Arthur Hayes' new article: My macro forecasts are only correct 25%, but crypto investments are still profitable

Original title: Volatility Supercycle

Original author: Arthur Hayes, co-founder of BitMEX

Original translation: TechFlow

(Any opinions expressed in this article are the author's personal opinions and should not be used as a basis for investment decisions, nor should they be considered as recommendations or suggestions for engaging in investment transactions.)

This week has been truly astounding. If you missed the Token2049 conference in Singapore last week, I feel sorry for you. More than 20,000 enthusiastic participants expressed their enthusiasm in various ways. I have attended almost every night F1 race in Singapore since it began, but I have never seen the city so vibrant.

Token2049's attendance doubled from last year. I heard that some lesser-known projects were charged up to $650,000 for speaking on some small stages.

Source: X

The party was packed. Marquee is a club that can accommodate thousands of people. Imagine queuing for more than three hours to get into the event. Every night a different crypto project or company books the club. Marquee's booking fee is $200,000, not including any drinks.

Source: X

There are all kinds of events. Iggy Azalea invited a group of strippers from Los Angeles to create a flash "experience". Who would have thought that strippers would also understand how to operate in a volatile market?

Source: X

Even Su Zhu, who has been called the "Randall of crypto," can't help but want to "make money fly." Randall, why do you look so uncomfortable in this video? Losing money is your specialty. When you finally submit your assets to the bankruptcy court in the British Virgin Islands and resolve the lawsuit, I will be happy to host you in Magic City and teach you how to do it.

Source: X

I'm thinking of asking Branson Cognac and Le Chemin du Roi to sponsor my next party, as 50 Cent said:

Source: TMZ

Every hotel was full, even the mid-range restaurants. When the 2024 numbers come in, I suspect we'll find that the crypto crowd has driven more business to airlines, hotels, restaurants, conference venues and nightclubs than any other event in Singapore's history.

Thankfully, Singapore tries to be geopolitically neutral. That means that, as long as you believe in Satoshi, you can basically celebrate with your brothers and sisters.

The energy and enthusiasm of the crypto crowd contrasts with the dullness and boredom of the attendees at the traditional finance conference. The Milken Institute is also hosting a conference the same week. If you walk around the Four Seasons, where the conference is being held, you will notice that every man and woman is dressed similarly, in drab business casual or formal attire. The attire and behavior of traditional finance is deliberately calm and unchanging. They want the public to think “there’s nothing to see here”, while in reality they are stealing human dignity through the inflation their institutions impose on the world. Volatility is their enemy, because when things start to move, the average person can look through the mirror and see the true depravity of their masters.

Today, we will discuss the volatility of cryptocurrencies and the lack of volatility in traditional finance. I want to explore how the elites print money to create a stable economic environment. At the same time, I want to show how Bitcoin can be used as a release valve for the fiat money that is printed to suppress volatility to unnatural levels. But first, I want to illustrate the key point that short-term macroeconomic forecasts don’t matter by reviewing my record from November 2023 to now.

Fifty-Fifty

Many readers and keyboard warriors in the crypto space often criticize me for poor judgment. So how have I performed on my big calls over the past year?

November 2023:

I wrote an article called Bad Gurl. In it, I predicted that US Treasury Secretary "Bad Girl" Yellen would issue more T-bills to drain funds from the US Federal Reserve's (Fed) Reverse Repurchase Program (RRP). The decline in RRP would inject liquidity into the market, driving risk assets higher. I think the market will weaken in March 2024, when the Bank Term Funding Program (BTFP) expires.

From November 2023 to March 2024, the Reverse Repurchase Program (RRP, white) fell 59%, Bitcoin (gold) rose 77%, the S&P 500 (green) rose 21%, and gold (red) rose 5%. The base of each dataset is 100.

Win +1.

After carefully reading the US Treasury's Quarterly Funding Announcement (QRA), I decided to add more cryptocurrency exposure. Looking back, this decision was very correct.

March 2024:

In my article Yellen or Talkin, I speculated that the Bank Term Funding Program (BTFP) would not be renewed because it was clearly inflationary. I argued that simply allowing banks to use the discount window would not be enough to avoid another non-TBTF US banking crisis.

The expiration of the BTFP had no material impact on the market.

Loss term +1.

