Arthur Hayes: Turmoil from the periphery will become a new catalyst for Bitcoin's price

2023.10.25

Arthur Hayes: Turmoil from the periphery will become a new catalyst for Bitcoin's price

This is not speculation about whether ETFs will be approved, but rather Bitcoin discounting the possibility of a highly inflationary global conflict that could shape the future world.

2023.10.25 - 07:34:35

比特币

Navigating Web3 tides with focused insights

This is not speculation about whether ETFs will be approved, but rather Bitcoin discounting the possibility of a highly inflationary global conflict that could shape the future world.

Author: Arthur Hayes Translator: Kaori, BlockBeats When talking about war and the loss of precious lives, my words may seem ironic and flippant. The truth is, I believe soldiers around the world deserve praise for being willing to risk their lives fighting for fictional national concepts. I myself would not do this, so I feel I have no right to vote for any country to enter into war. I deeply despise those politicians sitting on thrones of power who send good people to fight without risking anything themselves. Most of these politicians have no family members directly serving in the military, nor have they served personally. Yet they are eager to send others to die for their own political and economic gains. War is not a video game; war is wasteful, war is brutal, war is deadly. So to all these weak frauds, F* YOU! Life is filled with a series of events beyond our control. You didn't choose when or to whom you were born. Life deals you a hand of cards, and your response defines who you are, and whether you succeed or fail. Your reaction matters more than the triggering event. America responded to the "War on Terror" following the 9·11 attacks in 2001. Across three presidents and two parties, the U.S. waged wars in Iraq, Afghanistan, Syria, and many other undisclosed locations. After over two decades of fighting a conceptual war with no clear measure of success, what remains? Millions dead, nearly $10 trillion wasted. And the disproportionate response was triggered by a single incident that killed thousands of Americans and destroyed several buildings—buildings that have long since been repaired or rebuilt. Hamas’s October 7 attack on Israeli civilians prompted Israeli leaders to declare war on Hamas. Hamas is an organization. But an organization is merely an idea in human minds. The only way to completely eradicate an idea is to eliminate everyone who holds it. As a result, Israel has responded by waging war against Hamas and anyone supporting them. The decline of empires occurs due to multiple threats emerging simultaneously at the periphery. The Pax Americana is not directly threatened by events in Gaza. But Israel, the pet state under Pax Americana, requires billions annually to protect itself in a hostile environment. For the aristocrats of Pax Americana, this cost is justified because it preserves the image of American strength and establishes a fifth column in oil-rich the Middle East. One cannot abandon allies when needed—otherwise, your other allies will cease pledging loyalty to your flag. This is how America got dragged into the war between Ukraine and Russia, and now the war between Hamas and Israel. Thus, Pax Americana must spend itself into bankruptcy to support its ally, Israel. “Bankrupt the empire? How could hundreds of billions possibly bankrupt the dominant U.S. economy?” some readers might ask. I admit “bankruptcy” is a strong word—I’ll soften it: I mean driving debt servicing costs to unsustainable levels. Once the government can no longer afford its debt, central banks must step in and print money to fund it. This is where the real fun begins for fixed-supply financial assets like gold and cryptocurrencies. The long end of the U.S. Treasury market has rationally underestimated a future in which America will be forced to spend tens or even hundreds of trillions through proxies—not just in Ukraine, but now in Israel, and possibly across the broader Middle East. The last time America entered the Middle East, it cost $10 trillion; how much this time? Instead of reviewing historical lessons or speculating on military strategy, let’s look at how markets reacted to recent events. I find it interesting how the U.S. Treasury market responded to recent statements by Federal Reserve Board members and President Biden. The financial instruments I focus on are the 10-year and 30-year U.S. Treasuries, and the long-term U.S. Treasury ETF (TLT). Finally, I will compare how gold and Bitcoin reacted to volatility in the risk-free reserve asset of Pax Americana. Mission Accomplished The Fed believed it could defeat inflation by raising policy rates (the federal funds rate) and shrinking its balance sheet (composed mainly of