B itMEX co-founder Arthur Hayes published the latest article on the 24th. He believes that the next few months will provide cryptocurrency investors with a golden opportunity to increase their positions. The full text is translated and organized for you in the dynamic zone below.
Some of you think you are the masters of the universe now because you bought Solana for less than $10 and sold it for $200. Others similarly thought they did the smart thing, selling fiat for crypto during the 2021-2023 bear market while reducing their positions as prices soared in the first quarter of this year.
If you trade shit coin for Bitcoin, you are a smart person. If you exchange your Bitcoin for fiat currency that you don't need to spend immediately, you're stupid as hell. Because Bitcoin is the most difficult currency ever created.
Bull markets don't come around very often, and it's a travesty when you make the right decisions but don't maximize your profits. Too many of us try to reason in bull markets, but the real crypto legends have been lurking on the left side of the rising curve, buying, holding, and buying as long as the bull market continues.
Sometimes I find myself thinking like a loser. When I do this, I have to remind myself, what is the macro theme that all retail and institutional investors believe in?
That is, all major economic blocs (the United States, China, the European Union and Japan) are devaluing their currencies to reduce the leverage of government balance sheets. Now that traditional finance can profit directly from this narrative with the upcoming U.S. and upcoming U.K. and Hong Kong spot Bitcoin ETFs, they are urging clients to use these crypto derivatives to preserve the purchasing power of their wealth.
I want to quickly explain the underlying reasons for the massive rise in cryptocurrencies relative to fiat currencies. Of course, there will come a time when this narrative loses its potency, but that day is not yet there. At this point, I will resist the urge to take my chips off the table and I will stay firmly on the left curve.
I previously predicted that BTC would experience a period of weakness due to the US tax payment and the Bitcoin halving on April 15, but now I want to remind readers that we should think about why the bull market will continue and the price will become crazier?
In the market, it is almost unimaginable that anything could take Bitcoin from zero value in 2009 to $70,000 in 2024 to $1,000,000 in the future. However, as sovereign debt bubbles begin to burst and fiat liquidity surges, the macro factors driving Bitcoin’s rise will only become more apparent.
Nominal gross domestic product (GDP)
What is the purpose of government? The government provides public goods such as roads, education, medical care, and social order. Clearly, this is the wish list of many governments, but in reality they offer death and despair... and in exchange for these services, we as citizens pay taxes. Only a government with a balanced budget can provide as many services as possible with a certain amount of tax revenue.
Sometimes, however, the government borrows money to do things it believes will generate long-term positive value without raising taxes.
For example:
Expensive hydroelectric dams to build. Instead of raising taxes, the government issues bonds to pay for the dam, hoping that the financial return from the dam will match or exceed the bond's yield. The government entices citizens to invest in the future by paying a rate of return close to the economic growth the dam will create:
- If the dam will grow the economy by 10% in 10 years, government bond yields should be at least 10% to attract investors.
- But if the government pays less than 10%, its profits come at the expense of the public.
- If the government pays more than 10%, the public's profits will be borne by the government.
Let’s look a little further and discuss the economy from a macro level. The economic growth rate of a given nation-state is its nominal GDP, which is composed of inflation and real growth. If the government wants to drive nominal GDP growth through budget deficits, it is natural and logical for investors to receive returns equal to the nominal GDP growth rate.
While it is natural for investors to expect benefits equivalent to nominal GDP growth, politicians would rather pay less than that. If politicians can create a situation where government debt yields are lower than nominal GDP growth, then politicians can spend money faster than SBF (the founder of bankrupt exchange FTX) in effective altruism philanthropy. The best part is that taxes don’t need to be raised to pay for this spending.
So how do politicians create such a utopia? They use the banking system in traditional finance to economically suppress depositors. The simplest way to ensure that Treasury yields remain below nominal GDP growth is to instruct the central bank to print money and purchase Treasury bonds, artificially lowering Treasury yields. Banks were then told that government bonds were the only "appropriate" investment for the public. In this way, the public's savings are secretly invested in low-yielding government debt.
The problem with artificially low government bond yields is that it promotes inappropriate investment. The first project is usually worth it. However, as politicians strive to generate growth for re-election, the quality of projects has declined. At this point, government debt is growing faster than nominal GDP. Politicians now need to make tough decisions. Improper investment losses must be repaid by a severe financial crisis today or by low or even zero growth tomorrow. Often, politicians choose long periods of economic stagnation because the future occurs after they leave office.
A good example of inappropriate investment is green energy projects that are only possible through government subsidies. After years of generous subsidies, some projects have failed to achieve a return on invested capital or the actual cost to consumers has been too high. It is foreseeable that once government support is withdrawn, demand will weaken and the project will stall.
In bad times, when central banks press the "Brrrr" button harder than Lord Ashdrach hits the "sell" button, bond yields become more distorted. Government bond yields remain below nominal GDP growth, allowing the government's debt burden to be offset by inflation.
identify
The key task for investors is to understand when government bonds are a good investment. The simplest way is to compare year-over-year nominal GDP growth with the yield on 10-year government bonds. The 10-year bond yield should be a market signal giving us an idea of what to expect in terms of future nominal growth.
Real yield = 10-year government bond yield – nominal GDP growth rate
Government bonds are a good investment when real yields are positive. The government is usually the most creditworthy borrower.
Government bonds are poor investments when real yields are negative. The trick for investors is to look for assets outside the banking system that grow faster than inflation.
All four major economies have enacted policies that economically suppress savers and result in negative real yields. China, the European Union and Japan all ultimately take their monetary policy cues from the United States. Therefore, I will focus on the past and future monetary and fiscal conditions of the United States. As the United States eases financial conditions, the rest of the world will follow suit.
