By Arthur Hayes
Compilation | Wu Talks about Blockchain
Original link:
https://cryptohayes.substack.com/p/volatility-supercycle
The opinions expressed here are solely those of the author and should not be relied upon for investment decisions or construed as advice or recommendations for investment transactions.
What a crazy week. If you didn’t make it to Singapore for Token2049 last week, I can only pray for your soul. Over 20,000 faithful worshippers praised the Lord in whatever way they saw fit. I’ve been to almost every Formula 1 race in Singapore since the night races began, but I’ve never seen the city so alive.
Token2049 attendance doubles year after year. I’ve heard of lesser-known projects paying up to $650,000 just to speak on some of the smaller stages.
The party was packed. Marquee is a club that can hold thousands of people. Look at this line that was over three hours long, waiting to get into this event. Every night a different crypto project or company has reserved the club. The cost of renting out Marquee, not including any drinks, is $200,000.
All kinds of events cater to all kinds of people. Iggy Azalea brought a group of strippers from Los Angeles to create a "pop-up experience." Who would have thought that strippers also know how to play in volatile markets?
Even that clown Su Zhu (aka the Randall of crypto) couldn't resist trying to throw money around. Randall, why do you look so uncomfortable in your videos? You're great at losing money. When you finally turn over your assets to the BVI Bankruptcy Court and settle the litigation, I'll be happy to show you how to throw money around in Magic City.
I’m considering asking Branson Cognac and Le Chemin du Roi to sponsor my next party… to paraphrase 50 Cent.
Every hotel was full, as were any half-decent restaurants. I suspect that when the statistics come in in 2024, we’ll find that the crypto crowds brought more business to airlines, hotels, restaurants, conference venues, and nightclubs than any other event in Singapore’s history.
Fortunately, Singapore tries to remain as geopolitically neutral as possible, which means that, as long as you believe in Satoshi, you can mostly celebrate with your brothers and sisters in the crypto space.
The energy and enthusiasm of the crypto community contrasts with the dullness and boredom of traditional finance (TradFi) conference attendees. The Milken Institute is also hosting a conference the same week. If you walk into the Four Seasons Hotel where the conference is being held, every man and woman looks the same, wearing boring business casual or formal attire. This traditional finance way of dressing and behaving is a deliberate act to make the masses think "there is nothing to see here" while their institutions steal human dignity under the cover of global inflation. Volatility is their enemy because once the market starts to fluctuate, the common people have the opportunity to peek into the mirror and see the true depravity of their masters.
Today, we are going to discuss the volatility of the crypto markets, and the lack of it in traditional finance. I want to discuss how the elites are creating a semblance of a calm economy through money printing, and how Bitcoin is the fiat release valve for this artificially suppressed volatility. But first, I want to illustrate a salient point by reviewing my record from November 2023 to date, which is that short-term macroeconomic forecasts don’t matter.
50/50 chance
Many of my readers and crypto-X-men often criticize me for getting it all wrong. So, how have my big predictions fared over the past year?
November 2023:
I wrote an article titled "Bad Gurl" in which I predicted that US Treasury Secretary Yellen (I called her Bad Gurl) would issue more T-bills to drain funds from the Fed's reverse repurchase program (RRP). The decline in RRP would inject liquidity into the system and drive risk assets higher. I thought the market would retreat somewhat by March 2024, as the Bank Term Funding Program (BTFP) was expected to expire at that time.
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 data set is referenced to 100.
+1 to the victory column.
After I read the contents of the US Treasury's Quarterly Refinancing Announcement (QRA), I added more crypto risk assets. From the results, it turned out to be a good decision.
March 2024:
In my article “Yellen or Talkin’”, I speculated that the BTFP would not be renewed due to its significant inflationary component. I argue that simply allowing banks access to the discount window is not enough to avoid another non-Too Big to Fail (TBTF) US banking crisis.
The expiry of BTFP did not have a substantial impact on the market.
+1 in the failure column.