U.S. Treasuries and mortgage-backed securities, or MBS), thereby tightening borrowing conditions. When monetary conditions become sufficiently restrictive—a vague concept—they would stop hiking. This is what Chairman Powell repeatedly declared in various press conferences and speeches. At the press conference following the Fed's September meeting, Powell essentially stated that the Fed’s rate-hiking campaign was very close to completion. Subsequently, multiple Fed officials echoed this sentiment: rising long-term interest rates (U.S. Treasury yields >10 years) meant the Fed no longer needed to hike, as the market itself was tightening monetary conditions. Minneapolis Fed President Neel Kashkari said Tuesday there is “a possibility” that further hikes may not be necessary. —Reuters, 10/11/23 Fed’s Logan: Rising yields may mean less need for rate hikes. —Bloomberg, 10/9/23 Fed’s Daly says bond yield rise could substitute for rate hikes. —Bloomberg, 10/10/23 The Fed paused tightening, and the U.S. Treasury market promptly sold off violently, sending yields soaring. A rare phenomenon in modern financial history began unfolding: the dreaded “bear steepener.” A bear steepener refers to a broad rise in yields, with long-term yields increasing more than short-term ones. If the Fed isn’t going to fight inflation by hiking rates, why should anyone hold long-term bonds? It seems counterintuitive, but put down the TikTok videos and think with me. The ghost of inflation still haunts us. Manipulated U.S. government inflation data shows core CPI still more than double the Fed’s 2% target. The Fed should keep hiking until either a recession or a major financial institution collapses. Once either happens, the Fed will cut rates, as inflation will fall amid a weakened economy. Markets are forward-looking. Therefore, during a hiking cycle, as long as the Fed is committed to hiking away inflation, the yield curve will eventually invert (long-term rates below short-term rates), because long-term investors expect weaker economic conditions ahead. When a recession or financial disaster hits, short-end rates will rapidly decline as the Fed aggressively cuts policy rates. This is the “oh shit” moment. The yield curve will shift from inverted to upward-sloping (long-end above short-end), but within an overall declining yield environment, becoming steeper. This is known as the “bull steepener,” the classic yield curve pattern in modern financial history. Currently, the U.S. has neither experienced a recession nor a financial disaster. To mainstream financial cheerleaders like Paul Krugman, the regional banking crisis doesn’t count; they need to see a collapse like Bank of America before acknowledging deep rot in the U.S. banking system. Thus, the market—i.e., vigilant bond traders—expects the Fed to continue hiking to combat inflation. But the Fed says hiking is on pause, so the bull steepener scenario won’t materialize. Then why should the vigilant keep holding long-term bonds? They won’t. Instead, they express their view by selling long-dated bonds at the margin. Besides the Fed failing its duty, attention suddenly turned to the massive amount of debt the U.S. Treasury must sell to fund government operations. It’s not that this data was previously unknown—anyone can download debt maturity and auction schedules clearly showing the coming debt tsunami. However, only after the Fed hinted at pausing did the market start paying attention, evident from various commentary pieces by prominent investors in mainstream financial media. In recent weeks, bond market contrarians have challenged Yellen’s policies by pushing bond yields to levels that could trigger a debt crisis. Higher yields would crowd out the private sector, cause credit contraction, and induce a recession. Since the root problem is fiscally irresponsible spending, the government would then have to cut spending and raise taxes to appease bond market vigilantes—deepening the recession. The Fed hesitated to hike, while the federal government spent more recklessly than Sam Bankman-Fried on Adderall, making markets nervous. But why is a bear steepener so dangerous? Well, let me tell you. Lions and Tigers and Bears, Oh My! To explain why this market structure is so harmful to the global financial system, I need to dive into bond math and fixed-income derivatives. I’ll minimize jargon, but for those truly wanting to understand, grab your trusted John C. Hull derivatives textbook. I used to keep one on my desk when working for the demons of traditional finance. Let’s use a mortgage example to illustrate what happens to a bank’s hedging strategies when rates rise. Consider a 30-year fixed-rate mortgage where the borrower can prepay partially or fully at any time without penalty. Once the bank issues the loan, the mortgage appears