← Tom Bilyeu's Impact Theory
Tom Bilyeu's Impact Theory
A Great Depression Worse Than 2008 - Survive & Thrive During The New Economic Reset | Arthur Hayes PT 2
01:15:47
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Arthur Hayes
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Podcast Host
Welcome back two with Arthur Hayes, we're exploring the idea that Ray Dalio laid out that the next five years are going to be years of radical disorder. There's going to be money printing, rising inflation, we've got the potential banking crisis looming debt literally out of hand. And in this second part Arthur and I really go into what you can do in order to make sure that you get through all of this well and understanding exactly what crypto's role is going to be in all of this. Buckle up because there's a lot more to cover in part two with Arthur Hay. Okay, so that makes investing sound easier than I have experienced it to be. So the way again saying very clearly nobody should take investing advice from me and I mean nobody. I am still grappling to understand this stuff but when people do ask me, hey Tom, with your limited understanding of investing, what do you advise that I do? My thing is always you're gonna lose if you try to trade. So don't try to trade meaning actively like I'm in there, oh I got just right and I'm trading in the morning, in the afternoon, like you're going to lose guaranteed. What I would tell them to do is pick the most diversified bundle of whatever, whatever. So whether that's S and P or you said AI growth stocks, I don't know if you consider that high volatility but something that where it spreads your risk that is commensurate with the amount of knowledge that you have. If you don't have a lot of knowledge in it then I would go very broad and I would be very careful and I'd be trying to get as close to Ray Dalio's All Weather fund as humanly possible. Something that's going to perform 4 or 5% no matter what happens. That's when you're ignorant like me. That is the, the thing that I would push people towards. Do you agree with that? When people don't know and do you agree? If you're going to get into something that's high volatility, you should only do it in an area that you, I
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Arthur Hayes
think you need to define your time span. I think a lot of people think they're like, wow, I see this person on TV or TikTok or Instagram or whatever and they went from zero to hero and you know, five trading days they made all this money. So I should do the same thing. Like if you're not willing to dedicate 24. 7 of your life energy looking at a screen, then you should not be trading on short time frames. So what does that mean? Don't use leverage. Open up the, the, the, the options trading account or the futures trading account. If you're not willing to put in the work to sit there and trade. Now obviously I have a large ownership in a futures exchange. I'm not saying don't use my product. I'm saying if you are going to be a day trader, then be a day trader and dedicate yourself to doing it. Don't work a day job, think you're going to come home at night for two hours and just trade yourself into, you know, quitting your job, right? It's, it's a profession that, it's a dedication. You can do it, but be willing to put in the work to do it. If you're not willing to put in the work to do it, then you know, broad based indices, you know, different things, whatever you understand collectively, okay, I want to own stocks. I don't really know what, okay, well my country has a particular index, right? Everyone's going to be like, you're going to be on this buying the same thing. It's a question of taking that index and combining it with the brakes. That's the point. To be able to both participate in the general rise in and asset prices but not care when it happens. And if you can construct that portfolio, then you can sit at home and not worry about it.
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Podcast Host
Not worry about it. Meaning you need to have patience for when the moment is actually right. And if you've deployed capital into long term things, you're not going to be able to take advantage of the moment when it comes.
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Arthur Hayes
Or if you've basically thought you're going to day trade yourself out of this and you're staring at the screen all day and you're not willing to put in the work to actually be a good day trader, then you've squandered your opportunity versus saying okay, I don't know when the timing is going to be, but I know that I have thankfully to these relatively higher interest rates, I have the ability to both earn some income on my excess cash and deploy a small amount of cash into highly, what I, what I believe is highly volatile things, whatever that is for you. And, and that can allow you to sit there and patiently wait for the inevitable math to catch up with the bad politics.
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Podcast Host
Okay, so let's run through what you said. Is your likely scenario that three to six months something bad is going to happen, it's going to cause a ton of money printing. But I'm guessing in the money printing is when you're saying we're going to have this sort of jubilant moment where everybody is feeling flush and I forget the, you said it's going to be some huge moment, I forget how big you were saying, but it's really going to be wonderful. And then it's all going to lead to something like the Great Depression. How do we ride that wave and that crash so that we do well in both moments when the money printing starts, we want to go to high volatility. That's the play.
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Arthur Hayes
Yeah. So my sort of mental mind cap now is I think the biggest trend in. So you always want to own the new tech thing and the bunting, bitching bull market. So if you look over history, the new tech thing, it's been railroads, it's been radios, it's been computers, it's been the Internet. Right? Every single money printing cycle has a new technology that's going to fundamentally alter this modern civilization that we've had since the Industrial revolution in the mid 19th century. And therefore we all need to be in that because the way we exist as humans is going to fundamentally change. And yes, that's true in a longer term perspective. However, there's a mania that happens. So the mania this time around is going to be AI. Right? ChatGPT has been the fastest growing technology adoption ever in human history. Went from, I don't know, 0 to 100 million users in however many days it was. It's fast as ever. So we are all in on AI. And you can look at Nvidia and some of these other, you know, AI related stocks and they do not give two fucks about this banking crisis, about the debt overhang. The population issues are going straight to the roof, right? Because everyone's like, okay, I know AI on a, on a long term basis, fast forward today is going to completely change what it means to be human, what the human economy is or isn't. And I want to Own the next Google, Facebook, Amazon, Alibaba, ByteDance. Right. I want to be in that company. And so I'm going to start trying to find anything that's related to AI and pumping money into it. So on one hand, we have the most amount of money that's ever going to be printed in human history to try to save the global Keynesian bond market of all these governments and we have the newest technology that has the fastest adoption ever in history of a technology. We're going to combine those two. We're going to get the biggest tech boom mania that we've ever seen. And it's going to be predicated on anything related to AI and artificial intelligence. So for me personally, I have a portion of my portfolio that is predicated on AI. I actually am one of the largest shareholders in one of the largest sex doll manufacturers in the US that has robotic sex dolls.
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Podcast Host
I did not see that coming.
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Arthur Hayes
I think we actually plan on going public at some point. So that company I think is going to do very well in this boom. On the crypto side of things, I've been making the case that artificial intelligence economic agents inherently need decentralization and therefore they should be using Bitcoin for money. They should be using Ethereum for smart contracts and governance daos, and they should be using filecoin for decentralized storage. I own all three, whether it's mining companies in filecoin, filecoin itself, lots of Ethereum. I have my family office. We're investing in decentralized architecture technology that's going to power the growth and decentralization in the future and obviously have a lot of Bitcoin. Right. So I'm all in on, number one, AI in the traditional sense, AI robotics. And I'm all in on the intersection of AI and crypto on the technology front, because this is the mania that is going to captivate investors to take that money and to funnel it somewhere because they're not going to be buying companies like General Motors. I mean, maybe it'll go up, but that's not going to be where the zeitgeist of the world is. It's what is AI. The governments are printing all this money. It's got to go somewhere. It's going to go predominantly, in my opinion, to AI listed companies, venture capital funds doing AI investment. So it's going to be absolutely insane because we're combining the most money amount of money printed in human history with the most disruptive piece of technology to what it is, it means to actually be human and interact in this universe. And so it's going to create fantasies of growth that will never happen in the timeframe that they say it is, but we're going to believe it as a collective investment public which is going to drive that. So that's my super volatile segment that I want to participate in. And then on sort of the boring side, I will continue to move money from the high interest earning money market funds and stuff as rates start to come down, but I'm not going to do it beforehand. I'm going to wait for them to tell me. And usually, unfortunately, right after the Fed or any other central bank is printing money, there's usually some sort of financial crash because the reason they're printing money is something bad happened. So it's not as if they start printing money and things just keep going up further. Things usually went down a lot. Something happened, they said, oh, should be the print money. They print the money, then things go, they retake that level and then they go higher than that. So it's a mistake to think that just because we're investing now. Yes, if you have a long enough time frame, you should make money if they print enough of it. However, it's very path dependent. So instead of trying to time the market, just wait for them to tell you about it. They're going to tell you, but why not just earn 6% on your money market fund? Just chilling. So I'm not trying to time when it's going to happen. I have a mental model, I'm getting prepared, I'm making sure that we're ready to make investments and identifying the things that I think are going to do very well from a macro perspective and a thematic perspective in terms of where I think the investment public is going to focus on. But I cannot predict the timing and nor do I want to lose money because I try to be too cute and predict when you know something's going to happen, where exactly it's going to happen in the financial system.
