Arthur Hayes - Thoughts on Macroeconomics Current Events - TOKEN2049 Singapore 2024

good afternoon [ __ ] all right it's a great day today it's [ __ ] fed day our favorite person J Powell is going to Grace us with 25 50 75 whatever the [ __ ] he decides to do uh tonight while you're all drinking at the bar he'll be doing a press conference so I wanted to talk today about what sort of crypto trades make sense and don't make sense in a falling interest rate environment all right so here's a chart I've referenced a few times uh a global panoramic of which central banks are cutting and we're about 50% but the one that really really matters is the Fed what are they going to do uh as of August 23rd I think it was this year Paul got up on in Jackson Hole and he proclaimed that it was time to cut rates and as we can see here this is a chart from Bloomberg which shows the market expectations for how many rate Cuts there's going to be from now and until the future I haven't checked this morning but I think it's about a 60 60 or 70% chance that they do a 75 a 50 basis point rate cut and before I get into what I think is going to happen with crypto I in my opinion think that the FED is making a colossal mistake cutting rates at a time when the US government is printing and spending as much money as they ever have in peace time when you have inflation above their target and you have real GDP growth of plus 2% for the past probably 8 to nine quarters and so while I think a lot of people are looking forward to a rate cut meaning that they think the stock market and other things are going to pop pump the jam I think the markets are going to collapse a few days after the the rate F FRS rates because this is going to narrow the interest rate differential between the US dollar and the Japanese Yen and we saw what happened a few weeks ago when Yen went from 162 to about 142 over about 14 days of trading that caused almost a mini Financial collapse and now the fed and the market expects that they're going to continue to cut rates very very quickly we're going to see a revisit of that Financial stress but back to crypto all right so this is one of my favorite trades in my non- crypto portfolio I just sit on my [ __ ] t- bills and I collect fat interest so this is the one Monon T Bill rate and it's been hovering around 5.5% for the past year and a bit since the FED stopped cutting stopped raising rates now when you have enough capital and you make five and a half% on your money you don't have to do very much why take risk why try to make your Capital appreciate at the risk of capital preservation and so when people would have a lot of assets they are dissuaded from doing certain things because they can make so much money just sitting on their ass in t- bills and this has had a profound effect across financial markets including crypto so I want to lay out a few winners and losers from a change in the interest rate environment based on falling t- bill rates and interest income that you can generate just by owning the safest Fiat asset that you can so the first three assets here Athena ethereum or five ether 5 pendo just a disclosure I own big ass bags of these I don't own any of Ando thankfully um but at the end of the day the ma portfolio is very geared towards a falling interest rate environment and basically what that means is we're long allowed of projects that give users interest income and various shapes and sizes now right now these income yields are either slightly above or below the rate of t- bills and that has put a drag on their price performance because why would you invest in a riskier dii application when all you can do is call up your broker and put your money in t- bills and make 5 a half% now now there are projects that have done very well in this High interest rate environment I'm just using Ando here as an example there's lots of other um real world assets uh types of projects and basically these are projects where they say Hey you need treasury bills we're going to buy them put them in some sort of legal vehicle and issue a receipt that pays you interest these are one-way bets on rates going up and staying high but when rates go down there's no real need to have these products anymore so first up ethereum a lot of you in here are probably what the [ __ ] ethereum you haven't done [ __ ] Salon is just kicking [ __ ] ass for the past uh few months in this bull market the major narrative around ether is that it's an internet Bond and so if it's an internet bond with a yield of 4% then the t- yield is higher than that why would I invest in this Bond but if the T Bill yield drops quickly which I believe it will then ethereum becomes in the money and I'm earning more in endogenous ethereum yield than I can get in US dollar yields and t- bills and so as we see rates quickly decline as I expect because the FED is going to cut rates markets are going to tank and they're they going to say well let's do do more of that because that's what's going to fix things we we reignite the ethereum bull market so right now as you can see here the horizontal line is sort of the t- bill yield and our staking yield e is you know 3 to 4% it's not not doing enough for holders which is why they don't own it and as you can see here ethereum has underperformed Bitcoin in a very big way this bull market that we've had year today ethery which is a way that you can stake your eth in a non-custodial way has also gotten the [ __ ] kicked out of it because again it's offering I think about a 3% yield after fees that's not cutting it we need the t b yield to fall faster next up Athena a synthetic dollar again this is a way to package a basis trade for those of you who aren't familiar with it I take some ethereum some Bitcoin and even Solana physically and I sell a Perpetual swap against it and I earn some yield why is this yield present because Traders use leverage and they have to pay for this leverage and this trade has been going on for many many years this is how I started my career in crypto trading this basis trade athenos package this up in a very nice nice and easy way you just stake your money and you earn this Shield again there's risk involved it's not exactly as safe as a US treasury bond if you're a particular yield chasing investor and so if the yield that Athena is offering is not that compelling versus a t- bill you're not going to put your assets on this protocol but again if the TBO yield and the FED continues to cut rates number one crypto Market should reignite and go higher Traders might expect that and pay up for leverage basis increases tvl goes into Athena and hopefully the price exits the nuclear bare Market here's a chart of the Athena stake USD yield versus the T bills as you can see back earlier this year this is very very compelling you're earning 30 40 50 60% per anom versus a 5 a half% t- bill yield of course I'm going to put my dollars in this in this product but right now it's barely yielding at the t- Y I think it's about 4 and a half% right now so