Arthur Hayes: The Federal Reserve Is Lying (EXPOSED)

So, everyone knows that quantitative easing equals money printing equals inflation. So, it can't be... There's no more QE. QE doesn't exist anymore. It will never happen again. The Fed will never call increasing its balance sheet quantitative easing ever again because...

The US economy is a financialized economy. The stock market is the US economy, and so at the end of the day, the authorities have to do whatever is necessary to make sure the stock market goes up.

However, in real money, in real terms, i.e., how many steaks can you buy? How many eggs can you buy? How many times can you fill up your car? There's real risk there. The real value of a treasury bill or a treasury bond or note fluctuates a lot, and to the downside over time.

So if you take away Bitcoin, which is obviously the largest thing that we hold in our portfolio, our best performing position of this part of the cycle was being long Ethena. We got in very, very early because we were the founding advisor of that project. And next year, the team is going to try... we need to find another Ethena that made our portfolio for the last 2 years. What's the next thing? I think the next thing is...

Yeah, I mean, I think Japan, after the speech that Ueda gave a few weeks ago or a week, I don't remember the timing, and he basically said that the rate hike was on the table. And then obviously the odds rose. From what I hear from people who are more knowledgeable at the BOJ, basically dollar-yen between 155 to 160 is like a no-go zone for the BOJ. And so they will do what's necessary, obviously hike rates or possibly green light some sort of FX intervention to prevent the yen from weakening past 160. So right now, the Japanese people, like everyone around the world, is suffering from an affordability crisis. The authorities try to gaslight them and tell them that inflation is not real. They know it's real. This impacted the recent elections. The LDP is no longer the dominant party in power, which is a big shock. 100% driven by the affordability crisis within Japan and the weak yen. And the new fiscal stimulus package by the new prime minister does nothing to help that. And so, you know, we were getting close to 160 on dollar-yen. And that's why Ueda came out and basically greenlit a BOJ rate hike. I think the rate hike might go from like half a percent to like maybe a quarter of a percent. So in the grand scheme of things, with inflation running at the official tally of 3% a year, it's kind of meaningless. It's yes, it's going to tighten the market a bit, but you know, dollar-yen was 100 a few years ago and now we're at 160. Japan is still on sale for anyone who's got dollars or non-yen based currencies. So this isn't really going to change much. Yes, we saw a bit of a risk-off move when the yen reacted to that. With Bitcoin, the markets digested that. I kind of think this is kind of a nothing to see here kind of moment. It's just going to go in line with expectations.

As far as if they really were getting serious about raising rates to where they should be? Yes. But I think this is a band-aid on a fire hose. The yen's gonna... it's still 155 yen as I'm looking at my charts right now. Okay, whatever. It's sort of gone down five big figures from 160 to 155. Who cares? Whatever. Yeah, Bitcoin reacted a bit. Liquidity is a bit tighter in Japan, but again, it's still too easy.

As I always say, the US president gets the monetary policy he desires. If you read presidential history from 1913 when the Fed was created until the present, this battle between the president and the Fed chair is nothing new. It's always been acrimonious. It's always been fought nasty in the press. You know, there's a funny anecdotal story that Lyndon B. Johnson physically assaulted his Fed chair at his ranch in Texas to get him to lower rates. So all this stuff like, 'Oh my god, Trump is being really nasty to Jay Powell,' this is nothing new. And again, he's going to put in his own guy. It doesn't really matter what they believe before they were Fed chair. They understand that when you're Fed chair, you work for Trump. And Trump wants lower rates. He wants more money supply. He wants to juice markets. And he wants to sort of try to claim with a straight face that he's not sponsoring all this inflation. Otherwise, he and his Republicans are going to get voted out of office in November of next year in 2026 for the presidential election. So again, he'll do whatever he's told. It doesn't really matter who's at the helm. They'll react to the situation as warranted and they will roll out whatever program is needed to get the job done. And so I don't really care who's the Fed chair.