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Podcast Host
And so when you say that they're going to tell you, meaning we're going to print money, we're raising rates, we're lowering rates, whatever the case may be.
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Arthur Hayes
Yeah, they're going to come out and say, oh, because something happened in the financial system, we have now lowered rates of this, we've introduced that program, whatever it is. Right. It's very transparent. Regardless of whether it's the Federal Reserve, it's the pboc, it's the European Central bank, it's a Bank of Japan, bank of England, they're going to tell you exactly what it is. Because what if they want you to do, the market's already fallen, they want you, the investing public, to gain confidence to go and buy stuff. So they need to be very clear about what they're doing. And the question is whether or not you believe them or you're just going to say, no, no, no, I'm just going to stay in this very, very safe thing, it's fine. But on an, on a know real basis, you're probably not going to make the money we'd like to make before we get, you know, judgment day when things go down a lot.
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Podcast Host
Hmm. Okay, so if we know that the market prices in the things that it already knows, you have to be betting against the consensus and being right. So what would a well intentioned person who disagrees with you say to what you're saying right now? Because if it really was that easy, everybody watching this video would just do that and they'd make out like bandits. But of course it won't play out like that.
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Arthur Hayes
The consensus says that we're going to have a soft landing, that these few men, mostly men, very few women, have somehow divined the business cycle and thus can print just enough money and raise rates just enough. And the inflation rate of the world is going to come down just to the level of 2% and the employment is going to stay the same and we're just going to go along and be nice and happy. That's the consensus, that these guys know exactly what they're doing and they got it. So which means you don't need, you don't need to sell your stocks, you don't need to sell your boss, you don't need, you just, just sit tight and keep adding more because there's not going to be any financial disturbance because they have it right. And inflation is going to trend down right to their level exactly at 2% and it's going to be amazing. That's the consensus. So if you don't believe that, then you believe something on either extreme is going to happen. Either rate's going to go up really, really high or some financial disturbance is going to happen because they keep raising rates and force them to go right back down to zero. And so my thesis is that when you have 360% global debt to GDP, you no longer have situations where things happen in a calm fashion. You go to the extremes very quickly. And so to think that all of a sudden less than 100 people are able to determine how this global economy is going to somehow soft land after printing the most money that we've ever printed in human history and gone from 5000 year low of interest rates rising the fastest pace ever and in financial markets, then you're, you know, that's a bet that I'm not willing to take.
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Podcast Host
Do you know Chamath Polihopitiya?
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Arthur Hayes
Yes, I know Chamath.
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Podcast Host
Okay, I could be misquoting, but I'm almost certain this is correct that he, he was saying that, you know, people make such a big deal out of this 130% debt to GDP. But he It's a big nothing burger, it doesn't really matter. There's no law of physics that says that we can't go over it. So even though historically that that's been a sign that has led to collapse given the modern economic theory. And I'm so this is how I remember it. Oh God forgive me Chamath, if I'm way off, but that, that was my takeaway. So other than, it's very compelling to me that we have all the historical examples that say every time that we do this it leads to collapse. But what do you, if you were to take his stance for a second, can you see how maybe it is possible that we get the soft landing, that they do get it right. That that isn't some magic, you know, thing like the speed of light. It can be crossed and people can still come back from it. And I think you would say that. Well, I'm just gonna, I'm gonna listen to what they say anyway. I'm not gonna make a move until I actually see it happening. Yeah, give. Could he be right?
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Arthur Hayes
I would say we're investing is a game of probabilities and expected values. So if Chamath is saying, okay, there's been umpteen other examples where this has not been the case, but this is going to be the one example where the markets just keep grinding a bit higher. Okay, then you're taking a this is this time is different mentality. And every single time there's been a this time it's different whatever aspect of the financial markets, right. The problem is you're not just getting, you're not getting paid enough for this time is different. This time is different means S and P goes up, I don't know, 4 or 5%. Right. I'm making 6%, sitting my money in cash. So why bet on this time is different. If I can earn the majority of the excess return of stocks by literally just putting my money in a money market fund and I have no risk The Federal Reserve is going to pay me that money. Why take the risk? This time is different because usually it's not different. It's the same as every other time. But there's. So I'm not getting paid enough to be this time is different. That the only way to get paid enough is to add more leverage which increases your risk. I'd rather take. Okay, well the everyone believes this time is different, therefore I'm not getting paid enough for it. But the other alternative which is it's the same as it's always been but I get paid a lot more money to be in that camp. I want to go there and on an expected value basis I'm going to make more money over time. Why not? If you believe in chamath, just put your money in the money market fund. Don't buy any stocks. Why would like the S and P part from Nvidia and Facebook and Google and those seven big stocks has not beaten return on cash. So either put your money in cash and go in AI stocks believe this time is different or just put your money in a money market fund. There's just no point to take the risk on the general market for this time is different because it's never different. It's always been, you know, this time is different gets clobbered.
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Podcast Host
Other than the AI high volatility stuff, do you have anything deployed in the stock market right now?
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Arthur Hayes
Uranium. So I believe that we're finally going to get our, our shit together and somehow believe in nuclear. And there's been vast underinvestment in uranium refining capacity. And as the world moves to nuclear and maybe the, the west decides that they want to be dumb and not do it, fine, but China's going nuclear, India is going nuclear, Saudi Arabia is going nuclear, the rest of the world's going nuclear and there's just not enough refined yellow cake to go around. So you know, uranium mining companies in certain jurisdictions are going to do very well. And I'm in a large and well, not large. It's my largest equity position is Kiko Mining CCJ. It's up, I don't know, 80% this year. So that's something that I believe in as a longer term energy play.
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Podcast Host
Okay, so understanding now then the way that you're deployed. I want to talk about euphoria. So I never experienced what euphoria at the humanity level looked like until the 2021. 2020, 2021 crypto rush. It, it was really fascinating to watch it. It was great and it felt a certain way. So I certainly know now what to look out for in the ether. How, how do you think about as a disciplined investor, how do you think about euphoria? I know you're planning it into the AI, like hey, I know people are going to get there, stimulus checks or you know, the bailout. However we want to categorize it, they're going to put it into whatever is the hype thing at the moment you're expecting that to be AI. How do you know? Because I'm assuming you're going to get in, probably not try to time the top perfectly, but you're going to get in, you're going to get some level of gain and then you're going to come back out. I would assume if we're talking about euphoria, because euphoria is, I would say, quite irrational and we know when that clicks over. I would now be fearful when others are greedy and greedy when others are fearful. My now honed instinct for that would kick in.
