原文标题：Left Curve
原文作者:Arthur Hayes
原文来源：substack
Compiler: Tao Zhu, Golden Finance
Some of you consider yourself to be the master of the universe now because you bought Solana for less than $10 and sold it for $200. Others did the smart thing, selling fiat for crypto during the bear market from 2021 to 2023, but reduced their positions as prices soared in the first quarter of this year. If you exchange shitcoins for Bitcoin, you'll get a pass. Bitcoin is the hardest money ever created.
Bull markets don't happen very often; It's an irony when you're making the right decisions without maximizing your profit potential. Too many of us try to do bull market reasoning. As long as the bull market continues, they will buy, hold, and buy again.
Sometimes I find myself thinking like a loser. As I do, I have to remind myself of the overarching macro themes that the entire retail and institutional investment community has come to believe. That is, all major economic blocs (the United States, China, the European Union, and Japan) are depreciating their currencies in order to reduce the leverage of government balance sheets. Now that TradFi can profit directly from this narrative through the US and the upcoming UK and Hong Kong spot Bitcoin ETFs, they are urging customers to use these crypto derivatives to maintain the energy purchasing power of their wealth.
I want to quickly explain the root cause of the large rise in cryptocurrencies relative to fiat currencies. Of course, this narrative will someday lose its validity, but that time is not yet now. At this point, I resist the urge to take my chips off the table.
As we exit the window of weakness that I predicted due to the April 15 U.S. tax and Bitcoin halving, I want to remind readers why the bull market will continue and prices will become even more stupid. There are very few things in the market that will get you here (Bitcoin goes from zero in 2009 to $70,000 in 2024) that will get you there (Bitcoin to $1,000,000). However, as the sovereign debt bubble begins to burst, the macro environment that led to a surge in fiat liquidity and drove Bitcoin higher will only become more apparent.
Nominal Gross Domestic Product (GDP)
What is the purpose of the government? The government provides public goods such as roads, education, health care, social order, etc. Obviously, this is the wish list of many governments, but they offer death and despair...... But I digress. In return for these services, we citizens pay taxes. A government with a balanced budget provides as many services as possible with a certain amount of tax revenue.
Sometimes, however, the government will borrow money to do things that it believes will generate long-term positive value without raising taxes.
For example:
Construction of expensive hydroelectric dams. Instead of raising taxes, the government issued bonds to pay for the dam. It is hoped that the economic return of the dam will match or exceed the yield of the bond. The government attracts citizens to invest in the future by paying yields close to the economic growth that the dam will create. If, in 10 years, the dam will grow by 10% of the economy, then government bond yields should be at least 10% to attract investors. If the government pays less than 10%, then its profits are at the expense of the public. If the government pays more than 10%, the public's profits are borne by the government.
Let's take a longer look and talk about the economy at a macro level. The economic growth rate of a particular nation-state is its nominal GDP, which is made up of inflation and real growth. If the government wants to drive nominal GDP growth through budget deficits, it is natural and logical for investors to receive gains equal to the nominal GDP growth rate.
While it's natural for investors to expect gains equivalent to nominal GDP growth, politicians prefer to pay less than that. If politicians can create a situation where government debt yields are lower than nominal GDP growth, then politicians can spend money faster than Sam Bankman-Fried on effective altruistic philanthropy. The best part is that there is no need to raise taxes to cover this expenditure.
How can politicians create such a utopia? They use the TradFi banking system to suppress depositors economically. The easiest way to ensure that Treasury yields are below nominal GDP growth is to instruct the central bank to print money, buy Treasury bonds, and artificially lower Treasury yields. Banks are then told that government bonds are the only "suitable" investment for the public. In this way, the public's savings are secretly invested in low-yielding government debt.
The problem with artificially lowering government bond yields is that it promotes improper investment. The first project is usually worth it. However, as politicians strive to create growth in order to be re-elected, the quality of the program has declined. At this time, government debt is growing faster than nominal GDP. Politicians now have difficult decisions to make. Improper investment losses must be recognized today through a severe financial crisis or tomorrow through low or even zero growth. Often, politicians opt for a long period of economic stagnation because the future happens after they leave office.
A good example of improper investment is green energy projects, which can only be achieved through government subsidies. After years of generous subsidies, some projects fail to reap a return on investment capital or the real cost to consumers is too high. Predictably, once government support is withdrawn, demand will weaken and projects will stall.
In times of economic downturn, bond yields become more distorted when the central bank presses the "Brrrrr" button harder than Lord Ashdrake pushes the "sell" button. Government bond yields remain below nominal GDP growth, allowing the government's debt burden to be offset by inflation.
Yield
The key task for investors is to understand when government bonds are a good investment. The easiest way to do this is to compare the year-on-year growth rate of nominal GDP with the yield on 10-year government bonds. The 10-year bond yield should be a market signal that gives us an idea of what to expect in terms of nominal growth going forward.
Real yield = 10-year government bond yield – nominal GDP growth rate
When real yields are positive, government bonds are a good investment. Governments are usually the most creditworthy borrowers.
When real yields are negative, government bonds are a bad investment. The trick for investors is to look for assets outside the banking system that are growing faster than inflation.
All four major economies have policies in place that economically suppress savers and result in negative real returns. China, the European Union, and Japan all eventually got monetary policy cues from the United States. Therefore, I will focus on the past and future monetary and fiscal situation of the United States. As U.S. engineers ease financial conditions, the rest of the world will follow suit.
The chart shows the real yield (. USNOM Index), showing the Federal Reserve (Fed) balance sheet in yellow. I started in 2009 because that year launched Bitcoin's genesis block.