So I guess the game, the Fed game and the Treasury game, is the US economy is a financialized economy. The stock market is the US economy, and so at the end of the day, the authorities have to do whatever is necessary to make sure the stock market goes up. And by extension, that means the AI mania. I know people are starting to question the AI bubble and all this sort of stuff, and yes, there's been a bit of a correction. I think that they're missing out. And you know, if you're a stock person, you go long, you deal with a bit of volatility, but this bubble is not ready to pop yet. No, and the authorities need it to continue. Trump has basically staked the entire US economy on AI being successful, and the only way AI is successful if it becomes more debt-fueled is to lower the cost of money and increase its supply, and he'll do that until he can't. And so I think that it's a bit premature to start trying to short the NASDAQ or all the Nvidia-type companies. These companies are still profitable. They're still spending capex out of cash for the most part. Obviously, there's the odd Oracle out of the mix, but yeah, I'm not an AI doomer yet, and the monetary policy needs to make sure this bubble continues because this is essentially the US economy. If you look at what has been value add to GDP since ChatGPT burst on the scene in 2023, for whatever year it was. So again, they need to make sure the US stock market goes up. The problem with that is it causes inflation. So then the other side is, okay, how do you as a politician stand up with a straight face and say, 'No, the policies that I told these people to implement do not cause inflation'? And so they change the name of stuff and they make it sound more complicated. So everyone knows that quantitative easing equals money printing equals inflation. So it can't be... there's no more QE. QE doesn't exist anymore. It will never happen again. The Fed will never call increasing its balance sheet quantitative easing ever again because even the man on the street or the woman on the street knows that they mean inflation. They don't like inflation and they'll vote blue or vote red at the next election, and that's it.

Yeah, I'm not worried about that either. I think that you just can't let these things stop right now. You got to keep feeding it no matter what it takes. Even if it takes printing money or buying into these things or whatever. So very good point. And yeah, the quantitative easing thing, I think they just kind of change the name of it every time, right? And you look back, you say that was easing, but this time it'll be different.