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Arthur Hayes
So I think euphoria in my perspective is the willingness to invest in illiquid things that have a beautiful long term future. So the problem with AI is that to get liquidity in my cycle of time, which is 2026 timeframe, you need to have been investing three, four, five years ago, right? Because it takes, if you talk about equities, takes five to seven years to go IPO for a company. So if you're putting money into a series A startup today, you're not going to see any liquidity until 2030, you know, time frame, well after the bull market. Even though on paper your thing might be up, you can't actually sell it because it's not liquid. Now obviously I do a lot of cryptographic token investing and stuff. Again, if I'm signing a term to you today due to lockups and whatnot, I'm not getting my tokens until maybe 2026, 2027, which might be a little bit too late for me on the cycle time perspective. So to the extent that I can, I want to participate in my theme which is AI and crypto in a way where I have liquidity by 2025 and 2026. So that when I get the feeling and you're going to see something, I don't know what that something is, whether it's just something that looks mispriced, like, I don't know, FTX has Tom Brady and a basketball stadium, right? This exchange that never existed two years ago now has a, you know, has a logo on top of in Miami. And you Know Tom Brady, when some, some would say the biggest American football player ever is now stumping for them on tv. That looks a lot strange, right? There's going to be something that looks a bit strange that's going to tickle your mind. You're like, huh, that doesn't make any sense. Maybe we've gone too far. When you get that sense, you want to be able to go to your portfolio and liquidate things. Now the euphoria is that I believe that, you know, AI is going to be such a transformative thing that I'm willing to give somebody some money, not see it for a very, very long time and not be able to, to liquidate it at all. And therefore you're going to get caught off sides when the market all of a sudden goes okay, well show me the growth. Show me how you're going to generate enough earnings to pay me back 100 times earnings. Nvidia. Show me all the people willing to pay real money for these AI solutions. Show me how your startup has any defensibility against OpenAI or Bard or any of these other large initiatives that could essentially just, you know, disintegrated your little plugin on top of their large language models. Show me the money. When the market starts saying that and you can't liquidate, you're wrecked because then the market's going to start asking the question of where's the revenue, where are the users? Or where the users that are actually willing to pay real money for, for the product. And that's usually the end of that particular bull market and things just start falling to bed because there's just no liquidity and people can sell what they can. And so and the game is up now, obviously out of the wreckage comes your Amazon was down 90 something percent from high in 2000-2002 or whatever it was, and then rockets up multiples of what it was worth. But the majority of us are not going to be able to find the Amazons. We're going to be finding the pets.com and so that's the game. So it's trying to try to invest in the theme and the liquid vehicles available and not getting caught up in the hype and putting your money into illiquid fix that you can't sell when the mood turns.
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Podcast Host
That's really interesting. So with your AI stuff you're planning to be in a position where you are liquid by the time that that euphoria peaks. You see the FTX moment and you exit. So you've this isn't Something where you're going to wait for that first moment where they say, okay, we're printing money, and then you're in. You're already deployed in some of the places that you're expecting to be ready to go at that time of euphoria.
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Arthur Hayes
Yeah. So thankfully I have the capital position to do that. Right. I can pay my bills with my income from stuff. Right. So I can actually be a little bit more early and raw on things because they don't need the money. But for somebody who does need the money, you're not going to have that opportunity to have invested in an AI startup or some crypto thing years before and now receiving liquidity at the top of the market. You're going to have to be very disciplined to participating in the things that, you know, you can buy and sell on a day's notice and not get suckered into. Your boy down the street, he's got this new AI thing he's been cooking up and why don't you lend him some money or invests in his. In his startup and in seven years he's going to go ipo, Right. That's what gets you in trouble.
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Podcast Host
Yeah.
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Arthur Hayes
You can buy the liquid stock and it goes on 90%, but at least you can try to sell it. You can't sell the term sheet. It's. That's where people get in trouble. It's buying the liquid stuff. That's predicated on the theme continuing forever.
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Podcast Host
Okay. So that is the first part of the wave. Everything goes up. Looks like it's going to last forever. But then we get the big explosion, we lead to something like the Great Depression. How does that party end? Just all the money got poured into the new hype thing. Let's say it's AI and what makes the music stop?
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Arthur Hayes
Well, if we've already built up, if we've already printed money to do yield curve control and the system is still buckling, whether that's the price of oil is a thousand dollars a barrel now or something like it's going to be some energy component of it that or you know, the cost of end of life care is millions of dollars. Right. You can't print health care, can't print oil. Right. So these are the things that are going to go up massively in price. And then the system just breaks because people are like, holy. Hold on a second. Like, yes, the government bond yield is 2 1/2% in the banking system is solid on a nominal fiat basis, but it cost me $10,000 of fills. Like my gas Tank. Speaking of obtuse here, right? And then there's social unrest because I can't get enough to eat or you've broken the promise of the. The lifestyle that I'm supposed to live being in this country. I was promised to vote for you and I'm no longer going to be there. And then it's okay. Well if I don't have it internally, let me go out and get. Get somewhere else, right? Oh, don't worry everybody. We're going to go over there and take their and give it to you. So support me as a politician, right? And trade no longer becomes the way in which we acquire the things we need. We resort to force and then that's unfortunately how we lead to conflict. If you work in university maintenance, Grainger considers you an MVP because your playbook ensures your arena is always ready for tip off. And Grainger is your trusted partner, offering the products you need all in one place. From H vac and plumbing supplies to lighting and more. And all delivered with plenty of time left on the clock. So your team always gets the win. Call 1-800-GRAINGER visit grainger.com or just stop by Grainger for the ones who get it done.
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Podcast Host
Okay, so is to. When you look at that, is this a US China conflict? Do you see that going um, hot.
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Arthur Hayes
Hopefully not. I mean maybe it's. I think it's. I forgot I can't pronounce her last name. Pippa M. Something or other. She. She coined the phrase a. A hot war, a world war in cold places, cyberspace, the Arctic Circle space. Right. There's wars going on right now in these different spheres that are not the same as boots in the ground in the kinetic conflict. What's more important today? Owning territory or owning your citizens data? Right. So there's different things that we consider important in the substrate to our modern life. So if we are in this new AI world, your data is more important than going out and acquiring territory. So it might be that the war is not shoot them up on some border, but it's aggressive hacking between different Countries trying to ensure that they have access to certain Data or their AIs are able to operate in certain fashions. Right. So we don't. It could be a different type of war, not exactly the same war that, that we're used to. Maybe that's even more dystopian. I don't know. I'm hoping that we don't, you know, get into. I'm just going to go take your shit and you know, maybe get to the nuclear situation. But again, whatever it is that countries believe is the, the, the good that they need to provide to their people to stay in power, they're going to try to go out and tickets with somebody else.
