← Tom Bilyeu's Impact Theory
Tom Bilyeu's Impact Theory
The 5 Crypto Strategies Every Successful Investor Knows | Arthur Hayes PT 2
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- [00:01]
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Tom Bilyeu
I'm Tom Bilyeu and this is Impact Theory. Today we're diving right back into part two of my conversation with visionary entrepreneur and cryptocurrency advocate Arthur Hayes.
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Arthur Hayes
Over the last 40 to 50 years, the financial ecosystem has been predicated on a scenario where there's never been a situation where long end so let's call it 10 or 30 year bond yields
- [01:24]
Financial Analyst/Commentator
in the US
- [01:26]
Arthur Hayes
rise. So they go up, but they go up faster than in short term yields it's called that's never happened for a sustained period of time, no. Over the last 40, 50 years. It's called a bearish steepener. Right. So if I'm a bank, I'm an insurance company, I'm a pension company, and I'm going to model what I think the future is going to look like. I'm going to model the way the futures looked for the past 30, 40 years, which is every time there's an issue and yields go up, the government comes in and prints money and squashes the bet down. They squash the volatility down in the markets because they want to save the banking system, they don't want anything to blow up. But now, because we're in the situation, at least in the US treasury market, where the US government is issuing the most amount of debt ever, right? Federal deficits in like 7 or 8% of GDP. It's as if we're in a war. This is the largest, longest sustained sort of deficit since World War II. But we're not in a war, at least not an overt one.
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Financial Analyst/Commentator
You have
- [02:34]
Arthur Hayes
US$7.75 trillion worth of debt must be rolled over by 2026, massive amount of debt. That's just on the US side. So who's going to buy it? Right? The traditional buyers were one, China, Japan. Right, China, Japan are not buying any more US Treasuries. China because it doesn't want to become more tethered to the dollar from a geopolitical safety issue. Japan because it's also facing an issue in their bond market where their currency is getting trashed because they are also trying to save their bond market. Japan, thankfully to themselves have saved a lot of money over the last 30, 40 years. And so they're now starting to draw down on that money. They're not buying new Treasuries, they're starting to sell Treasuries. China's starting to not buy new more Treasuries, they're starting to sell Treasuries. And you can look at the official data from the US treasury and you can see the balance of Treasuries owned by China and Japan are declining on the oil exporter side. Right. Talking about opec, Russia is a big member of opec. Russia is obviously not buying any more Treasuries, they just banned them from the Western financial system. Saudi Arabia is not increasing its treasury position, it's also decreasing. So the oil exporting nations who previously would earn dollars internationally and park those dollars in the US Banking system and buy Treasuries, they're no longer buying Treasuries. The US Banking system, the US Banking system is functionally insolvent because the regulators made the rules in such a way that it was profitable from an accounting perspective, not an economic perspective, to essentially take in deposits and buy low yielding Treasuries. And they could do it with almost infinite leverage and a few basis points difference in the change in the price and everybody make a lot of money and everybody gets a big bonus. Right? So the banks collectively bought all these treasuries in 2021 and obviously the prices went down a lot since then. And that's why we have the regional banking crisis. So at a structural level, a US Banking system cannot buy more debt because they can't afford to because it's functionally insolvent. And so, and you know, that leaves the Federal Reserve, but the Federal Reserve has committed to doing quantitative tightening, which means it's letting the Treasuries roll off of its balance sheet. It's not accumulating more Treasuries. So the treasury has to issue all this new debt, it has to roll over all this new debt. But the major buyers of this stuff, for all their own, you know, disparate reasons cannot purchase it. And so what we're seeing in the markets is relationships that held clad are breaking down. If you take a look at the 10 year US treasury versus gold, you would think as yields are rising in the US treasury market, that gold would be getting clobbered. That's how it's worked in modern financial history. Because if the interest rate is high, money says I want to own that, I want to own the four and a half percent treasury versus owning gold which pays me nothing. But nowadays gold's holding firm, it's not like rising crazy in a crazy fashion, but it's not getting clobbered either as US Treasury 10 year yields are at, you know, 434 basis points last time I checked.
- [05:42]
Tom Bilyeu
So hold on, that makes a prediction at least as my mind grasp it, that people think that the bank is going to default because, sorry, the government's going to default. Because if you're getting whatever risk free money of it's right now it's like something like 5%. If you can have risk free money at 5% and people are not fleeing gold to get into that risk free money at 5%, that says to my limited mind that the market no longer believes that it's risk free. Is that an accurate assumption?
- [06:16]
Arthur Hayes
US is risk free in a US dollar perspective on a nominal basis.
- [06:20]
Tom Bilyeu
And why would people stay in gold?
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Arthur Hayes
Because they say I'm not getting paid enough right now. I use a term of real yield and if you ask an economist, you'll get a different answer depending on who you ask. My definition of the real yield is I take the government bond yield and I subtract nominal gdp, right? So if I'm lending money to the government, from a philosophical standpoint, I should receive at least the yield of the growth of the economy. So if the economy is growing at 10%, I should get paid 10% too because I'm contributing to that, right? I'm lending to the government, the government's doing its thing and the economy is growing, I should get paid the same amount. Now from the government's perspective we're like, hold on, I can make a profit if I can somehow engineer the economy to grow at 10%, but I only pay 5%, that's a negative yield. I, I the government and making a profit. Or conversely, if the yield is 10% and the economy is growing at 5%, then me, the bondholder is earning a profit. But right now the economy in the US if you take a look at the Latest Atlanta Fed GDP now cast and they have a real time guesstimate on where the GDP is running. Nominal GDP this quarter is running around 9%. The 10 year yield is about 4.34%. So I, as a bondholder, I'm getting shortchanged now. People are starting to realize that like hold on, the US economy on paper is growing like gangbusters. I should be getting paid more money. If I'm not going to get paid more money, then I'm not going to own these bonds because I can own something else that's going to give me a better return, whether that's stocks, gold, crypto, whatever right is gold just to,
- [08:08]
Tom Bilyeu
just to take a non controversial one. Would gold ever outperform that number in
- [08:15]
Arthur Hayes
terms of the yield?
- [08:17]
Tom Bilyeu
Yeah, because the way you're explaining it, it sounds like people are cutting their nose off despite their face. Like if you're going to get 5% risk free with a treasury and you're going to get next to nothing with gold, then why on earth would you, even if you could get 10%, even if you have a moral just, you have moral outrage at the government for keeping half of that yield for themselves. Which I admit if you loan the money to the government, it's pretty fishy that they would keep that for themselves. But if you're getting a better yield than you would get from gold, what on earth are people doing? Just saying, ah, I'd rather get nothing because I'm angry. I don't understand.
- [08:57]
Arthur Hayes
So most people who own bonds, the bond is a price, right? So as the yields rise, the bond price goes down. And so as yields go from 5% to let's say 10%, so the Fed just keeps raising rates, right? As a holder of the bond, you've lost money because the yields are rising, the bond price goes down, right? So as yields rise, I lose money because I've locked in a lower rate and it's going higher, the bond price goes down versus gold which you know, could go up, right? Or just could stay flat at the
- [09:30]
Tom Bilyeu
end of the day.
