The System Is Too Levered To Take Real Pain | Arthur Hayes

Before we get started with today's show, I just want to take a couple minutes to talk about Permission List 4, the next conference presented by Block Works. It's happening June 24th to 26th in Brooklyn, New York. And it's all for the developers and builders in crypto. So, if you're interested in really understanding how the nuts and bolts of the crypto industry are being built, and you want to learn more, go ahead and get your ticket. I'm going to be there, as well as Quinn and the rest of the Ford Guidance gang. It's going to be a ton of fun. So, use the code FG10 at checkout and you'll get 10% off your ticket. So, really looking forward to seeing you there. Prices are going to be going up pretty quickly in the leadup to the event. It's only a couple months away, so be sure to act real quick there to get the best deal.

All right, back to the show. All right, welcome back to another episode of Forward Guidance. And joining me today is Arthur Hayes, who is a first-time guest on Forward Guidance. So yeah, Arthur, really great to have you. Would love if you could just introduce yourself and a bit of what you do and what you focus on.

So my name is Arthur Hayes. Uh, I guess my claim to fame is obviously co-founder—well, I am the co-founder and former CEO of BitMEX, the trading platform that invented the perpetual swap, which I'm sure anyone who's involved in the cryptocurrency industry has created a product that is based on a design that we came up with in 2016. Subsequently to that, I created my own family office called Maelstrom, and I am the chief investment officer, and we do early-stage token deals and any sort of crypto-related trading stuff.

Cool. Right on. Um, yeah, I was saying off-camera here that it feels like we have a lot of similarities here. I love to go backcountry skiing. I love macro, and I love Bitcoin. And I love how it all comes together. And I know that's a lot of the worlds that you walk around in. So, we'll set aside the ski touring part for today's discussions and just really hone in on the macro situation. It's a really exciting time in macro right now. There's a lot of different moving parts, and obviously, the most fast-flowing, moving of those parts is tariffs and what's going on there.

So, we're recording this about a few minutes after there was a Trump press conference where he—it looked like he started to walk back a few interesting, you know, what were key risks in the markets. He was mentioning that he has no plans to fire Powell at any moment. Whereas last week, there were a lot of headlines in the tape where he was debating the fact of potentially firing him. A lot of talk around walking back the idea of potentially China tariffs and that dynamic. And also, we got the headline that Elon Musk is planning to walk away or, or at least scale back his participation with Doge in May.

So, with that as context here, and obviously, you know, we're kind of just reacting to it as we go, I'd love to just hear how are you thinking about Trump's overall policies right now on tariffs and especially with how it ties into different macro assets.

So, I think Trump has been extremely consistent in his overarching goal or message, which is: there's a portion of America who believes that they've gotten a raw deal from globalization over the past 50 years, since the early '70s when the US went off the gold standard, and Trump is going to be that politician that's going to speak to this underserved portion of America and bring back America's greatness, make America great again, all those political slogans. And, you know, he's been very consistent in his messaging that, you know, essentially the current account deficit that the US runs, which is in the trillions of dollars every year, has to go to zero, and manufacturing has to come back onshore, the financial system has to change, and all these sorts of things. Now the question is like, how fast and how hard can he go at these goals? In 2018, he started the trade war with China by restricting semiconductor chips. There is a, you know, a sort of deal reached between the US and China—not really much of anything changed, obviously Trump lost the next election, but, you know, Biden and the Democrats continued these policies of, hey, you know, America's getting a raw deal. Maybe the rhetoric wasn't as inflammatory as Trump's, but, you know, Biden ratcheted up tensions with China and increased the restrictions on semiconductor sales to China, you know, classified it as a strategic competitor, and all these sorts of things. So, it's a bipartisan effort within the American empire to sort of like try to distance themselves or decouple from China.

Which brings us to this year. You know, Trump has reinvigorated, won the election, has this mandate. Senate and the House are both Republican. And so, you know, he went with a maximalist position on tariffs, though, you know, worst-case scenario, no one even thought he would go to these levels of tariffs. And obviously, we saw a complete meltdown in the markets afterward. And, you know, I guess you say he backed down and found out exactly how much pain America and all the different vested interests could take. And obviously, him and his political advisors have to do the political calculus. Okay. Well, yes, you know, Trump himself will not be around post-2028, but all the people within his orbit are all angling for their next job in 2026 or 2028. So, obviously, they don't want to back policies that are going to not get them re-elected in the midterm elections or in the next presidential general election. And obviously, I think that that moderated his position. And now we're seeing concessions after concession. First, it was a 90-day pause with everyone except China. Then it was, "Oh, consumer electronics are exempt." Uh, I don't know what he said today about China. I know Bessant was on the tape saying something about, "Yeah, there's a deal to be done. It'll take a long time, but we're ready to negotiate with China." I'm not sure exactly what he said at this press conference, but it goes with the theme of the American financial system is so highly levered that it couldn't take one week of Trump's maximalist position on tariffs. And some people might say that, you know, this tariff thing is a good thing—that America returns to a balanced budget and brings back manufacturing jobs and all that kind of stuff. Doesn't really matter what you think of it—good or bad, but all that matters is: one week, bond market collapsed, equity market was collapsing, and they changed their tune, and they're continuing to change their tune as the volatility doesn't subside as much as they would like. And so I think it's just we're traversing along this trend. I think we've seen the market bottom, and especially Bitcoin, probably in stocks as well, as the leverage is too great. They can't go as fast as they want. Money will be printed.