Murica
The chart shows real yields (.USNOM Index) in white and the Fed's balance sheet in yellow. I started in 2009, because that was the year that Bitcoin’s Genesis Block was launched.
As you can see, after the deflationary shock of the global financial crisis in 2008, real yields turned from positive to negative. The index briefly turned positive again due to the deflationary impact of the pandemic.
A deflationary shock is when real yields surge due to a sharp decline in economic activity.
With the exception of 2009 and 2020, government bonds have been a poor investment compared to stocks, real estate, cryptocurrencies, etc. Bond investors can only perform well by using crazy leverage to trade. To the hedge fund stooges, this is the essence of risk parity.
This unnatural state of affairs occurs because the Fed expands its balance sheet by printing money to buy government bonds, a process called quantitative easing (QE).
The escape valve for negative real returns during this period was and still is Bitcoin (yellow). Bitcoin is rising in a non-linear manner on a logarithmic chart. Bitcoin’s rise is purely a function of a limited number of assets priced in fiat dollar depreciation.
This explains what has happened in the past, but markets are forward-looking. Why should you continue your cryptocurrency investments and feel confident that this bull market has just begun?
free shit
Everyone wants to get something for nothing. Obviously, the universe will never provide anything this cheap, but that doesn't stop politicians from promising benefits without raising tax rates. Support for any politician, whether at the ballot box in a democracy or potential support in a more authoritarian system, stems from the politician's ability to generate economic growth. When simple and obvious pro-growth policies are enacted, politicians use the money printing press to funnel money to their preferred constituencies at the expense of the entire population.
As long as governments borrow at negative real yields, politicians can give free stuff to their supporters. Thus, the more partisan and polarized a nation-state is, the greater the incentive for governing parties to improve their reelection chances by spending money they do not have.
2024 is a critical year for the world, with presidential elections taking place in many major countries. US elections are crucial globally because the Democrats in power will do whatever it takes to stay in office (as evidenced by the fact that the Orangemen have done some questionable things to the Republicans since they "lost" the last election). A large portion of Americans believe Democrats appear to have cheated Trump out of winning. Whether you believe this to be true or not, the fact that a large portion of the population holds this view ensures that the stakes in this election are extremely high. As I said before, peaceful fiscal and monetary policies under US politics will be emulated by China, the EU and Japan, which is why it is important to pay attention to the election.
The chart above is a chart from BCA Research showing political polarization in the United States over time. As you can see, the electorate hasn't been this polarized since the late 19th century. From an electoral perspective, this makes winner-take-all. Democrats know that if they lose, Republicans will reverse many of their policies. The next question is, what is the easiest way to ensure re-election?
It's the economy. Voters who have yet to decide on the election winner do so based on their views on the economy. As shown in the chart above, if the public believes the economy is in recession during an election year, the incumbent president's reelection chances drop from 67% to 33%. So how can a ruling party with control over monetary and fiscal policy ensure that there is no recession?
Nominal GDP growth is directly affected by government spending. As you can see from this Bianco Research chart, U.S. government spending accounts for 23% of nominal GDP. This means that the ruling party can print as much GDP as they want, as long as they are willing to borrow enough to meet the required spending levels.
The Chinese government determines the GDP growth rate every year. The banking system then creates enough credit to drive economic activity to the desired level. For many Western-trained economists, the "strength" of the U.S. economy is puzzling because many of the key economic variables they monitor point to an impending recession. But as long as the ruling party can borrow at negative interest rates, it can create the economic growth it needs to stay in power.
These are the reasons why the Democratic Party led by US President Biden will do everything possible to increase government spending. U.S. Treasury Secretary Bud Yellen and her counterpart at the Federal Reserve Board, Jerome Powell, will then need to ensure that U.S. Treasury yields remain well below nominal GDP growth. I don’t know what euphemisms they will create for money printing to ensure negative real yields persist, but I am confident they will do what is necessary to re-elect their boss and his party.
However, the Orange might win. What happens to government spending in this case?
The chart above estimates the deficit through 2024 under a Biden or Trump presidency. As you can see, Trump is expected to spend more than Slow Joe. Trump is seeking another round of tax cuts that would further widen the deficit. Whichever geriatric clown you choose, rest assured government spending won't go down.
The Congressional Budget Office (CBO) projects government deficits based on current and hypothetical future political environments, which predict large deficits. Basically, if politicians can create 6% growth with 4% borrowing, why would they stop spending?
As mentioned above, the political situation in the United States makes me confident about the development of the money printing press. If you thought what the U.S. monetary and political elites did to “solve” the 2008 global financial crisis and pandemic was ridiculous, you haven’t seen anything yet.
Wars on the periphery of Pax Americana continue to be fought primarily on the Ukrainian/Russian and Israeli/Iranian battlefields. As expected, warmongers in both parties are content to continue funding their proxies with billions in borrowed cash. As the conflict escalates and more countries are drawn into the melee, the costs will only increase.
Summarize
As we head into the Northern Hemisphere summer and policymakers take a breather from reality, cryptocurrency volatility will decline. This is the perfect time to take advantage of the recent cryptocurrency decline to slowly increase your position. I have a list of shit coin that took a big hit last week. I will discuss them in the following articles. There will be many more token releases, but they won’t be as popular as the first quarter releases. This provides a great entry point for those who are not pre-sale investors. No matter how the flavor of cryptocurrency risk excites you, the next few months will provide a golden opportunity to add to your position.
Calling everyone to stay on the left side of the curve, your hunch that money printing will accelerate as politicians spend money on handouts and wars is correct. Don’t underestimate the desire of current elites to stay in office. If real interest rates turn positive, re-evaluate your cryptocurrency beliefs.