on its balance sheet and must be hedged. What risks does the bank face from this mortgage? Two risks: interest rate risk and prepayment/duration risk. Next, I’ll discuss mortgages and shorting U.S. Treasuries. When you short a bond, you receive cash but pay the stated yield. For example, if I short a $1,000 par bond at 99% with a 2% yield to maturity, I receive $990 today, pay 2% annually, and repay $1,000 principal at maturity. I’m loose with bond math here, but you get the point. Here, I’ll loosely use the term “duration.” Accurately speaking, a 10-year long-duration bond falls 10% in price when rates rise 1%. Long-duration mortgage bonds have negative duration, while shorting U.S. Treasuries gives positive duration. Positive-duration bonds make money when yields fall and lose money when yields rise. Interest Rate Risk The bank offers a fixed rate for the entire 30-year loan. But it cannot predict deposit rates 30 years from now. Remember, banks borrow from short-term depositors to lend at higher long-term rates. If rates rise, deposit rates also rise, potentially causing losses. Imagine the bank lends at a fixed 3% mortgage rate while deposit rates jump to 6%—it loses money, earning 3% from borrowers but paying 6% to depositors. Hence, the bank must sell some Treasuries to hedge these losses. Prepayment/Duration Risk What if the bank shorts bonds? Maybe that offsets its mortgage losses. If the bank earns 3% on the mortgage and shorts a bond yielding 2%, it pockets a 1% profit. Sounds good—but which maturity bond should it short? Suppose you’re the trader managing the bank’s mortgage portfolio. You might think: if I have a 30-year mortgage, I should short a 30-year bond. But that’s wrong—because borrowers can prepay! If rates fall, borrowers refinance. They take out new loans at lower rates and use the proceeds to pay off their higher-rate loans. Suddenly, your assumed 30-year asset vanishes, leaving you with only a 30-year short position. You can no longer offset bond payments with mortgage income. In short, you’re screwed. If rates rise, borrowers stop refinancing and stick with their cheaper mortgages. But if you haven’t shorted long enough, you could still get hurt. Once the bond matures, you must repay principal. Now you must fund the still-on-the-books mortgage with deposits. Given rising rates, deposit rates exceed mortgage rates. As a bank, the duration—or effective life—of your mortgage changes with interest rate movements. Therefore, your expectations of future rates determine how long a hedge you buy. Banks’ trading desks use historical data to forecast future rate paths and hedge accordingly. The current rate regime isn’t in these models, so banks and other financial intermediaries tied to bonds or interest rate products are improperly hedged. As rates rise in a bear-steepening manner, the duration of bonds held on banks’ balance sheets extends. Because bonds lose value exponentially as rates rise—this is called “negative convexity”—trading desks suffer large losses as their hedges are too short in duration. So what’s the solution? As rates rise, traders must short more longer-dated bonds. At this point, banks may spiral into a fatal negative convexity loop. Here’s the negative convexity death spiral in a bank’s trading desk: 1. Bear steepener intensifies. 2. Trading desk duration increases. 3. Due to now net-short duration, total losses on bond portfolios grow. 4. Traders increase short positions to rebalance duration, pushing bond yields higher. 5. Trading desk duration increases again. 6. Repeat steps 2 to 4. I used a simple example of a mortgage hedged with Treasuries. I know mortgage hedging isn’t exactly done this way, but this simplified case helps readers grasp the concept. We mustn’t forget the real issue: during and after the 2008 global financial crisis, the Fed and other central banks dropped rates to zero or near-zero and printed money to buy bonds, suppressing yields. For pension funds and insurance companies—holding trillions in capital and needing sufficient returns to pay future benefits—the outcome was simple: hunt for yield. Why? Because a generation of elderly people are retiring (or about to), likely requiring healthcare funded by pensions and insurers. Healthcare and living costs don’t grow at 0%, so these institutions must somehow boost returns to honor financial promises made to baby boomers. Fixed-income trading desks at global investment banks became the primary source of yield for pensions and insurers, happily selling clients structured products offering higher returns. Ironically, having printed money to rescue traditional finance from its own stupid policies, these banks then profited by selling products to the very institutions harmed by those same policies. But how do these products offer higher yields