Yeah, that always feels like the point of tension between, yeah, what can we actually get done versus how much can the financial system hold in terms of the strain involved.

Obviously. Yeah, you know, when we got the 30-year passing 5% yield, that was starting to be more evident of the maximum amount of pain and uncertainty that it can hold, and we've seen that, yeah, ratcheting back. So I want to, I want to double-click down into—you've had some interesting insights on the reflection of how China is thinking about this all right now, and how does that get reflected in their currency and where they try to fix that. So I have two questions I want to ask you here. One is: what do you think is the goal in terms of this tariff approach on the US's allies, you know, notably like Europe and Canada and Mexico? Is it trying to go hard up front to try to, you know, consolidate these trade deals all together and get the western countries all aligned to go after and isolate China? And then also, yeah, what's your thesis on the endgame here in terms of China, and especially in terms of their reaction function in terms of how do they navigate managing their currencies, because you've had some really interesting insights.

US Treasury Secretary Bessant has been quite clear—at least in his mind—the strategy is: okay, let's get together all the good people and those aligned with western values, blah, blah, blah, and we're going to present this united front to China, which I guess kind of makes sense because, you know, we saw what happened when the US tried to restrict exports from China to come into the US market; then China said, okay, Mexico, Vietnam, Thailand, Malaysia, you know, we'll figure out a way to get stuff through you onto the US, and, you know, nothing really changed. So if they really want to have this China-America divorce, then the US has to co-opt these allies into, you know, taking a pay cut themselves by trying to restrict or make Chinese intermediate goods more expensive. Who knows whether that'll be successful or not.

On the Chinese side, um, they have a different reaction function, more so because if you think, you know, read enough Chinese history back, you know, the many thousands of years that the Chinese civilization has existed, obviously the Chinese people and the, you know, communist party rhetoric is very clear on this view—the last 100 or so years as the century of humiliation between the fall of the Qing dynasty, um, then obviously you had the civil war from 1931 to 1949, and then you had the '70s and '80s under Mao when China was trying to struggle to industrialize. And the key sort of things that Chinese people take away from that is, you know, on a big front was tariffs and trade, right? You had the United Kingdom forcing drugs down the throat of China because they needed the hard currency to make the trade with India work, and so you basically addicted 10% of the Chinese population to opium so that the balance of trade would work for the United Kingdom. And then you had all the other western powers coming in and dictating tariff treaties, usually out of the port of Shanghai, and this was to the detriment of the Chinese state, and they looked very poorly on that period of history. And so when you have a very aggressive, bellicose Trump stating that China must kneel, kiss the ring, and do what needs to be done so that America is great again, you can understand why Xi Jinping domestically cannot agree to anything like that because the whole point of the Chinese Communist Party is to rejuvenate China, return it back to its glory days when it was the largest economy in the world, the most sophisticated and advanced meritocratic civil service, all these sorts of things. And so for him to sit up there and just take that diet trade from Trump not only makes him look weak domestically, it makes him look weak amongst all the Asian countries which used to be vassals of China during imperial times. So again, I don't think that China can come to a deal, or a deal to the magnitude that is necessary to rebalance trade, which leads to: well, then what can they do because they're locked in a balance sheet recession and they need to print a bunch of money to solve their own problems internally.

Yeah, totally. And it feels like that's where the game theory is at now, which is: yeah. How do, how do they navigate that? So, you know, as it stands today, with how high the tariffs are between the US and China, if we take them at face value, it's effectively an embargo between the two largest economies in the world. And I'm curious, how do you think about if that stays constant? And, you know, to your point that, you know, Xi Jinping cannot just relent here, is that, you know, they—and they also have a lot more time on their side than I would say is like a traditional four-year election cycle. So they're not in a rush. So if we're in this current situation where there's just this embargo between the two largest economies, how do you think about the effect of that on the global economy—like if we take the assumption that the rest of the countries will come to some sort of at least marginal deal on tariffs, but, you know, the tension with China remains—can we have that and not have a recession, or is that, you know, just sort of part and parcel of it?

