"It's fucking fed day" , at Token 2049 held in Singapore on September 18, Arthur Hayes, CIO of Maelstrom Fund, delivered a keynote speech focusing on the macroeconomic environment. His first words caused the audience to scream. In the early morning of September 19th, Beijing time, the US Federal Reserve is about to hold an interest rate meeting. This is also the most important decision this year. The US Federal Reserve's decision to cut interest rates is directly related to the future market direction.
Hayes said there is about a 60% to 70% chance that the Fed will choose a rate cut of 75 or 50 basis points. Hayes made an interesting prediction about the future of ETH, arguing that falling U.S. Treasury rates may indeed make the high-yield token more attractive. He compared Ethereum to "Internet bonds" and further analyzed its potential. He emphasized the Japanese yen many times and reminded everyone to pay attention to the exchange rate of the US dollar against the Japanese yen. "This is the only important thing."
The following is the speech content compiled by PANews on site (refer to AI translation):
I think there's about a 60% to 70% chance that the Fed will choose a 75 or 50 basis point rate cut. Before talking about cryptocurrencies, I want to express my opinion. I think it is a huge mistake for the US Federal Reserve to choose to cut interest rates in the current situation of increased intervention by the US government.
I think the market will collapse in the days after the Fed cuts interest rates because it will narrow the interest rate differential between the dollar and the yen. We saw a few weeks ago that the yen fell from 162 to 142 in about 14 days of trading, almost triggering a mini-financial collapse. Now that the Fed and the market are expecting them to continue cutting interest rates very quickly, we're going to see similar financial stress again.
Back to cryptocurrencies. This is one of my favorite trades in my non-crypto portfolio. I hold my Treasury bills and collect interest. That's the yield on one-month Treasury bills, which has hovered around 5.5% for more than a year after the Federal Reserve stopped raising interest rates.
When you have enough capital and are earning a 5.5% return, you don't need to do much. Why take the risk?
Why try to add value while risking capital preservation? When people own large amounts of assets, they are reluctant to take certain actions because they can easily make money by holding Treasury bills. This situation has had ripple effects across financial markets, including the cryptocurrency market. I want to ask you, who loses when the interest rate environment changes? When Treasury bill rates fall, the interest income that can be generated by holding the safest risk-free assets is a question worth pondering.
The first reaction was a comparison between the five Ethereum assets - and for the disclosure, I hold a lot of these assets. Luckily, I'm not invested in any condos, but at the end of the day, this portfolio is well-suited to a falling interest rate environment. Basically, what this means is that I invest in a number of projects that provide users with interest income in various forms.
Currently, those yields are either slightly higher or slightly lower than rates on short-term Treasury bills, which is weighing on price performance. After all, why invest in riskier DeFi applications? You could just call a broker and put your money in Treasury bills and earn 5.5%.
Now, there are projects that do very well in a high interest rate environment. I'm just using Ondo as an example. There are actually many other types of real world asset (RWA) projects. Basically, the model of these programs is this: "You need to buy Treasury bills, we will buy them, put them in some legal structure, and then give you a certificate that pays interest." These programs are based on interest rates rising and maintaining A high one-way bet. But when interest rates fall, there is little need for such products.
Ethereum could benefit from rate cut
First, Ethereum. When many people hear Ethereum, they may think that it has not made any big changes. The main discussion point about ETH is that it is considered an "internet bond". If it's an Internet bond yielding 4% annually, and Treasury bills yield more than that, then investors will naturally prefer Treasury bills. But if Treasury yields fall quickly (which I think they will), then Ethereum will become more attractive, and the return I can make by holding Ethereum may exceed what I can make by holding USD.
As you can see, interest rates are falling rapidly because the Fed is going to cut rates and the market is going to fall. And then they're going to say, "Let's keep doing this because this is the way to solve the problem." Right now, what we can see is that the yield is basically staying on a line, and Ethereum's yield is between 3% and 3%. Between 4%, that's not enough for a holder, which is why I don't hold it.
As you can see, Ethereum has far underperformed Bitcoin in the current bull market. With ETH Staking (ETHfi), you can stake your Ethereum, but apparently this strategy has also taken a hit. Because the return rate after staking is only about 3%, after deducting fees, this return is not ideal. We need Treasury yields to fall faster so that Ethereum’s yields become more attractive.
Why is this a minor issue? Because traders use leverage, and they pay for that leverage. This has been going on for many years. This is how I got started in cryptocurrency: building basic trades and applying these strategies. This method is relatively simple, you only need to invest money to earn profits. Again, this is a risky loan and not comparable to the safety of U.S. Treasuries. If you are a yield-seeking investor, and the yields offered by Ethereum are not attractive enough relative to Treasuries, you may not put your assets into this protocol.
