Original title: Group of Fools
Original author: Arthur Hayes
Original source: Medium
Compiled by: Lynn, MarsBIt
The opinions contained below are solely those of the author and should not be used as a basis for investment decisions, nor should they be construed as advice or opinions on investment transactions.
The USD/JPY exchange rate is the most important macroeconomic indicator. I wrote in my last article, “Easy Buttons”, that something had to be done to strengthen the yen. The solution I proposed was that the US Federal Reserve (Fed) could exchange unlimited amounts of newly printed dollars for yen with the Bank of Japan (BOJ). That way, the BOJ could provide the Ministry of Finance (MOF) of Japan with unlimited dollar firepower, allowing them to buy yen on the global foreign exchange market.
While I still believe in the validity of this solution, the central bank crooks in charge of the “Group of Fools” (aka the Group of Seven (G7)) seem to have chosen to convince the market that the interest rate differential between the Yen and the USD, EUR, GBP and CAD will narrow over time. If the market believes this future state, it will buy the Yen and sell all other currencies, mission accomplished!
For this magic to work, the G7 central banks (the Federal Reserve, the European Central Bank, the Bank of Canada and the Bank of England), whose policy rates are “high”, must lower their rates.
It is worth noting that the Bank of Japan’s policy rate (green) is 0.1%, while other countries have policy rates of 4-5%. The interest rate differential between the domestic currency and foreign currencies fundamentally drives the exchange rate. From March 2020 to early 2022, countries were playing the same game. As long as you stay at home with a cold and inject mRNA heroin, everyone can make free money. When inflation manifested in such a huge way that the elites could no longer ignore the pain and suffering of the common people, the G7 central banks - with the exception of the Bank of Japan - all actively raised interest rates.
The Bank of Japan cannot raise interest rates because it owns more than 50% of the Japanese Government Bond (JGB) market. As interest rates go down, JGB prices rise, making the Bank of Japan look solvent. However, if the Bank of Japan allows interest rates to rise, causing its JGB holdings to fall, then the highly leveraged central bank will suffer catastrophic losses. I do some scary math for readers in "Easy Button".
That is why if Yellen, the “bad woman” who calls the shots in the G7, decides to narrow the spread, then the central bank with a “high” policy rate will have no choice but to lower it. According to orthodox central bank thinking, if inflation is below target, lowering interest rates is a good thing. What is the goal?
For some reason, and I don't know why, the G7 central banks all target 2% inflation, regardless of differences in culture, growth, debt, demographics, etc. Is inflation currently on track to break 2%?
Each colored line represents a different G7 central bank's inflation target. The horizontal line is 2%. No G7 government has ever published manipulated, dishonest inflation statistics that are below target. Putting on my technical analysis hat, G7 inflation appears to be forming a local bottom in the 2-3% range before exploding higher.
Given that chart, orthodox central bankers would not cut rates at current levels. Yet this week, the Bank of England and the European Central Bank cut rates despite above-target inflation. This is odd. Is it financial turmoil that is causing the need for cheaper money? Not really.
The Bank of England cuts its policy rate (yellow) while inflation (white) is above target (red).
The ECB cuts its policy rate (yellow) while inflation (white) is above target (red).
The problem is the weak yen. I believe that "bad woman" Yellen has stopped the kabuki show of raising interest rates. Now is the time to get down to business in preserving the US-led global financial system. If the yen doesn't strengthen, the Chinese will unleash the dragon of RMB devaluation to match the super cheap yen of Japan, their main export competitor. In the process, US Treasuries will be sold off, and if that happens, the US Paxos will be in trouble.
Next step
The G7 will meet in a week. The communique released after the meeting will be of great interest to the market. Will they announce some kind of coordinated currency or bond market manipulation to strengthen the yen? Or will they remain silent but agree that everyone except the Bank of Japan should start cutting rates? Stay tuned!
The big question is whether the Fed will start cutting rates so close to the U.S. presidential election in November. Typically, the Fed doesn’t change course so close to an election. However, typically, the favored presidential candidate doesn’t face potential jail time, so I’m prepared to be flexible with my thinking.
If the Fed cuts rates at their upcoming June meeting and their preferred doctored inflation measure is above target, USD/JPY will be much lower, which means a stronger yen. I don't think the Fed is ready to cut rates just because slow Joe Biden is being questioned in the polls because of rising prices. Understandably, ordinary Americans care more about whether their vegetables are more expensive than the cognitive abilities of the vegetables running for reelection. To be fair, Trump is also a vegetable because he likes to watch Shark Week while munching on McDonald's fries. I still think cutting rates is political suicide. My base case is for the Fed to stay on the sidelines.
As these second-rate bastards sit down to their taxpayer-paid dinner on June 13, the Fed and the Bank of Japan will have held their June policy meetings. As I have said before, I do not expect the Fed and the Bank of Japan to change monetary policy. The Bank of England will meet shortly after the G7, and while the consensus is that they will keep their policy rate steady, I think they will surprise the market with a cut given the BoE and ECB rate cuts. The BoE has nothing to lose. The Conservatives will be thumped in the next general election, so there is no reason to defy the orders of their former colonial rulers to curb inflation.
Helicopter money
June’s central bank drama, kicked off this week by rate cuts from the Bank of England and the European Central Bank, will drive cryptocurrencies out of the northern hemisphere summer doldrums. This is not the base case I expected. I thought the fireworks would start in August, around the time the Fed holds its Jackson Hole symposium. That’s usually the venue for sudden policy changes announced as the fall season begins.
The trend is clear. Central banks are starting an easing cycle.
We know how to play this game. We’ve been playing this damn game since 2009 when our savior Satoshi gave us the weapons to defeat the TradFi demon.
Go long bitcoin, then shitcoins.
The macro picture has changed compared to my baseline. Therefore, my strategy should change accordingly. For the Maelstrom portfolio project, they asked for my opinion on whether to launch the token now or later. My opinion was: "launch the fucking token now!"
It’s earning some nice APY on my excess liquidity crypto synthetic USD cash, aka Ethena’s USD (USDe), and now it’s time to deploy it again into faith shitcoins. Of course, I’ll tell readers what these are after I buy them. But suffice it to say, the crypto bull market is waking up and about to skin the profligate central bankers.