So, I think at the end of the day, the world needs Chinese cheap goods—cheap and high-quality goods, I should say. They're very high quality these days. It's the most advanced manufacturing setup in the world, which is why everyone makes their stuff there. Period. And the statement—there's no debating that. So, okay. So, what happens when you make something more expensive, but there is an imperative for lots of parties that still want the good—like, you know, illegal drugs in most countries, right? There's a demand; there's this function that says they're illegal, but the drugs still get consumed. Same thing. There are imports from China that are necessary for every single good in the world. They're cheap and they're high quality. No one else can—even if America completely was successful in this tariff thing, they're not going to have factories to replicate the Chinese ecosystem in 5, 10, 15, 20 years, right? It took China 30 years to build this situation. So the goods are going to find their way to America. At the end of the day, people are going to cheat and do all the sorts of things. There might be some, like, you know, secret pathways that are allowed that allow face-saving measures so that, you know, both sides can claim that no trade is happening. But if you really dig through the details, there's trade happening. It's just more expensive. You just increase the cost of the good, but the good is still going to get there because China is the only one who can make it. Until that's not the case, then these tariffs will be effective in making things more expensive around the world, but ineffective at actually decoupling the world trade ecosystem.

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All right, back to the show. So I know that for the most part you take your macro framework and, and for the most part you apply that to your perspective on Bitcoin. So I want to start to dive into that rabbit hole, and we'll bring forth the other, you know, potential levers that we could talk about in terms of what's going on in Treasury, what's going on with the Fed. But I want to first off hear about how do you think about Bitcoin as a global liquidity asset, especially versus, you know, say traditional, like US tech equities, which is often what it's highly been correlated to.

So, if you're talking about the fact that China needs to print a bunch of money, I assume that leads to positive tailwinds for Bitcoin. Is that right?

For sure. And China's not alone. Every major economy needs to print a bunch of money to basically cushion the effects of this attempted divorce, this decline in globalization. But at the end of the day, yeah, they're going to print money, Bitcoin benefits. Now the reciprocal of the current account deficit in the US is a financial account surplus. And so all these dollars that got earned—the trillions of dollars that got earned selling stuff to America—got recycled into Treasury bonds and stocks and, you know, MAGA 7—all the big US tech stocks. So mathematically, if Trump is serious about reducing the current account to zero, then foreigners have to sell stocks. Period. There's no—it's just math. And then the question is, okay, well, can the US government survive financially if there's a big decline in capital gains taxes because the market's not going up? I don't think so. Therefore, we get a printing-money function, and Bitcoin benefits and finally decouples from tech because of the structural flows and what needs to happen from an affordability standpoint for the US government.

Yeah, I've been thinking a lot about the decoupling thing because, yeah, to your point, if they do reduce the trade deficit, it means a lot less flows into US dollar-denominated assets. At the same time that China's going to print a lot of money—we've already established that. We've already seen some interesting reaction functions from Europe where they're looking to—we've had Germany take off the debt break and start talking about running a higher fiscal deficit, which is obviously going to be positive for Bitcoin as well. So, yeah, like how do we validate this idea of the decoupling? Because obviously, you know, if we just look at market price action for the last couple of weeks of comparing like US tech equities, which has been doing terribly versus Bitcoin, has been holding up really strong. Is that an early signal of this, or how do we validate that?

I think it's an early signal, but we might not get the demonstrative validation that we like because Trump backed off from the maximalist position so quickly. So obviously in the first few days after liberation day, stocks crashed, Bitcoin crashed. Okay, stocks—just high-beta NASDAQ—fits the narrative. Then the yield started ripping as, you know, basis-trading hedge funds got margin called, and people were afraid that there was an unwind of all these positions and front-running that trade, and the market stress started to increase. VIX went to 172 intraday, and Bitcoin started to rally, but then because, you know, Trump and the team pivoted so quickly, then we got back to business as usual, and everything just goes up together—just a question of how much. And so if, you know, further to today's press conference, if it's no longer "I'm going to fire Powell," it's no longer "China's the big bad boogeyman," we're going to find a deal, then everything goes up, Bitcoin goes up more, but everything goes up, and so we don't really get a test of this—is Bitcoin this high-beta NASDAQ in the short term? Now in the long term, I think that US tech exceptionalism as a narrative is dead. There are cheaper ways to do AI. You don't need to spend all this money. There are obviously DeepSeek and some other really cool LLMs coming out of China. It's questionable whether all this capex is being used. You know, we're starting to hear reports from different channel checks on Amazon and Microsoft and them canceling leases on some of these data centers and whatnot. So again, big US tech spent a bunch of capex just like they did in 2001. We know what happened to Cisco—we're down 90 something percent. Um, not to say that Google's going out of business, but I don't see structurally how these companies are going to be the leaders of the next rally. So it might not be that there's some sort of dislocation due to a divorce of the US and China and sort of trade. It's just the leaders of the last cycle become the laggers of the current cycle, and that being US tech, and Bitcoin continues to outperform because global liquidity continues to rise.