than government or corporate bonds? Banks embed options. Clients sell an interest rate option and collect a premium, appearing as a yield spread. The most common product is adjustable note structures. For those in the know seeking full accuracy, I must quote my OG volatility fund manager David Dredge: Technically, structured desks end up holding a series of so-called Bermuda swaps, hedged based on random future probability paths of bond durations—i.e., probabilities of call dates. As rates rise, the probability of calls in coming years decreases, so they adjust their “hedge positions,” resulting in selling vanilla swaps with longer tenors. Back to what’s happening in the swap market. My next question to Dredge: “So simply put, when dealers hit the ‘oh shit, my model broke’ moment, do they all rush to sell Greek-delta exposures in the cash market, causing long-end bond sales?” Dredge replied: “As the bear steepener worsens, dealers have already sold too many back-end payer swaps. They’ll find they’ve excessively sold back-end implied volatility and sold long-end bonds (technically sold swaps, but close enough).” Underneath record profits, the world’s “too big to fail” banks hide a ticking time bomb. I’m talking about JPMorgan, Goldman Sachs, BNP Paribas, Nomura, etc. They’ve sold trillions in notional value of these products to desperate pension and insurance funds, and now face losses exceeding those of Three Arrows Capital. To hedge and stem losses, these banks must trade identically. The more they hedge, the greater their losses—all stemming from the bear steepener, directly caused by Fed and global central bank policy. Talk about “human vipers” in traditional finance. The scale of the problem is partly invisible to global banking regulators. These products are traded bilaterally over-the-counter. Banks report some things, not others. Banks and clients go to great legal lengths to conceal risk. Banks want bigger bonuses based on accounting profits by taking more risk. Clients don’t want to admit insolvency. It’s a dirty swamp of deliberate ignorance. No one knows at what interest rate percentage everyone collapses, or how large the losses might be. But rest assured, global citizens: when the financial system teeters on collapse, your central bank will print the necessary money to save this filthy fiat financial system. We know something unusual is happening because bond volatility, measured by the MOVE index, is rising alongside yields. This tells me selling is triggering more exponential selling—what causes rising volatility. Then, unexpectedly, the “corpse” of a systemically important traditional financial institution will surface. They look highly correlated. The Fed knows this—that’s why they’re desperately trying to delay, claiming policy lags require them to pause and “assess effects.” Mr. Powell, how long will you sit and wait? The real reason for the pause is that while hiking could curb the bear steepener, continued hikes would once again hurt U.S. regional banks. Remember, depositors prefer dealing with the Fed for 5.5% or higher rather than keeping deposits at lower rates while risking bank failure. These regional banks are fragile, but unlike the gradual, rhythmic damage from consecutive Fed hikes, the shock of a bear steepener is sudden and severe. Also, recall the U.S. banking system faces nearly $700 billion in unrealized U.S. Treasury losses. As long-bond prices keep falling, these losses will accelerate. Once a few more regional banks fail, the Fed and U.S. will move to bail them out en masse. Authorities demonstrated this earlier this year with Silicon Valley Bank, First Republic, etc. But the market currently doesn’t believe the entire U.S. banking system’s balance sheet is government-guaranteed. And if the market—especially the bond market—reaches consensus on this view, inflation expectations will surge, and long-bond prices will fall further. This primer on bear steepeners and their impact on banks explains why long-term rates are rising rapidly in a self-reinforcing manner. It also highlights another problem facing the Fed and U.S. Treasury. Knee-Jerk Reaction Back to Hamas vs. Israel. After Hamas’s initial October 7 attack on Israeli civilians and soldiers, when markets opened Monday, U.S. Treasuries rose (yields fell), gold dipped slightly, and crude oil edged up. Commentators claimed investors were flocking to the ultimate safe-haven asset—the U.S. Treasury, the purest embodiment of American dominance. America strong, America just, America the refuge for capital when fear strikes. Wow, wow, wow! Does this make sense? At first glance, oil’s muted reaction suggested markets didn’t believe the conflict would spread across the broader Middle East. Hezbollah stayed calm along Lebanon’s northern border, Iran issued tough rhetoric