Arthur Hayes Says, “Get your Bitcoin, and Get Out!”

There's all these things that the average person needs that the government can't print. And if they're just going to not allocate the losses for all this debt, which is essentially

debt is I'm going to take the future and I'm going to spend it today, right? So we spent the future.

There's no more future, right? We have to pay for it. And so if you have money inside of the system, you will pay for it. And it's an implicit tax on anyone who saves and things that don't go up as fast as the amount of money printed. And so that's the game. It creates a financial speculator out of everyone. Even if you don't think you're a speculator, you are a speculator.

Bankless Nation, we got Arthur Hayes on the podcast because it is one of those times where there is a bunch of chaos in the macro world. Uh our banking sector is apparently completely underwater. Balogy Eastern Ivansin is claiming that Bitcoin is going to $1 million inside of 90 days, and it's not a bet on Bitcoin, it's actually a bet on the hyperinflation of the US dollar. And that is a very similar subject to what we are talking to Arthur Hayes today on the show. Recently, Arthur, a prolific writer, has written another article, Kai Seki. We'll get into why he titled that. But a little preview for this. Arthur runs through the last 15 years of monetary and fiscal policy to get up to COVID. And then he runs through COVID up to now and the Fed rug pull of rising interest rates faster than they've ever had before to create a mass insolvency in the banking sector. And Arthur walks us through this brand new thing, this brand new credit facility out of the Federal Reserve, the bank term funding program, and really unpacks the significance of this. Arthur's big claim here is that the bank term funding program, the BTFP, is constrained in two ways. Only certain eligible assets are available to access this new credit facility out of the Federal Reserve, and this new facility is only alive for one more year. Arthur's big claim is that both of those two variables are about to increase in scope, and that is what is going to ultimately allow for Bitcoin to reach $1 million. And so Arthur is divergent from Bology in that he doesn't think it's gonna happen in 90 days, but he does think it's going to get here pretty damn soon. So that is the preview of this content. I am here without our fearless leader, Ryan, is just me today on the episode. So bear with me as I navigate this one solo. Before we get into this extremely hot episode with Arthur Hayes, in which he drops a bunch of F bombs. So fair warning about that. We need to talk about Arthur Hayes, a man that needs no introduction, but I will introduce him anyways. Arthur co-founded BitMEX in 2014, one of the original leverage trading platforms that dominated the space during the previous bull cycle. Bitmex got in trouble with the powers that beat, and now Hayes has moved on to be the chief investment officer of a family office maelstrom. But you might know Arthur as perhaps the dominant financial creative writer in crypto. When Arthur Hayes drops an article, it commands the attention of basically everyone in the industry. And not only is this one of those times in which we say, babe, wake up, a new Hayes piece just dropped, but it's also one of the most chaotic and critical times in macro and monetary landscape that we've ever seen, at least since 2008. So Arthur is going to hopefully walk us through how he is navigating these stormy waters as a banking crisis seems on the brink of creating a monetary crisis and what we all need to do about it. Arthur, welcome back to the podcast.

Thank you for having me.

Cheers, my man. This is uh like I said, stormy times, creative uh and your creative writing I think has led people along and navigate, help people navigate this path, and I think that is what we want to do here today. And you start off this piece uh in good fashion with some really interesting literary elements, starting with uh this line when you sit down for a K-secki meal, the destination is known, but the path is not. And that really is the way that you guide us through this article. Can you talk about how this relates to the money printer? Because that's I think what you were really f referring to is a lot of these crypto people, myself included, we've all said eventually the money printer is coming back on. We don't know how, we don't know when, uh, but this is how you start off this article. Can you just unpack this metaphor? Because I think it's gonna help us guide us along as we go.

Well, if we've you know, I think a lot of people in crypto and just financial markets in general have gotten into the habit of studying past cycles to get informed on how the policymakers will react to another disturbance in the baking industry.

And if we go back, you know

Hundreds of years when central banks were first created, and obviously the most important one today, Federal Reserve, created in 1913. And we look at what they do every time there is a flare-up or some sort of financial risk, we find that they resort to printing money.