Okay. Um, I want to bring into this discussion the liquidity situation, especially how to think about it through Bitcoin. So obviously right now it feels like the big narrative is trying to understand who's really driving this: is it Powell on one side who's, you know, sitting on his hands and trying to remain resolutely hawkish versus Secretary Bressant on the Treasury side of things who is, you know, obviously going to be political because that's—he's part of the Trump administration—and there are a lot of different moving parts there. So I would love to hear—first off, let's dig into the fiscal side of things and what's going on with Treasury Secretary Scott Bessant and some of the signals that we can derive there to understand where is—where's the liquidity backdrop headed, and, you know, what levers can be pulled on the fiscal side of things to drive that.

We all are—we all were very well trained from 2008 to 2019 that the Fed does QE. It prints money every week to buy bonds, stock market goes up, right? Just—that was the game. We got conditioned: where's the QE? Stock market goes up, Bitcoin goes up, everything goes up, right? And so post-2020, after the little bit of inflation that the world experienced, and every central bank raised rates, you know, the community was like, okay, well, we know QE equals number go up, so where's the QE? And from 2022 until the current moment, Powell really—I mean, they cut a few times, but we haven't seen—and, you know, quantitative tightening has reduced a bit, but we haven't seen a 2008-to-2019 style quantitative easing program from the Fed, and that's left a lot of people saying, oh, no, the Fed's being really, really tight, therefore I can't buy risk assets, so I'm going to sit on the sidelines, and I don't know what you do because you're not in—you're not in Bitcoin, you're not in NASDAQ, you're not in these things. Now obviously that was the wrong trade because people forgot about the other side of the equation of what can the Treasury do unilaterally without the Fed. And so we've learned—you know, yelling—bad girl—yelling—or some staffer at the Treasury Department said, "Oh, there's $2.5 trillion sitting in this reverse repo program that doesn't really circulate within the economy. How do we get that money to come out of the reverse repo and into these bonds that we need to sell because we have a large deficit?" I know we're going to increase the amount of Treasury bills—that is a Treasury debt security with less than one-year maturity. And if the yield's a few basis points higher than the reverse repo, then the money market fund is going to pull the money out of the reverse repo and put it in the Treasury bill. The Treasury bill gets relevered throughout the system, and therefore liquidity goes up, stock market goes up. Right now Powell's over here doing his "I'm Paul Volcker" impersonation. I'm going to go and keep these monetary conditions tight. I really care about fighting inflation. On the other hand, Yellen just printed $2.5 trillion, but not really printed—it's not technically quantitative easing. And so people get caught up on this: oh, it's not QE, so the market's not going to go up. Yeah, but it's still released—$2.5 trillion into the market. So that was a September 2022 until sort of early 2025 situation. And that was a monster rally in Bitcoin. Bitcoin went up 6x in that period of time. So focusing on what Powell is doing was correct in the last cycle, but now it's a Treasury show. The Treasury runs the show. They dictate policy. So what do we get out of Treasury Secretary Bessant's mouth recently? He sat down with a Bloomberg interviewer—I think this was on April 11th or 12th in the heat of the moment—and said—and the interviewer asked him, well, Powell's keeping tight monetary policy. What do you guys have any tools at the Treasury to help market conditions? And he said, I've got plenty of tools, specifically Treasury buybacks. And so again, it was increased bills versus bonds under Yellen, stealth quantitative easing. Bessant is going with Treasury buybacks, another form of stealth quantitative easing. Both

Of these programs require no input from the Fed, no input from Congress. They can implement them as and when they please. And so I believe that was a seminal moment in sort of this risk-off situation.

And to me, that this feels like November of 2022, in that there's lots of reasons to hate the market in Bitcoin at that period of time. But if the Treasury is going to print $2 and a half trillion dollars, shit's going up. If Scott Bess is going to do Treasury buybacks till the till the cows come home, shit's going up. And it has gone up since he made that announcement. They haven't started increasing the pace yet, but they will do because they can do it without input from the Fed. And so that's kind of where we're at.

