Arthur Hayes' View: Bitcoin Will Rise Regardless of Fed Rate Hikes or Cuts

BitMEX founder Arthur Hayes has once again released a fantastical long article "Are we there yet?". Hayes discusses how traders are always looking for signs of the next bull market in the crypto market, even though they may already know the market trends, they still ask, "Are we there yet?". Although Hayes has always told everyone that "patience is a virtue" and has always predicted that the Federal Reserve will soon start printing money and cutting interest rates, why hasn't it happened yet? This time he explains why the real interest rate is the reason why the U.S. GDP continues to rise? Why hasn't the Federal Reserve cut interest rates as expected? And the fact that whether interest rates rise or fall, Bitcoin will soar.

This article is excerpted and compiled from "Are we there yet?", all opinions expressed are those of the author, please refer to the original text if in doubt.

What is Real Yield?

Hayes first explained the concept of real yield, simplifying it as:

Nominal GDP minus the two-year U.S. Treasury bond yield

Arthur Hayes used the two-year U.S. Treasury bond yield to represent government bond rates, as it is the most popular and liquid tool for tracking short-term rates. As shown in the chart below, despite the Fed starting to raise rates at the fastest pace ever in March 2022, real rates remained negative until barely turning positive by mid-year. In fact, even if the 2-year bond yield is replaced with the 10-year or 30-year bond yield, the real rate would still be negative because the current U.S. 10-year and 30-year bond yields are lower than the 2-year bond yield.

The next question is: What will be the future real yield?

According to the Atlanta Fed's GDPNow forecast, an immediate prediction of current quarter real GDP growth, as of September 8th, they forecast an incredible +5.7% growth rate for the third quarter! To derive the nominal growth rate, Hayes then added 3.7%, which is the average difference he observed between nominal and real growth rates over the past six quarters.

Note: Real GDP is nominal GDP minus inflation.

Third-quarter nominal GDP growth rate = Immediate forecast real GDP 5.7% + 3.7% = 9.4%

Forecasted third-quarter real yield = 2-year U.S. Treasury bond yield 5% — Third-quarter nominal GDP growth 9.4% = -4.4%

Traditional economics suggests that as the Fed raises rates, growth in credit-sensitive economies should slow, leading to a decrease in nominal GDP growth and an increase in real rates. However, this has not occurred!

Significant Drop in U.S. Government Tax Revenue Due to Capital Gains Decline

The U.S. is a financial powerhouse, generating significant revenue for the government by taxing capital gains earned in the stock and bond markets.

The 2020-2021 COVID bull market brought in substantial tax revenue for the U.S. government. However, starting in early 2022, the Fed began raising rates. Higher rates led to a rapid death in financial asset markets, resulting in a decline in capital gains tax revenue.

From the table below, it can be seen that if the index at the beginning of 2022 is set at 100, the returns for the S&P 500 index in yellow, Nasdaq 100 index in white, Russell 2000 index in green, and Bloomberg U.S. Aggregate Bond Index in magenta were all negative. This indicates that most individuals did not make money during this period!

U.S. Government Deficit as a Percentage of Nominal GDP

With decreasing income and increasing expenses due to rising healthcare and defense budgets, the U.S. government deficit continues to rise, now accounting for over 8% of nominal GDP.

The rising deficit necessitates financing through issuing more bonds. By year-end, the U.S. Treasury must issue an additional $1.85 trillion in bonds to repay old debt and cover the budget deficit. However, the increasing interest rates add to the interest payments the U.S. Treasury must make.

U.S. Government Issuance of Bonds and Wealthy Individuals Stimulating Consumption with High Interest Rates

By the end of the second quarter, the U.S. Treasury's annualized interest payments to debt holders amounted to $1 trillion. Given that most wealth is concentrated in the top 10% of households, the U.S. Treasury is effectively providing stimulus to the wealthy in the form of interest payments.

When these wealthy individuals have accumulated enough money to cover their essential expenses—housing and food—what do they spend on? They spend on services! Approximately 77% of the U.S. economy is service-related. In summary, as interest rates rise, the government increases interest payments to the wealthy, leading to an increase in their spending on services, thereby boosting GDP growth.

Wealthy depositors consume more services with interest income, further driving nominal GDP growth

The rise in bond yields has not curbed U.S. government spending because the government is making a net profit from this situation. When the government funds itself at a rate lower than the growth rate generated by debt, the debt-to-GDP ratio actually decreases.

Bitcoin Will Rise Regardless of Rate Hikes or Cuts

Traditionally, it is believed that when interest rates rise, the prices of risky financial assets such as Bitcoin, stocks, and gold should fall. However, as the government continues to spend massively and drive GDP growth, the real yield that individuals may derive from seemingly valuable 5% government bonds could actually be close to -4%, making risky assets still a very attractive proposition for investors.

Clearly, even with a short-term nominal rate of 5.5%, holding bonds is a tough battle, and marginal capital will begin seeking hard financial assets. Certain assets like Bitcoin, large tech stocks, and AI stocks will continue to rise,

Arthur Hayes has previously explained in multiple articles that Bitcoin's rise is driven by Fed rate cuts and printing money, and in this article, he proves that Bitcoin can survive even as the Fed must continue to raise rates! Although he still believes there is a higher probability that the Fed will be forced to lower rates to near zero and restart quantitative easing, even if wrong, cryptocurrencies can still see significant gains based on the arguments presented in this article!