I lost some money on Bitcoin put options.

April 2024:

In my article Heatwave, I predicted that US tax season would cause crypto prices to fall as USD liquidity was drained. Specifically, I said that I would pause adding any additional crypto exposure between April 15th and May 1st.

From April 15 to May 1, the Reverse Repurchase Program (RRP, white) rose 33%, Bitcoin (gold) fell 9%, the S&P 500 (green) fell 1%, and gold (magenta) fell 3%. The base of each dataset is 100.

Win +1.

May 2024:

While I was heading off for my northern hemisphere summer vacation, I published my article Mayday, which was based on several macroeconomic factors. I have the following predictions:

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

What is your price prediction? Bitcoin is expected to rise above $60,000 and then oscillate between $60,000 and $70,000 until August.

Bitcoin fell to a low of around $54,000 on August 5th due to a retracement in the USD-JPY carry trade. I was wrong in my prediction by 8%.

Loss term +1.

During this period, Bitcoin's price range was around $54,000 to $71,000.

Loss term +1.

During the summer weakness, I did add some exposure to altcoins. Some of the coins I bought are now trading below the price at which I purchased them, while some are above.

June and July 2024:

When Japan’s fifth-largest bank admitted its huge losses on foreign currency bonds, I wrote an article titled Shikata Ga Nai discussing the importance of the USD-JPY exchange rate. I predicted that the Bank of Japan (BOJ) would not raise interest rates because it would endanger the banking system. However, this assumption proved to be naive. On July 31, the BOJ raised interest rates by 0.15% and initiated a fierce USD-JPY carry trade retracement. I followed up on the mechanics of the USD-JPY carry trade pullback in a subsequent article, Spirited Away.

While USD-JPY proved to be the most important macroeconomic variable, I was wrong about the Bank of Japan (BOJ). The policy response did not go as I predicted. Instead of providing USD through the central bank swap lines, the BOJ assured the market that it would not take rate hikes or adjustments to money printing policy if these would lead to increased market volatility.

Loss term +1.

August 2024:

Two major events occurred this month: the release of the QRA for the third quarter of 2024 by the US Treasury, and Powell’s turnaround on employment data at Jackson Hole.

I predicted that Yellen’s re-issuance of Treasury bills (T-bills) would provide USD liquidity to the market. However, after Powell’s turnaround, he confirmed a rate cut in September, and these two forces worked against each other. Initially, I thought the net issuance of T-bills would add liquidity as it would drive RRPs to zero, but then T-bill yields fell below RRP levels and I predicted RPPs would rise and drain liquidity.

I did not anticipate Powell cutting rates before the election, risking an inflation explosion as voters go to the polls.

Loss term +1.

RRP balances increased directly after Jackson Hole, reentering an upward trajectory. Therefore, I still think this will be a slight drag on liquidity as T-bill yields continue to fall and the market expects the Fed to cut rates further at its November meeting.

The outcome is not yet determined; it is too early to tell if I am right.

September 2024:

When I left the mountains of Patagonia, I wrote an article Boom Times … Delayed and spoke at Korea Blockchain Week and Token2049 in Singapore predicting that markets would react negatively if the Fed cut rates. Specifically, I argued that a narrowing of the USD-JPY spread would lead to further yen appreciation and reignite the unwinding of carry trades. This would cause a decline in global markets, including cryptocurrencies, and ultimately require more money printing to get Hamti Dunty back together.

The Fed cut rates while the Bank of Japan (BOJ) kept rates unchanged, which narrowed the spread; however, the yen depreciated against the dollar and risk markets outperformed.

Loss terms are increased by +1.

Results:

2 correct predictions

6 incorrect predictions

So a batting average of .250. That's pretty poor for the average person, but as the great Hank Aaron said, "My motto has always been to keep swinging. Whether I'm in a slump, feeling down, or having trouble off the field, the only thing to do is keep swinging." Aaron had a career batting average of .305 and is considered one of the best baseball players of all time.

Source: MLB.com

Despite many losses, I'm still making money overall.

Why?

The Big What-If

When I write these macro articles, I try to predict specific events that will cause policy responses from our corrupt people in power. We know that they cannot handle any kind of financial market volatility due to the over-leveraging of the entire post-Bretton Woods 1971 trade and financial system. We - and I mean both the puppets of traditional finance and the followers of Satoshi Nakamoto - all agree that when things get bad, the "Brrrr" button is pressed. This is always their policy response.