Eventually, the Fed will come around. They've already indicated that, you know, quantitative tightening is is uh tapering. They might do some sort of like balance runoff where mortgage-backed securities, the maturing mortgage-backed securities, that money is in purchasing uh fresh new treasuries. So there's lots of things that you can do that aren't quantitative easing because that's a bad word. The plebs know what quantitative easing is. They know that means inflation. That's you can't do that anymore. You got to be more creative. So I think we have to be flexible in our mental models of what quantitative easing means, what money, what money printing means. Look at the second-order and third-order effects of, okay, well, if they do this, how do the other market participants react? Do they buy more bonds? Do they move money from a sterilized pool on some central bank balance sheet into the general market, which can be leveraged through the banking system? So we have to be a little bit more, I guess, indirect in our thinking of how the quantity of money changes as Treasury officials all across the world sort of take control from the central banks because the central banker says, "I want to be independent. I care about the value of the the fiat currency, blah blah blah blah blah." Right? And that's that's what they that's what they believe. But the Treasury official says, "This government's broke. The politicians want to spend the money. I work for the politicians. Therefore, I will make sure the government could fund itself at an affordable level."

Yeah. Yeah. Um, okay. So, there's a couple of points there I want to dig into on the available leverage. So obviously the one that you mentioned that that Yellen pulled, which was shifting issuance towards the bill side and having that be funded by the reverse repo, that's sort of a that's sort of a one-time gig that you can do because, you know, that was happening when that started when it was at one and a half trillion. We're at 100 billion dollars now. So there isn't you can't you can't run that same game again. Now, obviously there's the Treasury buyback scenario that you're talking about, which, to be fair, is something that was actually started under under Yellen, but for the most part, it was very small size, and I would love to to the way I see buybacks there is that there's two different routes that they can take. They can take the the traditional route which they've been doing, which is keeping the duration even where they just, you know, basically sell on the runs and then buy back off the runs, which is the most liquid part of of of the bonds, and so the duration doesn't really change, but what I've been thinking a bit about is, okay, well, what if they tried to do some sort of like operation twist style thing where they they issue bills but then they buy bonds, potentially? Do you see that as potentially being the next step here? So I think, you know, and this is from me talking to some of my friends who are really in the weeds on they work at large bond hedge funds. It's what you describe the former. So it's, okay, I'm a relative value hedge fund. I've bought an on-the-run bond and I've sold a bond futures contract waiting for that that basis to converge. Obviously, as time passes, the on-the-run becomes the off-the-run while I'm waiting for this basis to converge. But once the bond becomes off-the-run, then my bank says, "I need more collateral against that repurchase agreement," which means I can do less and less trading or I have to reduce my positions. And so if Bess can free up leverage, free up bank balance sheets to lend more under the current rules, which again he thinks are too strict, those will change in the future, but under the current rules, if he can free up balance sheet so that these RV hedge funds can increase the amount of bonds they can buy, then they can act as the marginal buyer of debt as he continues to increase issuance of debt going forward. And again, it's because the off-the-run bond is more illiquid and therefore cures a higher uh capital charge, a higher margin requirement. And so by alleviating the system of this supply and possibly even pushing off-the-run bonds into a premium, then these RV hedge funds can facilitate more buying on the margin of the increased issuance of Treasury debt.

Interesting. So, so he doesn't even need to, you know, do the the twist style thing. Just the fact of ramping up the, you know, swapping the the off-the-runs for the ons, that's enough to make for this meaningful increase in the marginal buyer debt? Correct. Correct. And we know that the debt, well, I I believe that the in his next uh quarterly refunding announcement, which should come out on I think May 1st, um, next week, uh, Bess will announce that he needs to borrow more than the market thinks, mainly because as you mentioned in the outset, you know, Elon Musk, Doge, I think I read a New York Times article, He said he was going to do a trillion. You think it's going to be more like 150 billion in terms of of cuts. Um, tax receipts might come in a bit light because of capital gains receipts. Taxes are low because the market's been tanking. And so uh and government outlays continue apace because of the structural, you know, social security, defense, all these sort of things that you continue to have to spend money on. Plus, you have Trump tax cuts, which, you know, pillar of the Republican platform. Looks like they're going to pass them. Uh, that's going to increase the the deficit as well. So Bess is going to have to issue more bonds. The market's not going to like it. He needs someone to step up and buy these things. There already hedge funds are there. They just need more capacity on the bank balance sheets. This buyback program, uh, if done in sufficient size, gives them the ability to buy more bonds. And because the purchasing of bonds doesn't come from actual savings, it's stimulative. It's, you know, the government is printing money to do stuff, goods and services, which will increase the amount of credit money in the system, which increases the quantity of money, and Bitcoin uh responds positively to that. So if you have, you know, Doge going from a trillion to 150 billion, negligible at this point, increased deficits, tax cuts, you have Scott Besson, who was a huge critic of what Yellen was doing, but is looking more likely like he's going to repeat the same things of just, you know, keeping the party going in some form or another. It feels like a lot of this is a huge fade in that, you know, the party goes on, does it not?