So the new term is Reserve Management Purchases. And when it first came out, I spent a lot of money on macroeconomic research, and I paid all of the writers that I read periodically, and I said, 'Okay, what is Reserve Management Purchases? Is it QE or not?' And the majority of the technical monetary market plumbers said, 'No, technically this is not quantitative easing.' And there's a bunch of reasons why. You ask some bond traders, some of my good friends, I'm like, 'Is this QE?' No, it's not QE. It's something different. Okay. Then you get some more of the people who have a little bit more cynical like myself who write macro stuff, and you say, 'Is this QE?' and they say technically no, but yes, it is. It's going to achieve the same purpose. So, I think right now, the market, as evidenced by Bitcoin because Bitcoin is the most sensitive asset to dollar liquidity issues, says no, this is not QE. I don't think that the market properly appreciates what that is. Before I get into why I think it's not QE, if you go back to 2008 and early 2009, Fed Chairperson Ben Bernanke comes out with the US's version of quantitative easing. The term quantitative easing comes from Professor Werner when he was talking about the Bank of Japan. I think he coined it sometime in the '90s. Quantitative easing, this balance sheet, using the balance sheet to affect asset prices. And again, the first time quantitative easing was done was I think the Bank of England back in the... when they were bailing out the... what was the name of the company? One of the companies involved in trading and colonization back in the 17th century. That was the first time there was quantitative easing. The proto stock market at the time crashed because people were like, 'Oh no, are they really going to discover all these lands and all this revenue?' And because it was such a big speculative mania, the Bank of England had to step in and essentially print money and buy the stock to help bail it out. That was the first time we had quantitative easing. So it's nothing new. Again, change the name. We've been changing names for hundreds of years. So right now though, it was quantitative easing. Bernanke comes out after the global financial crisis and rolls out this quantitative easing program in November, and the markets didn't know what to make of it. S&P continued to fall. S&P didn't bottom until March of 2009, when we were well into the wave of QE. And Bernanke always stood up and said, 'Yes, we understand that this is a temporary expansion of the balance sheet, and in the near future we will unwind this.' Now, by the time he left as chairperson in... I forgot what year it was, sometime in the 2010s, I think they were on the second QE program. The next chair, Janet Yellen, growing into her bad girl nature, continued quantitative easing. And it wasn't until 2021 when essentially quantitative easing was ended by Jay Powell, and obviously the market peaked at that point and had a nasty correction after that. But the point is, the market didn't understand what QE was. It didn't believe it was money printing as they understood it. It took a little while, and then everybody's like, 'Oh yeah, this is money printing, I love money printing, send it.' And so I think a similar situation is what's happening today with the Reserve Management Program, RMP. Is it technically QE? No. Because the Fed is buying Treasury bills instead of mortgage-backed securities and Treasury notes and bonds, which is what they buy in quantitative easing. And if you do the bond math, the modified duration of a Treasury bill is quite low versus the modified duration of a mortgage-backed security or a 10-year Treasury note. And that has implications about how the banking system replaces those securities with additional loans or bond purchases. Obviously, a T-bill is less impactful than a 10-year Treasury note because the 10-year Treasury note has more interest rate risk embedded in it. So yes, technically speaking, an RMP is not quantitative easing if you assume that the banking system is the one that is going to be the primary channel affected by this program. But it's not. The Fed is doing this to entice money market funds to lend more in the repo markets, which directly finance the US Treasury. So it's a way for the Fed to finance the US Treasury at the short end of the Treasury curve directly, using money market funds and the repo market as the conduit. And so people say, 'Oh, this is just technically helping the market plumbing.' But if Scott Bessent issues most of his debt at the short end and the Fed is buying the debt, that's money printing. It's the same thing. So, you know, that's essentially what I'm arguing. And I think that as time goes on, as we have a few months of seeing the operations, seeing how this money moves through the system, seeing how the US federal deficit doesn't decline, how the amount of weekly gross issuance of Treasury bills continues to increase, how the use of the repo market continues to grow, then people will understand. And nope, asset prices will bottom and start to recover. And then people will start to say, 'Oh no, this is actually QE. The Fed balance sheet is going up. The US Treasury is getting funded. This is the mechanism on how it works. Yes, it's a bit different than the QE program that they had previously, but it achieves the same effect.' And so that's essentially what I'm arguing.

I think we start getting into a lot more positive price performance in January. There'll be a bit of a question about whether the program is going to be durable because at least the official narrative is that this is a temporary program that will last until April. And so I think there's going to be... if the market starts to like this RMP and the weekly addition of liquidity to the markets, sometime in March you'll say, 'Okay, well what's next? Is this going to end? Is it going to continue?' And then maybe there's going to be a bit of question around that. And that could be a natural time that the market corrects a bit. And then there's obviously, who's going to be the next Fed chair? What's their policy? Are they going to continue this? We'll have a bit of market turmoil. And then they'll reaffirm, yes, we are committed to Reserve Management Purchases. And then it's off to the races.

So they... and the funny part is that there was the December 10th FOMC meeting, and they talked about the reduction of interest rates. Jay Powell never mentioned anything about Reserve Management Purchases. They hid this in a press release by the district bank of New York City. And they kind of said, 'Oh, they released a press release. We're doing this thing called Reserve Management Purchases.' Even in the press release, they didn't mention the exact amount that they were repurchasing. They said they released a schedule the next day. It was released and it's about $40 billion, right? So it's not like Jerome Powell got a threat at the press conference and announced this new program because they know it's money printing and they know they need to hide it. And so, by putting it at a district bank press release, not talking about it in the official communication of the meeting, it's like they try to sort of hide it and downplay its significance in terms of what they're doing. Whereas, when Ben Bernanke announced QE, it was front and center because again, he was trying to juice financial asset markets after a massive collapse in prices.