As you can see, after the deflationary shock of the 2008 global financial crisis, real yields turned from positive to negative. Due to the deflationary shock of the pandemic, the index briefly turned positive again.
A deflationary shock is when real yields soar in response to a sharp drop in economic activity.
With the exception of 2009 and 2020, government bonds have been poor investments compared to stocks, real estate, cryptocurrencies, etc. Bond investors can only perform well by trading with crazy leverage. For hedge fund puppet readers, this is the essence of risk parity.
This unnatural state of affairs occurs because the Fed expands its balance sheet by printing money to buy government bonds, a process known as quantitative easing (QE).
The safety valve of negative real returns during this period was, and still is, Bitcoin (yellow). Bitcoin rises in a non-linear fashion on a logarithmic chart. Bitcoin's rise is purely a function of a limited number of assets priced at the depreciation of the fiat dollar.
This explains the past, but the market is forward-looking. Why should you continue your crypto investments and be confident that this bull market has just begun?
Free shit
Everyone wants to get something for nothing. Obviously, the universe will never offer something so cheap, but that doesn't stop politicians from promising benefits without raising tax rates. Support for any politician, whether at the ballot box in a democracy or implicit in a more authoritarian system, stems from the politician's ability to create economic growth. When simple but obvious growth support policies are enacted, politicians use the money printing machine to channel money to their preferred constituencies at the expense of the entire population.
As long as the government borrows at a negative real rate of return, politicians can offer free stuff to their supporters. Thus, the more partisan and polarized the nation-state, the more incentive the ruling party has to improve its chances of re-election by spending money they don't have.
2024 is a crucial year for the world, with presidential elections set to be held in many major countries. The U.S. election is crucial on a global scale, as the ruling Democrats will do everything in their power to hold on to their positions (as evidenced by the fact that the Orange people have done something dubious to the Republicans since they "lost" the last election). A large percentage of Americans believe that the Democrats somewhat deceived Trump into failing to win. Whether you believe this to be true or not, the fact that a large percentage of the population holds this view ensures that the stakes are very high in this election. As I said before, peaceful fiscal and monetary policies under the United States will be emulated by China, the European Union, and Japan, which is why it's important to focus on the election.
The chart above is a chart from BCA Research that shows the political polarization of the United States over time. As you can see, there hasn't been such polarization of the electorate since the end of the 19th century. From an electoral standpoint, this makes the winner take all. The Democrats know that if they lose, the Republicans will reverse many of their policies. The next question is, what is the easiest way to secure re-election?
This is stupid economy. Voters who have not yet decided on the winner of the election will decide based on their views on the economy. As the chart above shows, if the public perceives the economy to be in a recession during an election year, the incumbent president's chances of re-election will drop from 67% to 33%. How can a ruling party with monetary and fiscal policy ensure that there is no recession?
Nominal GDP growth is directly affected by government spending. As you can see from this Bianco Research chart, the U.S. government spends 23% of nominal GDP. This means that the ruling party can print GDP as much as they want, as long as they are willing to borrow enough money to meet the required level of spending.
The Chinese government determines the GDP growth rate every year. The banking system then creates enough credit to drive economic activity to the desired level. For many Western-trained economists, the "strength" of the U.S. economy is confusing, as many of the major economic variables they monitor indicate an impending recession. But as long as the ruling party can borrow at negative interest rates, it can generate the economic growth needed to stay in power.
That's why U.S. President Joe Biden's Democratic Party is doing everything it can to increase government spending. Then, US Treasury Secretary Bud Gul Yellen and her Fed Chair Jerome Powell will need to ensure that US Treasury yields are significantly lower than nominal GDP growth. I don't know what kind of money-printing euphemism they will create to ensure that negative real yields persist, but I am sure they will do what is necessary to get their boss and his party re-elected.
However, the Orange Man will likely win. What happens to government spending in this case?
The chart above estimates the deficit under the presidency of Biden or Trump since 2024. As you can see, Trump is expected to spend even more than Slow Joe. Trump is seeking another round of tax cuts that will further widen the deficit. Whichever elderly clown you choose, rest assured that government spending isn't going down.
The Congressional Budget Office (CBO) forecasts government deficits based on current and hypothetical future political conditions, with large deficits expected. Fundamentally, if politicians can create 4% growth by borrowing 6%, why should they stop spending?
As mentioned above, the political situation in the United States gives me confidence in the development of the money printing machine. If you think it's ridiculous what the US monetary and political elite did to "solve" the 2008 global financial crisis and pandemic, then you haven't seen anything.
The war on the periphery of American-style peace continues to be fought primarily on the Ukrainian/Russian and Israeli/Iranian battlefields. As expected, the warmongers of both parties are content to continue to fund their proxies with billions of borrowed cash. As the conflict escalates and more countries become involved in the melee, the costs will only increase.
summary
As we head into the summer months in the northern hemisphere and policymakers get a respite from reality, the volatility of cryptocurrencies will decrease. This is the perfect time to take advantage of the recent cryptocurrency decline to slowly increase your position. I have a list of shitcoins that have been hit hard last week. I will discuss them in the next article. There will be many token launches, but they won't be as popular as Q1 launches. This provides a great entry point for those who are not presale investors. Whatever the smell of cryptocurrency risk excites you, the next few months will provide a golden opportunity to grow your position.
Your hunch is that money printing will accelerate as politicians spend their money on handouts and wars, and rightly so. Do not underestimate the desire of the current elite to remain in office. If the real interest rate becomes positive, reevaluate your crypto beliefs.