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Arthur Hayes
And I'm, I'm fine. So if you take a look at returns of 10 year bonds starting in end of 2021 when the Fed started raising rates, you've gotten absolutely killed. It's been the worst bond bear market in hundreds of years, right? So owning bonds has been a terrible, terrible investment over the last two years. But because inflation's going up and the bond market's saying actually I demand more yield and the keeps going higher and higher and higher and Higher to attract more and more buyers. Now if the US government is perfectly willing to put the 10 year treasury yield up at 10%, they'd have a flood of money into the market. That's awesome. I'm getting paid the same growth as the US economy, but right now I'm not because the government can't afford it. Right now the treasury is already spending something like 34% of the budgets, like interest payments on an annual basis.
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Tom Bilyeu
34, 34%, yes.
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Arthur Hayes
So it's like $1 trillion annualized right now is the interest expense as of second quarter of the last time the treasury published a statistic. So they're issuing more debt and they're paying more money on the debt. And that number is just going like that in terms of the interest expense handing out to people who own, own bonds. Right. But on the long end, and this is how bonds work, the longer the maturity, the more risk more sensitive you are to interest rates. Especially if the bond, the yield starts at a low level. Going from 1% to 5% on a 10 year treasury absolutely destroys you as a long bondholder. Which is why a lot of these bond funds have done terribly well, have done terribly over the last few years because of how bond math works. And it's a non linear change when you raise interest rates and how the bond price performs. Gold is pretty much held constant over that time. You haven't made money, you haven't lost money. But if you were holding a long bond at 1, 2% and now it's at 5, you've gotten crushed. And that's exactly what happened with the banking system. Svb, First Republic, Silvergate Signature. You know, this year they've gotten crushed on long, long bond trading.
- [11:40]
Tom Bilyeu
Okay, I want to walk people through that. So I, when it comes to math, I have a very simple mind. You're going to correct me where I go wrong, but I think people at home, some of them are going to benefit from what I have struggled over the last year or so to put together in my mind. Again, you're going to, when I go wrong, you need to jump in and let people know. But here is how I understand bonds. If you hold a bond to maturity, you're not going to lose your principal. So what you're losing is potential earnings. So you would not be able to sell that bond. So for those keeping score, it goes like this. You buy a bond, that bond has a interest payment and that interest payment, let's say is 2%. And if you buy that bond for 10 years to get the 2% and a year later a new bond comes out for 10 years that pays 5%. Now if you try to sell that bond in the secondary market, people are going to go, why on earth would I buy that when I can for the same price I can get a better yield. And so you have sort of lost money in that. You can't sell it before the mature date. You are now going to have to hold it all 10 years in order to get all of your money back. But if you hold it for all 10 years, you will get your 2% and you will get your money back. Assuming that this is a government bond and they don't default. So that I, I want to make sure people understand the difference between you're losing potential revenue because if you didn't have your money tied up in a 10 year bond and you could now put it into that other 10 year bond that's earning 5%, obviously you'd be better off, but you don't lose your money unless you need to sell. Now that brings us, and you will notice he has not interrupted me. So I'll assume that's.
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Arthur Hayes
Well, I'll give it even more even closer to home example, people who have a mortgage on a house, right? I think this is even more understandable. Like everybody rushed and bought houses in 20, 20, 2021 and the yields, I don't know, mortgage, three year mortgage rates in the US are around three, three and a half percent. And now there's another job in another location. Or maybe you're living in a high tax state, you want to move to a low tax state, right? And you need to buy another house. Same value of the house, the price of the house is the same, but you need to get a new mortgage. But now the mortgage rates are 7, 8% and you're like holy shit, I can't afford this house anymore because this bond that I have at 3% is more valuable than the bond of the mortgage at 7, 8%. Therefore I can't find another loan that I can service with my income because of the change in interest rates. And so that's, I think even more hits home. Example, the majority of the public who own a house or apartment or whatever, it's oh, I had a mortgage at 3%, I can't in the same value of the house, I cannot afford that house in another location because I'd have to get a new mortgage at 7, 8%. That is bond math. That's the exact. And you can put the same thing for, you know, Treasuries Mortgage is a bit more complicated, but at a high level. That, that's, that's exactly the phenomenon you describing.
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Tom Bilyeu
Now the mortgage though would be completely inverse, right? So on a mortgage I want my rate going down. On a bond I want my rate going up. Yeah, makes sense. Okay, so now let's take that. So we understand that I buy a long term bond and back in 21 when all the banks gobbled up all this US debt, they had to go long to get a return, which a bank is incentivized to do. So they're going to take the deposits that they're getting. Everybody's getting stimulus checks, everybody's depositing into a bank. The bank's like, amazing, I'm going to invest. The first of all, the Fed is like, we're not going to raise rates. Oh my God. It's going to be like this basically forever. And so they buy all these long term bonds on the word of the Fed that they're not going to be raising rates. So they think, okay, well if rates aren't going to go up, then I don't have to worry about the value of this going down. This will get me a higher yield by me taking a longer term, which we need to get back to because you were talking about how it's very atypical for short term to raise faster than long term. So that's a sign that something weird is happening. But in 21 that hadn't happened yet. So a long term was the way to get the extra interest payment. So the banks gobble up these long term treasuries. So they're buying debt.
- [15:48]
Arthur Hayes
I know, I'll add one little caveat here is you can actually hedge this stuff. So it's not as if there isn't instruments for to say like, okay, I bought a bond at 2, 3%, I'm worried about a future where the Fed raises rates. Let me go out in the market and hedge that. The banking system could have easily hedged a lot of this risk. And some banks did, a lot of banks didn't. But that comes at a cost. So I can either have a higher bonus or a lower bonus. The Fed says, don't worry, I got this. Inflation is transitory, never raising rates, we're never going above 2% inflation, blah, blah, blah. Why would I go out and hedge the long end rates? Why would I go out and hedge rates going up and reduce my bonus? So I'll stop there.
- [16:31]
Tom Bilyeu
Dude, that's horrifying if that. And look, I'm sure it did. I Don't want to play naive, but that's horrible. Okay, so if that's right, then to get their bigger bonus, they buy these longer term treasuries, they lock themselves in. Now the Fed does raise the interest rate. Now that bond, they can't sell it early and therefore they're losing that potential income. Wouldn't necessarily be a problem except for the fact that people begin to realize, hold on a second now. The risk free rate of a U.S. treasury that I can get myself is 5%. So I don't want to leave it in the bank where they're paying me next to nothing. I want to go get my 5% risk free with the government. So hey SVB, I will take my money, thank you very much. And now SVB has to cover that so that they can give you the money back. And now they're forced to sell these long bonds at a loss and all hell breaks loose.
- [17:32]
Arthur Hayes
Yep, that's exactly it. The US government bankrupted the banking system essentially.
- [17:39]
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- [18:39]
Tom Bilyeu
That that is brutal. When said that plainly. Okay, so now my question is they create the. I just had it. The BTFP bank term funding program which basically says hey everybody, don't worry your deposits are safe. But the problem is that puts them on the hook for up to $4.4 trillion that they would have to print their way out of. So do we still have a banking crisis or do we only have a looming potential inflation crisis?
