Arthur Hayes: Why Bitcoin is the Fastest Horse in the Yield Curve Control Era

Arthur Hayes (0:00)

You want to own the asset that's going to go up the most as the balance sheet of the central banks around the world rises. And we have demonstrative evidence from 2009 to the present, the most responsive asset in human history to central bank money printing is Bitcoin, period, end of sentence. And so if you believe in this thesis, if you believe Bessent and Warsh and Trump and Kadayama and the PBOC governors are all serious about printing money to save this system, then you buy Bitcoin. You don't buy bonds. Get on the fastest horse.

That is what you have to do as an investor.

Spencer Nichols (0:38)

Hello and welcome back to the Bitcoin Magazine Podcast. I'm your host, Spencer Nichols. And today we are sitting down with the one, the only, the Yarl of Yahtzee himself, Arthur Hayes, CEO of FLOP Labs. Arthur, welcome to the show. How are you doing today?

Arthur Hayes (0:51)

Thank you. Thanks for having me. I'm doing great.

Spencer Nichols (0:53)

Excellent. I'm glad to hear that. I'm doing quite well as well with Bitcoin sitting at about $77,000 a coin as we record here on September 2nd. Today, for the rest of the podcast, we're going to be chatting Bessent bonds, Bitcoin, and how bullish or bearish the outlook should be going forward.

One of the things that I want you to help us understand in our audience at home to understand, Arthur, is what happened with Bessent in this bond buyback? You know, what took us from the events in Iran that precipitated this? What spurred this buyback and what has that done to Bitcoin?

Arthur Hayes (1:25)

Sure. So obviously, since the Iran War started in late February of this year, developed market bond yields have been rising, especially in the US. And myself and a lot of other analysts have noted that it seems that there is a paying threshold for the US Treasury Department, regardless of which administration is in charge, and the post-COVID period of about 5% on the 10-year. Now, in the US President Biden's term, his Treasury Secretary, Janet Yellen, basically printed a bunch of money through issuing a lot of Treasury bills over Treasury bonds in 2023, when the 10-year-old almost hit 5%.

And that was sort of the spark of the first leg of this rally post-FTX for crypto and a lot of other risk assets.

Fast forward to today and the Iran War, the higher oil prices, the persistent 2 trillion-ish federal deficits in the United States have caused investors to say, okay, maybe I'm not getting paid enough on this 10-year, I should be getting more, especially when you think about the US economy is growing at about 8-9% on a nominal basis, at 4-something, you're not really getting compensated for the growth in the US economy. That's the backdrop of the rise in 10-year yields.

Now, obviously, we come into the summer, it's a pretty quiet period.

Out of the blue, the first thing that we have is to tell that the monetary mandarins are worried is Bessent's intervention in the yen. This happened in early August where he and the MOF Minister Kadayama of Japan engaged in a market manipulation of the yen, where the US sold euros, bought yen of the Exchange Stabilization Fund, and Japan as well sold some assets and bought yen as well. But the key tell for the markets was Bessent's statement that this was not enough, the yen needed to strengthen, but the Japanese were not allowed to sell US Treasuries. Instead, he wanted the Fed to upsize the per-counterparty limit on the FIMA repo facility from $60 billion to an infinite, which would allow Japan to essentially take their $1 trillion-ish worth of US Treasuries, hand them to the Fed, and get a loan in dollars and continue to roll that loan. Take those dollars, sell them on the open market, buy yen, repatriate the yen of Japan, and that's going to strengthen the yen. So essentially, Bessent's calling on the Fed to print dollars so that Japanese investors do not sell Treasuries, but they get their dollars and they can pump their currency. That was the first tell that happened in early August. Then there was a quarterly refunding announcement where the Treasury laid out its plan for how it would conduct issuance of debt in the next fiscal quarter. And there is a buyback there. There've been buybacks for many, many years. There's nothing new there. The issue was that a few weeks later, Bessent out of the blue says, I'm going to double the amount of buyback starting in, I think, a week's time in September. And the market took that as, oh, shit, he's really worried about this 10-year yield. It was like, I don't know, 470 at the time. This is sort of like a soft yield curve control where Bessent is going to issue debt at the short end, which the Fed is buying through the reverse management purchases program, RMP, essentially another form of quantitative easing or money printing. Take that cash, buy back long-term debt, and essentially fix the price of long-term debt. People said, oh shit, this is what uses yield curve control. I know what that means. Balance sheet expands infinitely to essentially manipulate the bond yield at a particular level. Therefore, I need to own gold. I need to own Bitcoin. This was essentially the spark that reinvigorated the Bitcoin price action from 63,000 to about 82 I think a lot of that short covering was due to short gamma hedging for people who are short call overwrite options. So yes, there was a move on this Bessent buyback thing, but it was so violent, especially in Bitcoin, because so many people were short call options to essentially earn a bit of premium while the market was more bound.