shorting my entire portfolio on every call, Maelstrom would be broke by now. Randall and Kyle Davies are right; there is a super cycle of elite suppressing volatility. They have no patience and instead borrow against fiat to buy more Bitcoin, and as the cost of funding converts to fiat (as it always does), they get sucked in and lose everything. Well, not everything — I’ve seen pictures of Randall throwing lavish parties at his Singapore mansion. Don’t worry though — that’s his kids’ names to avoid seizure by bankruptcy court.

Assuming you don’t abuse fiat leverage, the real risk is that the elites can no longer suppress volatility and volatility will surge back to natural levels. At that point, the system will reset. Will it be a revolution like Bolshevik Russia, where bourgeois asset holders were wiped out, or a more common revolution, where one group of corrupt elites is replaced by another group of corrupt elites and the suffering of the masses continues under a new “ism”? Regardless, everything will fall, with Bitcoin falling less relative to the ultimate asset…energy. Even if your overall wealth has decreased, you’ve still outperformed. Sorry, nothing in the universe is risk-free. Security is an illusion peddled by scammers hungry for your vote on election day.

Trading strategies

USA

From the Fed's historical response to "high volatility" we know that once they start cutting rates, they usually don't stop until rates are close to 0%. Furthermore, we know that bank credit growth must accelerate as rates are cut. I don't care how "strong" the economy is, how low unemployment is, or how high inflation is, the Fed will continue to cut rates and the banking system will issue more dollars. No matter who wins the U.S. presidential election, the government will also continue to borrow as much money as it can to win over the public from now and into the foreseeable future.

European Union

The EU’s unelected bureaucrats are committing economic suicide by shunning cheap and abundant Russian energy and dismantling its energy production capacity in the name of “climate change,” “global warming,” “ESG,” or other ridiculous slogans they are selling to the public. The ECB will respond to the downturn by lowering euro interest rates. Governments will start forcing banks to lend more to local businesses so they can provide jobs and rebuild crumbling infrastructure.

China

As the Fed cuts rates and US banks issue more credit, the dollar will weaken. This allows the Chinese government to increase credit growth while keeping the dollar-yuan exchange rate stable. China's main concern about faster bank credit growth is the pressure on the yuan to depreciate against the dollar. If the Fed prints money, the People's Bank of China (PBOC) can also print money. This week, the PBOC announced a series of interest rate cuts for China's monetary system.

Japan

If other major economies are easing monetary policy now, there will be less pressure on the Bank of Japan to raise rates quickly. Bank of Japan Governor Makoto Ueda has made it clear that he will normalize interest rates. But he doesn't have to catch up so quickly because everyone else is cutting rates to his level.

The moral of the story is that once again the global elite are suppressing volatility in their country or economic bloc by lowering the price of money and increasing the quantity of money. If you are fully invested in crypto, sit back, relax, and watch the fiat value of your portfolio go up. If you have excess dirty fiat, deploy it into crypto .

As far as Maelstrom is concerned, we will push projects that have delayed issuing tokens due to poor market conditions to speed up. We want to see the green cross in the Christmas stocking. The guys at the fund want a big 2024 bonus, so please help them!