And the most poignant example of what happens in their minds when they don't print money is the 1930s depression in the US. And if you remember, the Fed was not as happy with the money printer go burr button back in the day, and they actually allowed banking credit to get liquidated.

I think I forget if you Secretary of the Treasury or not, but um Andrew Mellon, you know, regard uh remarked that do they need to let the leverage get cleansed out of the system and people need to go bankrupt. And this was sort of the ethos back then, a little bit more uh hued to the free market capitalism versus you know modern-day corporate socialism that is in most countries around the world.

And so the US authorities essentially let the bake aid crisis unfold. They let the system get cleansed of the leverage. And one can argue that the US actually put itself in a better position vis-a-vis Europe, who didn't do the same thing faced with the same sort of deflationary impulses. And ultimately that led the way for the US essentially to bail out the Western world when they decided to blow themselves up in World War II.

But after that, everyone learned this lesson, they thought they learned this lesson that anytime there is the threat of deflation, anytime there is a threat of a banking panic, for whatever reason, the response must be to print money. And every single cycle they come up with a new term for it. You know, the most recent one was quantitative easing, which I believe was a phrase coined by Professor Werner when he was talking about the Bank of Japan after the 1989 crisis.

And essentially it just means that the central bank in some way, shape, or form is printing money. Now, technically speaking, it's not like the Federal Reserve has a money printer and there's a bunch of dollars coming out. In the prior circumstance, the the Fed was printing bank reserves. And so you see this balance on the Fed's balance sheet of how much excess money the banking system has, and it's something like $3 trillion last time I checked. But that's essentially what they respond to. And so as crypto people are like, okay, well, 2009, right after the global financial crisis, Lehman Brothers went bankrupt.

That December, Ben Brernicki had basically announced that he is going to embark on this thing called quantitative easing, purchasing these assets to sort of bring financial conditions more fliquid so that people can make loans and businesses can expand, at least in his theory. And starting in March 2009 is when the Fed made its first purchase, and that pretty much marks the bottom of the SP around 666. And obviously we know that the Bitcoin Genesis block was in January of 2009. And some could say that it was in part a direct response to the biggest financial crisis since the 1930s and the response of the authorities, which different from then was to okay, we're going to print money and bail everybody out.

And so we went through that cycle from 2009 until basically up until 2020 when prior to COVID the Fed was toying with this idea that they were going to, in Janet Zillon words, watch paint dry as their balance sheet declined. And Jay Powell, who was the Fed chairman at the time, was in the beginnings of trying to tighten monetary policy. And then all of a sudden COVID-19 happened. And you know, there were uh this specter of lockdowns in America.

And the financial conditions started to tighten. Everybody was worried about all these different companies going out of business. The corporate credit market froze. And you know, there's just basically a tailspin, and the SP ten-year treasury touched a low intraday low, I think 33 basis points. And then the Fed responded with an immediate emergency meeting, and they said essentially we're going to nationalize the entire US corporate bond market by guaranteeing triple being above. You can sell it to us, and we're going to provide infinite liquidity to make sure that financial conditions can stomach this pandemic.

And then obviously in response, the the US federal government, um out of any government in the entire world, Develop and Developing, printed the most money by basically handing out checks to people. Um yeah, the STIMI checks, right? Everybody got a check. Some people bought, you know, went on Robin Hood and punted crypto and doge and stocks, whatever. Some people bought uh, you know, got a put down payment on a new car, whatever. Everybody got money and everybody did whatever they wanted to do with it. Right? And so that was in the tune of a few trillion dollars. And guess what?

People were like, oh that's kind of inflationary. We don't actually want to own US treasuries if the government's just gonna be handing out money to people. So what happened? The Federal Reserves, you know, did their job and they bought almost half of the issuance of of this debt.

And underpinned this massive amount of money printing, the most since World War II for the US. And obviously crypto went from about you know three and a half, four thousand to sixty-nine thousand at the peak. And then obviously they throw us at oh my fucking god, we overdid it. So we need to go the other direction. And then you know Jerome Powell raised rates the fastest of any Fed chairman in in uh modern day history.