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Podcast Host
All right, I'm going to set aside the most dire stuff largely just because I hope it doesn't happen. And two, I don't know, just like the best thing so rarely ever happens, I think the worst thing so rarely ever happens. Not that it doesn't happen. I am certainly a student of history and am well aware that things do actually go off the rails. But let's take a scenario where we don't end up in a hot war, but we do get that rubber band snap effect. We just printed too much money. Gas tank is way too expensive to fill. We do have the social unrest. Government does lock things down, put in capital controls. We do more silly things like sanctioning countries and so they're terrified of buying our debt and we just end up in a position where other countries are incentivized to begin to break away from the dollar. Do you see a real threat to de dollarization? And if so, how does that impact the average person?
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Arthur Hayes
So de dollarization negatively impacts the financial elite of America. It could have zero, if any impact to the average American. Because I've argued in some essays that the current system of the fiat financial system that works in America doesn't really benefit the average American. It benefits New York and San Francisco and la, right? Essentially the coast. People who are in finance, people who are in tech. America as a place is a great landmass. It has enough food to feed itself, it has enough oil. US is either number one or number two. Largest oil producer in the world, right?
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Podcast Host
I think number one, which I was
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Arthur Hayes
surprised, it's protected by two oceans and Canada and Mexico, you might as well just call part of America, right? And if you count the Mexican population and growth in terms of their demographics, America actually can hit the replacement rate of like was it 2.05 kids per. Per. Per woman, right? So as a economic unit, America is unique in that it could become an otarky and it basically was until World War I. And so it could go back to that place. But the current crop of people who are in power would lose standing in that sort of situation, which is why they continue on carrying them out what the value of the dollar is because their wealth is international companies where half the business is abroad, where the workforces in China, Vietnam, wherever. Right. It's not in America. So de dollarization is, you know, pointed at this big thing and America needs to protect the dollar, but for whom? It doesn't actually benefit. The manufacturing worker, the uaw, you know, union worker or the UPS truck driver. Right. I mean, so it's, it's a question of what the political system is there to benefit. Who is it there to benefit? And so America and the de dollarization, it's you know, banning about that's a super bad thing. And yes, it's bad for some people who are tied to the fiat financial system and that's where their wealth is. But if you want to think about it from the average American person, made in America is great. Wages for the bottom 50% rise. They have better purchasing power. Yes, stuff is more expensive, but at least they're able to get it. There's lots of parts of the world and Europe is probably the most fucked where they don't have population growth, they don't have energy and they don't have enough food. That's where you probably could see a big internal conflict again as the edifice of the Euro crumbles where these countries don't want to be tied to a bunch of faceless bureaucrats in Brussels who tell them what to do.
- [32:26]
Podcast Host
Do you see that as a real concern? I didn't realize that Europe was higher risk.
- [32:32]
Arthur Hayes
Yeah, I think Europe is higher risk because yet it's dying like the rest of the western world. It doesn't have energy security, it doesn't have food security. I mean most of productive region of Germany was powered by Russian gas. Right. The Ukrainian breadbasket helps feed a lot of Europe. Right. North African oil and natural gas helps keep things running in most of most of Europe. And so removing those things you're sought the Euro's, it's a poor, it's a construct. You know this, I'm quoting paraphrasing macro guide Felix Zulof. The Euro was created to keep France strong in Germany weak. And it's, it's a tempting to paper over these differences in economics with this structure that just doesn't work. And it'll come to a head when all of a sudden there's just not enough stuff to go around. And Europe's traditional trading partners are like, well, if you're going to be aligned with the US then we're no longer going to sell you stuff on a preferential basis. There's no longer any Russian gas, there's no longer a bunch of West African countries willing to sell you stuff cheaply. We're just going to let you figure it out yourself. And what's the answer? Print more money. But again, with the euro perspective, you have a bunch of countries that think that they, you know, are some sort of democratic, you know, polities and the population might be why we have the hero anymore, but there's obviously an elite that likes the hero and that could come to blows.
- [34:10]
Podcast Host
Okay, so I've talked to Ray Dalio several times and one of the things that I'm asking him routinely is because he sees so much disruption coming, what do we do about it? Where do we go? And he keeps drumming this idea that what matters is how people treat each other. And he said, you want to be somewhere where people are treating each other well, there's rule of law that you can trade. What is the move? And is this how crypto enters your thesis? What is the move if the Western world does get dramatically disrupted, either hot wars and cold places or capital controls, so the government is trying to lock things down, yield, curve control, they're just doing all of those things to continue to prop up the system. What's the play is you obviously are American, but you do not live in America. Yeah. How do you think about that step? And is cryptocurrency part of that?
- [35:14]
Arthur Hayes
So the easiest thing right now is to protect your, your financial wealth. Right. For the first time in human history, we have a financial system that is not predicated on government violence. That is crypto. It's an opt in violence, free finance, free coercion system where I can opt into this, this bitcoin blockchain based financial system. And now I have a way to transact with anyone around the world on an honest, transparent, open source basis. And I can escape the fiat system with as much or as little wealth as I deem appropriate. Right? So now I have the ability to take my wealth outside of the government system. And unlike gold, nobody knows how much crypto I have. I can store my crypto in my head, I can memorize my private keys and my, my seed phrases and restore any of my wallets. And not that I do this, but you can do it if you, if you're good at that, so you can hold as much wealth that you could in Fort Knox in your head. That's absolutely revolutionary. And so that's how we have the financial freedom, if you choose to use it. And so once you obtain financial freedom, then it's about, as Balaji says, choose your tribe. Whereas a place that has the same ethos as you has a good food supply. The weather, you like the weather, but most importantly, you like the community of people who are there. And there's no prescriptive of where that is. That's very personal. Maybe it's where you are right now. And the only thing you need to do is obtain your financial freedom such that if the borders close and whatever, you're cool. You're able to maintain purchasing power and energy terms. But you're around a community of people that you like and love. So I think, yeah, the community aspect, a very personal one. There's no one right place. The financial aspect is if you have the ability to do so, get your financial freedom for the amount of capital that you wish from the fiat financial system. If you believe in the thesis of me and others and that the math is going to collide with bad politics, then now have financial freedom, which gives you the ability to move if you want to or not want to.