So, we're probably about 90% invested. There's a little bit of cash sitting around right now. Just weathering the volatility. Obviously, we don't use leverage at Maelstrom, so we're not really worried. Bitcoin goes on as breaks 80,000. Okay, whatever. I don't care. I have a view. I'm willing to hold on to that view and play that out. What we're really looking for is what's going to be the next dominant narrative in the altcoin space. So, if you take away Bitcoin, which is obviously the largest thing that we hold in our portfolio, our best performing position of this part of the cycle was being long Ethena. We got in very, very early because we were the founding advisor of that project. And next year, the team is going to try... we need to find another Ethena that made our portfolio for the last 2 years. What's the next thing? I think the next thing is something related to privacy, zero-knowledge proof, ZK technology, something like that. And I think that is going to hit on a lot of things that people are afraid of, like quantum resistance, AI overloads, AI deanonymizing data, all that kind of stuff. So, yes, we got a lot of Zcash beta, but I think there's going to be some project doing something related in this space that's really going to blow up and could be the best performing altcoin of the next 2 or 3 years. And I think 2026 is the time to find that project. I don't know what that is. That's our job as investors. We got to find it.

Well, people don't understand. People see what they want them to see. And so if I want you to see it, I let you see it. If I don't want you to see it, you're not going to see it. And so, whenever you see those wallet trackers on X or the social media platforms, take whatever you see with a grain of salt. It may or may not be exactly what I'm doing. And so, I like transparency and I like that there's a blockchain. I can put stuff on chain I want to have on chain. I can trade with other counterparties where you're never going to know what I do. But I think the privacy narrative for at least Zcash and other ZK-type things is, if I actually need to make sure that there's not a government or adversarial company or somebody watching what I do, do I have the way to do that yet? Or how do I make sure my data is private that's going across these digital highways? And that is the promise of ZK and whatever else people come up with. And there's obviously a latent fear about this, and you want to capitalize on people's fear. If it turns out in 3 years time that what the hottest shitcoin of 2026 was a complete piece of shit, it doesn't matter. You're still going to make a lot of money between now and then.

I mean, I think the biggest, the easiest thing to talk about would be the Canadian truckers. I forgot what year that was. And basically, there was a protest in Canada and people wanted to donate because they politically believed that they were politically aligned with these folks, and the Trudeau government essentially penalized them by saying, 'Oh, I see what you're doing there. I don't like your political views. Fuck you. Debank you. Put you up in the courts. Try to take your money.' And so, you know, that's a real-world example of why you need privacy. If you're a political dissident, if you're someone who wants to support a cause that the government doesn't like, you need a way to transact without them being able to stop you. And that's the use case for privacy coins.

Your money, and they could see everything because either it was through the bank system or it was onchain, and they were able to sort of back things out. So I think that's the real risk for the average ordinary person. You might have a political view, whether that's what are the hot things today, immigration, reproductive rights, all these sorts of things where you might have a view that differs from whatever you're supposed to believe wherever you're based, and you want to contribute to that as somebody who's politically inclined to do so. And crypto is a great way to do that. And what if the government's looking at what you do and they're able, because it is pseudonymous, to backtrack where this money came from, penalize you for having the wrong political view whatever that may be. I think this is something that the average ordinary person can get very passionate about, and Zcash fixes that. Shielded transactions, you don't know. I received my Zcash, I've shielded it, now I can send and receive money and the only person who knows what happened is me.

I mean, they have transparent addresses. So if you want to use transparent Zcash addresses, and I think a lot of exchanges, that's the only thing they use, yes, then those transactions are available to see. But the shielded transactions, that is shielded, and the strength of that cryptography increases the larger the percentage of the network that is shielded. So that's why a lot of influencers on X and other social media platforms... Do you think that there could be? I mean, I know obviously it's impossible to shut it down or ban it entirely or anything like that, but if the government made an effort to try to tell people it was illegal to use something like that, it would sure scare a lot of people away from it. Do you think that's a risk of betting on Zcash?

