Stock Daddy: Fiscal Deficit Drives Economic Growth, Arthur Hayes Believes Limited to AI Tech Stocks and Cryptocurrencies

The founder of BitMEX, Arthur Hayes, has released another lengthy article "Kite or Board", drawing on his personal experience with kiteboarding to explain why he believes the Federal Reserve in the United States is destined to fail, and why quantitative easing and loose monetary policies are about to kick in. He advises investors to place their assets in technology stocks and cryptocurrencies, and patiently wait for the return of the bull market.

However, Arthur Hayes' article is, as always, filled with elaborate arguments and various whimsical ideas. Let's first watch a video from a well-known Taiwanese financial YouTuber, Stock Daddy, to help us understand what the fiscal stimulus in the United States is all about and why, despite the significant interest rate hikes, the U.S. economy remains so robust.

Monetary Policy vs. Fiscal Policy

First, let's understand the two government tools for regulating the economy: monetary policy and fiscal policy. Monetary Policy, which we are familiar with, is about "controlling the money supply" to influence the economy. When the economy is not doing well, the central bank can lower interest rates, increase the money supply in the market, make savings less attractive, and encourage people to spend or invest. This has been a common method used by the Federal Reserve in recent years. On the other hand, Fiscal Policy involves using "government spending and taxation" to impact the economy. During economic downturns, the government can increase public construction spending, reduce taxes, and provide more money for people to spend, but this often leads to an increase in government deficits.

In his video, Stock Daddy detailed the historical context of previous monetary and fiscal policies in the United States. He mentioned that expansionary fiscal policies often occur during times of war, with the most recent one being triggered by the COVID-19 pandemic. At that time, the U.S. government passed the $1.9 trillion American Rescue Plan, directly giving money to the people, resulting in government spending reaching 54% of the GDP, even higher than during wartime.

As we enter the post-pandemic era, theoretically, the fiscal deficit should gradually return to the mean. However, data shows no signs of this happening, with one of the reasons being the significant increase in bond interest rates.

Fiscal Policy Drives Strong Economy

Recent economic data released by the U.S. has been robust, with real-time GDP estimates from the Atlanta Fed indicating a 5.8% growth in the third quarter of the U.S., the highest single-quarter growth in 45 years! Stock Daddy believes that one of the reasons behind the strong U.S. economy is the expansionary fiscal policy.

Although the U.S. did not have a large fiscal stimulus package this year, reduced government revenue, increased bond interest, along with healthcare and military expenditures, have led to a continuous expansion of the U.S. fiscal deficit. This has created another form of indirect fiscal stimulus policy, preventing the U.S. economy from facing a recession due to violent interest rate hikes as many might have imagined.

Not All Assets Are Rising

Arthur Hayes, in his article, also cited various data to explain the expansion of the U.S. fiscal deficit. He pointed out that behind the strong growth, not everyone benefits equally! Apart from those who can deposit funds into Fed accounts and enjoy risk-free interest rates of over 5%, Hayes also created a chart comparing the recent performance of the U.S. regional bank index in white, the Russell 2000 index in green, the Nasdaq 100 index in yellow, and Bitcoin in magenta, using March 8, 2023, the day Silvergate filed for bankruptcy, as the base index of 100.

The white area bank index fell by 24%, indicating that regional banks are facing operational difficulties as deposits flow out to money market funds. Recently, international rating agency Moody's also downgraded the ratings of many small and medium-sized banks in the U.S.

The Nasdaq 100 index rose by 24%, with Hayes believing that large tech and AI companies do not need banks. Their business profits are substantial, and any capital expenditure can be directly funded through retained earnings, as seen with companies like Google, Facebook, Microsoft, Apple, or those benefiting from AI prosperity like NVIDIA. Clearly, these are the areas where wealthy individuals are allocating their assets.

Bitcoin, benefiting from the decline of the banking system, has risen by 18% since March.

The Fed Will Lose Control of the Bond Market

But can the continuously rising interest expenses expand indefinitely? Arthur Hayes predicts once again that the Federal Reserve will be unable to control the continuously rising bond interest rates. If countries like China, oil-exporting nations, Japan, etc., for various reasons, stop buying U.S. bonds, the U.S. will follow Japan's path, facing failed bond auctions and a situation where no one wants to buy bonds. This will force the Fed and the Treasury to take action, starting to print money and implement loose monetary policies.

Hayes extensively quoted a paper by Dr. Charles Calomis, an economics professor at Columbia University, published on the website of the St. Louis Federal Reserve Bank, indicating that the Fed is quietly signaling to the market that they messed up and are trying to devise a way out. As known, a way out typically involves more financial repression and money printing.

Tech Stocks and Cryptocurrencies Will Be Preferred Investments

Hayes believes that more investors will begin to understand and calculate, shifting their idle cash to other places, with some flowing into tech stocks and cryptocurrencies. Although the significant price adjustments in cryptocurrencies may sound like doomsday to mainstream financial media, there is still a substantial amount of cash that needs to be placed in financial assets with limited supply, such as cryptocurrencies.

Hayes anticipates that the price of Bitcoin will drop to around $25,000 in early Q3. However, he is not afraid of this decline but chooses to embrace it. Since he did not use leverage in this part of his investment portfolio, he is not concerned about a significant price drop. He will patiently purchase some decent altcoins because when the bull market returns, these altcoins will shock the robots.