- [37:16]
Podcast Host
So the thing I think a lot about with this is timing. I'm obviously a big believer in crypto, but I really don't want to leave where I'm at. And I'm. Not only am I in America, which does not strike me as the most crypto friendly place, I'm in California, which is definitely done some legislative things that I have found questionable. But man, I don't want to leave. So is that, is that how they get you like that you just wait until it's a little too late? Or did that play into your decision to move out of the U.S. no,
- [37:56]
Arthur Hayes
I moved out of the U.S. because it's just not a place that, you know, resonates with me personally. Right. I love being in Asia. I love the people, I love the culture. Yeah, just, you know, my place, the economic opportunity, all that kind of stuff. Right. For some people, America's great and that's fine. It's a very personal thing. But yes, there's a lot of inertia. Right. We with people and money, they understand how this monetary system works. Bitcoin didn't exist 20 years ago. You're really going to take your hard earned money and you're going to put it in magic Internet money with a bunch of people with like, pudgy penguins and crypto punks as like avatars who are like, debating macroeconomic policy on Twitter and other social media platforms. You might think these, you know, we're a bunch of fucking clowns over here, right? And so, like, why would I, why would I trust this financial system versus the man and the woman in a navy suit with a Hermes tie and a pair of Louboutins on, right? And so it's all these things that factor into whether or not you trust the financial system or not. Again, very personal. But the unfortunate part is that most people aren't taught the math. They don't understand how a bond works. They don't understand how a bank creates and removes credit from the system. They understand why mathematically this, this cannot continue the way it's, it's going and that there will be a reckoning. And history has told us the exact playbook they're going to use. It's not as if they're hiding it from us. There's paper about paper written about exactly how to financially repress a population to make sure money doesn't leave the banking system to use the banking system to purchase the government debt at a level the government can afford, that is below the level of growth in the economy, such that the government profits. This has all been written about. You can read it on the Internet, but most people are too lazy or too distracted or they work a job and they're just too tired to open up a book and read. But it's all there for you to read. And if you read it all, you'll understand very quickly that the situation cannot continue and you have to do something. And that something depends on your financial position. Obviously, I'm in the position to put a lot more of my wealth into crypto and not care too much where the price goes. Maybe you're not. The, the most insidious part of inflation is that the poorer you are, the harder, the more percentage of your income is spent on energy. Therefore, the more inclined you are to become a degenerate speculator because the little bit of money you're able to save, you need to lever up so much just to make an impact on the depreciation of your wages versus the cost of food and fuel, that you make bad choices. Especially if you're not educated about what these financial markets are, because that's been essentially government policy globally is to keep people in the dark about how money works so they can blindly trust the supposed person in Power, Yeah, that's something
- [40:42]
Podcast Host
that I heard you say that really hit me, which is that inflation makes a speculator out of all of us. Speculation is the one thing that really I find super unnerving that I, to me, speculation and gambling are basically the same thing. Like people are just taking a guess. How is it though that people cannot understand the system and yet still feel the force that compels them to be a speculator? Is it that they're looking at their wife and their kids and they're like, I'm only going to get a 2% raise but I can feel that that's not enough. Like I don't even know if they like it doesn't seem like they would think through all of that. So what is the instinct that kicks in that makes people speculate?
- [41:22]
Arthur Hayes
Because I want to. I know I can't earn my way out of this. I can work as hard as I want, I can put as much overtime, but I'm only going to make so much money per hour, period. But I watch the TV and I see the successful, mostly men, driving a fancy car, has a nice clothes, whatever. And six months before he was on the street, whatever the story is, it's, you know, Horatio Aler, you know, rags of riches, very little effort. There was this thing I did, it was trading stocks or whatever it is, right? Usually it's financial markets because things move so fast and you can apply leverage. And yes, there are people who have done that, but the majority of people who try that fail because it's very, very difficult to do. And so you're desperate. You're like, I know I need to uplift my economic earning potential, but working my job in my lane, I can't do it. It's just impossible. I see myself losing day after day after day. I see my, my family having a lower standard of living day after day after day. If I could only pick the right stock, if I could only predict where, you know, the yen euro crosses go on 200 times leverage. If I could only hit black five times in the roulette world, if I could only, you know, go to the casino and play crap, if I can only. And then we spiral out of control.
- [42:45]
Podcast Host
Yeah, it's interesting, the idea of creating a financial system that people can, and I'll use my words, that people can bet on to create capital to move capital into the system. So if I'm a company and I'm trying to grow, I could say, hey, who would like a piece of this? I don't even have to offer A dividend, like dividend stocks, I understand, because they actually you're getting profits out of the company. That makes all the sense in the world to me. When I was first, when I was in my 20s, trying to wrap my head around the stock market, I was like, okay, so wait a second, some of them are baseball cards and some of them are dividend paying stocks. That was like, that just made sense to me. I was like, okay, well sure. Like if this thing which does not pay me a dividend, but if I can get somebody to pay more for it, to own it for whatever reason than I can, which is that they think somebody else is going to buy it from them, now all of a sudden that company has access to capital. I see, well that's good. I have a chance. If I can actually sell it to somebody, then okay, that makes sense for me. I'm able to make more money. I mean it's really a genius system. But hiding inside of it is the greater fool theory of, well, wait a second, if the stock isn't paying a dividend, then if no one else is willing to buy it for more and the number is not always going to go up, I mean it's never always going to go up, but it can go up for some companies for a very long period of time. But it's really ingenious. But yeah, that the, the element of speculation, the element of I have to, the element of I don't know what I'm doing but I'm going to YOLO in anyway, it all makes me very nervous. So one thing I hear people say a lot is crypto is your exit from that system where, because it can't be inflated. And this is the thesis with Bitcoin. And again, stop me if, if I go awry. Bitcoin has a finite supply. Going back to one of the things you said very early on is that it's risky stuff, but it's a fixed supply. That idea of it's a fixed supply, there's only 21 million of them, they're not going to be any more made. They can't be more made cryptographically. So and therefore if everyone agrees that it has value and I put money in that, then that money should maintain its value because it's not going to get inflated away. But is that really an exit from the system of having to speculate or is it just another bit of speculation?
- [45:19]
Arthur Hayes
So you can speculate in crypto? Absolutely fucking lutely. There is all you can speculate in Bitcoin itself, right? You Know, you put a lot of your wealth in it and it's very volatile. It goes up and down a lot, right? So when you're moving yourself out of the speculator category, if you're putting up a certain amount of money into crypto, for example, and you say, I'm going to assume this goes to zero and I'm not going to care, then you're not speculating, Right. You're speculating on a future, but again, your lifestyle is not going to be impacted like the, the mo. The worst part about speculating is I need this to go up because I need to buy my dinner tonight. Right? And so that is when you get into dealing the problems. But yes, speculating on more human, you know, humanity getting into a new system and that system being worth more because there's a bigger community, fine, but just choose the size. It's all about sizing. No one knows the future. We're speculating every second of every day, every step we take, Right. We're speculating on things. We have informed historical experience to say that this thing is less risky than the other, but none of us know what the future holds. We're always speculating. The question is the size and the risk. Right. Don't put your whole net worth into crypto where if the price goes down a little bit, you can't eat. That's not smart. Seems to put your money in the s and P500 or, or some other stock indice and go long too much. Where if it goes down 1%, you can't eat. Right. Again, it's all about creating a system that works for you and where your financial position is in life. And if you do want to go into the super leverage speckling aspect, make sure it's a pot of money that you could afford to lose.
- [47:07]
Podcast Host
What's your thesis on crypto? Why do you think that it's going to be here for the long run? It's been around for 12 years, 13 years, something like that. Obviously it's done well, but that's a pretty short period of time. What is the thing that gives you confidence that it's going to keep mattering?