I lost money on my small position in Bitcoin put options.
April 2024:
In my article “Heatwave”, I predicted that US tax season would cause crypto prices to fall as there would be less USD liquidity in the system. Specifically, I said I would pause 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 referenced to 100.
+1 to the victory column.
May 2024:
As I prepared to leave for my summer vacation in the northern hemisphere, I published a Mayday article with the following predictions based on several macroeconomic factors:
1. Did Bitcoin bottom out earlier this week at around $58,600? Yes.
2. What is your price prediction? A rally above $60,000 and then range-bound between $60,000 and $70,000 until August.
Bitcoin hit a low of around $54,000 on August 5 due to the unwinding of USD/JPY carry trades. I was wrong by 8%.
+1 in the failure column.
Bitcoin’s range during this period was approximately $54,000 to $71,000.
+1 in the failure column.
I did add some exposure to altcoins during the summer weakness, and some of the coins I bought are now trading lower than when I bought them, and some are trading higher.
June and July 2024:
When Japan's fifth largest bank admitted its huge losses on foreign bonds, I wrote an article about the importance of the USD/JPY exchange rate titled "Shikata Ga Nai". I predicted that the Bank of Japan (BOJ) would not raise interest rates because it would endanger the banking system. This assumption turned out to be naive. On July 31, the BOJ raised interest rates by 0.15%, triggering a fierce USD/JPY carry trade unwinding. I later discussed the mechanics of the USD/JPY carry trade unwinding in the article "Spirited Away".
While USD/JPY did become the most important macroeconomic variable, I was wrong about the BoJ. The policy response was not what I expected. The BoJ assured the market that it would not take action if raising rates or adjusting its money printing policy would cause market volatility.
+1 in the failure column.
August 2024:
Two major events occurred this month: the release of the 2024 Q3 QRA by the U.S. Treasury Department and the Powell job market turn at the Jackson Hole conference.
I predicted that the net issuance of Treasury bills by Yellen would provide USD liquidity to the market. But after Powell’s turnaround, he confirmed the expectation of a rate cut in September, and the two forces interacted. At first, I thought that the net issuance of Treasury bills would increase liquidity by draining RRP, but then the T-bill yield fell below RRP, and I predicted that RRP would rise and drain liquidity.
I didn’t expect Powell to cut rates before the election and risk inflation exploding, right when voters go to the polls.
+1 in the failure column.
RRP balances increased after Jackson Hole, then fell, and are now back on an upward trajectory. Therefore, I still believe that as T-bill yields continue to fall, this will be a slight drag on liquidity as the market anticipates further rate cuts from the Fed at its November meeting.
The outcome is still undecided; it is too early to tell whether I am right.
September 2024:
When I left Patagonia, I wrote an article titled “The Boom Moment… Delayed” and gave presentations at Korea Blockchain Week and Token2049 in Singapore predicting that markets would react negatively if the Fed cut rates. In particular, 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 crypto) to fall, and ultimately require more money printing to restore order.
The Fed cut rates while the Bank of Japan kept rates unchanged, narrowing the interest rate differential; however, risk markets performed well as the yen weakened against the dollar.
+1 in the failure column.
result:
2 correct predictions
6 wrong predictions
So, batting average = .250. That's pretty bad for the average person, but as the great Hank Aaron said, "My motto has always been to keep swinging. It doesn't matter if I'm in a slump, or I'm having a bad day, or I'm having trouble off the field, the only thing to do is keep swinging." Aaron's lifetime batting average was .305, and he is considered one of the greatest baseball players of all time.
Despite some forecast errors, I'm still making money.
Why?
Key Assumptions
The attempt I make when writing these macro articles is to predict the specific events that will trigger a policy response from our corrupt rulers. We know they can’t handle any financial market volatility because the entire post-1971 Bretton Woods trade and financial system is overleveraged. We — whether we’re puppets of traditional finance (TradFi) or believers in Satoshi — all agree that when a crisis comes, the button on the printing press will be pushed. It’s the eternal policy response.
