Arthur Hayes says it’s time to go long on Bitcoin. The former BitMEX CEO, known for his no-nonsense style, has released an essay titled “Group of Fools.” In it, Hayes explains why he believes Bitcoin is set to rise, thanks to various macroeconomic factors and central bank policies.
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Hayes starts by discussing the dollar-yen exchange rate, which he calls the most important macroeconomic indicator. He recalls his previous essay, “The Easy Button,” where he suggested that the US Federal Reserve (Fed) should swap unlimited amounts of freshly printed dollars with the Bank of Japan (BOJ) for yen. This would allow the BOJ to support the yen in the global forex markets.
Hayes says G7’s strategy needs a revamp
While Hayes stands by his solution, he notes that the Group of Seven (G7) central banks have opted for a different approach. They aim to convince the market that the interest rate gap between the yen and other major currencies like the dollar, euro, pound, and Canadian dollar will narrow. If the market believes this, it will push the yen higher and devalue other currencies.
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For this strategy to work, Hayes says the G7 central banks, including the Fed, European Central Bank (ECB), Bank of Canada (BOC), and Bank of England (BOE), must cut their high policy rates. The BOJ, with its policy rate at 0.1%, stands in stark contrast to these higher rates of 4-5%. Hayes explains that the interest rate differential between the home and foreign currency fundamentally drives exchange rates.
From March 2020 until early 2022, everyone played the same game. Free money was handed out as long as people stayed inside during the pandemic. When inflation surged, the G7 central banks, except for the BOJ, raised rates aggressively. The BOJ couldn’t follow suit because it owns over 50% of the Japanese Government Bond (JGB) market. If the BOJ allowed rates to rise, it would face catastrophic losses on its JGB holdings.
The global economy has a problem of a weak JPY
Hayes points out that if Janet Yellen, who he nicknames “Bad Gurl Yellen,” decides to reduce the interest rate differential, the only option is for the central banks with high policy rates to cut them. In orthodox central bank thought, cutting rates is only good if inflation is below the target. But what’s the target? For some reason, every G7 central bank has the same inflation target of 2% despite differences in culture, growth, debt, demographics, etc.
Hayes includes the chart above showing that no G7 country’s government-published inflation statistic is below the 2% target. He suggests that G7 inflation is forming a local bottom in the 2-3% range before exploding higher. Despite this, the BOC and ECB cut rates this week while inflation was above target. Hayes finds this strange, as no financial disturbance demands cheaper money.
“The BOC cut its policy rate while inflation is above the target,” Hayes writes. “The ECB did the same.” The real problem, according to him, is the weak yen. He believes Yellen has halted the rate hike performance and is now focused on preserving the Pax Americana-led global financial system. If the yen isn’t strengthened, China might devalue the yuan to compete with Japan’s cheap yen, leading to a sell-off of US Treasuries and endangering the Pax Americana.
It is time to go long on Bitcoin
If the Fed cuts rates at its upcoming June meeting while their inflation measure is above target, the dollar-yen exchange rate could shift dramatically. Given the political heat from rising prices, Hayes doubts the Fed is ready to cut rates. He predicts the Fed will hold its course.
The rate cuts by the BOC and ECB have already set the stage for significant movements in the crypto market. Hayes initially expected these shifts to happen around August during the Fed’s Jackson Hole symposium. However, the trend is clear. Central banks are starting easing cycles.
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“We know how to play this game,” Hayes says. “It’s the same game we’ve been playing since 2009 when Satoshi gave us Bitcoin to defeat traditional finance.” He advises going long on Bitcoin and other cryptocurrencies. The changing macro landscape calls for a change in investment strategy.
Hayes plans to deploy his excess liquid crypto cash into conviction investments. He believes the crypto bull market is reawakening and will challenge central bankers. “Let’s F**king Go!” He exclaims.
Cryptopolitan reporting by Jai Hamid