If I can predict the trigger in advance, my ego will be boosted, and maybe I can make extra profits by getting ahead of time. But as long as my portfolio benefits from printing fiat money to dampen the natural fluctuations of human civilization, it doesn't matter if every event-driven prediction I make is wrong as long as the policy response is as expected.

I will show you two charts to help you understand the sheer volume of fiat money required to dampen volatility at historical lows.

Volatility

Beginning in the late 19th century, the elites who controlled global governments made a deal with the common people. If the common people surrendered more and more freedoms, the "smart" people who ran the country would create a calm universe by suppressing entropy, chaos, and volatility. As the decades progressed, the role of government became more important in the lives of every citizen, and it became very expensive to maintain the appearance of increasing order, as our knowledge of the universe increased and the world became more complex.

Before, books by a few authors were seen as the authoritative source of truth about the workings of the universe. They killed or ostracized anyone who practiced science. But as we freed ourselves from the constraints of organized religion and thought critically about the universe we inhabit, we realized that we knew nothing and that things were much more complicated than you would believe just by reading books like the Bible, Torah, and Koran. So people flock to politicians (mostly men, a few women) who replace priests, rabbis and imams (always men) with a promise of a secure way of life and a framework for understanding the workings of the universe. Yet whenever volatility spikes, the response is to print money and cover up the world’s problems to avoid admitting that no one knows what the future will hold.

Just like when you push an inflatable ball under water, the deeper you push the ball, the more energy it takes to maintain its position increases. The distortions on a global scale are so extreme, especially for the US hegemony, that the amount of money printing required to maintain the status quo is growing rapidly every year. That is why I can confidently say that the amount of money printing required between now and the final reset of the system will far exceed the total amount that has been printed from 1971 to date. It is just the laws of mathematics and physics.

The first chart I will show is the MOVE Index (white), which measures the volatility of the US bond market in relation to the Fed Funds Cap Rate (green). As you know, I believe that quantity is more important than price, but in this case, using price paints a very clear picture.

You may remember the rise and collapse of the tech bubble in 2000. As you can see, the Fed pricked the bubble by raising interest rates until something went wrong. Bond market volatility spiked in 2000 and 2001 after the 9/11 attacks. Once volatility rose, the Fed cut rates. After volatility fell, the Fed thought it was okay to normalize rates, however, they punctured the subprime housing market, leading to the 2008 Global Financial Crisis (GFC). Rates were quickly cut to zero for nearly 7 years to suppress volatility. It was time to normalize rates again, and then COVID happened, which caused the bond market to collapse and volatility to surge. The Fed therefore cut rates to zero. COVID-spurred inflation ignited the bond market starting in 2021, leading to increased volatility. The Fed raised rates to curb inflation, but had to stop at the time of the non-"too big to fail" bank crisis in March 2023. Finally, the current Fed easing cycle has occurred during a period of increased bond market volatility. If 2008 to 2020 is considered "normal," current bond market volatility is close to double our comfort level.

Let's introduce a dollar quantity indicator. The red line is an approximation of the total amount of bank credit, which consists of excess bank reserves and other deposits and liabilities (ODL) held by the Fed, which is a good indicator of commercial bank loan growth. Remember from basic economics class, it is the banking system that creates money by issuing credit. As the Fed does quantitative easing (QE), excess reserves increase, and as banks issue more loans, ODL also grows.

As you can see, 2008 was a major turning point. The financial crisis was so huge that the scale of the credit money outpouring overshadowed what happened when the tech bubble collapsed after 2000. No wonder our Lord 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 collapse under its own weight. Moreover, in every crisis, banks must create more and more credit to suppress volatility.

I could show a similar chart showing FX volatility versus government debt levels, central bank balance sheets, and bank credit growth for USDCNY, USDJPY, EURJPY, etc. They are less clear than the one I just showed. The US hegemon cares about bond market volatility because that is the asset that backs the global reserve currency, the dollar. All other allies, vassals, and enemies care about the volatility of their currencies versus the dollar because it affects their ability to trade with the world.