- [47:27]
Arthur Hayes
So it's a financial system that's gone from zero, right. First J's block in 2009 to a system that has weathered multiple crises. Right. In the most recent, we had one of the largest exchanges in the world, much of the largest lenders, some of the largest hedge funds, massive amounts of fraud. All this happened in the span of six months. People lost hundreds of billions of dollars in value. Yet blocks kept being produced every 10 minutes for Bitcoin, 10 seconds for Ethereum and whatever the blockchains are for a lot of other currencies, the decentralized finance or defi movement, people were still trading on decentralized exchanges, people were still borrowing and borrowing and lending different currencies on some of these lending platforms. The financial architecture worked even though we had one of the biggest losses of wealth and biggest amounts of financial malfeasance ever in the crypto ecosystem. And I mean if you want to compare the amount of money that know Sam Beckman Freed and his crew allegedly stole from their customers, it would rank it one of the largest thefts, financial frauds in human history. Right? All this happened. There was no bailout, there was no central bank that said we need to preserve the system. And therefore if assuming they could print a bunch of Bitcoin or Ethereum or whatever and make sure these entities are made whole so that certain people don't lose any money, none of that happened. People lost a lot of money. But the architecture of the system worked. The community was still there, people are still shipping code. I was just at token 249 in Singapore, the energy 11,000 tickets sold, sold out. You know, basically almost took over the whole of Marina Bay Sands Convention center for this conference. People around the world believe in this system. There's some of the smartest people in the world who I've ever met who are building this system. You know, you take a look at what's. Who are the smart people in the, the scleric financial fiat system. A bunch of muppets, right? They're there because they've always been there. Not because they're special, not because they're inspiring. So they're not building anything new, they're trying to keep the old thing relevant. And so that's why I believe this is going to have staying power. Because the math works, the cryptography works, but most importantly, the people are so impressive and so I'm dedicated and so enthusiastic about what they're building. And I've worked at a bank too. There was none of that energy working on working in the traditional financial system where they're punching a clock, earning a paycheck and trying to take as much risk as possible so we make a little bit of money so we can get the fuck out of there.
- [50:17]
Podcast Host
Okay? But there is a question to be asked which is there's regulation for a reason and that the average person, I mean, look at ftx, the very thing that we're talking about it's very impressive to me. And again, I want to say I, I am a big believer in crypto for a different reason than you, which is interesting but, but at the same time I want to face head on the things that strike me as worrisome and this may be a feature and not a bug and we may all just have to wrap our heads around it, but they're the amount of regulation that's in the tradfi world is pretty extreme. Now I will admit the first time I realized that just because I had over $1 million that I was suddenly
- [50:58]
Arthur Hayes
a
- [51:00]
Podcast Host
God, was a qualified investor is not the term, but that I was now accredited, I was an accredited investor and I was like, but wait, I don't know anything more about investing money now I know how to make money, I don't know how to invest money. And so I was very shocked by that. Just seemed stupid that you couldn't pass some sort of test and be able to thing. But at the same time there are people get their wallets drained constantly in crypto people. The amount of malfeasance just in FTX is just absolutely bananas. And either crypto tends to attract those people or the current lack of regulation just creates the, the incentive structure where that's what's going to happen.
- [51:46]
Arthur Hayes
One, one thing to jump in there is FTX was regulated in, I don't know, however many jurisdictions around the world. They had licenses all around the world. Right. So the notion that regulation would have stopped the FTX is patently false. They were highly regulated. Not highly, not as regulated as a bank, I wouldn't say. But they did have regulators around the world that had given them licenses and they were supposed to do things in a certain way. Right. If you want to take the other example, like let's take a look at Credit Suisse and they didn't steal you with his money. Right. But Credit Suisse was a global, systemically important bank. G sib. Right. And yet the most highly regulated of regulated industries in the world, banking. The most highly regulated of regulated banks, Credit Suisse in Switzerland up and blew up and required the Swiss taxpayers to bail them out for umpteen billions of dollars. Right. So financial regulation, when the incentive structure doesn't work is useless. It doesn't solve anything. It makes you feel good at night, that's fine, you can get your money back on a nominal basis. But what happened? They printed more money and made us all poor in the result. So I would say that financial regulation, yes, it's nice that as a bank needs to be run in a certain way, but it doesn't prevent bad people from doing bad things. It just makes the. If someone's going to run a scam, it usually makes it bigger.
- [53:05]
Podcast Host
So what do you think? How do you. How does this all begin to settle out? And I'll give you my thesis. The reason that I think that bitcoin specifically and crypto in general will be here is I believe that tomorrow is going to be more digital than today. I believe that every generation grows up like a fish and water. And when you're born and crypto is just a thing and you don't even think about it. Yeah. It would not make sense to you that that is somehow less valuable than fiat money. Especially when everything you do, you buy your skins in video games and to you those are as valuable as your real clothes and you love them just as much. And so, you know, when I think about kids and V bucks, it's. They're just digital natives, like through and through. So I think for them it will just make all the sense in the world. And so once something is digital, then why wouldn't you want your money to be digital as well? Then it becomes a question of control. Because hey, the government will be more than happy to come out with a CBDC and the. That then collides with freedom. So I don't know how humanity is going to answer that question. I'll be completely honest. When I think about, I think people like being taken care of. I think there is a huge. Like when you read the rhetoric from 1776, like those guys were ready to die for freedom. We're not there. We're not there. Like right now it is just a different time, man. And so I think people want the convenience of something digital. I think money will be digital. I think people will live in digital worlds. I think they will buy digital goods. But I don't know where we're going to settle on a desire for protection. Like even myself. It wasn't until SVB looked like it was going to collapse that I finally was like, you know, I should just get. I didn't have any direct exposure to svb, but it, it made me just take everything off every exchange. But then when you look at the realities of cold storing and you realize you have to store them in different places and not at your house. And it was like, oh God, like I just felt so, I still feel so paranoid. I'm going to forget where I put something or half of my key, which is in, you know, this place. Like I forget which one has what. Oh, God. Like, that kind of stuff terrifies me. And so what do you think about that? Do you think that people will truly, while they'll embrace digital money, I think most people will agree to that. Do you think they're going to care enough about money, privacy, which is something I've heard you talk a lot about with Bitcoin. Will they care enough to make Bitcoin, which maybe is trying to be choked by the government and all that, Will they do it or will they just take their cbdc?
- [55:52]
Arthur Hayes
So I think most people don't care about privacy. And that's. I know this because they have a mobile phone in a pocket, a smartphone. The smartphone is tracking you. We voluntarily have given the most amount of information about ourselves to Facebook, Google, Alibaba, WeChat, all these things, right? Because we want community, we want to communicate with each other, we want to look at thirst traps. Whatever the reason is right, we've done this. No, the government didn't force us to do this. These were private companies creating these products. So most people, as you said, it's just too much to be financially independent. To actually be your own financial institution for a lot of people is just too much. And they're going to stay in the system. And I like to say that there's a flood coming. This inflationary, maybe pseudo collapse of the fiat financial system. There's an, there's a. Noah's got an arc of, you know, Satoshi down there with Bitcoin. Unfortunately, most people are going to drown because this isn't, this isn't for them. Right? And so when you move it up to the government aspect, crypto in itself isn't a problem. The problem is that the people own it and it's not the standard individuals and firms that are used to owning the new levers of technology. And that's their issue with it. And so now we're seeing that the experiment has worked so far. We have however many millions of wallets created, we have however many trillions of dollars worth of transaction that have been completed on these systems. They work. It's more sound than the traditional finance. It's faster, it's cheaper. Fine. Well, let's not have a bunch of muppets running around the world who are a bunch of old bald dudes sitting in New York, London and Paris and wherever owning this thing. We want to move it back to who should be owning this. So we're going to now allow the traditional financial players to launch things like ETFs, right? Which is a very easy way for everybody to own the financial return of Bitcoin. Very important I say the financial return, not actual Bitcoin. As you said, I don't want to private keys, I don't want to worry about where I put my wallet. I just want to earn that inflationary protection aspect of Bitcoin. But I don't necessarily care to really experience the real financial freedom of it, of owning my own financial system in my pocket, in my head, right? So I'll just put some Fiat into the BlackRock ETF, the Fidelity ETF or the Pick your large asset manager, wherever you're from, etf, right? You don't own Bitcoin, you don't care about custody. Like, oh, the price goes up and down on the screen. I beat inflation. But guess what? My money, when I want to sell, comes right back into fiat, right back in the banking system, right back, ready to be financially repressed to make sure that bonds are purchased by the banking system to keep governments afloat. Now, fine. Bitcoin is an open architecture. Everyone should be able to build whatever financial products they want. The question then becomes, and I don't know the answer to this is will so much value and currency be owned by these centralized asset managers who are essentially arms of the tradfi ecosystem, that the underlying fundamentals of what Bitcoin is, the privacy, will those be altered? Will a BlackRock support through maybe ownership in large mining companies, different sorts of improvement protocols that detract from the immutability of the money or the censorship resistant or the decentralization? Right. So while we as traders are cheering, yes, etf, etf, ETF is going to bring all this money into the system because now people who want to escape inflation understand the value prop of fixed supply and all that, but just don't want to deal with the technology aspect of a cryptographically bearer asset because cumulative is bad with passwords and whatnot. People don't want to deal with that. They want to put their money in the ETF and we're like, yes, great, more money in the system, number go up, everybody's rich. But are we inviting in something that's going to fundamentally change what Bitcoin is? Because now they're going to have a say through large ownership and mining pools or they're going to run a bunch of nodes or they're going to have control over the price. Right? It's an open question and this is going to be the real crucible we're going to have to face as an industry of determining what is bitcoin when now we have tradfi, who is a stakeholder in this system. How do we deal with them? How do we maintain this ethos that makes bitcoin a valuable, this immutability, this money, that's this the hardest money ever existed. With a system that is basically trying to capture as much capital and sequester it so that it can pay the inflation tax to make sure that the government stay afloat. I don't have the answer to that, but that is the real crucible that we're going to have to face going forward. Because as you rightly point out, it's just pain in the ass to be your own financial institution.
