Awesome. Um, like you said, my name is Felix. I'm the host of the Forward Guidance podcast over at Blockworks, which looks at all things at the intersection of macro and crypto. So, no better guest to represent that than Arthur Hayes.
Hey. Hey, good to have you. Um, you are fresh off, you just released a new essay and I thought what's the best way to structure this conversation and I love the way that your essays which you've become quite well known for among endless other things is starting off with your high-level macro theme and then it always ends with how does that translate into crypto, how does that translate into altcoins. So let's walk through that and start off with what is your high-level macro framework. You wrote this new essay called '47' I believe it was called. Um, give the high level of that, what's going on there?
Yeah, so a high level is how does Trump and his boy Bessent, Buffalo Bill Bessent, get from where they are today where he controls the Treasury to, you know, where they need to go, which is the Treasury and the central bank, the US Federal Reserve are working together to print money to accomplish their economic policies. And so this is an essay basically talking about the minutia of like how votes happen and how many people you need to have on which board to do what things, and you know, this bureaucratic quagmire that Trump is going to try to pack his people on there so that he gets the policies that he wants.
Got it. And yeah, let's double click a little bit deeper into this. You mentioned this idea of yield curve control in it and just a fancy way of saying obscene money printing effectively. Um, how do you discount the probability of that occurring over the next couple years and how do you see that progression actually going from where we are today to that endgame?
So, I mean, if you listen to the rhetoric from both people, you know, Bessent just wrote an op-ed in the Wall Street Journal about the Fed's policy. If you listen to Trump and all of his lieutenants, and what's the big thing that they care about? Well, they're really pissed off that the US can't go and bomb everybody that they want to bomb without impunity because they don't have any bombs. So, they want to build more bombs. And so, they need to have more companies building real things and not just, you know, MBAs doing LBOs in New York. And so they need to print money and revitalize the American industry. Now it's not that easy to do. And this is what they did during the war in World War II, right? They fixed the yield curve. And in the essay I had a chart of the yield curve from 1942 to 1951. And the T-bill rate was fixed at 0.675%, like less than 1%. And then 10-year bonds forward were two and a half percent. And so this was a yield curve that was very steep. It enabled a commercial bank to borrow from depositors cheaply, lend long, lend money to relevant industries to juice supply and provide credit. And you know, politicians are not very imaginative. They can, oh well it worked during the war then why can't it work now? And that's essentially what they're saying. I mean, even if you listen to recent Fed board member Stephen Miran, he talks about the Fed's third mandate and you know, relevant interesting people on Twitter posted the quote from the actual Federal Reserve Act of 1913 and it basically said the Fed is responsible for ensuring a moderate rate of government interest on its bonds. What does moderate mean? Whatever the politicians want it to mean. And so, you know, by law, the Fed is allowed to print infinite amounts of money to make sure the government can afford to borrow. And so, why not do it now?
Yeah. So, this, well, two themes. One which is this risk of central bank and Fed independence being eroded and printing a ton of money which is increasingly likely over the next while, lowering a Fed funds interest rate more so than what you would probably anticipate based on like how much inflation we have right now and where the economy is at. You put those two themes together I would think okay well Bitcoin is made for this we should be absolutely ripping and roaring right now. I mean gold is, equities are, but the crypto market's been stagnating a little bit. What's your read on what's going on there? Do you think it's just a lag thing? And I've seen some analysis where it's often like gold runs first and then Bitcoin follows. How do you think about all of that?