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Arthur Hayes
There is a political choice there, you know either as people say. Again, I don't. I haven't looked at the deposit rates yet. But if you are a non too big Detailed bank. There's eight of them. It's very hard to attract deposits and it's very hard for you to raise your deposit rate because again, you have this, this portfolio of stuff and your, your deposits are not guaranteed. So If I'm a J.P. morgan, a Citibank, a Wells Fargo, I forgot the other ones, the big banks, they have a unlimited deposit guarantee. Now, they have to pay a bunch of other charges for that. But if I'm a depositor in those banks, I know I'm. There is no question, the politicians have told me I will get 100% of my money back, no limit, if I'm not in one of those banks. I have to think to myself, okay, is this bank going to get saved? Is this going to be the Lehman Brothers or is this going to be the Goldman Sachs? Which one's going, which one is it going to be? Right? They let Lehman fail. They didn't let Goldman fail, right? And so it's the thought and so you're like, well, why even take the risk? Get me the out of here. I'm giving my money to Jamie diamond, right? And so that's the issue. People are fleeing because number one, the political choice has been we are not going to extend a blanket guarantee to all these other smaller banks because of moral hazard and all these different things. We're only going to give it to these banks over here. So then the rational response of the public is, well, I don't want to be in that bank. I don't want to have to take the risk that they decide that this is the bank they're going to believe in capitalism on. I'm going to go on over here, let me go to socialism, I get my money back. And so I think that's driving part of it. And then the other thing is the rates are still going up, right? Five and a half percent. You know, maybe the Fed raises a couple more times, maybe it'll be 6%. I can literally, two clicks, go online, go to my money market account, deposit money with the government essentially and get more money than my bank can mathematically pay me. So yes, there's a banking crisis. We, it was smoothed out a bit with the bank term funding program. But it's not as if people have stopped noticing that in less than five minutes they can, you know, go from 0% to 6% interest income. That didn't stop. So the banking crisis is still there. The acute political choice that the regulators and the government is going to have to make is still there. It's still looming. Who is going to pay for these losses on the bond portfolios of all these banks?
- [21:41]
Financial Analyst/Commentator
I don't know what they're going to
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Arthur Hayes
decide, but I think they're going to
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Financial Analyst/Commentator
decide to print the money and make
- [21:46]
Arthur Hayes
sure that the electorate gets their deposit back in nominal dollar terms. So that's just my opinion.
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Tom Bilyeu
So the bank term funding program does not cover regional banks? I thought it did.
- [21:59]
Arthur Hayes
No, no, it covers, it covers banks that have eligible securities. So that essentially means U.S. treasury bonds and mortgage back mortgage backed securities. Now the big thing that a lot of people are now focusing on is the commercial real estate, right? That's not included. So it's not as if I lent money to some real estate developer and some market who's going to build office buildings. I can't take that loan right now and give it to the Fed and get back 100% of my money back in dollars. Right? I can take a Treasury, I can take a mortgage backed security, I can swap that for dollars. I can't swap commercial real estate, which is a problem because small regional banks were the engine of commercial real estate lending boom over the last decades, whatever you want to call it. So now as we are changing the way we work and you know, two to three days work from home for a lot of folks, these office buildings are becoming kind of irrelevant and the market has frozen. So now it's a question of okay, what deals get done, how big is the price decline going to be and then are basically going to have to write down this, this section of their balance sheet and oh shit, they're insolvent again. Or at least we know they're insolvent again. Or what's the Fed going to do? Are they going to expand the BTFP to include commercial real estate loans? Because this was, you know, this is the thing that's going down in price. Or they can expand it to auto loans or are they going to expand it to, you know, personal loans? Like all these things that the banks have been lending out where the ability to pay or the asset value is declining that aren't U.S. treasury bonds and mortgage backed securities. Is the BTFP going to be expanded to cover those? Because if those are down in price, the banking system still insolvent, right? And so yes, they've solved one portion of the market, the one they really, really care about, which is mortgage backed securities. They want Americans own a House and U.S. treasuries, they want Americans to invest in the government. Now all this other stuff, they would rather not have to bail it out. But again the banking system is choking on all this stuff and they're going to have to make the political choice at some point. Either they're going to let the non cubic to fill banks actually fail and a lot of, you know, Americans with small deposits not get their money back or they're going to come in and save the day and bail everybody out and print more dollars.
- [24:17]
Tom Bilyeu
Okay, I think this is the part in our program where we point out exactly what inflation is. What when it was first described to me as an invisible tax, I was like, it didn't make sense to me. And now understanding it better, I realize that what you're doing is you're saying, okay, we're going to make everybody's money worth a little bit less. So by making more of it then the value of any $1 just reduces a little bit. And so it becomes a way to spread the taxation across everybody. So the real question the government is asking is okay, this bank, whatever they did something that isn't well. So we already know that mortgage backed securities and Treasuries, those are going to be one for one. But if they have something other than that, they're asking the question, do we want everybody to have to cover this thing that didn't end up working out, this investment that didn't work out, or are we just going to let them roll over and die? Um, as you look at that and when you think about this three to six month big disturbance, is that the thing that you think happens, that we get some, something triggers a run on these small banks? Could be commercial real estate starts, something kicks off and it starts going down. Or are there other things on your bingo card other than the regional bank failures?
- [25:40]
Arthur Hayes
I mean usually it's, the problems are known. It's a question of whether or not we're focusing on and we being the market. Right. So the market knows the commercial real estate's a problem, but we haven't really seen a big price markdown because no one wants to trade. The sellers don't want to realize a loss and then have to mark the rest of their portfolio down and thus be insolvent. And the buyers don't want to buy at this price. They know it's too high. So nobody's trading. Right. So it's that calm situation where okay, well the price is still where it was, you know, 12 months ago. But there's no transactions. Right, right. So once there's a few transactions when people have to sell for whatever reason, we don't know what that, that it's going to be. Then we're going to go. Then it's the fiduciary responsibility is okay, well there are these transactions in the market and I, I now need to mark down my portfolio report to my regulators. Oh shit. My capital buffer is declined, therefore I'm insolvent. And what usually happens is, you know, because of the politics, they'll let some, somebody fail. Someone's gonna, there's gonna be at least one failure and then the market's gonna throw a fit, shit's gonna be training all sorts of up ways and then, you know, on one weekend they're like, okay, we can't let the next one fail. Right? They let Silvergate fail in, in March of, of this year, but they didn't let svb. And by fail I mean Silvergate went bankrupt. And the, the depositors are not guaranteed to get their money back by the, the Federal Deposit Insurance Company, the fdic. Whereas with SCB and Signature and First Republic, they were bailed out. They being the depositors were bailed out. Now obviously the bank management was replaced and equity holders lost money, but the depositors were bailed out. So usually one person fails. There was a Lehman, there was a Bear, before there was Goldman, Morgan Stanley, everybody else sitting around. So they'll probably let somebody fail first because the politics demand it. Once the fear of looming collapse is instilled in the regulators, they're then going to say we have to print the money because the system is going to fail. What that's going to be, I don't know. I just see that for whatever reason, financial crises happen in the fall and in the winter. The Northern hemisphere perspective. And so we haven't solved any of these problems. They're only getting worse. They're getting exponentially worse. And the countries that would usually bail out the American financial system by buying assets for their own reasons can't do so. And so as we progress further into this season where traditionally crisis happens, there's going to be something.
- [28:19]
Financial Analyst/Commentator
I don't know what it's going to be.
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Arthur Hayes
That's just my, my, my base case. And I want to prepare myself and make sure that I'm able to make money. And in a situation where she gets all up.