- [60:56]
Podcast Host
It's interesting that one feels easy to me. I don't. I. If, if the money really stands for freedom, then you have to let people do what they're going to do. I saw this in web3 a lot and there was a sense of like, we, the vanguards of Web3 are going to decide who is Web3 enough. And if you don't pass the purity test, then you know, we don't want you in here. And it's like you're never going to be able to, to get something to scale by trying to impose culture top down. Culture is always, and I mean always going to arise from the bottom and you can manipulate it through media and stuff like that, but at the end of the day, man, that what, what people internalize is going to become the culture. The youth will always get whatever culture they decide they want. Like it is just an unstoppable force. And yeah, to me it's like Satoshi created the thing and then the thing's going to become what the thing becomes. And if, if there is a way to control it, then it will become no better than the thing that it's trying to replace, which is already something that's being controlled. And the whole point is you think you want to be able to control it because you think you have all the answers and you're going to do everything right. And the reality is as soon as somebody can control it, then they will come control it and use it against you. Which is the whole point. Like, I mean, just to get myself in hot water here. When I saw what was going on with the Canadian trucker convoy, I was like, yo, they are freezing people's assets that donated to a cause. Like, that's crazy. I couldn't believe it. That, that really got me way more interested in having something that I could control. Now I'm not Convinced the government can't use force to get what they want out of crypto. Because at the end of the day, look, if the government puts a big enough gun in my face, here's my crypto. So, you know, I get it, it's easier and if I leave before they start breaking out the guns, then fair enough. But God, I don't want to, I don't even want to contemplate a world that gnarly.
- [62:58]
Arthur Hayes
Yeah, I hope it never comes to pass.
- [63:02]
Podcast Host
You and me both. So I have to ask, where do you think bitcoin is going? Is this something that breaks a hundred thousand? Is this something that breaks a million? Is Michael Saylor going to be a hero or the world's biggest l. What do you think?
- [63:20]
Arthur Hayes
So my working model is that we're going to continue chopping around 25, 20, 30,000 this year as we get to some sort of financial disturbance and people recognize that real rates are negative. If, you know, if government are growing, if economy is growing at nominal rate of 10%, but I'm only getting 5%, 6% even though it's high, people are on the margin going to start buying other stuff, crypto being one of those things. So coming into 2024, either we get a financial crisis, rates go to zero, or we keep raising rates, but not as, not fast, not as fast as governments are spending money because they're just trying to keep people doing things and the rates are negative that we get to crypto around 70,000 by the end of 2024. And that's combination of the crypto happening event, right. Maybe there's going to be, you know, a few ETFs launched by large asset managers in the US and Europe and China, maybe Hong Kong to be specific. So we regain the all time high to the end of the end of 2024. And that's where the real fund starts, right? That's when the real bull market starts. And so my mental model for where we could go, I think we're going to go somewhere between, you know, 750,000 to a million dollars in bitcoin on the upside, right? And we're going to, whatever the level is, is going to be a round number. Everyone's going to be focusing on, I guess like Bitcoin hit 69,000, 999, did hit 70,000 and then it's going to go and just crash, you know, 75, 8, 90, whatever it is, right. Doesn't matter. But yeah. So my upside target, ish, is the 750,000 million dollar level 2026 time frame. Just because again, I believe this is going to be the largest market in financial bull market and financial assets we have ever seen in human history. So not only will bitcoin be at a ridiculous price, you know, NASDAQ will be at a ridiculous price. S and P will be at a ridiculous price. You know, pick your, you know, stock indices wherever you're. If you're not in one of the, in the Europe or the US that'll be at a ridiculous price. Right. Certain types of property, ridiculous prices. So we're going to have a lot of ridiculous prices out there and not just in crypto.
- [65:40]
Podcast Host
Yeah, that, that will be a weird moment. And with people thinking that the party is never going to end, of course it always. Let me ask you so that I can help better understand the sort of way that this all plays out at the global level. What, what is with Hong Kong and crypto? China clamped down really hard. It seemed like that was a really bad sign for me. I was like, whoa. This was the thing that I was concerned about, that a government would be able to effectively eliminate it from its country. Not that they'd be able to eliminated crypto.
- [66:17]
Arthur Hayes
It never eliminated crypto from China.
- [66:19]
Podcast Host
Tell me more.
