Macroeconomics Explained: Everything You Need To Know Before Investing by Founder Arthur Hayes

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 hell he decides to do 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: a global panoramic of which central banks are cutting, and we're about 50%. But the one that really matters is the Fed. What are they going to do? As of August 23rd, I think it was this year, Paul got up at Jackson Hole and 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 until the future. I haven't checked this morning, but I think it's about a 60 or 70% chance that they do a 50 basis point rate cut. And before I get into what I think is going to happen with crypto, in my opinion, I think 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 peacetime, when you have inflation above their target and you have real GDP growth of plus 2% for the past probably eight to nine quarters. So while I think a lot of people are looking forward to a rate cut, meaning 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 rate cut 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 if 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 ass in T-bills and collect fat interest. So this is the one month T-bill rate, and it's been hovering around 5.5% for the past year and a bit since the Fed stopped raising rates. Now, when you have enough capital and you make five and a half percent 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? So when people 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. The first three assets here: Athena, Ethereum or ether, and Pendle. Just a disclosure: I own big bags of these. I don't own any of Ando, thankfully. At the end of the day, the Maelstrom portfolio is very geared towards a falling interest rate environment. And basically that means we're long a lot of projects that give users interest income in various shapes and sizes. 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 DeFi application when all you can do is call up your broker and put your money in T-bills and make five and a half percent?

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 are lots of other real world assets 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 here are probably, 'What the hell, Ethereum, you haven't done squat, just kicking ass for the past few months in this bull market.' The major narrative around ether is that it's an internet bond. So if it's an internet bond with a yield of 4%, then the T-bill yield is higher than that, so 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 in T-bills. So as we see rates quickly decline, as I expect because the Fed is going to cut rates, markets are going to tank, and then they're going to say, 'Well, let's do more of that because that's what's going to fix things.' We reignite the Ethereum bull market. Right now, as you can see here, the horizontal line is sort of the T-bill yield, and our staking yield in ether is like 3 to 4%. It's 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 in this bull market that we've had year to date.

Ether.fi, which is a way that you can stake your ETH in a non-custodial way, has also gotten the shit 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 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. This trade has been going on for many, many years. This is how I started my career in crypto trading, this basis trade. Athena packages this up in a very nice and easy way: you just stake your money and you earn this yield. Again, there's risk involved; it's not exactly as safe as a US treasury bond for a particular yield-chasing investor. 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 Fed continues to cut rates, number one, the 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 bear market. Here's a chart of the Athena stake USD yield versus the T-bills. As you can see, back earlier this year this was very, very compelling: you're earning 30, 40, 50, 60% per annum versus a 5.5% T-bill yield. Of course I'm going to put my dollars in this product. But right now, it's barely yielding at the T-bill yield; I think it's about 4.5% 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 treasury 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. Pendle is an interest rate derivatives protocol that allows you to trade fixed and floating interest rates. They've just rolled out a new product that allows you, through the Lombard or Corn protocol, to essentially stake your Bitcoin and earn a fixed yield. 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 5.5% in treasury bills into this Bitcoin yield. And I'll show you in 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, Pendle's TVL or total value locked should rise and offset some of the TVL losses that are coming from the expiration of liquid restaking protocols like EigenLayer and their points programs. Again, you can earn about 9% 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 that that attractive versus four and a half percent? Maybe for some of you. But I would bet, given the DeFi risks and smart contract risk, that a lot of interest-sensitive investors don't think this is high enough when, again, I can make 5.5% in treasury bills. So here's a chart of Pendle. It's obviously given back 50-60% of its gains so far. Will there be a 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 protocols are a complete dogshit. 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 FDV, 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 to one. It's very difficult to get a clean way to invest in treasury bills. I'm sure there are 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 dogshit that isn't what you asked for because they don't really make a lot of money selling treasury bills, because they're very, very cheap to own, very low fee. So these RWA protocols are quite attractive for certain types of investors who really want an easy way to access this 5.5% 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 RWAs goes away. Why would I want to take this smart contract risk to earn 1% or 2%? And so that's why I believe that a lot of projects whose TVL 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, six billion FDV, very low float, and you can get 5.35% using their USDY stablecoin. 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 I posted, Ether.fi 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 the more the Fed cuts, the more the market is not going to like what is going to happen. And I really want everyone, when they leave this room, if they don't remember anything else, it's tonight when you're drunk 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 surprises, goes 50 or maybe if it goes 75 basis points, you're going to see a 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 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 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 decades, 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 upwards of 20 trillion dollars of exposure, that of people who have borrowed yen. 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, Jerome Powell and Janet Yellen will have to take notice of this. Because I think it's about 40 or 50 days until the US election. The last thing that they want to have happen is for Kamala Harris to go up against Donald Trump and the S&P is down 20% going into the election. And so that's why I believe that they will cut rates aggressively if they see the yen 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 fucking matters. I hope to see all of you at our party on Thursday. Have a great afternoon, everyone.