Title: The Foolish Group
Author: Arthur Hayes
Translated by: Ismay, BlockBeats
In this article, Hayes explores the current macroeconomic situation and the investment strategy for cryptocurrency. With interest rate cuts from the Bank of Canada and the European Central Bank, the cryptocurrency market is poised to recover from its summer slump, signaling a new bull market. Hayes believes that since 2009, Bitcoin and other cryptocurrencies have been powerful weapons against the traditional financial system. In the current macro environment, Hayes suggests actively going long on Bitcoin and altcoins, and supporting the token issuance of new projects, as the market is set for a strong rebound.
The USD-JPY exchange rate is the most important macroeconomic indicator. In my previous article, “The Easy Button,” I discussed the need to strengthen the yen, proposing that the Federal Reserve could swap newly printed dollars with the Bank of Japan (BOJ) infinitely to support the yen. This would allow the Bank of Japan to provide unlimited dollar firepower to the Japanese Ministry of Finance (MOF) to purchase yen in the global foreign exchange market.
While I still believe in the effectiveness of this solution, it seems that the central bank scammers who govern the Group of Seven (G7) have chosen to let the market believe that the interest rate differentials between the yen and the dollar, euro, pound, and Canadian dollar will narrow over time. If the market believes in this future state, they will buy yen and sell other currencies. Mission accomplished!
To make this magic work, the central banks of the G7 (Federal Reserve, European Central Bank, Bank of Canada, and Bank of England) must lower their “high” policy rates.
It is crucial to note that the policy rate of the Bank of Japan (BOJ) (green) is 0.1%, while the rates of other countries are around 4-5%. The interest rate differential between domestic and foreign currencies fundamentally drives the exchange rate. From March 2020 to early 2022, everyone has been playing the same game. Stay at home, get the flu, get an mRNA vaccine, and get free money. When inflation becomes so severe that the elites can no longer ignore the pain and suffering of the common people, the central banks of the G7, except for the Bank of Japan, have been actively raising rates.
The Bank of Japan cannot raise rates as it holds over 50% of the Japanese Government Bonds (JGB) market. When rates fall, JGB prices rise, making the Bank of Japan look solvent. However, if the Bank of Japan allows rates to rise, JGB prices will fall, causing this highly leveraged central bank to suffer catastrophic losses. I did some scary math calculations for readers in “The Easy Button.”
This is why if the decision-makers of the G7, like Yellen, decide to narrow the interest rate differentials, the only choice is for central banks with “high” policy rates to lower them. In traditional central bank theory, rate cuts are beneficial if inflation is below target. What is the target?
For some reason, unknown to me, the inflation target of each G7 central bank is 2%, regardless of cultural, growth, debt, population differences, etc. Is the current inflation rate rapidly crossing 2%?
Each colored line represents the inflation target of different G7 central banks. The horizontal line is at 2%. None of the G7 countries’ inflation statistics, even those manipulated and dishonestly released by governments, are below the target. Putting on my technical analysis hat, it seems that inflation in the G7 is forming a local bottom in the range of 2-3%, and then it will surge higher.
Given this chart, a traditional central bank governor would not cut rates at the current level. However, this week, the Bank of Canada (BOC) and the European Central Bank (ECB) cut rates despite inflation being above target. This is strange. Is there some financial turmoil that requires cheaper money? Not really.
The Bank of Canada (BOC) cut its policy rate (yellow) when inflation (white) was above the target (red).
The European Central Bank (ECB) cut its policy rate (yellow) when inflation (white) was above the target (red).
The issue lies with the weak yen. I believe Ms. Yellen has stopped the “Kabuki” dance of raising rates. It is now time to maintain the US-led global financial system. If the yen is not strengthened, the villains of China will release a devalued yuan to match the ultra-cheap yen of their main export competitor, Japan. In this process, US treasuries will be sold, and if that happens, it will mean the end of the “American Century” game.
Up Next
The G7 will hold a meeting in a week. The post-meeting communique will generate significant interest in the market. Will they announce some coordinated currency or bond market operations to strengthen the yen? Or will they remain silent but agree that all countries, except for the Bank of Japan (BOJ), should start cutting rates? Stay tuned!
The big question is whether the Federal Reserve will start cutting rates so close to the November US presidential election. Usually, the Fed does not change policy close to an election. However, in normal circumstances, the favored presidential candidate does not face a possible imprisonment sentence, so I am prepared to adjust my thinking flexibly.
If the Federal Reserve cuts rates at the upcoming June meeting, and their preferred adjusted inflation measure remains above target, the USD-JPY exchange rate will plummet significantly, meaning the yen will strengthen. With “Slow Joe” Biden facing a backlash in polls due to rising prices, I don’t think the Fed is ready to cut rates. The average Americans are clearly more concerned about the rising prices of their vegetables than the cognitive abilities of the elderly man seeking reelection. To be fair, Trump is also a “vegetable” as he enjoys eating McDonald’s fries and watching “Shark Week.” Nonetheless, I still believe that rate cuts would be political suicide. My fundamental expectation is that the Fed will maintain its current policy.
By June 13th, while these amateurs sit down to enjoy a lavish meal provided by taxpayers, the Federal Reserve and the Bank of Japan have already held their policy meetings for June. As I mentioned earlier, I expect no changes in the monetary policies of the Federal Reserve and the Bank of Japan. Shortly after the G7 meeting, the Bank of England (BOE) will also convene, and while the market generally expects its policy rate to remain unchanged, given the rate cuts by the Bank of Canada and the European Central Bank, I believe there might be an unexpected cut. The Bank of England has nothing to lose. The Conservative Party is set to suffer a defeat in the next election, so there is no reason to defy the commands of their former colonial rulers to control inflation.
Exiting the Turbulence
The rate cuts by the Bank of Canada and the European Central Bank this week have set the stage for central bank policy changes in June, freeing cryptocurrencies from the northern hemisphere’s summer slump. This is not the baseline scenario I anticipated. I thought the fireworks would start in August, at the Jackson Hole Symposium hosted by the Federal Reserve. That event is usually the venue for sudden policy changes in autumn.
The trend is clear. Peripheral central banks are beginning an easing cycle.
We know how to play this game. It’s a game we’ve been playing since 2009 when our savior Satoshi gave us the weapon to defeat the traditional financial demons.
Go long on Bitcoin, then other altcoins.
The macro environment has changed relative to my benchmark, so my strategy will also change accordingly. For those asking about the Maelstrom investment portfolio project and whether to release their tokens now or later, my answer is: start now!
For the surplus synthetic USD cash I hold (such as USD from Ethena, USDe) and am earning a generous annual yield, it’s time to deploy it once again in promising altcoins. Of course, I will inform readers of what these altcoins are after I purchase them. But one thing is certain: the crypto bull market is awakening and is about to pierce through the disguises of the extravagant central bank governors.
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