but seemed unlikely to intervene directly. President Biden and his administration tried to calm tensions. They didn’t blame Iran—America’s usual punching bag—though some U.S. senators automatically called for strikes on Iran. The market placed great hope in this. Oil prices may slowly rise as Saudi Crown Prince Mohammed bin Salman (MBS) continues production cuts. Rumor had it MBS would ramp up output after normalization with Israel. But now that rapprochement is shelved, as MBS must stand with Arab and Muslim brethren. More importantly, young Saudis strongly support Palestine. MBS has no choice but to back Palestine fully. Markets regained confidence, buying U.S. Treasuries—especially long-dated ones. The yield curve between short- and long-term Treasuries steepened negatively in subsequent trading, clearly showing this shift. But as events unfolded, it became clear Israel wouldn’t quietly endure the night. Instead, Israeli Prime Minister “Bibi” Netanyahu announced the IDF would strike back hard against Hamas. He authorized decisive action to eradicate Hamas, declaring their campaign would affect generations. Bibi is playing hardball. Every Hamas terrorist is dead – Bibi The Strong All well and good, but Israel is surrounded by Arab and Persian nations who believe Palestinians suffer under apartheid. If Israel retaliates too fiercely, these Arab states must respond—they fear public pressure to protect co-religionists and ethnic kin, risking domestic unrest. Moreover, Palestinian refugees flooding into neighboring countries could create crises. Specifically, many Arab states don’t want Hamas’s ideology challenging their rule, which is why they’d prefer Hamas remain confined to Israel. The biggest question: Will Iran and its proxy Hezbollah enter open conflict with Israel? If Iran joins, does that mean America joins too? Israel’s aggressive foreign policy rests on unwavering U.S. support. What about Russia? If her ally Iran faces America, will she intervene via proxies? If Russia enters, how will China respond? Many questions, no easy answers. What about U.S. Treasuries? America spent $8 trillion in Afghanistan, fought for 20 years, and ultimately left in disgrace—a hide-and-seek war against impoverished farmers. Biden reiterated U.S. support for Israel, but as war costs mount, the U.S. Treasury market resumed its sell-off. The yield curve shifted back toward a bear steepener. Nothing dramatic happened—then Gaza’s largest hospital was bombed. Pax Americana’s Dilemma As you know, I am a cynic. I’ve repeatedly said the most important thing in politics is re-election. Israeli Prime Minister Netanyahu is currently on trial for bribery, fraud, and breach of trust. The trial continues. For a cornered politician, nothing beats a war to rally fearful citizens behind their leader at all costs. The Hamas attack is horrific for the dead and still-captive, but it’s politically rehabilitating Bibi. So he must react as forcefully as possible, assuring Israeli citizens—and perhaps those judging him guilty or innocent—that he will guarantee their safety, thus proving he’s the best man for the job (the job being eliminating Hamas and its ideology). Israel’s aggressive response has reduced much of Gaza to rubble and killed thousands of Palestinian civilians—posing a problem for the elite rulers of Pax Americana. The world watches Biden, wondering: will America condone and financially support such actions? America can support Israel, but risks getting dragged into war with Iran and other Middle Eastern states. For whatever reason, Iran has stated its red line is a ground invasion of Gaza by the IDF. That’s the flashpoint. Israel disabled airports in Damascus and Aleppo via airstrikes. Syria is a Russian client state. Russia was once Israel’s ally, but is now distancing itself. How will Russia react if America supplies bombs destroying its allies? Would that require U.S. military intervention elsewhere? These are just two examples. As Israel continues bombing parts of the Middle East, I believe more such incidents will occur, regressing the region to Old Testament times. Biden could control this by telling Israel U.S. support is limited. Threaten that if Israel continues, America will cut funding. Seeing this, other U.S. allies might reconsider whether it’s worth obeying American advice. Many governments have already marginalized minority groups demanding greater political voice or economic share. These minorities are sometimes suppressed by force. Such actions may embarrass America, seen globally as a human rights champion. Without U.S. backing, coexistence with hostile neighbors becomes harder for many allies. America’s elite have no winning move. Whatever stance they take on Israel weakens the empire. Either it spends trillions helping Israel fight Middle Eastern