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Tom Bilyeu
Yeah, okay, I didn't know that there's a preponderance of problems in the fall and winter. Is that the obvious guess for somebody that's never heard that before would be it has something to do with energy prices as people have to crank up
- [28:42]
Arthur Hayes
their usually so in the past it was agricultural issues. Right. So the Farmers, the credit tightens and certain parts of the year, depending on when the farmers need credit to, you know, buy more equipment to do the winter planting, right. They receive a bunch of money. Now they need to, to draw down on credit. And so that's why you get the spikes in, in credit as we move through the agricultural cycle. And that's part of the reason why you have different Federal Reserve banks in different districts is to try to smooth out that the demand and supply of credit between the banks in the east and the agricultural regions in sort of the center of the country and every other country is kind of the same. Right. Farmers are always in debt and they're always borrowing money and then receiving lots of money depending on how the harvest goes. And I think that's part of the reason why we usually experience crises in harvest season and then winter planting.
- [29:43]
Tom Bilyeu
Now, you said the problem is usually known, but it's a question of whether the market's paying attention to it or not. What are some of the problems that you're already aware of, whether the market's focused on them or not. That could be those early dominoes that fall.
- [29:57]
Arthur Hayes
So we already know that the US Banking system is insolvent from a US Perspective. We already know that the major buyers of US treasury debt are not buying and the treasury needs to issue a lot of it. That's known. We are already know that commercial real estate in the US Is a problem. It's just that nobody's trading right now because of what I just described. You know, globally, we already know that China has this massive real estate issue and is deleveraging, which means that China cannot contribute to global growth in the ways that it used to, meaning doing massive government stimulus and essentially buying stuff from the rest of the world to build up their country. Right. China's been the economic powerhouse of global growth, which leads into the US and European economies. You know, since the early 90s, they, they have lost their capacity to stimulate in the ways that they're used to. Japan has a problem. Either they're going to save their government bond market or they're going to save their currency. Japan holds is one of the richest countries from an asset perspective on their balance sheet. Are they going to sell down their Treasuries, their fancy US Real estate, their equity positions to essentially help fund the ability for their central bank to manage the depreciation of a currency. So these are all known things. There's nothing hiding. Which one is the one that causes the spark for everyone to start focusing on freaking out? I don't know.
- [31:32]
Tom Bilyeu
I think the train wreck will happen so slowly that it might be more imperceptible than we think. How long can we print money before that bad thing happens in the bond market? And I'll set the table with Japan. As far as I know, they print money like fiends. Is there an obvious breaking point or are we like at the 10% of what we can print, Mark, 90% of what we can print.
- [32:04]
Financial Analyst/Commentator
So let's use two countries and the big narrative. And this is sort of the Keynesian monetary, modern monetary theory, MMT crowd is the government. There's infinite capacity for the federal government to have debt. And the first example there is, look at Japan. They have a. I don't know what the debt to GDP of at the government level is like 300% or something. And look, this is perfectly fine. You go to Japan, everyone's nice, food's great, trains run on time, super safe, blah blah, blah. What they don't understand is what Japan actually did. There's a great report by Deutsche bank and I forgot what it is and it's the label. Is Japan the best curate, the biggest carry trade ever run? So everyone always looks at the central government's debt to GDP and they say, oh, it's ridiculous. They forget that, you know, they think Japanese. If you ever been to Japan and done any business there, you'll realize that Japan is a socialist country with hoisted with capitalism. That was hoisted on it. They're, they're a very collectivist culture. And I'm not saying that in a negative way, that's just how they are. So you have to combine things that you otherwise wouldn't believe as one into
- [33:15]
Arthur Hayes
one to get the real financial picture of Japan. So you have to look at, okay, yes, you have government debt, then you have the corporate and private sector of Japan.
- [33:25]
Financial Analyst/Commentator
The people of Japan, they own something
- [33:29]
Arthur Hayes
like US$3 trillion worth of assets around the world.
- [33:33]
Financial Analyst/Commentator
Japan is probably the richest country in
- [33:35]
Arthur Hayes
the world on sort of an aggregate basis.
- [33:39]
Financial Analyst/Commentator
Because what happened after the war, the US made Japan a colony for a
- [33:42]
Arthur Hayes
bit, lent them a bunch of money, helped them get off their feet and
- [33:44]
Financial Analyst/Commentator
said, we're going to give you access to our market. Please sell us shit. The Japanese said, great. We're going to essentially subsume the individual
- [33:54]
Arthur Hayes
and promote the collective.
- [33:56]
Financial Analyst/Commentator
So everyone, we're going to financially repress you, but we're going to make really, really good stuff.
- [34:01]
Arthur Hayes
You're going to have a job for life. We'll pay for your education, health care, cheap transportation, good food, work really Hard so that these major companies can sell great stuff to America.
- [34:12]
Financial Analyst/Commentator
And that's what Japan did. They started with America, then it went
- [34:14]
Arthur Hayes
to Europe, then it went to China and Southeast Asia. They are the largest holder of U.S.
- [34:19]
Financial Analyst/Commentator
treasuries, which is just the savings of the nation.
- [34:22]
Arthur Hayes
Plus they own in total about $3
- [34:24]
Financial Analyst/Commentator
trillion of just assets, mainly in United
- [34:28]
Arthur Hayes
States, but around the world with all their savings.
- [34:30]
Financial Analyst/Commentator
So if you add that back to
- [34:32]
Arthur Hayes
their debt and then you add back
- [34:34]
Financial Analyst/Commentator
the private savings of people which is estimated of like $5 trillion of just money and is sitting in bank accounts of the Japanese people because they haven't spent anything for the past 30 fucking years because of the deflation that they've been having. You get a much different picture. You get a debt to GDP of around like 100%, something much different.
- [34:53]
Arthur Hayes
So Japan can print all this money because it owns the fucking world.
- [34:58]
Financial Analyst/Commentator
They're not that broke. And so people say, oh, Japan just
- [35:01]
Arthur Hayes
prints a bunch of money.
- [35:02]
Financial Analyst/Commentator
It's okay, it's okay.
- [35:03]
Arthur Hayes
Because they were extremely productive.
- [35:05]
Financial Analyst/Commentator
They had a captive market in that
- [35:07]
Arthur Hayes
the richest country in the world from
- [35:09]
Financial Analyst/Commentator
a GDP perspective, America. They could freely sell anything they wanted into America. And that's how they got so, so wealthy. So that's the Japan example on the why it doesn't really work. Then you get to China, China says we're completely state socialist. Again not saying that in, in a bad way. The central government owns essentially all the most productive companies and we are going to debt finance our way out of the poverty of the, you know, 1949 to 1980s, right? Massive transformation in the society. And there wasn't an infrastructure project that China didn't love. And they've run up with something like a 300% debt to GDP.
- [35:52]
Arthur Hayes
They built all this stuff. Now if you believe that debt, you can print as much debt as you want.
- [35:58]
Financial Analyst/Commentator
Then why isn't China responding to this property bubble by printing as much money as they can and just doing the same thing they did for the past 20 years? Because they've reached the capacity of the amount of debt. They know that the more debt I spend, I produce no value. And I just make the problem bigger. I create more angst amongst the population. I create more desire for people not to have children. I create a declining population because people, you know, cannot make ends meet because I've just overproduced and there's just not
- [36:28]
Arthur Hayes
enough real return there.