Reaction

All of this fiat money has to go somewhere, and Bitcoin and cryptocurrencies are the release valve for that flow. The fiat money needed to dampen volatility will flow into cryptocurrencies. Assuming the technology of the Bitcoin blockchain is sound, Bitcoin will always benefit from the elites continuing to try to break the laws of physics. There has to be a balancer; you can’t create something from nothing. Bitcoin happens to be the most technologically sound way to balance the profligate behavior of the ruling elite in this modern digital world.

As an investor, trader, and speculator, your goal is to acquire Bitcoin at the lowest cost. This could mean pricing your hourly labor in Bitcoin, using excess cheap energy for Bitcoin mining, borrowing fiat at low rates and buying Bitcoin (call Michael Saylor), or buying Bitcoin with a portion of your fiat savings. The volatility between Bitcoin and fiat is your asset, don’t waste that by using leverage to buy Bitcoin that you plan to hold for the long term.

Are there any risks?

It is very difficult to profitably speculate on short-term price fluctuations. As you can see from my record, my success rate is 2 to 6. If I had moved my entire portfolio long and short every time I made a judgment call, Maelstrom would probably be bankrupt by now. Randall and Kyle Davies are right; there is indeed a super cycle in the elite suppressing volatility. They have no patience and instead borrow fiat to buy more Bitcoin, and as the cost of fiat funding changes (which always happens), they get caught and lose everything. However, not all is not lost - I've seen pictures of Randall throwing lavish parties at his mansion in Singapore. Don't worry though - that's in the name of his children to avoid seizure by bankruptcy court.

Assuming you don't abuse fiat leverage, the real risk is that volatility will rise back to its natural level when the elites can no longer suppress it. At that point, the system will reset. Will it be a revolution like in Bolshevik Russia, where the capitalist class holders are completely wiped out, or will it be the more common case where one group of corrupt elites is replaced by another and the suffering of the masses continues under a new "ism"? In any case, everything will fall, and Bitcoin will fall less relative to the ultimate asset - energy. Even though your overall wealth has decreased, you've still outperformed others. Sorry, nothing in the universe is risk-free. Security is just an illusion, sold by scammers eager for you to vote on election day.

Trading Strategies

United States

Based on the Fed's historical response to "high volatility", we know that once they start cutting rates, they usually keep going until rates are close to 0%. In addition, bank credit growth must also accelerate in tandem with rate cuts. I don't care how "strong" the economy is, how low unemployment drops, or how high inflation gets, the Fed will continue to cut rates and more dollars will be released into the banking system. No matter who wins the US presidential election, the government will also continue to borrow as much as it can to gain the support of the civilian population until the foreseeable future.

European Union

The unelected bureaucrats in the European Union are destroying their economies in a suicidal way, rejecting cheap and abundant Russian energy and dismantling their energy production capacity in the name of "climate change", "global warming", "ESG" or other nonsense slogans. The economic depression will be responded to by the European Central Bank lowering Euro interest rates. Governments will also begin forcing banks to lend more to local businesses so they can provide jobs and rebuild deteriorating infrastructure.

China

As the Fed cuts rates and U.S. banks extend more credit, the dollar will weaken. This allows the Chinese government to ramp up credit growth while keeping the dollar-yuan exchange rate stable. The Chinese president’s main concern about accelerating bank credit growth is the pressure on the yuan to depreciate relative to the dollar. If the Fed prints money, the People’s Bank of China (PBOC) can print money, too. This week, the PBOC rolled out a series of rate cuts throughout the monetary system. This is just the beginning; the real “big move” will come when banks extend more credit.

Japan

If other major economies are easing monetary policy now, there will be less pressure on the Bank of Japan (BOJ) to raise rates quickly. Bank of Japan Governor Kazuo Ueda has made it clear that he will normalize interest rates. However, he doesn’t need to catch up so quickly because other countries have lowered interest rates to his low levels.

The moral of the story is that once again, the global elite is suppressing volatility in their country or economic bloc by lowering the price of money and increasing the money supply. If you are already fully invested in crypto, sit back, relax, and watch the fiat value of your portfolio go up. If you have extra fiat, rush to put it into crypto. As for Maelstrom, we will push projects that have delayed launching tokens due to poor market conditions to speed up. We want to see those green candlesticks in our Christmas stockings. And the brothers at the fund are hoping for a good 2024 bonus, so help them out!

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