Arthur Hayes: How to deal with extremely long economic fluctuation cycles?

Author: Arthur Hayes; Translator: Plain Blockchain

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

It was a crazy week. If you are a newbie and didn't fly to Singapore last week to attend Token2049, I can only pray for your soul. More than 20,000 devout believers praised God in the way they saw fit. I attend the F1 night race in Singapore almost every year, but I have never seen the city so vibrant.

Token2049 attendance doubles every year. I have also heard that some unknown projects paid up to $650,000 to speak on the stage - just for the opportunity of those small stages.

It was packed. Marquee is a club that can accommodate thousands of people. Look at this line that’s over three hours long, everyone wants to get in and join this event. Every night of the week, a different crypto project or company rents out the venue. The rental fee for Marquee (not including drinks) is as high as $200,000.

There are all kinds of activities to suit different groups of people. Iggy Azalea invited a group of strippers from Los Angeles to create a flash "experience". Who would have thought that strippers also know how to survive in a volatile market? ;)

Even this clown Su Zhu (Randall of crypto) can't help wanting to "rain". Randall, why do you look so uncomfortable in this video? Losing money is a must. When you finally turn over your assets to the BVI bankruptcy court and resolve the lawsuit, I will be happy to have you at Magic City and teach you how to play. I'm thinking of asking Branson Cognac and Le Chemin du Roi to sponsor my next party... Like 50 Cent said: title="1727433265909956.png">

Every hotel was full, even the regular restaurants. When the data is tallied in 2024, I suspect we will find that the crypto scene has generated more business for airlines, hotels, restaurants, conference venues and nightclubs than any other activity in Singapore's history.

Fortunately, Singapore is geopolitically neutral as much as possible. This means that as long as you believe in Satoshi, you can basically come here to celebrate with like-minded brothers and sisters.

The energy of the crypto community is in stark contrast to the dullness of the participants in traditional finance conferences. The Milken Institute also held a conference in the same week. If you walk around the Four Seasons Hotel, every man and woman there looks the same, wearing monotonous business casual or formal clothing. This traditional finance dress and behavior is obviously intentional. They want the public to find "nothing to see", while in the meantime, they steal human dignity with inflation. Volatility is their enemy because once things start to move, ordinary people can look through this mirror and witness the true depravity of their masters.

Today, we will discuss the volatility of cryptocurrencies and the volatility that is missing in traditional finance. I want to talk about how the elites print money to create a calm economic appearance. At the same time, I also want to explore how Bitcoin has become a fiat release valve that suppresses volatility to unnatural levels. But first, I want to illustrate a significant point by reviewing the record from November 2023 to date: short-term macroeconomic forecasts are not important.

1. My prediction accuracy

Many readers and keyboard warriors in the crypto circle often criticize me for doing something wrong. So, how did I perform in my main judgment over the past year?

November 2023:

I wrote an article called "Bad Girl". In this post, I predict that US Treasury Secretary "bad girl" Yellen will issue more T-bills to drain funds from the US Federal Reserve's reverse repo program (RRP). The decline in RRP will inject liquidity into the market, driving risk assets higher. I think the market will soften somewhat by 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 (magenta) rose 5%. Each set of data is based on 100.

This one is my win.

After reading the US Treasury’s Quarterly Refinancing Announcement (QRA), I added more crypto exposure. In retrospect, this decision was very correct.

March 2024:

In my article “Yellen or Bullshit”, I speculated that the Bank Term Funding Program (BTFP) would not be renewed due to its obvious inflationary characteristics. I argued that simply giving banks access to the discount window would not be enough to avoid another US banking crisis that was not “too big to fail”.

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

This one is my loss.

I lost money on my small position in Bitcoin put options.

April 2024:

In my article “The Heat Wave”, I predicted that US tax season would cause crypto prices to fall as USD liquidity was withdrawn from the market. Specifically, I said there would be a pause in adding any additional crypto risk 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%. Each set of data is based on 100.

