Left curve -- Arthur Hayes

Apr 24, 2024

Hayes walks through his reasoning for why this bull market isn’t over

Within any nation, the government will tax its citizens to provide public goods and services (roads, education, etc)
The gov also can raise money beyond taxes (e.g. issuing bonds aka government debt)
Economic growth for a nation is its nominal GDP (inflation + real growth)
When the government wants to raise debt, the yield the pay should be equal to the nominal GDP (otherwise lenders are losing in real terms)
But politicians would prefer to pay lenders less – they can than aggressively spend
- They are effectively paying off their debt in this way
This is all obfuscated with bank deposits (ultimately used to fund government debt)
This incentivizes misbehavior, and at the end of the day politicians are only in office for so long so then inevitably will kick the can down the road

If gov bonds yield more than nominal GDP than it is a good investment
A good measure of this is the diff between the 10Y gov bond yield and annual GDP growth aka real yield
Most of the times real yield is negative - so the trick is to find assets outside that outperform
Additionally, most major governments mimic what the US is doing, and the US has been financially repressing savers for the last decade +

Real yields have been negative since 2009 aside from the 2020 covid crisis
Beyond 2009/2020, gov bonds have been terrible investments relative to stocks/real estate/ crypto
This is because the Fed as just been constantly printing $ and buying bonds
However, BTC has outperformed drastically
- “BTC’s rise is purely a function of an asset with a finite quantity being priced in depreciating fiat dollars”
Now to answer - why should you left curve your crypto investments and feel confident that this bull market is only getting started?

Politicians offer supporters free shit, as long as gov borrows at negative real yield
The more divided a nation state is, the more incentive the ruling party has to enhance their re-election odds by spending money they don’t have
US is super polarized (divided) now - they want to ensure a re-election
And re-election odds are highest when the economy is booming
US gov spending accounts for 23% of nominal GDP – if this is the relation, the US can borrow enough money to fund the required level of spending
Similar to China - the gov there determines the GDP growth rate every year
- Work backwards and the banking system creates enough credit to power the desired lvl of economic activity
Lots of signs point to an impending recession for the US - but so long as the political party keeps printing, it will create the economic growth necessary to stay in power
So because of all of this, Biden and the dems will do everything they can from here on out to increase gov spending
Then it is up to Yellen and Powell to ensure the bond yields are below nominal GDP growth
- They will be printing a fuck ton of money to ensure negative real yields
But what if Biden loses? Trump is forecasted to spend even more than Joe
Trump is campaigning around a number round of tax cuts, which further aggravates the deficit
And at a fundamental level, if the politicians can create 6% growth by borrowing at 4% why would they stop spending?

Arthur expects volatility to decline over the next couple months going into the summer
He thinks lots of token launches won’t be heavily bought and there will be many good opportunities to add to positions
The invalidation for the left curve thesis is if/when real rates become positive
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