And now we are where we are today. The consequence of super easy monetary policy in one direction really quick, super tight monetary policy in the other direction really, really quick, and now we essentially bankrupted the entire US banking system.

So the the punchline that I think really we need to get to is this thing called the BTFP, the Bank Term Funding Program. And you thank you for walking us through the like what was the setup to this. But I want to really just uh drive this the uh the setup home. Uh and so a bunch of money gets printed in this crazy bull market that happened both inside and outside of crypto. And as a result of that, a bunch of new money gets deposited into a bunch of new banks. And this kind of sets up a lot of these commercial banks, the commercial banking sector, into kind of a trap. Because once the Fed raised all the interest rates, all of a sudden the paradigm shifts. Can you kind of walk us through that last bit of context to set us up for the uh this bank term funding program?

Sure. So obviously, you know, post the global financial crisis, essentially the

US banking system is bifurcated into the super large, too big to fail. They call them globally systemic important banks, like the JP Morgan's, the Cities, Wells Fargo's, Bank of America, those types of banks. And then you have everybody else, right? And there's a lot of the new regulations passed on how to do banking in the US and around the world. That's Dodd Frank in the US and Basel III internationally. And basically what it meant was only the really large players could really make money because it's just so expensive to be a bank.

But you know, America is very, you know, there's obviously high income disparities between people and businesses, but there is a big tail of people at the middle and the low end, right? And all these people got checks from the government. And what do they do? They went to their local bank. Um it might not be a JP Morgan or a city, might be a community bank, a regional bank, and they deposited all this money.

And then, you know, let's take the one case that everybody's really focusing on the Silicon Valley Bank. Okay, and you have this history of startups raising a lot of money. You have 2020, 2021, just massive money printing, tech is just going bananas, people are raising massive rounds, and what do they do? They stick all their money right back into the bank that was supporting them, Silicon Valley Bank, right? Another you know no name small bank that sort of rose to prominence. I don't know who published this chart, but there's a great chart that shows percentage rise of deposits over the last um three years, and you see Silicon Valley Bank is like one of the biggest beneficiaries.

Of just deposits in general. And so as a bank, what do you do when you get a lot of money, right? The job of a bank is to take money from depositors and to lend it out, right? And you know, as we know, banks don't actually like to take real risk. If there's a way that the bank can earn money without taking a lot of risk, and the risk in this sense is more like a credit risk, right? Lending to an individual person or a small business is way riskier than lending to, say, the United an arm or the United States government. So the bank says, okay, well, I'm getting all these deposits essentially for free. I'm paying 0%.

I can go lend to the US government and treasuries 1 to 2%. I can help originate mortgages or buy mortgage-backed securities and those yield 3-4%. And then on billions and billions of dollars, I just get to sit here and take money, pay nothing, lend money to the US government, and I make 1 to 3% net interest margins. That's a fucking great business. And you know, as I pointed out in the article, the shares of the small banks, you know, soared, right? Something like uh over one and a half times uh in uh from 2019 to 2021 at the peak because these banks had never had so much deposits, never had so much raw net income from just lending to the US government. And then

As a banker, how can you how can you lose your job? It's not like I'm going out and lending to like sketchy individuals. I'm literally lending to the US government who essentially regulates me. So what what's wrong with this? I I can't see, you know, if from I'm thinking of a bank manager, this is like this is the best trade ever. My stock price goes up, I make a lot of money, I'm taking little to no credit risk um because I'm lending to the government. So that's a set of things. They're buying share.

Very long term bonds, correct? That's also like a super important part of the story.

Yeah, so they they they they didn't they couldn't just lend to the US government on like an overnight basis or a one-year basis because that was basically zero, because that was where the Fed the Fed plays in that you know zero to one to two year mark. That's where they really control the short end of the curve, and that was at zero percent as per Fed policy. So it said, okay, we need to take more duration or time risk. Let's lend to the government for longer periods of time so we can earn more income. Right? So that's you know, 10 year treasuries, 30 year mortgage bonds. And essentially what that means from a risk perspective is the longer the bond, the riskier it is as interest rates change.