it's actually below and as a result Athena's price has gotten hammered because people are saying why do I want to put my money in this protocol when it's not giving me the yield that treasure bills are giving me again if rates go down this trade becomes attractive again and tvl should rise and so should the price another thing that we want to talk about Bitcoin staking um pendel is an interest rate derivatives protocol that allows you to trade fixed and floating interest rates they've just strolled out a new product that allows you through uh the Lombard corn protocol to essentially stake your Bitcoin and earn a a fixed yield and again this yield is attractive but it comes with risks I don't think it's high enough yet to convince a lot of people to rush out of earning 5 a half% in treasury bills into this Bitcoin yield and I'll show you a second what that yield is similar sort of story if the yield drops I'm more incentivized to own this sort of interest rate risk and as such the pendal tvl or total value locked should rise and offset some of the tvl losses that are coming from the expiration of liquor reaking protocols like igen layer and their points programs again you can earn about $9 % uh doing this strategy right now it's quite a new thing I think they just rolled it out a few weeks ago you can earn 9% on your Bitcoin is it that attractive versus 4 and a half% maybe for some of you but I would bet but I would bet given the defi risks and smart contract risk that a lot of interest rate sensitive investors don't think this is high enough when again I can make five and a half% in treasury bills so here's a chart of Pendle it's obviously given back 50 60% of its gains uh so far will there be Resurrection as Bitcoin staking yields are outpacing treasury bills by a large margin so I've spoken a lot about how I think real world asset protocol is a complete dog [ __ ] and mainly that's because it's an interest rate bet and I can do that in a cleaner and cheaper way than paying up for some high FDB low float token but at the end of the day these protocols provide a valuable service for those of you who don't have a US brokerage account or don't have access access to one it's very difficult to get a clean way to invest in treasury bills I'm sure there's lots of very wealthy people in this room and if you go and ask your private Banker hey I'd like something that just owns treasury bills they're going to sell you all sorts of dog [ __ ] that isn't what you ask for because they don't really make a lot of money selling treasury bills because they're very very cheap to own very very low fee so these rwa Protocols are quite attractive for certain types of investors who really want an easy way to access this 5 and a half% % yield but again if we expect the FED to aggressively cut in response to a weakening economic environment or financial crisis then the whole reason to put your money in these R rwas goes away why would I want to you know take this smart contract risk to earn 1% or 2% and so that's why I believe that a lot of projects that depend on the project tvl that depends on a high treasury bill yield will suffer as rates Decline and I use Ando here as an example so I just pulled this off the website last night here's their market cap you know six billion fdv very low float um and you can get 5.35% using their usdy uh stable coin again that rate's going down it's going to go down today by 25 to 50 basis points and more as the FED continues to cut now Ando on a relative basis has performed quite well if you saw the other charts that I posted ether uh and Athena you see that they trade under the price at which they listed earlier this year whereas Ando is trading above where it came to the market and I believe that's because we're in a high rate environment and their product makes sense but as I've alluded to gravity is coming for Ando now I have about five more minutes than I thought I would so I just want to basically delve into a little bit more about why I believe that a the more that the FED cuts the more that the market is not going to like what is going to happen and I really want to everyone when they leave this room if they don't remember anything else it's tonight when you're [ __ ] up at some party you pull out your phone and you log on and you look at the dollar yen exchange rate it's the only thing that matters because if the FED surprise isn't go as 50 or maybe if it goes 75 basis points you're going to see a very very negative reaction in terms of the dollar Yen it's going to strengthen because the boj is raising rates and the FED is cutting rates and theoretically an exchange rate is this an interest rate differential and as such the dollar Yen should strengthen meaning the nominal price that you see on the screen should go lower so if I expect If the Fed Surprises with a larger than expected cut or they surprise with a very aggressive Dot Plot and the Dot Plot for those of you who don't know what that is they query every single fed governor and they say what is your expectation for the FED funds rate one month two month three months out to think three years into the future and you can plot this curve and see how aggressively they believe they're going to have to lower interest rates now if this is a very aggressive curve versus what the market expects you're going to see a massive strengthening of the Yen and what does that mean the Yen carry trade is probably the most used trade of the past three DEC ades whereby I as an individual investor or a corporate or a central bank I borrow Yen at practically nothing sometimes I even got paid for it and then I invest in higher yielding assets and what that has meant is I invest in the United States I invest in tech stocks I invest in the NASDAQ I invest in the S&P I invest in real estate I invest in US Treasury bonds the size of this trade has been estimated between you know upwards of 20 trillion dollar of exposure that of people who have borrowed Yen and so if this rate strengthens very quickly you wipe out your profit very very quickly and as such your risk manager Taps you on the shoulder and says cover your risk what does that mean you dump things you dump stocks they're liquid you dump treasury bonds they're liquid and the Japanese are the largest creditors in the world and as such jome pal and jenet Yellen will have to take notice of this because I think it's about what 40 days or 50 days until the us election the last thing that they want to have happen is for Camala Harris to go up against Donald Trump and the S&P is down 20% going into the election so that's why I believe that they will cut rates aggressively if they see jlyan strengthening and provide more supply of money which should turbocharge all the trades that I talked about today in this presentation so while I did talk a lot about crypto the takeaway from my presentation is please please please dollar Yen it's the only thing that [ __ ] matters I hope to see all of you at our party on Thursday have a great afternoon everyone