Absolutely. I mean, maybe in 20 or 30 years there's some, you know, massive change in in global architecture, but for whatever reason, the Trump administration couldn't take the pain to pursue this maximalist position in quickly reversing the current account uh deficit, probably because people like, "I can't get re-elected if I do this," you know, and that's just the that's just the that's just the the math, unfortunately, if you if you think that these are good policies.

Yeah, absolutely. I mean, that really gets to the to the meat of it here, which is, you know, people like you and I that are also like, you know, fundamentally bullish Bitcoin, not just as a speculative trading vehicle. It's that, yeah, you know, you can't taper a Ponzi. You know, the can will always get kicked. And so, here we are looking at here comes the next big can kicking. Tokenization isn't just a buzzword. It's the most efficient way to reimagine how financial assets are owned, traded, and managed. Ono is bringing traditional assets like stocks and bonds onchain, unlocking trillions in value and creating open global financial markets. They're not just dreaming big. They're building the platforms, assets, and infrastructure to make it happen. Head to finance, o n o.f i n, and see how they're bringing capital markets onchain. Restriction supply.

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All right, back to the show. So, the last part of this framework is obviously the Fed side of things. So, they have been, you know, pretty relatively hawkish compared to a lot of the the data, basically since what I felt like is mid-December. We've we've seen him we've seen, you know, Chair Powell continue to to really hit home in this idea that they don't really want to move much even though, you know, we got we got a negative month-over-month inflation print last month, and you know, that would on its own be obviously a huge signal to be quite dovish, it obviously isn't because of this concern for the inflationary potential impulse from tariffs. Um, but overall, I I would love to dig into how you're thinking about the Fed right now. So, you've you've been mentioning that you feel like regardless of what Powell says in Senate testimonies where he says we won't do QE until rates are at least at zero. Um, which is a long way off. We need a lot more pain to get the rates at zero at first before even thinking about QE. But I believe you're of the mind that regardless of what he says there, some form of QE needs to happen. So, how are you thinking about Powell and the Federal Reserve?

They're reactive to the market. And let's go back to 2023. Um, the Silicon Valley Bank uh banking crisis. Three banks failed in two weeks, and we had the bank term funding program released overnight between Powell and Yellen. Powell is supposedly supposed to be tightening monetary supply. If you look at the week after um they announced this program, their balance sheet blew up like by like $400 billion, right? So quantitative tightening happens as long as there's nothing wrong going on in the market. As soon as something is is up, the Fed is right there ready ready to do what they need to do, right? You got Susan Collins and the Financial Times, you know, during the heat of the tariff tantrum, saying the Fed is stands ready to do what it needs to to do what is necessary to keep the market functioning. What does that mean? The Fed stands ready to create some alphabet letter gobbledygook that isn't QE that prints money. That's that's what it is. Um, and so I think people are getting too hung up on the words. Just look at the actions. Every time bond market volatility spikes, the Fed does something. It might not be QE in the traditional form of what we believe QE is, but they have so many other tools. They have supplemental leverage ratio. They have, you know, how fast they're going to do quantitative tightening. They have other sorts of um Basel 3 implementation things that can slow down or completely cancel in the banking system. So they have a lot of these tools that the, you know, uninitiated public would not consider money printing that lead to the same outcome.

Yeah. It's so funny. It feels like, you know, obviously they try to have a lot of focus on the Fed funds rate and what they're doing there, but in reality and in practice, a lot of, you know, the marginal moves and liquidity happens throughout these facilities. Um, you mentioned SLR in there, the SLR exemption, which has been something really interesting. You've been on top of it. But, you know, if I just think back to obviously during 2021, etc., they had the SLR exemption in there just because there was so much debt being issued, and they just needed somebody to come and mop it up. They then reversed out of it. They they canceled the SLR exemption, and it sounded like a lot of the talk that was coming out of there, especially in relation to Yeah. Basel 3 endgame stuff, is that there was no plan to ever have that happen again. There was no plan to run the SLR exemption ever again. And we've seen a very notable shift in the last few months where we have Treasury Secretary Scott Besson talking about the SLR exemption. We have Powell saying it's time to review it. We have uh Fed Governor Bowman talking about it who who just got nominated to to the vice chair of supervision. So suddenly there's a lot of talk about SLR exemption. What's your read on that? And and what are the implications of that? How does it work?