And so a small change in interest rates can change the price of a 10-year or 30-year bond much more than a small change in interest rates can change the price of a bond that's going to mature in the next year. And so the banks, instead of having credit risk, they had duration risk. If interest rates rose, they stand to lose a lot of money.

And so from 2008, the banking sector probably loses their appetite for credit risk. I think that's one of the important pieces of setup here. And so what you're saying is they go into uh the most solvent entity that exists, which is the Fed, because they can print money. But in order to have any sort of margin whatsoever, they have to buy the longest-term bonds because we were existing inside of a paradigm of zero interest rates for so long. That was the equilibrium that has been established almost almost completely since 2008. And so that's the setup for like what I'm modeling out as like the Fed rug rug pull because they inject a bunch of liquidity and then they jack up interest rates faster than they've ever jacked them up before. And so, Arthur, what does this do to the banking sector? And like this is the setup for this current crisis that we're inside of, correct?

Yeah, absolutely. So the banking sector has all these US government bonds, long dated bonds, and then the Fed goes, okay, we've us and the fiscal politicians have created all this inflation. We need to we need to rein this in.

And so we're going to raise rates really, really fast. And you know, Jerome Powell thinks he's the modern day Paul Folker, who, you know, that starting in 1979 rose short term rates, something almost like 20%, to sort of break the back of inflation. And Powell says, okay, we're gonna raise rates too, really, really fast to get to in his mind neutral. And so the Fed is targeting uh core personal consumption expenditures, core PCE, is is their measure. Um

And so he needs to raise rat rates really, really fast. And obviously every month there's a new high in year-on-year inflation as measured by the consumer price index. And the politicians are all over him. You know, the Democrats are looking like they're gonna get their asses kicked in the midterm elections because everybody's worried that the price of gas and the price of milk is going up. So there's all this pressure in the Fed beat inflation, beat inflation, beat inflation. Fed goes, okay, well,

we stuff the banking system full of reserves, right? So there's they're very, very solid. There's trillions of dollars sitting over here that I see from the banks that I regulate. Okay, they can handle it. So they start jacking rates. And so what happens? The the prices of bonds in 2022, so

Fed communicates starting in December 2021, hey, we're going to start this thing called quantitative tightening, which means we're going to allow the bonds that are maturing on our balance sheet, we're not going to reinvest them into the bond market. So our balance sheet's going to shrink slowly at the tune of about $100 billion a month, starting in uh they've ramped up starting in September of 2022. And we're going to raise the short term policy rate starting in March. So they started raising policy rate in March, quantitative tightening kicks in.

So you have this dual effect. Not only is the price of money going up, but the quantity of money is going down as well. And so it's really, really tightening financial conditions. And as a result, 2022 was one of the worst years for the bond market on record, right? Because when you move from essentially 0 to 1% interest rates to even 2, 3, 4%, like to us it is, oh yeah, it's only a few percentage points difference in the rate of interest. But that's a 2, 3, 4x change in the nominal level of interest rates. And on a highly nonlinear bond that has a lot of what we call gamma convexity at the zero bound, it causes ridiculously bad losses for anybody who's long bonds. And as we saw, bond funds got their asses kicked. Um, Bloomberg Aggregate Bond Index was down something like 15 or 20% in the year, which is the worst showing since probably late early 19th century.

At least in the US context, in terms of the bond market. And the banks are basically sitting on all these losses. And so the bank's balance sheet is broken up into two things. They have what we call available for sale bonds, which are the bonds that they they mark to market. And so those all fluctuate, and you can see you know gains and losses. And then they have held to maturity securities, which is this essentially sleight of hand that they get to play. They say, Oh, I have a 30 year bond, I'm not going to sell it for 30 years. Therefore, even if the price goes down 50%, because I'm waiting for maturity and I'll get back all my money plus interest, I don't need to mark that to market. And so if I have a lot of held to maturity securities and the prices start tanking,

Hey regulator, don't come after me for breaching regulatory deposit or you know requirements. These are held to maturity. You can hold these at par. And the regulators, oh shit, sure, because we don't want to like actually like do our jobs and you know look at what the banks actually hold. And so then we get to play this game that the banks have all these unrealized losses on held to maturity securities, but on that from an accounting standpoint, they're they're solvent and they meet all the requirements. And so these

For some reason this is legal, which is insane, right? Because we're we're uh basically pricing in the future of what a bond will be priced at in the future and saying that you can account for that today. W do you have any intuition as to why this is allowed?