- [36:30]
Financial Analyst/Commentator
So there is an internal capacity. So there's.
- [36:34]
Arthur Hayes
China and Japan are probably the two
- [36:36]
Financial Analyst/Commentator
examples that prove the point that I'm Trying to make, which is there is a capacity limit for debt. It's not some number that we know once you go higher than this, that things automatically happen. There's a paper by Ken Rogoff, I forgot what it is. And he did a study and basically the study was that once you get above about 130% debt to GDP on a government level, then you're almost, you're assumed to have a financial crisis sometime in the near future. Now again, you can't put a time frame around it. The US is around 130, 140%. So it's on that path to doing so. Does it have capacity to load itself up with a lot more debt? Absolutely. China's at 300% GDP, right? So you can, you can go that far or even farther maybe, but again, then you start to have the decaying society. You get to have, you get to have this more moral angst that is amongst the population who feel it. They can't put their finger on why they don't feel confident or why they feel angry. But the reason is that the government has again taken away their dignity by up the money monetary supply. So again, I don't know what that number is. We're in the territory where something could happen. And so my thought is as an investor, I want to be long that volatility by being long a put option on the sovereign bond market, which is crypto. I don't know when it's going to happen, but it's going to happen if they continue doing these same things. So why not buy something where I have insane upside if it fucks up? And what's my downside? It's a super liquid asset. As soon as, if it's not working, then I sell a bit of it, whatever. So I have an asymmetric return debt.
- [38:19]
Tom Bilyeu
The debt flywheel. How is it possible, given our need to at a minimum make interest payments that we aren't already in trouble? So I think right now our interest payments are already our third biggest line item. It's more than our national defense. We're adding a trillion dollars to our debt every roughly 100 days. That will compound. So what takes 100 days now will be 95 and then 90 and then 80 and then 60. I don't understand how we're not at the end. What am I missing?
- [39:08]
Financial Analyst/Commentator
Because the money, because there's so much money trapped in the treadfi Western financial system. It's there to be inflated, there to be taxed. Every dollar you have in your retirement account, every dollar you have in the, in your tri bank account, every stock that you hold that is required to trade on the, you know, the clearing functions of the US or the European governments is ripe to get taken by the government via an inflation tax. So that's how they're able to do it. Because this capital is sitting around and not doing anything. The pension funds are forced to own government bonds. The banks are almost forced their excess reserves and buy government bonds. And so that's how they're able to keep the game going because there's all this capital that's sitting around that they can inflate away. Now that's why crypto is such a fundamental problem, because it's an escape valve. It's outside the system. I take my fiat, I sell it and I buy Bitcoin. Can't take it away from me. You don't even know I have it. And so that's why the ETF is such a key component which is, okay, recognize that we have a problem. We're not going to change our spending, we don't want to outright ban the thing. Okay, now it's time to allow these fund managers to ingest this fiat into a derivative, but keep the Bitcoin within the system, you know, so that is why you can afford to do this. And of course the US is a reserve currency issuer, largest military in the world. Again, you have the ability as the empire to do this a lot longer than other countries can. Now to the extent that other countries stop saying I'm willing to sell you oil or food or whatever in dollars, then the ability to keep this game going, the timeframe diminishes.
- [40:59]
Tom Bilyeu
Yeah. What do you think about the petrodollar being used to have at least a response to our financial warfare, which may be a little unfair, but when we, for people that haven't thought through this yet, when we inflate the currency that spreads it to people like Japan that own trillions of dollars in bonds. So we're, we're exporting the inflation tax. Do you see people weaponizing that, do you think? Because I've heard people say, oh my God, de dollarization is imminent. And I've heard other people say get out of here, there's literally nothing else. So people would flee the dollar to what?
- [41:43]
Financial Analyst/Commentator
So I think that they're get missing the point. So de dollarization started in 2008 when the US authorities decided that they're going to save the banking system by this massive money printing. And if you look at the charts and you take a look at Amount of gold that foreign central banks started buying with the nadir was in 2008. Now it's ticking up. Similarly for the the effect of foreign central banks on buying US treasuries the
- [42:11]
Arthur Hayes
height 2008, now it's tapering off.
- [42:14]
Financial Analyst/Commentator
So de dollarization is happening slowly at the margins. The Roman Empire, the British Empire, these empires didn't fall overnight. It's not like overnight you just stop using these currencies.
- [42:26]
Arthur Hayes
It's a slow process. It happens at the margins.
- [42:30]
Financial Analyst/Commentator
We're already seeing it in 2023, 20% of all oil sales were in a currency other than the US dollar, highest ever. So the petrodollar is breaking down slowly at the margin. Of course the western world and the US major allies are going to continue using the dollar whether China, Saudi Arabia, whoever uses it or not. That's not the question. The point of, for an investor trying to save is okay, align myself with the trend but don't get blown out of water if it takes a long time. If de dollarization is a trend, if the trend is to have a multipolar situation of currencies being used, what do I know that central banks and countries have used in the past to trade between themselves to settle debts and trade flows?
- [43:20]
Arthur Hayes
Gold, okay, that's why I own gold.
- [43:22]
Financial Analyst/Commentator
I own gold because I know the countries who are not going to use the dollar to settle their trade imbalances
- [43:27]
Arthur Hayes
will use gold and are using.
- [43:28]
Financial Analyst/Commentator
I want to be alongside that trade. Okay, well what about the people? The people don't want to continue to be over by inflation whether they're rich or poor. Here's a global decentralized digital system that anyone, rich or poor can access. Okay, I want that system too. Another put option on the current, you know, order of things. And again, I think people try to get more holistic about it like right or wrong, like I believe America is good or bad, it doesn't matter. All, all I'm saying is we're going to change and I want to be long the change and I don't know what it's going to happen in the future. I just know it won't be like it was yesterday.
- [44:04]
Tom Bilyeu
Is there anything right now that is a plausible replacement for the dollar? Is it BRICS I know is trying to back their currency with gold? I think central banks are buying up gold. Is it a return to a gold standard? Is there another governmental currency that has more respectability, less inflation?
- [44:26]
Financial Analyst/Commentator
I would say that, you know, in my view the most likely outcome is that countries will continue to use the dollar or whatever currencies to trade amongst each other. So let's say that I'm, you know, I have a, I have some oil and, but I also import food. So if I sell more oil than food I need to import, I say, okay, don't pay me the difference in dollars, pay me in gold. But I can still invoice my oil in dollars or whatever, depending on who's buying it. So I, I don't think there's going to be one particular global reserve currency. I think there'll be different economic spheres and the trade between those economic spheres, the nets of that trade will be settled in gold. Interesting.
- [45:09]
Tom Bilyeu
Okay. Are you surprised at all that gold does not go up in a similar fashion to Bitcoin?