I think it's gonna happen. And even Jamie Diamond, if Jamie Diamond says that it happened, if if Jamie Diamond wants it, then Jamie Diamond gets it, right? As soon as Jamie Diamond went on TV saying Trump's trade policies were bad, Trump changed immediately. So Jamie Diamond gets what Jamie Diamond wants. Jamie Diamond wants SLR exemption. Very simply, a bank borrows at the short end from depositors and lends long. Now, banks don't like to take risk, as anyone who knows who had a risky, you know, a business proposition or personal loan, they need to go to the bank. And the bank said, "Uh, uh, I don't know about that. I guess we're going to lend to S&P 500 or Fortune 500 companies because that's safer." Um, so if I can borrow cheaply, if I'm a, you know, too big to fail bank and I essentially my deposit rates are much lower than where the treasury market rates are, I borrow short and I just go buy government debt, and I don't have to put up any equity capital against this debt. Whereas if I bought if I had a personal loan or a car loan or a corporate debt, I have an equity charge. It costs me money to originate that loan. I have to put some of my own skin in the game. But it's a US government says no more skin in the game. You can buy as much of the stuff as you want. Great. I have a positive net income margin as a bank. I just ram that through. Infinite leverage. My stock price goes up, my earnings go up, everybody's happy. So the banks want SLR um because they're going to make a ton of money uh doing this. Um, and the banks are going to get it because at the end of the day, if, you know, Trump is serious about this divorce of trade where the US Treasury bond no longer is the global reserve asset. Um, then who's going to buy this stuff? The banking system is the only person who can buy it. Especially if the Fed is doing quantitative tightening or not doing QE to the level which is necessary to mop up all of the supply of debt being issued. And it certainly isn't going to be the private sector because they spent all their money on cars and washing machines. Everyone's broke.

Yeah, 100%. Um, okay. So, as you keep nerding out here on on monetary acronyms, digging into the QE side of things. So, obviously that to me is just Yeah. the outright permanent purchase and and swap of a bond for central bank reserves versus a lot of these other ones feel like more loan facilities or temporary. Obviously, like BTFP was one where it was like a loan that was temporary of sorts but still provided this this liquidity impulse. And when I look at, you know, they already have the standing repo facility available. So, you know, a repeat of the September 2019 tit is pretty unlikely because that's there and already open and ready to go. So yeah, I'm trying to just figure out where where would this potential outcome of an actual like QE impulse come from? Like what what would trigger them to want to do it? Because it feels to me like the big reason is more so this like political one, which is we don't want the long bond above 5%, and and that to me gets into the realm of almost like yield curve control. So I'm just curious like how do you think is the the catalyst factor here? Is it just yields being too high or is it like an actual, you know, some some esoteric part of the monetary plumbing world going no bid and seizing up? How do you think about all of that?

I mean, the most obvious one, but not necessarily going to be the most likely, is carry trade unwind out of Japan. So obviously Japan is a staunch ally of the US; they do whatever they're told, and if a weak dollar is necessary so that, you know, the US can re-industrialize. Japan is the largest holder of Treasury debt. It's not China; it's Japan. So and the yen is weak. They keep it weak. The BOJ's has been printing money for 30 years um to solve their balance sheet recession that started in 1989. So at the end of the day, the the world has financed itself with cheap yen. You know, yen went to 140 or below 140 yesterday. When the yen strengthens, people have to unwind these assets. They have to sell stuff. They have to sell bonds specifically. And so if we get a chaotic Japan unwind because Trump wants a weaker dollar, so the yen has to strengthen. Well, if the yen is strengthening and the BOJ is raising rates, then if I'm a Japanese person who's borrowed yen to buy stocks or bonds or whatever, I have to sell it and cover immediately because I'm not about to lose money. Or if I'm a Japanese person now, I can buy a Japanese government bond, and it yields enough so that I don't have to FX take that FX risk and go into treasuries. And so this is the unwind of Japan Inc.'s massive carry trade position as a country is probably the biggest risk to uh the biggest catalyst to, you know, the resumption of QE and explicit yield curve control because if Japan is going to repatriate the trillions of dollars of capital, most specifically in the United States, then they're going to have to have some accommodation from the Fed and the Treasury to make sure they don't blow up the US financial system.

Yeah, that's what that's what seems so confusing is that, you know, I don't think it's a coincidence that the first place Scott Besson is going to to negotiate on trade is is Japan. And to your point, you know, yen of 140, and if they're talking about wanting a weaker dollar, that almost certainly means a stronger yen, but if they have a stronger yen, that can, you know, if we lose that 140 level, for example, like that's going to have some pretty significant impacts on on yields. So do you think they're thinking about this in terms of, okay, if we get some sort of, you know, currency agreement where we strengthen the yen, there there needs to be that other side of the impulse which covers the yield side of things, or else this thing just all blows up.

Absolutely. And they already have the tools, right? There's the there central bank swaps, the Fed can essentially print infinite amounts of money, hand it to the BOJ, and the BOJ can basically take these bonds off the private sector and warehouse them, and then the Fed will just keep continue to roll the loan. This is they did it; they've done it before during the, you know, 2008 financial crisis; they don't like to talk about it, but that's why these all these things were created, and so I would imagine like that's the simplest way for them to do it, and again, it's not considered quantitative easing per se because it's not the technical definition of it, uh, how the general layperson understands it, and so people would be oblivious to exactly why why is the market going up, why is my coffee, why is it coconut water $20 now? I thought they weren't printing money. No, they are printing money. It's just in a way that you don't understand.