Well, you know, from a from a logical standpoint, if you if the bank says I'm never going to sell this and um it's with the US government, then I should not be penalized in terms of a capital charge. So if you think you know US treasuries don't require any additional capital against them as per, I think Basil Free banking regulation. So what is the bank versus if they like to you and me, then they need to reserve against losses, right? Because we could default. So from a capital perspective, lending to the government means I don't have to put up additional equity or capital against these loans or uh reserve for losses versus lending to real people and real businesses. That's required, that's considered riskier. Therefore, I need to put up additional capital. So am I gonna make those loans? Fuck no, I'm gonna lend to the government. Right? I'm getting two or three percent risk free essentially for doing that versus taking real risk to underwriting a loan and then getting charged more capital and and possibly I could be in breach of my.

of my requirements and have to go to the equity markets and raise more funds and just not not a lot of fun. I like to do the easy thing and still get paid, right? And so that's what banks did.

And importantly, regardless of how you measure the value of the bond, whether the government allows you to measure it at the full term maturity, it still doesn't change the fact that there's only so much cash that's available for withdrawal by all of these banks. And so that kind of

The market doesn't lie. The Treasury's down 30%. Okay, cool. You can ignore it for 30 years, or if you have to sell it today, then you're realizing a 30% loss. And that was the issue.

And that this is kind of where we are in the current state of affairs in the last like week or so where the bank stocks are like red across the board. Uh and so can can you just like give us an audit, a sit rep of the current state of the United States banking sector? Like everything from my knowledge is like deeply red. Uh how bad is it?

Again, it's a bifurcated market. It's um I think the the US is sort of at this um ideological turning point. They don't know what to do, right? It's do we want to be like China, which has you know essentially four state banks? All credit is you know going through those banks, and that's Baker China, uh, ICBC, Baker Communications, um, and uh CCB, China Construction Bank.

You could uh the analogous would be like JP Morgan City, Walls Fargo, Bank of America, right? Is that what the U is that what the US regulators want the banking system to be? Let's have four really, really big banks. They do all the credit creation, they're super sound.

But there's, you know, they they ossify, there's little to no financial innovation, blah, blah, blah. But, you know, they're essentially actors of the state. Or do we want to have a more freewheeling market where you have thousands of small banks catering to the different um, you know, how a different location might do banking or different credit conditions, right? It's kind of the reason why you have either like a one central bank, which is like let's say the ECB, right? There's one central bank for all of Europe, versus the Fed system where there's, I forgot how many regional banks there are and they feed up into the board of governors, right? Because it's a little bit more decentralized structure because the US is coming from this agrarian perspective of okay, there's different regions in the US, they're different industries, therefore there's going to be different rates of interest that it would apply.

Which one do you want to choose? It's sort of a philosophical question. And so essentially in the US you have this sort of schizophrenia. You have, on the one hand, all these rules that are supposed to make spanks safer, but all they do is increase the cost of compliance and mean that there's only really a few handful of players that can afford to do it. They're really, really big banks. And then you have all these long tail of smaller banks that essentially serve all the things that the big banks don't want to do. Because the big banks don't need to serve Silicon Valley startups.

The crypto industry, legal marijuana, like all these different things that that people that other banks might cater to that the big banks don't need to because they have so much business. They have the biggest companies in the world stashing billions of dollars of deposits. They can lend them money, it's very safe. Like those are the kind of clients that these smaller banks will never ever have. And so you have this sort of this different banking system.