Here is a chart showing Ethena yields compared to Treasuries, using data from earlier this year. This is very attractive. We see returns of 30%, 40%, 50%, 60%, etc. relative to a 5.5% return. I would put my money into this product. But now, its actual yield is around 4.5%.
So prices have been suppressed because people are asking, why would I put money into a protocol that doesn't yield as well as Treasuries?
Another thing we'll discuss is interest rate derivatives agreements, which allow you to trade fixed and floating interest rates. There’s a new product that just launched that allows you to stake your cryptocurrency and earn a fixed income through a loan buyer agreement. While this benefit is attractive, it comes with certain risks. I don't think the yield is high enough to attract a large number of people to switch from the 5.5% Treasury yield to this product. A similar scenario is that if yields fall, more people may be unwilling to take on this interest rate risk.
Once again, you can now earn up to 9% with this strategy. This was launched just a few weeks ago. This yield is very high and very attractive compared to 4.5%. For some people, although there are risks and smart contract risks, many investors who are sensitive to interest rates may think that this yield is not high enough, but if I can earn an interest rate of 5.5%, you can try Pendle. Obviously, it has given back 50% to 60% of its gains, but if yields significantly exceed Treasury yields, there will be a lot of appeal.
I've talked about how many cryptocurrency projects are terrible. The main reason is interest rates, I can do these things in a simpler and cheaper way than paying a high price to buy some low-liquidity token. But ultimately, these agreements provide a valuable service to people who don't have a U.S. brokerage account or don't have access to traditional investments. There are a lot of very wealthy people in this room, and if you go to your personal banker, they're probably going to recommend something to you that has nothing to do with U.S. Treasuries because they're not making a lot of money on it. Treasury bonds are very cheap to hold.
These protocols are very attractive to certain types of investors, especially those looking to earn an easy 5.5% yield. But if we expect central banks to aggressively cut interest rates in a deteriorating economic environment or financial crisis, then the reason to put money into these RWA (Real World Assets) protocols disappears.
Why should I take on smart contract risk to earn 1% or 2%? Therefore, I believe many TVL (total value locked) projects that rely on high-yield Treasury bonds will suffer when interest rates fall. I'm using Ondo as an example. I just pulled it off the website last night. It has a market cap of $6 million, a very low FDV (fully diluted market cap), and you can earn 5.35% on their stablecoin. We expect yields to fall 25 to 50 basis points now, with more changes to come.
On a relative basis, if you look at other charts that they've released, you'll see that they're trading below where they were when they came out earlier this year, and I think that's because we're in a high interest rate environment. Their product is reasonable, but as I quickly mentioned, it's about five minutes off now. I want to go into a little more detail now about why I think the more the Fed cuts interest rates, the more dissatisfied the market will be with what happens next.
I really want you all, if you just remember one thing tonight, it's this: when you're drunk at a party, turn on your phone and check the dollar-yen exchange rate. This is the only important thing. Because if the Fed suddenly cuts rates by 50 or 75 basis points, you're going to see a very negative reaction from the dollar.
Again, since the Bank of Japan is raising rates and the U.S. Bank is cutting rates, in theory, the exchange rate should reflect the interest rate differential. Therefore, the USD/JPY exchange rate should rise, which means the nominal prices you see on your screen should fall. If I expect the central bank to cut interest rates unexpectedly and sharply, or if they show very aggressive rate cut expectations in the dot plot (the dot plot is the central bank's tool for asking each official for their expectations for interest rates over the next period of time), we Will see a sharp appreciation of the yen.
Yen arbitrage unwinding risk
what does that mean? The Japanese yen carry trade is probably one of the most commonly used trading strategies over the past three decades. As an individual investor, company or central bank, I would borrow Japanese yen at almost no interest cost, sometimes without paying any fees. I then invest these borrowed funds in assets with higher returns.
These assets may include U.S. stocks, the Nasdaq, the S&P 500, or even real estate and U.S. Treasuries. This trading method is estimated to involve positions of up to $20 trillion globally, all invested by people who borrowed Japanese yen.
If this rate appreciates quickly, your profits can be wiped out quickly. Therefore, your risk manager will remind you to "cover the risk." That means you sell assets, sell stocks (high liquidity), sell Treasuries (high liquidity). Japan is the world's largest creditor country, so U.S. Treasury Secretary Powell and Yellen need to pay attention to this.
I think we're still about 40 to 50 days away from the US election. The last thing they don't want to happen is that Trump's approval rating is high and the S&P falls 20%. That's why I believe they will aggressively cut rates. They will see the yen appreciate and provide more money supply, which should drive all the trades I talked about in my speech today. So while I talk a lot about cryptocurrencies, the main point I want you to remember is this: pay attention to the USD/JPY exchange rate, that’s the only thing that matters.