I think it really depends on when you bought your Bitcoin in terms of whether you think this is a bull market or not. Right? If you bought a bunch of Bitcoin in like, you know, 2015, 2013, even like 2020, you're like, 'Yeah, this is great. It's a bull market.' Bitcoin, it's outperformed gold, it's outperformed stocks, it's outperformed real estate. But if you're like, 'Oh, wow. They started they were printing more money starting in March this year or April and I bought Bitcoin at like 95 or 100 or whatever thousand dollars and it's only up 10, 15% and I feel like a jackass because I was supposed to be the best performing asset.' Well wait a bit. So I think the premise of that question is a bit flawed because Bitcoin is the best performing asset ever to respond to money debasement. You go back to World War II and if you think about around the world, where could you have invested your fiat dollars or euros or whatever currency if you wanted to escape, right? If you think about the United States, gold was illegal. Couldn't buy gold. You could only buy stocks. S&P 500 or whatever the stocks were at the time. If you were in Europe, you were probably blown up. Couldn't buy anything or the Germans were taking your gold. If you're in the UK, gold was banned. Couldn't buy gold. Stock market was a piece of shit because they were getting bombed. So, you couldn't do that. If you were in Asia, the Japanese were taking all your shit so you didn't have anything either. So, you know, we can't really, we don't have an analog to what we could have bought back in World War II because there just weren't that many assets. But today, we have a stock market globally, you know, relevant countries. You have gold. It's a bit clunky, but you can still buy it. And you have Bitcoin, and we've seen what's happened since 2008 in terms of the price performance of Bitcoin, gold, and stocks, and they've done very, very well. Bitcoin being the best. So, I think that you just have to wait a bit.
Um, one of the key premises underlying a lot of the essays that you write about is effectively what I would call this inevitable debt doom loop that most fiat currencies and just fiat economies are basically destined for. And one of the big macro questions at hand that I think ties in nicely to the conference we're at here at the Origin Summit, which is these ideas of technological innovation, AI, and just this inevitable productivity boom that's potential. So there's a lot of questions at hand which is is this the saving grace that can get us out of this debt doom loop or is it just something that just won't quite move the mark enough to really solve the debt issues. So yeah, how do you think about these AI technological innovations? Is it something that can actually save us from this debt doom loop of fiat currencies?
I think that's a political choice in terms of what do we, are we going to share as humans? Right? So imagine that AI was as effective as Sam Altman says it is. It is not obviously. And all of a sudden 90% of the jobs are gone and like, 'Oh, great. Wow, everyone's super productive. You know, we can go and just, you know, jack off all day, whatever the shit you're going to do.' And so, but you have a, you had this thing called a mortgage and a car payment, and you had this thing called rent, and you don't have a job anymore. And so the question is, okay, well, is the government going to mandate that private profits must go to the populace because now everyone's so productive. But then the people who own those companies are, well, hold on a second. I know I'm Facebook. I just dropped a trillion dollars in capex. I want my returns. Why am I now giving, you know, universal basic income to all these people who weren't investing while this AI thing was happening? I don't want to share. So then okay, well then what are you going to do about that? Are you going to just take away private profits and distribute them to people? I don't know. Again, that's a political question depending on where you're based. Or you were fortunate enough to have financial assets and you invested in crypto or AI or whatever and you've done very very well and then there's all these people who weren't in your case you believe you were smarter than them or better than them because you have more money. Whether or not that's true, are you going to share? Oh, let's put a 99% tax rate on all capital gains and dividends so that everyone else can share in this amazing AI revolution and productivity boom. Do you want to share? Probably not. And so I think then the question is, okay, well, it's going to be very difficult for the government to politically expropriate assets from those who are in power already to essentially allow everyone to live this utopian lifestyle because of AI. Then what do you do? You just print a ton of money and hand everybody out and then keep the capital structure the same. And so either you have a massive deflationary event and asset holders are completely wiped out or you have a massive inflationary event which continues the same social structure but then the asset holders feel like they've gotten something out of a return for their prescient investing behavior. Again, a political choice. I don't know. But if I had to bet, I bet on the government not wanting to rock the boat and they're just going to print the money to paper over this big boom and then maybe we decide to share as humans in this AI, in this new ecosystem. So, it could be a completely risk-off event which everything's worth zero or it could be a risk-on event where everything's worth infinity and I don't know what that is.
Do you underwrite the probability of that political decision the same between say the US and Asia and specifically like Korea where we are now? Like I know you're a big fan of Asia. You live in Asia. We're here in Korea, but you write a lot about the US and there's a, yeah, there's a lot of that inherent cynicism around yeah, we're just going to, you know, print a ton of money and throw it away and that sort of like. So yeah, do you view that as an even probability of governments to resort to that or how do you think about it?