enemies, or—if their domestic conduct is questioned—it risks alienating allies who begin to drift away. Hamas started a conflict, and now the empire must choose. For an empire already in decline, there are no good choices. Good deeds bring good results; evil deeds bring evil results. Now let’s discuss which path “Imperial America” has chosen. Back to the Middle East Situation Israel’s military actions have so damaged relations with Arab neighbors that Biden tried to meet many leaders, but they all canceled at the last minute. Ultimately, Biden just landed in Israel, confirming U.S. support for Israel no matter what. I think a video call would’ve sufficed, saving millions in travel costs and relieving American taxpayers. As Israel escalates militarily and America stays silent, the U.S. Treasury market resumes its decline. It’s increasingly clear the market is pricing in future military support costs for Israel and other inevitably challenged allies. How do you feel about U.S. Treasuries now? Budget After explaining to the American public why the U.S. must support Ukraine and Israel, Biden requested $105 billion from Congress. Here’s the breakdown: $60 billion for Ukraine America keeps throwing money in the wrong place. The war is stalemated. Ukraine has already wasted hundreds of billions of U.S. taxpayer dollars, while Russia consolidates the territory seized at war’s outset. In his speech, Biden repeatedly cited Russian President Putin as a despicable dictator who must be defeated. It looks like America has no intention of escaping this quagmire. $14 billion for Israel This is just the beginning of Biden’s pledged unwavering support for Israel. Biden basically said America will ensure Israel gets everything needed to continue fighting Hamas, no matter the cost. America is absolutely involved in this war. Your move, Iran? If Iran intervenes, support for Israel could reach trillions—and faster than approving a BlackRock Bitcoin ETF. Never underestimate that bald white guy in New York City! $10 billion for Ukraine and global humanitarian aid Ukraine needs aid because weapons allow President Zelenskyy and his band of conscripts to keep fighting. Stop funding the war, and you won’t need more humanitarian aid. If America sticks to current policy, Biden will keep asking Congress for more money—even if the actual policy is unclear. $14 billion for border funding to combat drug smuggling and the fentanyl crisis Some say the fentanyl crisis is a modern Opium War on American soil. In the 19th century, China was forced under threat of gunboats to allow the British Empire to widely traffic drugs within its borders. Many iconic buildings in Shanghai’s Bund and Hong Kong were built by opium traders like Jardine Matheson, Kidoorie, Sassoon, etc. It wasn’t illegal—the British Parliament approved it. May everyone live happily and healthily! Could it be some nations aren’t cracking down hard on cheap fentanyl exports to the U.S.? Whoever bears responsibility, this is yet another assault on America’s periphery with no end in sight. $7 billion for the Indo-Pacific region America is busy securing friendship and influence in Asia. Former President Obama launched the Asian “pivot” over a decade ago. America actively courts India, the Philippines, supports Taiwan, Japan, Australia, and New Zealand. Trillions, quadrillions—soon it’ll be real money. The bond market listened to Biden, read his budget, and panicked. The next morning, bond yields spiked sharply. If you’re a long-term U.S. Treasury investor, the most alarming thing is that the U.S. government doesn’t believe it’s spending too much. This is what Treasury Secretary Yellen said when asked if America can afford two wars. Sky News: Can the U.S. and West afford another war at this time? Grandma Yellen: The U.S. can certainly afford to support Israel and meet Israel’s military needs. We can and must also support Ukraine against Russia. The U.S. economy is performing very well. Source: Sky News Well, then came the sell-off in long-dated U.S. Treasuries. 2-year vs. 30-year yield spread. For the first time since mid-2022, the 2-year vs. 30-year U.S. Treasury yield spread turned positive. If U.S. defense spending goes into absurd mode, trillions in borrowing will fund the war machine. As America enters a true wartime economy, Biden mentioned all those Americans producing deadly items like bullets—as if that justifies spending. But this crowds out production of other goods and fuels inflation. Workers making bullets, tanks, and bombs are not making cars, clean adult diapers, or saying “Would you like fries with that?” That’s why bonds are selling off and yields rising. But more importantly, watch gold and Bitcoin price action. Since Israel intensified pressure on Gaza, gold prices have risen. This suggests the market is