Title: Group of Fools
Author: Arthur Hayes
Translated by: Ismay, BlockBeats
Editor’s Note: In this article, Hayes discusses investment strategies for cryptocurrencies in the current macroeconomic environment. With interest rate cuts by the Canadian and European Central Banks, the cryptocurrency market is poised to recover from its summer slump, indicating a new bull market. Hayes believes that since 2009, Bitcoin and other cryptocurrencies have been powerful weapons against the traditional financial system. In light of the changing macro environment, Hayes suggests actively investing in Bitcoin and altcoins, and supporting the token issuance of new projects, as the market is set to experience a strong rebound.
The USD-JPY exchange rate is the most important macroeconomic indicator. In my previous article “The Easy Button,” I discussed the need to strengthen the yen, proposing a solution where the Federal Reserve could exchange newly printed dollars with the Bank of Japan (BOJ) unlimitedly. This would allow the Bank of Japan to provide unlimited dollar firepower to the Japanese Ministry of Finance (MOF) to purchase yen in the global foreign exchange market.
While I still believe in the effectiveness of this solution, it seems that the central bank scammers who oversee the Group of Seven (G7) have chosen to deceive the market into believing that the interest rate differential between the yen and the dollar, euro, pound, and Canadian dollar will narrow over time. If the market believes in this future state, it will buy yen and sell other currencies. Mission accomplished!
To make this magic work, the central banks of the G7 (Federal Reserve, European Central Bank “ECB,” Bank of Canada “BOC,” and Bank of England “BOE”) must lower their “high” policy rates.
It is crucial to note that the Bank of Japan’s policy rate (green) is 0.1%, while rates in other countries are at 4-5%. The interest rate differential between domestic and foreign currencies fundamentally drives the exchange rate. From March 2020 to early 2022, everyone has been playing the same game. Stay at home, get the flu, get the mRNA vaccine, and get free money. When inflation becomes so severe that the elites can no longer ignore the suffering of the common people, the central banks of the G7, except for the Bank of Japan, are actively raising rates.
The Bank of Japan cannot raise rates because it holds over 50% of the Japanese government bond (JGB) market. When rates fall, JGB prices rise, making the Bank of Japan appear solvent. However, if the Bank of Japan allows rates to rise, JGB prices will fall, and this highly leveraged central bank will suffer catastrophic losses. I did some scary math for readers in “The Easy Button.”
That’s why if Janet Yellen and the rest of the G7 central bank decision-makers decide to narrow the interest rate differential, the only choice is for central banks with “high” policy rates to lower them. In traditional central bank theory, lowering rates is beneficial if inflation is below target. What is the target?
For some reason, I don’t know why, the inflation target for each G7 central bank is 2%, regardless of cultural, growth, debt, population differences, etc. Is the current inflation rate rapidly surpassing 2%?
Each colored line represents the inflation target of different G7 central banks. The horizontal line is 2%. None of the G7 countries’ inflation statistics – even those manipulated and dishonestly released by governments – fall below the target. With my technical analysis hat on, it seems that G7 inflation has formed a local bottom in the 2-3% range and is poised to spike higher.
Given this chart, a traditional central banker would not lower rates at the current level. However, this week, the Bank of Canada (BOC) and the European Central Bank (ECB) lowered rates despite inflation being above target. This is odd. Is there some financial turmoil that requires cheaper money? Not really.
The Bank of Canada (BOC) lowered its policy rate (yellow) when inflation (white) was above target (red).
The European Central Bank (ECB) lowered its policy rate (yellow) when inflation (white) was above target (red).
The problem lies in the weak yen. I believe Ms. Yellen has stopped the “kabuki” dance of raising rates. It is time to maintain the globally dominant financial system led by the United States. If the yen is not strengthened, the big bad guys in China will unleash a devalued yuan to match their major export competitor Japan’s super cheap yen. In the process, US Treasury bonds will be sold, and if that happens, it will signal the end of the “American Empire” game.
Next Steps
The G7 will convene a meeting in a week. The post-meeting communique will generate significant market interest. Will they announce some coordinated currency or bond market operations to strengthen the yen? Or will they remain silent but agree that all countries except the Bank of Japan (BOJ) should start lowering rates? Stay tuned!
The big question is whether the Federal Reserve will start lowering rates so close to the November US presidential election. Typically, the Federal Reserve does not change policy as the election nears. However, in typical scenarios, favored presidential candidates do not face potential imprisonment sentences, so I am prepared to adjust my thinking flexibly.
If the Federal Reserve lowers rates at the upcoming June meeting, and their preferred adjusted inflation gauge remains above target, the USD-JPY exchange rate will plummet, signaling a stronger yen. With “Slow Joe” Biden facing a backlash in opinion polls due to rising prices, I don’t think the Federal Reserve is ready to lower rates. Ordinary Americans are clearly more concerned about the rising cost of their vegetables than the cognitive abilities of the elderly man seeking re-election. Fair to say, Trump is also a “vegetable” because he likes eating McDonald’s fries and watching “Shark Week.” Nonetheless, I still believe that lowering rates would be political suicide. My baseline expectation is that the Federal Reserve will maintain its current policy.
By June 13th, as these amateurs sit down to enjoy a lavish meal funded by taxpayers, the Federal Reserve and the Bank of Japan have already held their June policy meetings. As I mentioned earlier, I expect no changes in monetary policy from the Federal Reserve and the Bank of Japan. Shortly after the G7 meeting, the Bank of England (BOE) will also convene a meeting, and while the market generally expects its policy rate to remain unchanged, given the rate cuts by the Bank of Canada and the European Central Bank, I believe we may see an unexpected cut. The Bank of England has nothing to lose. The Conservative Party is headed for a defeat in the next election, so there is no reason to defy the orders of their former colonial rulers to control inflation.
Exiting the Turbulence
The rate cuts by the Bank of Canada and the European Central Bank this week have kicked off the June central bank policy changes, freeing cryptocurrencies from the summer slump in the northern hemisphere. This is not the basic scenario I expected. I thought the fireworks would ignite in August, at the annual Jackson Hole symposium hosted by the Federal Reserve. That’s usually the venue for sudden policy changes in the fall.
The trend is clear. Peripheral central banks are beginning an easing cycle.
We know how to play this game. It’s a game we’ve been playing since 2009, when our savior Satoshi gave us the weapons to defeat the demons of traditional finance.
Go long on Bitcoin, then other altcoins.
The macro environment has changed relative to my benchmark, so my strategy will evolve accordingly. For those asking if they should launch their tokens with the Maelstrom investment portfolio now or later, my answer is: start now!
As for the surplus synthetic USD cash I hold (e.g., Ethena’s USD, USDe) and am earning a handsome annual yield on, it’s time to deploy it once again into promising altcoins. Of course, I will let readers know what these are after I purchase them. But one thing is certain – the crypto bull market is awakening and is about to pierce the disguises of the reckless central bankers.
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