Right. A lot of narcotics are illegal around the world. Look at the United States. It's obviously addicted to drugs. Even though there's been a drug war since the 1970s. So people are going to do what they're going to do. And if you tell them they can't do something, they're going to want to do it more. So instead of that, they just lean on the intermediaries. XYZ exchange, you're not allowed to trade this. And so if it's not available in the easy way that people understand how to buy and sell crypto, then no one's going to use it. And when I got redpilled by Naval, read me cash, I pulled up my phone. I bought some. I pinged every one of my eight brokers and I said, 'Make me a price on a few million dollars of Zcash.' Only two out of eight were willing to make a price because they were not allowed to by the regulators to trade privacy coins. If you think about the exchanges, most exchanges do not allow the trading of Zcash or other privacy coins. And so this is how the government prevents you from owning it. They just make it very difficult to get.

So, you know, you debate it if you want. I always thought that Monero was the best of the best in terms of security coin. Maybe they've made some protocol upgrades since then, but there was a story about a criminal network in Japan. They were using Monero. The Japanese authorities were able to deanonymize the transactions using large data sets and some other things. And the way in which, and I'm not a cryptographer so correct me, don't go nuts on me if I get this a little bit wrong, the way the ring signatures work, it's not entirely foolproof. Zcash wasn't either while it had a very small percentage of transactions that are shielded. I think now it's about 30 or 35% of the total supply is shielded. And the big problem with Zcash when I was super knowledgeable about it back in 2016 when they launched, BitMEX launched the first Zcash derivative ever. It was quite an interesting market open for that back in the fall of 2016. There was a question about this trusted setup that Zooko and Ellie and a bunch of other guys did. We had to trust them that they weren't screwing it up. That sort of stuff was removed and I think the Halo 2 protocol upgrade whenever that was a few years ago in Zcash. So this is purely cryptographically secure and private assuming you have a large enough sample set of shielded transactions. So again, it's all about the shielded transactions. The higher that goes, the more robust the system is. And so I think that's one of the reasons why I moved from the Monero camp into the Zcash camp when we talk about privacy coins.

Well, it is technically risk-free in dollar terms, right? So we have to think about in what terms is it risk-free? It is risk-free in dollar terms. The US government, and no government for that matter, will voluntarily ever go bankrupt. So they can always print money and pay back the holdings. So in US dollar terms, an obligation of the US government is risk-free. However, in real money, in real terms, i.e., how many steaks can you buy? How many eggs can you buy? How many times can you fill up your car? There's real risk there. The real value of a treasury bill or a treasury bond or note fluctuates a lot, and to the downside over time. And that's the risk that you have to be concerned about. What can I do with these dollars? Who gives a damn if your bank balance is however many dollars? You could be a Zimbabwean quadrillionaire. Did it actually do anything for you? No, it didn't. What are you going to buy with this stuff? The whole point of money is not just to sit in a bank account. It's to actually do something with it. And if you can't afford to do anything with it, whatever that nominal number says on the screen or the amount of pieces of paper that you have stacked under your bed, it doesn't matter. So I think yes, it is risk-free in fiat dollar terms, but it's not risk-free in the things that we actually care about: feeding ourselves, clothing ourselves, heating our homes, driving the car, that kind of stuff. In energy terms, very risky.

And I would say yes, you're absolutely correct. I'm talking about a future state. I'm saying that the market is digesting this new acronym on money printing, at least in the United States, and it's going to change. That's the risk that I'm taking in my prognosis. And yes, you could point to where the market is today and say that you're full of shit, Bitcoin tells you you're wrong. And I say okay, well let's find out in the market. I'm going to be wrong. I'm putting my money where my mouth is and we'll see.