discounting future U.S. support for Israel escalating the conflict, possibly drawing in Iran. Since you don’t want to hold bonds of a nation entangled in two endless wars, investors begin shifting wealth to apolitical safe havens like gold. Bitcoin barely reacted at the start of the Hamas-Israel conflict. But as U.S. Treasury yields rose and the bear market deepened, Bitcoin surged sharply, breaking $30,000. Neither gold nor Bitcoin offers investment returns. So if they rise as U.S. Treasury yields spike, it tells me both safe-haven assets are pricing in more future government spending and inflation. Since the Fed’s September 20, 2023 meeting, long-term U.S. Treasuries (i.e., TLT) have fallen 11%, Bitcoin has risen 11%, and gold has gained 1%. The market fears inflation, not growth—that’s why Bitcoin and gold rise alongside long-term bond yields. In this article, I’ve focused on America and its financial and moral dilemmas. But what if the world descends into proxy wars between the U.S. and Russia/China across multiple fronts? All major economies must ramp up war production to supply their allies. For example, increased rail traffic between North Korea and Russia has led to speculation that Kim Jong-un is supplying ammunition and weapons to Russia to sustain its fight. Every dollar, ruble, or yuan spent on a bullet is one not spent producing food or other essentials we need. Everything requires energy. There is no war without inflation. If this is the new reality, I wouldn’t want to hold any nation’s bonds. It’s all bad news. Gold and Bitcoin are starting to deliver this message. Capital Flows Let’s tie it all together. The Fed told us rate hikes would continue until inflation is defeated. As a direct result, U.S. Treasury holders began selling long-dated bonds. Thus, the yield curve steepened bearishly (2-year vs. 10-year and 2-year vs. 30-year spreads rose). This triggered automatic reactions from global banks, forcing them to sell more bonds in a way that drives volatility higher alongside yields. As Biden stated, the U.S. will steadfastly support its allies with indefinite commitments, pouring unlimited funds into arms to back Israel’s war effort. Combined with spending on Ukraine, America’s military budget will explode—especially if Hamas’s allies like Iran respond by engaging via proxies. This will increase future government borrowing, and the amount of capital wasted in war is limitless. Thus, bonds are being sold and yields are rising due to expectations of expanded peripheral war spending by the U.S. Structural hedging demands from banks and borrowing needs from America’s war machine reflect each other in the U.S. Treasury market. If long-dated U.S. Treasuries no longer offer safety to investors, their capital will seek alternatives. Gold, and more importantly Bitcoin, will begin rising due to genuine fears of global wartime inflation. So what should you do with your portfolio? Ideally, I’d wait for a financial crisis to erupt or the Fed to change course and start cutting. But markets rarely give you perfect opportunities. Biden is trying to drag America into another conflict with no clear end. Congress could say no, but few politicians have the courage to oppose the military-industrial complex, even fewer to take an anti-Israel stance. If Afghanistan cost $8 trillion, how much would war with real adversaries like Iran waste? Bitcoin briefly surged above $30,000 on false rumors that the SEC approved BlackRock’s spot Bitcoin ETF. When Crypto Twitter suggested Cointelegraph—the rumor source—might have gone 100x long, spread fake news, then dumped on retail, Bitcoin quickly fell back to $27,000. But now, post-Biden speech, Bitcoin and gold are rising against a backdrop of plunging long-dated U.S. Treasuries. This isn’t speculation on ETF approval—it’s Bitcoin pricing in a very inflationary global war scenario for the future. When yields rise too high, the inevitable outcome is the Fed ending all pretense that the U.S. Treasury market is free. Instead, it will become what it truly is: a PPT village, where the Fed sets rates at politically convenient levels. Once everyone realizes the game we’re playing, the Bitcoin and crypto bull market will go full throttle. That’s the trigger. Now is the time to start moving from short-term U.S. Treasuries into crypto. First stop is always Bitcoin, then Ethereum, then my beloved shitcoins. I’ll start small in case I’m wrong, but you can’t stay on the sidelines forever waiting for the perfect opportunity. Perfect opportunities are usually right in front of you—you’re just too focused on the past to see them.

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Arthur Hayes

Arthur Hayes: Turmoil from the periphery will become a new catalyst for Bitcoin's price

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