- [45:17]
Financial Analyst/Commentator
No, because gold is different. It's bigger door. It's not digital. It's not the new, new thing. The drivers of gold are very, very slow and methodical central bank purchases. The crazy volatility in gold will be when let's say that, you know, the US government wants to help the situation, they devalue the dollar in gold and say, okay, I think the gold on the, on the Fed's balance sheet is held at $35 an ounce. Same price it's been since 1970s. Right. They say now our gold on the Fed balance sheet is valued at $10,000 an ounce, which is basically them devaluing the dollar. Gold shoots up massively and now all
- [46:01]
Arthur Hayes
of a sudden a lot of these
- [46:01]
Financial Analyst/Commentator
financial problems go away because the Fed has so much gold they're valuing at a certain price and now the dollar is seen as a stronger currency. So that's a situation that could happen which would massively one off increase the price of gold by 3 to 5x. And other countries could do the same thing who hold gold at an artificially low value, but could revalue it higher on their own balance sheets. So that is probably the gold bull market scenario that I'm sort of. That's why I own the thing. That's the optionality that I'm playing is a revaluation by central banks to make their currency seem stronger in gold terms.
- [46:39]
Tom Bilyeu
I've never heard that before. What, what would trigger that?
- [46:44]
Financial Analyst/Commentator
Oh, a war budget crisis. I mean, the same things that, you know, the government's done in the past, right. The, when the gold window closed, I think FDR depreciated the dollar and gold terms by like 80% overnight or whatever it was. But obviously you couldn't own gold as a person did it after that, said, okay, I'M gonna take all your gold now. I got all your gold.
- [47:10]
Arthur Hayes
Guess what dollar is worth.
- [47:12]
Financial Analyst/Commentator
The gold is worth way more dollars now.
- [47:14]
Arthur Hayes
Sorry.
- [47:16]
Financial Analyst/Commentator
So I think that's a sort of a situation that could occur.
- [47:21]
Tom Bilyeu
Okay, let me see if I understand this.
- [47:24]
Arthur Hayes
You're.
- [47:26]
Tom Bilyeu
I don't understand this. Why would you want to make gold more expensive? What do you plan to do with that but buy more gold? Buy more dollars? Like what are you doing?
- [47:38]
Financial Analyst/Commentator
No, you already have a bunch of gold. So at least the US is a very stark example. The US Federal Reserve has however many metric tons of gold, a lot of it, it's held at, I think it's $35 an ounce or whatever that price is. Very low value gold right now is valued at.
- [47:52]
Tom Bilyeu
But are they artificially holding that price down?
- [47:56]
Financial Analyst/Commentator
They're not holding it or they're saying this is what, this is what we value gold at. So this is so our balance sheet. If you think about what's a dollar worth? It's worth the assets that they hold. What's the only real asset that the federal government has in a monetary sense? It's gold. How much gold do you have? What do you value it at? So US being the reserve currency issuer could say overnight we think that gold is worth $20,000 an ounce. And guess what we have? I don't know how much they have, but. And so all of a sudden I
- [48:24]
Arthur Hayes
was like, oh shit.
- [48:25]
Financial Analyst/Commentator
They've just devalued the dollar and gold terms, but they own a bunch of gold. So now the dollar, instead of being a US treasury backed currency and the US Treasuries are trash because of all
- [48:36]
Arthur Hayes
this spending, it's now a gold backed currency. And guess what? They've got a lot of gold and it's worth $20,000 an ounce.
- [48:43]
Tom Bilyeu
So hold on, hold on. Sorry, sorry, sorry. My brain is just too small for this, but I really want to understand this. So are you saying that they are repegging the dollar to gold in this scenario?
- [48:59]
Financial Analyst/Commentator
Yes. Well, it wouldn't be a peg per se. It's, it's. What do you think a dollar is worth, right? If, if this, if you're, if you believe in this de dollarization thing and that country's like, I don't want to hold the dollar because it's inflating away, it has no value, it has no assets back into that. I don't believe in the US Treasurys. Well then the federal government and the Fed could say, oh actually guess what?
- [49:19]
Arthur Hayes
We've got all this gold it used
- [49:21]
Financial Analyst/Commentator
to be worth this now it's worth that. This new price that we believe gold is worth is massively above the current clearing price of gold. For certain individuals, we'd be willing to exchange gold for dollars. Not everyone, obviously. Only certain individuals, certain probably sovereign nations. And all of a sudden the dollar becomes a strong currency again because it.
- [49:46]
Tom Bilyeu
Why on earth would a government do that? Like, if I saw that you just changed the value of your dollar massively, why then would I exchange gold? Because I'm thinking, ooh, dollars are still great. I still want to have dollars and I have gold. And so now I'm gonna get those dollars. Like to, to me again, I'm sure I'm just missing something, but to me, I would see that as such a wild manipulation of the currency. I'd be like, I don't want anything to do with a currency that just changed three to five years old Bitcoin.
- [50:19]
Financial Analyst/Commentator
But this is how fiat currencies have worked in the past. And this, and this was done in the 19.
- [50:24]
Tom Bilyeu
What's the incentive?
- [50:25]
Financial Analyst/Commentator
Is it because you have to devalue the currency? You, the US needs a weaker currency. A weaker currency helps you sell your
- [50:31]
Tom Bilyeu
X. I get our incentive. But something is only worth what someone else is willing to pay. Why is someone else willing to trade their gold for dollars in that scenario? Obviously someone is or they wouldn't do it.
- [50:42]
Financial Analyst/Commentator
Well, no one don't have to trade anything. I'm saying the, the government itself says that we believe gold is worth this price. Right now they say it's worth $45 or 35 DOL. It is on that balance sheet now it's worth. We will exchange gold at this price way up here. And they're able to do that because they own a ton of gold. If you didn't own a lot of gold, then I would agree with you. Why would you do that? This is more a way to engender a belief that the dollar has a. A large gold value. Well, okay, here's what we value gold at on our balance sheet. And we're able to do this because we're the central bank and you can exchange gold at this price. Now it's much higher than the price that it is around the world. Now that only works if you have a lot of gold. US has a lot of gold, China has a lot of gold, Russia has a lot of gold. So there's, there is a thinking out there that any number one of these countries that have been accumulating a lot of gold could say our currency is very strong. Guess what? We're willing to bid for gold at this high price. Therefore sell me oil in my currency because you know that you're going to get gold at a very attractive price because this is what it's worth. Sell me medicine, sell me wheat, whatever it is. So it's a confidence game amongst other issue, other trading partners to say my currency is worth a lot of gold. Because gold has historically been the real
- [52:04]
Arthur Hayes
currency of the world. Not these fiat things, man.
- [52:08]
Tom Bilyeu
Again, so that seems false. What you're saying is my gold is worth a lot of currency. My currency is worth a tiny bit of gold. If my currency used to be $35 buys you an ounce of gold and now it's a thousand dollars buys you an ounce of gold. The gold got expensive. The currency devalued in its purchasing power. Anyway, I'm probably tearing their hair out right now. Say that again.
- [52:34]
Financial Analyst/Commentator
But I also, but I also have a trillions of dollars of debt. So now my currency is devalued in gold terms, but I owe a fixed amount of debt, right? So the reason why, and that's the reason why I devalue your currency is, well, I own, I, I owe a lot of it. I, I owe a lot of it. And now it's worth less. I've decided it's worth less. So I can pay you back. But you're getting paid back in depreciated dollars. Now obviously going forward. People who trade going forward have a different deal than people who have traded stuff in the past. So again, yeah, I agree with you. It's a fucked up way to treat people who invested in your bonds. But again, it's another option that you can use as a sovereign country is devaluing your currency in gold terms to pay back an unsustainable debt load. If you don't want to outright default by saying, I'm just not going to pay you back instead of saying that, you're saying, okay, I'll devalue in gold.