The big banks are fine. They've got trillions of dollars of excess liquidity with the Fed. They have essentially an explicit government guarantee because they're deemed too big to fail. But then the smaller banks don't have this guarantee. They're supposed to be these free market actors responding to supply and demand in the market. And so that was a setup for where we are today. Everybody did the same trade. It's just the smaller banks did it in much bigger size relative to their equity capital.

They got a lot of deposits that they never had before. They made a lot of loans to the U.S. government, right? And not only the US government, they were responsible for a lot of the construction loans, a lot of the commercial real estate loans, which is now in focus, right? So they were doing all the things that generate the economic activity of the United States. And in most countries in the world, it's the small businesses, the single operators, they're responsible for the majority of all economic activity. Those people can't get accounts at a GP Morgan R city, but they can get an account at First National, at a Silicon Valley Bank, at some of these smaller banks. And so they were the ones making all this these riskier loans. They are the ones who had much more exposure to a rise in interest rates based on their government bond portfolios.

And that's where we are today. Now, obviously, all banking stocks are down across the board, but no one's worried that JP Morgan's going out of business. But they're worried about these smaller banks that aren't too big to fail. The question mark of what is the what is the government going to do? Are they going to extend, can they access a discount window? Are they able to do the things that a JPE or a city can do vis-a-vis their interactions with the government? And this uncertainty was what's driving people out of the system. Like, well, okay, do I leave my money at this smaller bank and take any risk that for whatever reason the politicians decide this one, we're gonna let this one fail. We're gonna do free market over here, socialism over here. And so then you're like, I'm gonna go with socialism because then I get my money back. And then that's and that's the problem. So all the deposits are like, fuck this, I'm out.

And then as the deposits leave, the small banks are like, okay, well, how what do we have to do to give back the money? We have to sell these bonds. And then that is why this is where this bank term funding program uh came about. It's like, okay, the Fed doesn't want us to sell the bonds. Because if they sell these treasuries, not only do they realize a loss and technically go bankrupt, they um uh create a disorderly market in the treasury market, right? Because liquidity has declined since 2008, when essentially the government made it very hard for banks to make markets and treasuries profitably. So they said, you know, okay, we're gonna step back.

Now the majority of liquidity are these non-bank financial actors, but you know, they're not gonna provide liquidity when it's needed, they'll provide it when it's not needed, the fair weather friends of the market. And so the last thing the Fed and the Treasury want is everyone dumping bonds to get deposits to just go to stuff them in JP Morgan, right? It's kind of this like it's this vicious cycle, right? Okay, we need to bail out the small banks because everyone is not is worried that we're not gonna extend the same preferences to them that we're extending to these big guys over here, so everyone's going to the big guys, and then the small banks go under, and it causes all this this this you know this knock on effects. And so that was what the bank term fund program is there to is there to solve. It says, don't worry.

You don't need to sell your bonds. If depositors leave, just give us the bonds. We'll give you the full value of the bond in cash, and then you give your depositor cash. And now you've done your duty as a bank. No issue. No bank failures. You might not make any money, but management, you're not looking like guys from SVB Silver Gate Signature who don't have a job anymore because they've been taken over. You know, you're there, right? And so that's that's essentially the program in essence.

I've actually haven't heard it articulated in this particular way that I actually find this really, really useful. My my mental model for like the all the shenanigans that have happened in the banking sector is that there's been a flight upstream to the big banks. The long tail of banks is more or less getting cut off because of the rising, fastest rising interest rates that we've ever had. That I think is more or less what most people understand. The fact that these the fact that this long tail of banks are also serving the long tail of the economy is actually a new, a new insight for me that I haven't heard before. And so this is perhaps why you're you're you started this conversation saying, well, what do we want out of our banking sector? Do we want it to be like China where everything does centralize in the four biggest banks inside of the country? Or do we want to actually promote the long tail of banks that promotes the long tail of the United States economy? And I think what you're saying is this new institution, this new bank term funding program, is a political statement that we do want to support that long tail. Is this this is my interpretation of it?

Halfway house. It's not there yet. It's it solved the first problem. The first problem was I'm not gonna get my deposit back.