Yeah, 100%. Um, okay. So, I want to shift finally here into just digging deeper into your Bitcoin framework and how you're thinking about it for the rest of the year. And I want to start with what's been going on with gold, which has just been on an absolute tear, hitting all-time highs every day. And, you know, Bitcoin was lagging there for a little bit. It started to wake up, you know, recently, especially the last couple of days, which is exciting to see. But yeah, I would love to first off just hear what do you think has been driving gold so much and how do you think about that in in contrast to the digital version, i.e., Bitcoin?

Well, I mean, first off, Bitcoin has performed better than gold. If you take a look at just about any time frame, so this is more of a relative thing, you know, people see it going up and all all that, and I own lots of gold. That's a great trade. At the end of the day, the I think the big two events in the gold market of the last few years uh was February 2022 when the Biden administration decided to steal Russia's assets and freeze them um and destroy property rights. I mean, properties are already kind of destroyed, but to take the largest commodity producer in the world and say, "Okay, we're going to take your shit." That's a literally that's a different sort of escalation. And then uh Trump rolled out these maximalist tariffs uh on everything except for gold and some commodities, which is telling in terms of where the system's going. So if you're a central bank manager or some sort of sovereign wealth individual and you've got all these dollars coming in, do you want to make the problem worse of owning these treasuries that you can't sell? Um, the liquidity is declined. If you piss off the president, they sanction you, and you no longer have access to your money. Do you want to keep buying that or do you want to buy gold, which has always been for 10,000 years sort of this neutral stateless asset where people save energy uh for human civilization? Well, I want to buy more gold. And that's what they've been doing. Central banks around the world, especially in the global south and uh current current account surplus countries, have been increasing their purchases of gold, obviously China's doing uh doing so um other countries as well, you know, even like Poland in the EU, they have an explicit target; they want to bring it up to something like I don't know 15 or 20% of their central bank reserves, so everybody understands that treasuries are no longer a risk-free asset; yes, the government can US government can print nominal dollars to pay you back; that's if they want to pay you back. If you're Russia, they don't want to pay you back. Um, if you, you know, piss the, there's a research piece by some Deutsche Bank strategist a few weeks ago stating that, oh, could the Trump administration refuse to renew dollar swap lines in the EU because they didn't do something he wanted them to do, right? Again, that's just another part and parcel of a Treasury bond is not risk-free. There is risk. You have to start asking yourself what if. And when you start asking yourself what if, then you might as well own gold because there is no what if in gold. I own the gold in my vault. I've got a guy with a gun guarding it. I know that I've been able to buy oil and seeds and whatever for thousands of years with this shiny gold, this shiny metal. It's going to last longer than a US treasury treasury bond. I'm going to own some of this. That is the structural bid behind behind gold.

Yeah. So if if we, you know, extrapolate this theme that reserve managers at central banks are trying to diversify away from being overweight US and obviously get into gold and into other currencies. How do we feel about extrapolating that to Bitcoin? It feels like one of those golden geese that everybody has been talking about potentially happening for a long time. And do you think this is the time where it could actually happen? We could start to see some

Central banks are starting to add it onto their books. I actually don't think that they're mentally prepared for that sort of leap. They understand gold. They've been trained in gold. They read history books about gold.

I think, you know, the most likely outcome would be to do something like what China is doing, right? Twenty percent of the hash rate comes from China. You can't privately mine Bitcoin in China. It's all the governments and state-owned entities doing it. So, if you have a surplus of energy, then you save it in Bitcoin. You know, some countries in the UAE are doing that—um, oil-exporting nations, all that kind of thing.

So, I think it's more likely that you say, "Okay, well, I'm producing excess energy. I'm going to store that in Bitcoin versus I'm going to, you know, buy Bitcoin with my dollar earnings." Now, of course, there are smaller countries that will do this, but I'm talking about major economic powers. Um, central banks say, "I'm going to buy some Bitcoin and hold it."

Again, that's just my view. You may—maybe I could be wrong. I just believe they understand gold. I think that's fair. Yeah. Yeah. It's a big leap. Um, yeah, it feels like that's still a ways off for sure.

Um, Arthur, it's really great to have you on. Really interesting to dig into all these different themes and how they all come together. Where can folks go if they want to hear more about your work? So on X, it's um, cryptohaze, cryptohaze.com, and on Substack, cryptohaze. So check us out.

Awesome. Sounds good. Thanks. Thanks for having me.