Double Happiness -- Arthur Hayes

Arthur really writes a book every 3 weeks

I’m here with another Hayes’ summary. I’ve split Arthur’s article into sections to make it more digestible:

• How did we get here?

• Assumptions broken

• We are all interconnected

• (-3, -3) Defecting starts

• The bond bubble

• Where does the $ go?

How did we get here?

• We are coming to a point where bankers need to make a choice

  • 1) Print $$$ or

  • 2) Let the government go bankrupt (default on its debt)

• Likely 2) happens, and as a result we get inflation. So how did we get here?

• Arthur makes the assumption:

  • GDP Growth = population growth + prod growth + debt growth

• Credit markets allow you to time travel - borrow from the future so you can build more today

• The assumption is that since population continues to grow, the infra and technology built scales to a larger population, resulting in more wealth (so long as the gdp growth is greater than the underlying interest rate)

• But we have one problem – the productive world population ain't growing

Assumptions broken

• Population growth being negative is not good since growth rates are baked into all financial models today

  • I.e. a “terminal” growth rate is present in the DCF model for all companies

• Because of this widely accepted, but false model, governments have continuously lent with the assumption that it will eventually lead to profitable investments

  • As a result global debt to gdp has come to be 360%

• “In hopes of one day paying off their existing debt, governments try to fuel future economic activity by taking on even more debt and investing the proceeds”, the start of a vicious cycle

We are all interconnected

By selling goods the blue (Japan, China, Germany) amassed wealth paid by the red (primarily US) 

• This arrangement only works if:

  • Wage growth in exporting nations < productivity growth. Goods must be measured in USD. The savings basically come from underpaying the wage cucks

  • US allows exporters to sell goods tax free and invest in American financial assets

• We are at a point where many of these net exporters have a lot of USD. The problem now is:

  • How can these nations spend 10T without blowing up the US financial system? They can’t

(-3, -3) Defecting starts

• China and America have started ratcheting up their trade war

• China is starting to settle trade in yuan, not rolling their us treasuries as they expire

• The US is focusing on local manufacturing, subsidizing infra (where do those subsidies come from?)

• America is cheating by using the savings of China, Japan, and Germany to rebuild domestic industry so that American firms can make goods for America

  • This will reduces the market for Chinese, Japanes, and german goods

• Also as a result, US Treasuries have lost value a lot of value relative to energy as the amount of debt in circulation has grown exponentially

  • China, Japan, and Germany see this so now so they aren’t rolling their expiring treasuries

Long term treasuries on a total return basis have underperformed oil by over 50% since the COVID fiat-printing bonanza

• As a result, Arthur thinks we get a new credit regime since the demand for US debit is drying up

• But it won’t come easy – the US will use force + the $ printer to create demand for their undesirable debt

The Bond Bubble

• Arthur estimates there is 33.58T of US debt that needs to be rolled in the next 3 years. But who buys this debt? There will always be a buyer at the right price

  • If the price (rate) on this debt is too high, it doesn’t fly since this wrecks everyone else – the ELI5 is, imagine mortgage rates jumping from 7% to 25% over the next 3 yrs

• So the question is, given a “fair” approach, how much of this debt is recycled aka bought by the Fed?

• To estimate this, Arthur references that there was 14.59T of money printing globally during Covid

• Also to consider - the private sector bought gov debt during covid so their portfolios are sitting on trillions of dollars worth of losses so they won’t be able bid as much this time

  • As a result, Arthur thinks its likely central banks will buy 50%+

• So the result is that from now until ‘26 the world’s fiat money supply goes WAY up (more than COVID)

But where does all this $ go?

• If we look at history, credit expansion always ends up in new tech which promises insane returns

  • Post 2008 housing collapse -> web2 ads and social media

• This time it will be AI, and it has already started

• But just because there’s lots of buzz around AI doesn’t mean it’ll be easy to make money

  • Lots of startups, but the vast majority (99%) will fail and amount to nothing

  • Arthur thinks AMZN / NVDA will outperform most AI startups in this space

• Arthur subscribes to “During a gold rush, sell picks and shovels”

• But Arthur does think the P/E of NVIDIA is very high right now, and doesn’t like it personally

  • Makes the comparison b/t TSMC (14x P/E) and NVDA

• Arthur shares his rules for participating in the AI boom

  • Only trade things that are liquid (no private investments)

  • Only buy things that are down substantially from their prev ATH

  • The multiple on earnings should be substantially lower than its ATH multiple

  • It should intersect with crypto somehow

• Arthur proceeds to shill Filecoin and shares some stats on it

The gobs of fiat money printed and the lightspeed adoption of AI will combine forces and produce the biggest financial bubble EVER!