This one is my win.

May 2024:

As I prepare to leave for my summer vacation in the northern hemisphere, I publish my article “A Cry for Help” based on multiple macroeconomic factors. My predictions are as follows:

Did Bitcoin hit a phased low of about $58,600 earlier this week? Yes.

What is your price prediction? It will rebound to over $60,000 and then fluctuate between $60,000 and $70,000 until August.

Bitcoin’s low on August 5 was about $54,000 due to the unwinding of the USD-JPY carry trade. I was off by 8%.

I lose on this one.

During this period, Bitcoin ranged between roughly $54,000 and $71,000.

This one also counts as a loss for me.

During the summer doldrums, I did add some exposure to “shitcoins.” Some of the coins I bought are now trading below the price at which I purchased them, and 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 on the importance of the dollar-yen exchange rate titled “Nothing Can Be Done.” I predicted that the Bank of Japan would not raise interest rates because it would endanger the banking system. This proved to be a naive assumption. On July 31, the Bank of Japan raised interest rates by 0.15%, triggering a violent unwinding of dollar-yen carry trades. I followed up on the mechanics of unwinding the USD-JPY carry trade in a follow-up article, Spirited Away.

While USD-JPY turned out to be the most important macroeconomic variable, I was wrong about the Bank of Japan. The policy response was not what I had predicted. Rather than providing dollars through central bank swap arrangements as I had expected, the Bank of Japan assured the market that they would not raise rates or adjust monetary policy if that would lead to increased market volatility.

I lose on this one, too.

August 2024:

Two major events occurred this month: the US Treasury issued the Quarterly Refinancing Announcement (QRA) for the third quarter of 2024, and Powell’s “payroll turn” speech at Jackson Hole.

I predicted that “bad girl” Yellen’s re-issuance of Treasury bonds (T-bills) would provide dollar liquidity to the market. However, after Powell’s turn speech, he confirmed that he would cut interest rates in September, and these two forces offset each other. Initially, I thought the net issuance of Treasuries would add liquidity as it would drain the reverse repo program (RRP) to zero, but then Treasury yields fell below the RRP level and I predicted the reverse repo program would increase and drain liquidity.

I didn't expect Powell to cut rates before the election and risk a burst of inflation when voters go to the polls.

I lose on this one.

After Jackson Hole, the reverse repo balance increased directly and returned to its upward trajectory. Therefore, I still think it will act as a slight liquidity drag as Treasury yields continue to fall and the market expects the Fed to cut further at its November meeting.

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

September 2024:

When I left the Patagonia Mountains, I wrote an article, “Boom Time… Delayed” and gave talks at Korea Blockchain Week and the Token2049 conference in Singapore, predicting that the market would react negatively if the Fed cut rates. Specifically, I argued that the narrowing of the USD-JPY spread would lead to further yen strength and reignite carry trade unwinding. This would cause a decline in global markets, including cryptocurrencies, and ultimately require more money printing to repair the market.

The Fed cut rates while the Bank of Japan kept rates unchanged, narrowing the interest rate differential. However, the yen weakened against the dollar and risk markets performed well.

This one also counts as my loss.

Results:

Correct Predictions: 2

Wrong Predictions: 6

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. Whether I’m down, feeling sick, or having a hard time 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.

2. Even with all the unexpected risks I’ve encountered, I’ve still made money.

1) Why? Huge Assumption

The exercise I’m performing when writing these macroeconomic articles is actually trying to predict specific events that will lead to policy responses from those of us who are corrupt and in power. We know that any volatility in the financial markets is beyond their ability to withstand due to overleveraging after the Bretton Woods system in 1971. We (meaning the puppets of traditional finance and the followers of Satoshi Nakamoto) all agree that when things get out of control, the "Brrrr" button is pressed. This is always their policy response.