If I can predict the trigger in advance, my ego will be satisfied and I may even earn a few extra percentage points for being ahead of the curve, but as long as my portfolio is properly positioned to profit when the money printing press is turned on to suppress the natural fluctuations of human civilization, even if I am wrong about all event-driven predictions, I will still make money as long as the policy response occurs as expected.
I’ll show you two charts to help you understand the massive amount of fiat money needed to suppress volatility at all-time lows.
Volatility
Starting in the late 19th century, the elites who controlled global governments struck a deal with ordinary people. Ordinary people gave up more and more freedoms in exchange for “smart” national leaders creating a peaceful universe that maintained order by controlling entropy, chaos, and volatility. Over time, as the role of government in the lives of every citizen grew, maintaining this increasing semblance of order became extremely expensive because the world became more and more complex as our understanding of the universe deepened.
In the past, a few people wrote books that defined the truth about how the universe worked. They would kill or ostracize those who practiced science. But as we freed ourselves from the constraints of organized religion and began to think critically about the universe we inhabit, we realized that we knew nothing and that things were far more complicated than described in religious books like the Bible, Torah, or Quran. So people flocked to politicians (mostly men, a few women), who replaced priests, rabbis, and imams (always men, never women) to provide a prescriptive way to describe life, promise security, and provide a framework for understanding how the universe worked. But every time volatility spikes, the response is to print money and cover up the problem, rather than admit that no one knows what the future will hold.
Just like when you push an inflatable ball underwater, the more you push it down, the more energy is required. The distortions in the world, and in Pax Americana in particular, are so extreme that the amount of money printing required each year to maintain the status quo is exponentially increasing. That is why I can confidently say that the amount of money printed between now and the final reset of the system will far exceed the total amount from 1971 to today. It is the law of mathematics and physics.
The first chart I will show you is the MOVE Index (white), which measures volatility in the US bond market, compared to the capped Fed Funds rate (green). As you know, I believe volume is more important than price, but in this case, using price paints a very clear picture.
Some people remember the dramatic rise and collapse of the tech bubble in 2000. As you can see, the Fed popped the bubble by raising interest rates until something collapsed. Volatility in the bond market spiked in 2000 and spiked again in 2001 after the 9/11 attacks. Once volatility was up, the Fed quickly cut interest rates, volatility dropped, and the Fed felt it could return to normal interest rates. However, they then popped the subprime housing market bubble, leading to the 2008 Global Financial Crisis (GFC). To suppress volatility, interest rates were quickly cut to zero, where they remained for nearly 7 years. The Fed then tried again to return to normal interest rate policy, but COVID hit, causing the bond market to crash and volatility to spike again. The Fed once again cut interest rates to zero. Inflation caused by the COVID stimulus has ignited the bond market since 2021, and volatility has risen. The Fed raised interest rates to suppress inflation, but had to stop raising interest rates in March 2023 when the non-TBTF banking crisis occurred. Finally, the current Fed easing cycle has coincided with increased volatility in the bond market. If you consider 2008 to 2020 as “normal,” current bond market volatility is nearly twice the rulers’ comfort level.
Now, let's add in a representative measure of the dollar amount. The red line is an approximation of total bank credit, which combines 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 Economics 101, the banking system creates money by extending credit. As the Fed engages in quantitative easing, excess reserves grow, and as banks extend more loans, ODL grows.
As you can see, 2008 was a watershed year. The financial crisis was so huge that the scale of the credit money outpouring eclipsed what happened after the tech bubble crash in 2000. No wonder our Lord and Savior Satoshi 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 would collapse under its own weight. Furthermore, in every crisis, banks must create more credit to suppress volatility.