I'd say you're probably more likely to share over here in a more community-driven society than America. But even still, I think there's an inherent belief that because you have more money, you have done something better than somebody else. Whether that's you've studied harder in school or your family is just quote unquote better than somebody else's family. And I think that's going to be a very difficult thing for humanity to overcome because now we've achieved this sort of plateau of productivity and we're calling upon those who've done the best to share with everyone else even though they intrinsically believe that they're better than them. So I don't think that goes away just because you have a flatter income distribution structure. Even in China there's you know the princelings and those who are very very rich who believe they're better than everyone else because of the decisions that they've made. I don't know how we're going to get over that without some calamitous political infighting globally.
All right. So, it's clear that the government's going to keep printing money and fiat currencies will be debased. Crypto will most likely go up meaningfully over the next few years. With that set up, I want to shift gears into just hearing a bit about what specific crypto themes are you excited about today? Um, where's your head at? What are you thinking about?
I mean obviously we love DeFi at Maelstrom and if you look at our portfolio our best performing things, you know, Ethena, stablecoins, DeFi. I wrote a before this one was about stablecoins and how I believe that this is the policy of the American empire to try to force dollars around the world and that's going to benefit the DeFi ecosystem because you're going to onboard, you know, millions or billions of people to using these tokens to represent whether it's a fiat currency or it's a bond or it's a bank deposit, what have you. And so we're super bullish on all things DeFi in the medium and the longer term, but obviously there are some short-term hiccups that, you know, relevant projects could not do so well in the short term, but in the long term, we're very positive on that kind of stuff.
What's your analysis of perps DEXs right now? Obviously, you are one of the originators of the perpetual futures over at BitMEX, but I know you're bullish on Hyperliquid and then you caught a little bit of flack for moving on from that. Um, but yeah, where's your head at on perps DEXs?
So I think that Hyperliquid could by 2028, keyword 2028, go up a lot or, you know, whatever the relevant leading DEX is. But I think that Hyperliquid is now going to experience some real competition and the competition is from low to no fee trading because they've proven that finally the retail customer is ready for a decentralized trading experience. They're ready to connect their wallet and trade on chain and, you know, they've generated these volumes. Okay, cool. Hyperliquid, four basis points or whatever it is, right? And they've proven that there is good alignment between taking your revenues, buying back your token, creating wealthy folks who get an airdrop for trading. Okay, so then what does the next project do? They go, 'Okay, great. I have this token. I'm going to charge zero for trading and I'm going to do this massive airdrop and if you trade on my platform, it costs you nothing in terms of just the fee to me, but you're gonna possibly get this lottery ticket that could go up 10 to 100x in the next three months. I'm gonna vampire squid attack all of your volume, Hyperliquid.' And you've seen this with, if you look at the retail, assuming the volumes are legit. I know there's been questions about that, of Lighter and Aster and some of these other protocols because at the end of the day, from the DEXs, the customer wants the cheapest price. It's on-chain, they're not having to pay for security, that's handled by the layer 1 blockchain. So then I guess it becomes a race to zero and then what value-add service does the DEX provide that allows you to charge a fee? And then I think that's what we're going to figure out. And in Hyperliquid's case the issue is that because they have this massive unlock happening in the next two months before all these new competitors started lowballing them. You could say oh well they're going to make however many billions of dollars buy back the token and I don't really care about the unlock. Well, if I just have competitors that are offering zero then and I have to somehow lower my fees or do something to keep the traders trading which could materially decrease the revenue that I make. Well, then now I can't buy back all these tokens that the traders are worried about that my developers will be selling and that's sort of the situation in the very very short term that Hyperliquid has to overcome. And we'll see what happens with the microstructure of the market of what are these exchanges going to deliver to a trader in an environment where fees are close to zero and it's kind of similar to what it was like in mainland China before the PBOC banned Bitcoin trading in 2017 where spot trading was free, there was no fees, and so then how did OKCoin, Huobi, and BTC China make money? They made money on the float of renminbi sitting in the bank, they made money on new issues, they made money trading against their clients. So like, what is the revenue stream for Hyperliquid and Lighter and Aster and all the other platforms if trading is free?