If I can predict the trigger point for volatility in advance, then my confidence will be boosted, and maybe I can make a few more percentage points of profit by acting slightly ahead of time. However, as long as my portfolio can benefit from the fiat currency printed to suppress the natural volatility of human civilization, then it doesn't matter if I am wrong every time I predict the event-driven prediction, as long as the policy response is in line with expectations.

I will show two charts to help you understand the huge amount of fiat currency required to suppress historically low volatility.

2) Volatility

Since the late 19th century, the elites who control global governments have made a deal with ordinary people. If the general public surrenders more and more freedom, then the “smart” ones will create a calm universe by controlling chaos, disorder, and volatility. As the decades progress, and the role of government in every citizen’s life grows, it becomes extremely expensive to maintain the appearance of a continuous order in an increasingly complex world.

Before this, a few people wrote the definitive books on the workings of the universe. They killed or ostracized anyone who did scientific research. But when we freed ourselves from the shackles of organized religion and thought critically about the universe we inhabit, we realized that our knowledge of things is insignificant and that things are much more complicated than you can understand by reading the Bible, Torah, or Quran, etc. Therefore, people tend to follow politicians (mostly men, a few women), who replace priests, rabbis, and imams (always men, never women), offering advice on a way of life, promising a sense of security, and giving a framework for understanding the workings of the universe. But every time volatility rises, the response is to print more money and cover up the various problems facing the world to avoid admitting that no one knows what will happen in the future.

Just like if you push an inflatable ball under water, the deeper you push it, the more energy it takes to keep it in place. The distortions are so severe globally, especially for the American Empire, that the amount of money printed each year to maintain the status quo is growing exponentially. That’s why I can confidently say that the amount of fiat money printed between now and the final system reset will far exceed the total amount printed from 1971 to date. It’s just math and physics.

The first chart I’m going to show you 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 to present the picture is extremely clear.

Some may remember the tech bubble surge and collapse in 2000. As you can see, the Fed burst the bubble by raising interest rates until something broke. Volatility in the bond market rose sharply in 2000 and 2001 after the 9/11 attacks. Whenever volatility rose, the Fed cut interest rates. After volatility fell, the Fed felt it could return to normal interest rates, but then the subprime housing market crisis broke out, which in turn triggered the 2008 Global Financial Crisis (GFC). Interest rates were quickly reduced to zero and remained there for nearly 7 years to suppress volatility. Just as the time to return to normal interest rates approached, COVID hit, causing a bond market crash and a surge in volatility. In response, the Fed cut rates to zero again. Inflation fueled by the pandemic ignited the bond market starting in 2021, further increasing volatility. The Fed raised rates to control inflation, but had to stop during the non-TBTF banking crisis in March 2023. Eventually, the current Fed easing cycle began amidst increased bond market volatility. If the period from 2008 to 2020 is considered “normal,” then current bond market volatility is nearly double what those in power are comfortable with.

Let’s throw in one more proxy for the dollar amount. The red line is an approximation of total bank credit, which combines excess bank reserves held at the Fed with other deposits and liabilities (ODL), which is a good proxy for commercial bank loan growth. Remember from Econ 101 that the banking system creates money by extending credit. Excess reserves increase as the Fed engages in quantitative easing, and other deposits and liabilities increase as banks extend more loans.

As you can see, 2008 was a watershed moment. The scale of the financial crisis allowed a surge in credit-based money that overshadowed what happened after the tech bubble crash in 2000. No wonder our lord Satoshi Nakamoto created Bitcoin in 2009. Since then, the total amount of bank credit has never fully diminished. This fiat credit cannot be eliminated or the system will collapse under its own weight. Furthermore, in every crisis, banks must create more and more credit to suppress volatility.

I could present a similar chart showing the relationship between FX volatility for USD/CNY, USD/JPY, EUR/JPY, etc. and government debt levels, central bank balance sheets, and bank credit growth. While these charts are not as clear as the ones I just presented, they still convey important information. For US hegemony, volatility in the bond market is critical because it is the asset that backs the global reserve currency, the dollar. Every other ally, client, and enemy nation watches the volatility of their own currency against the dollar because it affects their ability to trade with the world.

