Intro
In this episode of Impact Theory with Tom Bilyeu, Arthur Hayes, Co-Founder and Former CEO of BitMEX, predicts a major financial crisis worse than the Great Depression near the end of the decade. He discusses the factors leading up to this crisis, the role of governments and central banks, and the potential solutions. Hayes also delves into the global power dynamics and the impact of political instability on the economy. Join Tom Bilyeu and Arthur Hayes as they explore the challenges and opportunities of the new economic reset.
Main Takeaways
Impending Financial Crisis
- Arthur Hayes predicts a major financial crisis worse than the Great Depression near the end of the decade.
- There will be a large bull market in stocks, real estate, crypto, art, etc. before the crisis.
- Governments and central banks have destroyed the free pricing mechanism in almost every sector of the financial economy except government bond markets.
- The global debt has increased from 100% to 360% of GDP and is still accelerating due to declining population growth.
- The only way to ensure the system is solvent is for governments and central banks to print more money.
- Governments have been adding on debt to keep the system solvent, which is expensive and unsustainable.
- There is so much debt that a major market disturbance is expected within the next 3-6 months.
- The solution will be to print more money than ever before to save the Fiat financial system.
- This will create a massive bull market, but eventually, the government won’t be able to save everything.
- A generational collapse is expected, and it may coincide with a major global conflict.
Global Power Dynamics
- Nuclear energy, if adopted globally, could potentially help countries grow out of debt.
- Political instability, particularly tension between Western countries and Russia, is a cause for concern.
- The control of the home island (Euregia) is crucial in global power dynamics.
- The strategy going into World War I was to ensure Germany and Russia were not friends.
- Western powers were okay with Hitler as long as he fought Russia.
- US foreign policy since the end of World War II has been to ensure a divided Eurasia.
- The US response to the collapse of the Soviet Union was to incentivize oligarchs to take resources and move wealth to London and New York.
- Putin’s appeal to the Russian people is to rebuild the Russian ideal after suffering through the end of the Soviet Union and having resources stolen by the West.
- The conflict between Russia and Ukraine is a proxy war between Russia and the West, with the West providing resources to fight Russia.
- The West’s policy of ostracizing Russia is causing inflation globally, leading to a financial crisis in the West.
Inflation and Energy
- Cheap energy prices equal prosperity, and Russia is a large commodity exporter with oil, debtor gas, metals, and food.
- The ideology of fighting Russia to keep the Eurasian island fractured is the proximate cause of the inflation causing the financial crisis in the West.
- Money printing leads to inflation which causes the banking crisis.
- US government promised baby boomers healthcare and energy security, leading to high consumption.
- Healthcare costs continue to rise, but politicians cannot reform the system without losing votes.
- Defense and healthcare budgets are sacred and cannot be altered under the current political system.
- Inflation is caused by a multipolar world with other challengers, such as China, and companies keeping their products for themselves, making things more expensive.
- Hydrocarbons are the energy source that powers our global civilization, and ignoring other sources like nuclear has limited our productivity in pulling oil out of the ground.
- The inflation we are experiencing now is a result of a multipolar world with other challengers like China and companies keeping their products for themselves, making things more expensive.
- Energy is the main determinant of the cost of goods and services, and every good we use is a derivative of energy.
Bond Market and Financial System
- The US government is issuing the most amount of debt ever and has a federal deficit of 7-8% of GDP.
- Traditional buyers of US treasuries like China, Japan, and oil exporting nations are no longer buying new treasuries and are even selling them.
- The US banking system is functionally insolvent and cannot buy more debt.
- The Federal Reserve is committed to quantitative tightening and is not accumulating more treasuries.
- Relationships in the markets are breaking down, with gold holding firm despite rising US treasury yields.
- The market no longer believes that the US is risk-free in a US dollar perspective and a nominal basis.
- People are staying in gold because they are not getting paid enough.
- Real yield is the government bond yield minus nominal GDP.
- Bondholders are getting short-changed because the US economy is growing like gangbusters but the yield is only about 4.64%.
- The bond market has been the worst investment over the last two years due to rising inflation and increased demand for higher yields.
Investment Strategies and Options
- A well-structured portfolio can provide a positive carrier trade and a cost of waiting that is zero to making money.
- Constructing an optionality portfolio costs little to nothing and can earn a yield over time.
- The barbell strategy involves investing in high volatility assets and short-term cash instruments with a fixed supply.
- Volatility can be a feature, not a bug, and can help maximize profits.
- Emotional awareness is key to successful investing.
- Personal preference and understanding of assets can guide investment decisions.
- Balancing high volatility investments with a “break” category of cash or stable investments is important for financial security.
- Paying attention to market panics and central bank actions can inform investment decisions.
- Inflation is a factor to consider when choosing investments.
Summary
A Looming Financial Crisis and Global Power Dynamics
Arthur Hayes predicts a major financial crisis worse than the Great Depression near the end of the decade. Governments and central banks have destroyed the free pricing mechanism in almost every sector of the financial economy except government bond markets. The global debt has skyrocketed, and the only way to ensure the system is solvent is for governments and central banks to print more money. However, this solution is expensive and unsustainable. The impending crisis may coincide with a major global conflict. The control of the home island (Euregia) is crucial in global power dynamics, and historical tensions between Western countries and Russia are cause for concern. The West’s policy of ostracizing Russia is causing inflation globally, leading to a financial crisis in the West.
Inflation, Energy, and the Bond Market
Inflation is a significant factor in the current economic landscape. Rising healthcare costs and energy prices, along with a multipolar world and companies keeping products for themselves, contribute to inflation. Energy, particularly hydrocarbons, is the main determinant of the cost of goods and services. The bond market is experiencing challenges, with traditional buyers of US treasuries no longer purchasing new treasuries. The US banking system is functionally insolvent, and relationships in the markets are breaking down. Gold remains a popular investment option due to low yields and the market’s perception of risk.
Investment Strategies and Options
When it comes to investment strategies, a well-structured portfolio can provide positive returns and a cost of waiting that is zero to making money. Constructing an optionality portfolio and employing the barbell strategy can help maximize profits. Emotional awareness, personal preference, and understanding of assets play crucial roles in successful investing. Balancing high volatility investments with stable options and paying attention to market panics and central bank actions are essential for financial security. Inflation should also be considered when choosing investments.
Conclusion
Arthur Hayes paints a sobering picture of the global economic landscape, with a looming financial crisis and complex power dynamics. Understanding the factors driving inflation, the challenges in the bond market, and the importance of sound investment strategies is crucial for navigating these uncertain times. By staying informed and making conscious investment decisions, individuals can better position themselves to survive and thrive during the new economic reset.