- [53:23]
Tom Bilyeu
I'm going to say, psych, it's worth like one tenth of what you thought it was worth. That's crazy. I can't believe that they can do that. Insane. Okay, let's talk about all the liabilities. Since we're on the subject. Do you think that the U.S. so going back to this idea of Argentina comes in, they slash spending. For the US to get back on track, they would have to slash spending. Social Security is basically a pyramid scheme. Would they be wise to lop off Social Security and could you see that actually happening? With any sort of political plausibility
- [54:13]
Arthur Hayes
in
- [54:14]
Financial Analyst/Commentator
the United States, given that boomers are more politically active, I would say that it would probably be a death sentence for most politicians to try to take away those health benefits. Now, a very skilled politician who's able to get a lot more younger people out to vote and explain to them how they've gotten over by the old people in the country, if that person's able to do that and put in that kind of work, then yes, I think that, you know, a reformation of the United States's healthcare system could be on offer. But if, if you're not willing to put in that sort of political work to re energize the younger constituents, there's no fucking way you'll be able to do it.
- [54:59]
Tom Bilyeu
Did you see the video that Ben Shapiro posted about retirement and Social Security?
- [55:08]
Financial Analyst/Commentator
No.
- [55:10]
Tom Bilyeu
It's very interesting. Lighting the, the Internet on fire. And he basically said, look, Social Security is not going to play out the way that you think. You're probably not going to be able to reap the benefits. Not with people retiring as early as they are. You should, you know, look at pushing retirement back or removing retirement altogether. If you look at managing a fiscally responsible country. Is that an option on the table for you or do you think that there are better ways to get that done?
- [55:44]
Arthur Hayes
Absolutely. You should remove.
- [55:46]
Financial Analyst/Commentator
I think these, these programs are great for the people, you know, the boomers, right? They, the biggest beneficiaries of, of all these, you know, around the world. These sort of like Social Security programs, depending on how you, you pay for them and removing them will remove that, that dead weight. But I think at the other end you also need to sort of reform like, you know, global sick care, which is the health industry and the misaligned incentives, right? People shouldn't be dying the way they're dying based on the shitty food that we eat and the over prescribed medicines. There shouldn't be. And that's why people think, oh, I need to have this health care because everybody gets sick. Why does everyone get sick? Because we eat fucking processed food and all this dog shit that's, you know, put out to us as healthy. There's a reason why everybody spends a majority of their money in the last like two years of their life dying of horrible cancers and heart disease and all this kind of shit, right? We're poisoning ourselves every single day with these fucked up food chains. So I think it's not just let's remove the retirement benefits and the healthcare as well. Let's get at the Root problem of why do we treat people the way we treat them in the healthcare systems around the world? Let's have a better relationship with food.
- [56:55]
Arthur Hayes
Yeah.
- [56:56]
Tom Bilyeu
One thing I don't think people really understand is that you can, obviously, because we print to make all these problems go away. But if healthcare costs, you know, let's say 10x what it needs to cost, if people were actually healthy, you are quote unquote bankrupting the country and that you get to a point where there's no way that the productivity of the country could possibly match that. So you've got the interest payments just absolutely insane. You've got sick care management insane. You've got Social Security, retirement. All of it becomes really unmanageable. I have, until recently I had no visceral relationship with how those expenses actually played out in terms of the budget until I started looking at how much the government spends versus the actual GDP of the country. That stuff gets very scary. And that's why we race towards war. We flood into crypto. It all comes back there. All right then let me ask you, where does ETH go? We've talked about Bitcoin. Where do you think ETH goes from where it's at now?
- [58:08]
Financial Analyst/Commentator
Oh, maybe 30, 40,000.
- [58:11]
Tom Bilyeu
Whoa, that's mahusive. What do you think gets us there? Just the knock on effect of everything that happens to Bitcoin has a trickle down to ETH trickle down.
- [58:23]
Financial Analyst/Commentator
You have the eth, etf, possibly the Ethereum is the decentralized computer and the decentralized computer has a commodity, the ETH, the currency that pays an intrinsic 4% yield, which is the staking yield. It's the only crypto asset of that size that has this intrinsic yield and that's going to draw a lot of. It's the Internet bond, it's the bond of the Internet computer and pays you a yield to own it. And so I think that's going to be a very powerful narrative as people start to think a bit more about what ETH actually is. And they're going to allocate and say, oh well, not only do I get sort of this deflationary network value increase in the ETH, the currency, I'm also getting paid 4% yield on ETH. Where else do I get that sort of return? That's great, I want to allocate to this and there's all sorts of different interest rate strategies you can do around that. But I think that's going to be a big narrative for people who are going to get into ETH and Understand?
- [59:24]
Arthur Hayes
Oh great.
- [59:24]
Financial Analyst/Commentator
I get to participate in that's create a new digital Internet on defi and I get 4% yield.
- [59:32]
Tom Bilyeu
Why do you think that right now ETH seems to be more to the upside. I don't know if this is true to the dollar, but it seems to be more to the upside than Bitcoin. So I'll see Bitcoin dip, but ETH just keep going. Not that it hasn't had its own dips, but are people pricing in the future in a greater way than they're pricing in the reality of bitcoin today?
- [59:58]
Financial Analyst/Commentator
I don't think so. It's a smaller asset, right. So smaller things move faster. Just love large numbers. So I'm not really. Yeah, I don't think so.
- [60:08]
Tom Bilyeu
So do you think it's rate of, rate of increase will speed up if an ETF goes for sure, just like
- [60:16]
Financial Analyst/Commentator
Bitcoin, just more, more assets and you know, if people are actually using the Ethereum network post the, the merge, you, it becomes the, the supply of eth actually declines. So there's less eth available the more people use the thing. So if we believe in defi and the network activity grows in defi because more people know about it, they want to experiment, then not only the, the total supply of ETH declines and then you have the etf, you know, taking eth out of circulation as well. So you get sort of a double whammy effect on, on sort of the price and the upside.
- [60:52]
Tom Bilyeu
The narrative that I've been hearing is you're going to get big gains in bitcoin, you're going to get bigger gains in Eth and then you're going to get even bigger gains in Solana. Is that just one, do you agree with that narrative? And two, is that just a law of large numbers or is this people seeking out the highest volatility, clearest narrative assets?
- [61:14]
Financial Analyst/Commentator
It's oh, I guess timing is everything. So we think about last cycle. So bitcoin went down, something went from 69,000 down to 16,000.
- [61:25]
Arthur Hayes
Right.
- [61:25]
Financial Analyst/Commentator
Solana went from 250 I think to seven. So yes, from seven to 250 is going to be a bigger return from 16,000 to 69,000.
- [61:36]
Arthur Hayes
Right.
- [61:37]
Financial Analyst/Commentator
It's just, it's the path dependency of returns and the time in which you get in and out of an asset. So you could make much more money in Solana or some other much lower market cap shitcoin than you could make in Bitcoin. But if your ass doesn't get off the train at the right Time you're going to get absolutely wrecked versus Bitcoin. Yeah, you might get wrecked, but it won't be as bad as going from 250 to 7. So again it's, it's one of those things, right? Yes, you can make more money in lower market cap shitcoins, but if you don't time it right, you're going to lose more of the downside. So you have to sort of balance those, those two together. All right.