3) Reactions

All of these fiat currencies have to go somewhere. Bitcoin and cryptocurrencies are the release valve, and the fiat currencies needed to keep volatility low will flow into the crypto markets. Assuming the Bitcoin blockchain is technically sound, Bitcoin will benefit from the elites’ constant attempts to break the laws of physics. There has to be a balancer; you can’t get something out of thin air. For every action there is a reaction. Bitcoin happens to be the most technically sound way to balance the wasteful 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 possible cost. This could mean pricing your labor in Bitcoin, mining Bitcoin using cheap excess energy, borrowing fiat at low rates and buying Bitcoin (note Michael Saylor), or buying Bitcoin with some fiat savings. The volatility between Bitcoin and fiat is your asset, don’t waste that opportunity by using leverage to buy Bitcoin that you intend to hold for the long term.

4) Risk

Profitable speculation from short-term price fluctuations is difficult. As you can see, my record is 2 wins and 6 losses. If I had gone all-in on long and short positions every time I made a call, Maelstrom would probably be broke by now. Randall and Kyle Davis are right; the elites are in a super cycle of volatility suppression. They have no patience and instead borrow fiat to buy more Bitcoin, and as the cost of funding in fiat changes (which it always does), they end up getting caught and losing everything. Well, not everything - I've seen pictures of Randall throwing lavish parties at his Singapore mansion. Don't worry though, the house was purchased in the names of his children to avoid seizure by bankruptcy court.

Assuming you're not abusing fiat leverage, the real risk is that the elites can no longer suppress volatility and it will surge to its natural level. At that point, the system will reset. Will it be like the Bolshevik Revolution in Russia, where asset holders are wiped out, or will it be like the more common scenario, where one set 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 is reduced, you're still beating the market. Sorry, nothing in the universe is risk-free. Security is an illusion, marketed by scammers eager for your vote on election day.

3. Trading Strategies

1) United States

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%. In addition, we know that bank credit growth must accelerate as rates are cut. 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 release more dollars. The government will also continue to borrow as much as it can to gain popular support, no matter who wins the US presidential election.

2) European Union

The unelected bureaucrats of the European Union are suicidal destroying the economy by rejecting cheap and abundant Russian energy and dismantling their energy production capacity in the name of “climate change”, “global warming”, “environmental, social and governance” (ESG) or other fancy slogans. The economic downturn will be responded to by even lower euro interest rates set by the European Central Bank. Governments will also begin to force banks to lend more to local companies to create jobs and rebuild crumbling infrastructure.

3) China

As the Fed cuts rates and U.S. banks extend more credit, the dollar will weaken. This allows the Chinese government to increase credit growth while maintaining a stable dollar-yuan exchange rate. Chinese President Xi Jinping'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 also print money. This week, the PBOC launched a series of interest rate cuts in the Chinese monetary system. This is just the beginning; the real "blockbuster" will come when Xi Jinping instructs banks to extend more credit.

4) Japan

If other major economies are now easing monetary policy, there will be less pressure on the Bank of Japan (BOJ) to raise interest rates quickly. BOJ Governor Kazuo Ueda has made it clear that he will normalize interest rates. But since interest rates in other economies have fallen to lower levels, he doesn't need to rush to keep up.

4. Conclusion

The moral of this story is that the global elites are once again suppressing volatility in their countries or economic zones by lowering the price of money and increasing the quantity of money. If you are fully invested in cryptocurrencies, sit back, relax, and watch the fiat value of your portfolio rise. If you still have extra fiat currency, use this opportunity and put it into the crypto market. For Maelstrom, we will push projects that have delayed coin issuance due to poor markets to start as soon as possible. We hope to see those green candles in our Christmas stockings. In the meantime, the partners of the fund are also looking forward to receiving generous bonuses in 2024, so please support them!