- [66:20]
Arthur Hayes
So the, the, you know, if you want to think about from the Chinese government perspective, the thing that they most, they care most about is social stability. Right. And so as everyone becomes a speculator because they're desperate, right. The last thing they want is a bunch of mom and pops rolling up and gathering in groups with a communal grievance. It could be crypto, could be anything. Right. We know this stories has played out over Chinese history. They do not like this. And so seeing that that could cause disturbance in China and also the energy aspect of bitcoin mining consuming a lot of electricity that could be used to do other things, they basically made it very hard to trade it. So the exchanges all left Chinese people still own bitcoin. That hasn't changed. You can't mine it. There's no exchanges. Fine. They can't really acquire it. But at the end of the day, I think the Chinese government sees that this is a technologically sound thing and they want more of it. In the Chinese diaspora that they can control. It doesn't necessarily need to be in a government coffer, but the Chinese government thinks if you are Chinese, we own you as a person. You are Chinese, we are the Chinese government, therefore you are our subject, no matter where you live around the world, ethically speaking. And so if you think about Hong Kong, which is part of China now and always was, but now it's very explicitly part of China. But it has this western capital, Western eastern capital meeting point. If they want to experiment in allowing a more general ownership of crypto, or if they want to allow certain types of Chinese individuals to own crypto through Hong Kong regulated financial institutions, which essentially means that they're controlled by the Chinese government in the same way that BlackRock is controlled by the US government. It's no different then they're going to allow these companies to buy and hold crypto because at the end of the day, as long as the crypto is inside of China, they believe that they can control it. So why not let a part of the country experiment with this thing, Let people own it, let people buy it by controlling it in terms of the way firms are able to acquire users and let those users on crypto. So that's why there's been licenses issued. The Hong Kong government's very positive on bitcoin. The Hong Kong government is part of China. Therefore they would never do this if it was not blessed by blessed in Beijing as part of a national prerogative for this particular part of China to be positive on crypto. So it's similar sort of situation to how to describe the BlackRock ETF, right? Larry Fink and BlackRock having a trillion dollars of bitcoin under its custody is the same thing as, you know, bank of China launching an ETF on the Hong Kong Stock exchange and having a trillion dollars of crypto. They're both essentially in the orbit of either the United States or China. And that's the goal. If this technology is as transformative, if it is the hardest money that's ever existed, wouldn't you rather your citizens have it rather than someone else's? And so as the American political establishment decides what they want to do with crypto, and that uncertainty drives companies out of America, out to the rest of the world. China's already gone through that. They've already purged the exchanges, you know, starting at 2017, accumulating in like, you know, I think 2020. Right now, they've gone the other direction. Okay, let's try to control this. Let's try to permit certain types of ownership through firms that we can control in Hong Kong, which is our test bed region for sort of, you know, financial innovation, and give the Hong Kong economy something to draw in to expertise, foreign capital. Because, you know, Chinese government believes in technology. Crypto is the forefront of financial technology. Why not bring these smart people here, let Them experiment and we think we can control what they do. Right. So that's, in my opinion, what's behind the Hong Kong story. We're going to see how that progresses. I obviously live in Hong Kong. I love Hong Kong. I hope that there is a vibrant cryptocurrency ecosystem there and that people are able to experiment with different things because there is a tacit government support for the technology. We'll see what happens. At the extreme, if all of a sudden there's all these firms with trillions of dollars worth of crypto, I don't know. But. But at least there are some people who are given the space to at least experiment and try it versus other places in the world where they're being pushed out and shunned.
- [70:52]
Podcast Host
Yeah, I'll be very interested to see how it plays out. I was super intrigued when China opened that back up in Hong Kong. It made me realize, okay, maybe they're not as negative as I thought they were. And like you said, this is really an element of control, which does make me super uneasy in terms of just governments having more control than I am comfortable with. But I fully recognize that the way that it's looked at, and as somebody who lives there, you can certainly speak to this better than I can, that it's not necessarily one is better than the other. They are just different. But, man, from my perspective, it just seems better to be free. But I won't try to export my values. So one thing that I want to get a better understanding of is I had Peter Schiff on the show and in the comments because he was like, right down my alley in terms of all my fears. Like, he was right there. Everything that if I'm honest, he comes very close to articulating exactly what I think is going to happen when I just objectively look at the math of all this. And then one of the comments in the feed was Peter Schiff has predicted nine of the last two recessions. And I had to laugh at that. So, you know, we've. The backdrop to our whole conversation has been a sort of mutual acceptance that, yeah, all hell is probably going to break loose, that we think we have a pretty good handle on just the physics of the math and that it can't go up forever. That you, using my analogy, you will pull this rubber band back until it snaps. There's just no way around it. What if we're wrong?
- [72:39]
Arthur Hayes
So what if we're wrong? Well, if we're wrong, if there is a energy miracle, like we discover some form of energy, we Instantly commercialize it. Like think of how long it took for us to get to a car in every household in the U.S. think of how long it took us to electrify the world. Even though these technologies have created in the 19th century, mid to late, that
- [72:59]
Podcast Host
already assumes we can't have a soft landing. What if we just. They get it right?
- [73:04]
Arthur Hayes
If they get it right, then you earn. You could. You're where you're now, right? The S and P is up. I don't know. Let's remove the tech stocks. Right? It's up, I don't know, 6, 7, 8% this year or whatever it is.
- [73:16]
Podcast Host
Right.
- [73:16]
Arthur Hayes
It could have made the same. You say you could have the same amount. I can make the same amount in bonds and live it literally overnight lending to the Federal Reserve, zero financial risk. I get paid five and a half, six percent. Why take the risk if they get it all right, great. I'm taking, I'm getting 2/3 if not 75% of the return of in the US stocks with taking none of the mark to market risk. So it actually makes zero sense to own stocks if you believe they're going to get it right because stocks aren't returning enough. It's not like the SV is up 25% and cash yield 6. Right. So from a risk adjusted. Risk adjusted perspective, if they get everything right, then okay, maybe the only stock I should know is on Nvidia. Fine, the rest of the market's dog. Why even, why even, why even play the game? Put your money in the money market fund. Take your money out of your 0% yearly bank account, put it in a money market fund. There's just no point to trading stocks if they have it. All right.
- [74:21]
Podcast Host
What would have to be true for you to say, yeah, I no longer think there's anything looming on the horizon. There's no financial crisis coming. They'd have to get, I assume the debt to GDP down below 130. I assume they'd need to start pulling some money out of the economy without it causing any sort of secondary knock on effect. What else?
- [74:46]
Arthur Hayes
Well, so the US government right now is running the the playbook they should be running, right? Which is nominal GDP is at 9% but the government debt yields 4 and a half. Call it right. So the government's making money. It's if it can continue to keep money in the bond market in the banking system at these rates and at this growth level, then the US government, at least for them will deleverage themselves over time. The problem is that capital can move. So we're making the assumption that capital doesn't move. So if for my, for the, you know, Goldilocks scenario, number one, no capital leaves a long term bond market when they have a negative real yield, right. Number two, there, there is a energy miracle or we decide that nuclear is the next thing and we run out to invest in all sorts of different types of startups to basically miniaturize nuclear reactors such that instead of pumping oil into our car, we have a small little nuclear reactor and that powers our, our vehicles. Or we're going to build all these different power plants. Like that needs to happen right immediately. Those are the things that was okay, maybe I'm wrong and we're going to have sort of an acceleration in energy productivity. Therefore I should own a company that makes real stuff apart from semiconductors. Otherwise I'm just putting like the overnight bonds because at this, the second they cut the rates, cool. I don't care. I didn't lose any money. I just take money on the bonds and they go buy stuff, right? But I'm definitely not going to own long term long end bonds. That trade is negative ev, negative expected value in my perspective. I don't see how they get all these things right before money leaves the system saying fuck this, I want 9%, not four and a half. So why own the long end? Just put all your money in short term bonds if you believe that they are going to get solve everything. Just put your money in short term bonds and take no risk.
- [76:40]
Podcast Host
Arthur Hayes. This has been a wonderful conversation. Where can people follow you?
- [76:45]
Arthur Hayes
So on Twitter at Crypto Hayes I have a substack as well. Same handle at Crypto Hayes. And I write essays probably, you know, twice a month on macro geopolitics. Obviously there's always a crypto angle but yeah, that's where you can find me and I speak globally at conferences around the world.
- [77:07]
Podcast Host
All true, brother. Thank you so much for joining me today everybody. If you haven't already, be sure to subscribe. And until next time, my friends, be legendary. Take care.
- [77:16]
Arthur Hayes
Peace.