- [62:15]
Tom Bilyeu
As a trader you seem very comfortable with what I'll call trading on culture, trading on trends, momentum. Because when I talk to people about why I'm a believer in Bitcoin, why I'm a believer in Ethereum, I can say very robustly that I have a thesis around where the world is going and those are going to be long term adoptions. They're not fugazi, as you have said about other things including the tradfi system. There, there's just something really intrinsic about them. Now there's a flaw in the Bitcoin thing. If it can't, whether it's ordinals or whatever, whether it can't become another thing, which it has that sort of looming specter, but that narrative, digital gold, it being the store of value makes sense. Ethereum world's computer, it's a bond in the distributed world's computer.
- [63:06]
Financial Analyst/Commentator
Cool.
- [63:06]
Tom Bilyeu
Those make sense. Beyond that, when you get into NFTs, maybe Solana, although if they can speak to maybe gaming, web3 gaming or something like that, then there, there could really be a core thing there. But I have a feeling that's not why you're trading on it, that this is really just about. People get hyped about a thing. I'm able to read the tea leaves, I see what they're getting hyped about. I know the signs to get on the train, I know the signs to get off the train and, and I trade on that. Is that an accurate assessment?
- [63:36]
Financial Analyst/Commentator
Yes. So I believe that I have a, at least for the assets that I have large in my portfolio, I have a fundamental understanding of like what they are, what they're not. And I can trade on the narrative and know when the narrative gets out of whack with what they fundamentally are, then maybe it's time for me to step off versus I don't understand what these things. I've never read the white papers for Bitcoin or Ethereum or you know, reading research from very much smarter individuals on the like technical things that are going on. I just know what I read on Twitter Your ass is going to get wrecked because you don't even know whether you're believing in something that's true or false. At least if I know I'm trading a piece of shit, I know it's a piece of shit and I'll size my position accordingly.
- [64:19]
Tom Bilyeu
That's interesting. Okay, so everything is gambling. Getting in the elevator versus walking up the stairs is a gamble. I think that people would do well to conceptualize all of investing to an extent as a gamble. 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 in 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 there, 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, I, 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 that you have to store them in different places and not at your house and ah, 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?
- [67:18]
Arthur Hayes
So I think most people don't care about privacy. And that's. I, I know this because they have a mobile phone in their pocket, a smartphone. The smartphone's 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. Um, you want to look at thirst traps. Whatever the reason is, right, we, we've done this. No, the government didn't force us to do this. These were private companies creating these products, right? 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, is just too much. And they're going to stay in, in this system. And I like to say that there's a, there's a flood coming. This, you know, inflationary, maybe pseudo collapse of the fiat financial system. There's an, there's a, no one'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 lovers of technology, and that's their issue with it. And so now we're seeing that this, 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 aren't a bunch of old bald dudes sitting in New York, London and Paris and whatever 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 maneuver private keys. I don't want to worry about where I put my wallet. I guess 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. You're like, oh, the price goes up and down on the screen. I've 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, resistance or the decentralization, Right? So while we as traders are cheering, yes, etf, etf, etf, that's gonna 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 bear, 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. 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 valuable, this immutability, this money, this, 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 and going forward because as you rightly point out, it's just pain in the ass to be your own financial institution.
- [72:22]
Tom Bilyeu
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 Web three 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, 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, 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 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.
- [74:25]
Arthur Hayes
Yeah, I hope it never comes to pass.
- [74:28]
Tom Bilyeu
You and me both. So I have to ask, where do you think bitcoin is going? Is this something that, you know, 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?
- [74:47]
Arthur Hayes
So my working model is that we're going to continue chopping around 25, 20, 30,000 this year
- [74:56]
Financial Analyst/Commentator
as we get to
- [74:57]
Arthur Hayes
some sort of financial disturbance. And people recognize that real rates are negative. If government are growing, if the 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 halving event, right? Maybe there's going to be a few ETFs launched by large asset managers in the US and European and China, maybe Hong Kong to be specific. So we regain the all time high end of the end of 2024, and that's when 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 750,000 to a million dollars in bitcoin on the upside, right? And we're going to whatever the level
- [76:09]
Financial Analyst/Commentator
is, there's going to be a round number, everyone's going to be Focusing on,
- [76:12]
Arthur Hayes
I guess like Bitcoin hit 69,999, didn't hit 70,000.
- [76:16]
Financial Analyst/Commentator
And then it's going to go and just crash, you know, 75, 8, 90%, whatever it is.
- [76:22]
Arthur Hayes
Right. Doesn't matter.
- [76:23]
Financial Analyst/Commentator
But yeah.
- [76:24]
Arthur Hayes
So my upside target, ish is the 75,750,000 million dollars level 2026 timeframe. 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. Um, so we're gonna have a lot of ridiculous prices out there and not just in crypto.
- [77:07]
Tom Bilyeu
Yeah, that, that will be a weird moment. And with people thinking that the party is never gonna end, of course, it always does. 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.
- [77:42]
Arthur Hayes
China never eliminated crypto. They'd never eliminated crypto from China.
- [77:45]
Tom Bilyeu
Tell me more.
- [77:46]
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 story, you know, has played out over Chinese history. They do not like this. And so seeing that, you know, that could cause disturbance in China. And also you have 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, you know, Chinese people still own bitcoin. That hasn't changed.
- [78:32]
Financial Analyst/Commentator
You can't mine it.
- [78:33]
Arthur Hayes
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, um, but it's 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 own crypto. So that's why there's been licenses issued. Um, 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 in 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
- [80:56]
Financial Analyst/Commentator
decides what they want to do with
- [80:57]
Arthur Hayes
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 in 2017, accumulating in like, you know, 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 testbed region for sort of, you know, financial innovation and give the Hong Kong economy something to. To draw in, to expertise, forward capital. Because, you know, Chinese government believes in technology. Crypto is a 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, you know, a tacit government support for this technology. We'll see what happens. At the extreme, if, you know, all of a sudden there's all these firms with, you know, trillions of dollars of crypto, I don't know. 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.
- [82:19]
Tom Bilyeu
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?
- [84:05]
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 were created in the 19th century mid.
- [84:25]
Tom Bilyeu
But that already assumes we can't have a soft landing. What if we just they get it right?
- [84:30]
Arthur Hayes
If they get it right, then you earn. You could you earn what you earn 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. Right. I could have made the same say you could have take 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 the US stocks with taking none of the mark to market risk. So it's 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. Risk adjusted perspective, if they get everything right, then okay, maybe the only stock I should go is on Nvidia. Fine. The rest of the market is dog shit. Why even, why even? Why even play the game? Put your money in a 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.
- [85:47]
Tom Bilyeu
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?
- [86:12]
Arthur Hayes
Well, so the US government right now is Running 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 for my, for the, you know, Goldilock, 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 vehicles. Or we're going to build all these different power plants. 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 productivities. Therefore I should own a company that makes real stuff apart from semiconductors. Otherwise I'm just putting money in overnight bonds because the second they cut the rates, cool, I don't care. I didn't lose any money. I just take my money in the bonds and I go buy some, right? But I'm definitely not going to own long term long end bonds. That, 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 solve everything. Just put your money in short term bonds and take no risk.
- [88:05]
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