I could provide a similar chart showing the volatility of USDCNY, USDJPY, EURJPY, etc. versus government debt levels, central bank balance sheets, and bank credit growth. Those charts are not as clear as the one I just showed. Pax Americana cares about volatility in the bond market because bonds are the asset that backs the world’s reserve currency — the dollar. And all the allies, vassals, and enemies are focused on the volatility of their currencies against the dollar because it affects their ability to trade with the world.
reaction
All this fiat has to go somewhere. Bitcoin and cryptocurrencies are the release valve. The fiat needed to maintain low volatility will eventually flow into the crypto markets. 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 balance; you can’t get something out of thin air. For every action, there is a reaction. Bitcoin happens to be the most reliable balance in the modern digital world to counter the extravagant spending of the ruling elite.
As an investor, trader, and speculator, your goal is to get Bitcoin at the cheapest price possible. Maybe that means pricing your hourly labor in Bitcoin, redirecting excess cheap energy to Bitcoin mining, borrowing fiat at a low rate and buying Bitcoin (call Michael Saylor), or using a portion of your fiat savings to buy Bitcoin. Bitcoin's volatility against fiat is your asset, don't waste it by leveraging it, especially if you plan to hold Bitcoin for the long term.
Are there any risks?
Speculating to profit from short-term price fluctuations is hard. As you can see from my record, my success rate is 2 to 6. If I had used my entire portfolio to go long or short every time I made a prediction, Maelstrom would have gone bankrupt long ago. Randall and Kyle Davies were right; the elites are in for a volatility suppression supercycle. But they have no patience and instead borrow fiat to buy more Bitcoin, and when the fiat funding cost changes (which always happens), they get caught and lose everything. It’s not all lost though — I saw pictures of Randall throwing lavish parties at his mansion in Singapore. Don’t worry, the house is registered in the names of his children, avoiding bankruptcy court seizure.
Assuming you haven’t abused fiat leverage, the real risk is volatility returning to its natural level when the elites can no longer suppress it. At that point, the system resets. Will it be like the Bolshevik Revolution, where the asset-holding bourgeoisie is completely purged, or will it be like the more common case, where one corrupt elite group is replaced by another and the suffering of the masses continues under a new “ism”? Regardless, all assets will fall, with Bitcoin falling less relative to the ultimate asset — energy. Even if your overall wealth has shrunk, you’ve still outperformed. Sorry, there is no such thing as risk-free in the universe. Security is just an illusion, a lie sold on election day by scammers hoping to get your vote.
Trading strategies
USA
Based on 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 in tandem with rate cuts. 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 continue to issue more dollars. The government will also continue to borrow as much as it can to keep the people on their side, from now until the foreseeable future, no matter who wins the US presidential election.
European Union
The unelected bureaucrats of the EU are destroying their own economies by rejecting cheap and abundant Russian energy, using the excuse of "climate change", "global warming", "ESG" or other similar slogans. The economic depression will be countered by lower euro interest rates set by the ECB. Governments will also start forcing banks to lend more to local companies to provide jobs and rebuild crumbling infrastructure.
China
As the Fed cuts rates and U.S. banks issue more credit, the dollar will weaken. This will allow the Chinese government to ramp up credit growth while maintaining a stable dollar-yuan exchange rate. China’s main concern about accelerating credit growth is the depreciation pressure on the yuan 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 rate cuts throughout China’s monetary system. This is just the beginning; the real “big move” will come when banks issue more credit.
Japan
If other major economies are now easing monetary conditions, there is less pressure on the Bank of Japan (BOJ) to raise interest rates quickly. BOJ Governor Kazuo Ueda has made it clear that he will return to normal interest rate policy. But since other countries' interest rates are moving closer to his low interest rate level, he does not have to catch up so quickly.
The moral of the story is that the global elites are once again suppressing volatility in countries or economies 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 rise. If you have extra "dirty fiat", now is the time to add to crypto. As for Maelstrom, we will push projects that have delayed issuing tokens due to poor market conditions to speed up. We want to see a green cross in our Christmas stockings. The brothers in the fund also want a nice 2024 bonus, so please help them!
