“Practical men who believe themselves to be quite exempt from any intellectual influence, are usually the slaves of some defunct economist. — John Maynard Keynes

JMK, the best investor of his generation (12% C.A.R., 1921–46), can still help us separate the real signal from the noise of the monetarist boy once again crying about the hyperinflation wolf.

There’s an updated, crypto-bubblicious version of the old Austrian economics’ gold buggery, repackaged in crypto cool clothing to seduce the unwary like a Gamestop stonk chart on r/Wallstreetbets. Rest assured, it’s the same old Fix It Again Tony FIAT monetarist engine dressed up in a sleek libertarian Lambo body. The difference between the Hayek original and this latest crypto-monetarist fantasy is the latter’s illiteracy with respect to basic facts of economic history. So what used to be an interesting policy debate now resembles a war on QAnomics disinformation era in which nothing is true and everything is possible (Pomerantsev reference below).

The image above assures you that a profitless expenditure of intellectual energy is required to refute this crypto-libertarian update of monetarist Zombienomics. Since I have, and can spend, the energy, you can read on profitably with minimal expenditure. (1 of 3 Keynes-Hayek debate videos: https://www.youtube.com/results?search_query=keynes+vs+hayek+rap ).

One of its more colorful pseudo-erudite exponents is Arthur Hayes, the co-founder of BitMEX (https://cryptohayes.medium.com). It’s no surprise that monetarist Zombienomics is the Undead of economic history, with Hayes about to meet an interesting future you won’t read about on his Medium profile or his article Pumping Iron (https://cryptohayes.medium.com/pumping-iron-ae8a54a32ea2):

“Arthur Hayes, founder and former CEO of BitMEX, says he will surrender to U.S. authorities to face charges the cryptocurrency derivatives exchange facilitated unregistered trading and other violations. Under a proposal sent to Judge John G. Koeltl at the U.S. District Court in New York Tuesday and agreed upon with the U.S. in principle, Hayes would be allowed release on a $10 million personal recognizance bond secured by $1 million in cash and co-signed by his mother. Hayes intends to surrender in Hawaii on April 6, where the local FBI office would transport him to the courthouse….Following his initial court appearance, Hayes would stay in Hawaii for a quarantine period before returning to Singapore. Later in the court process, he says he would travel to New York for court appearances and meetings with lawyers….In October, BitMEX and co-founders Hayes, Samuel Reed and Ben Delo were charged with violating the Bank Secrecy Act and conspiracy to violate the act by the U.S. Department of Justice…..At the same time, the Commodity Futures Trading Commission alleged that BitMEX received some $11 billion in bitcoin deposits and made more than $1 billion in fees “while conducting significant aspects of its business from the U.S. and accepting orders and funds from U.S. customers.” (https://www.nasdaq.com/articles/bitmex-co-founder-arthur-hayes-offers-to-surrender-to-us-authorities-in-hawaii-2021-03-17)

Hayes was undeniably a brilliant innovator in building a crypto money laundromat (living in the Jurmala, Latvia real estate money laundromat, I’m surrounded by well-washed formerly homeless flight capital). Since how he built BitMEX is outside the scope of examining how he repackages the old Hayek monetarist let-the-medicine-kill-the-patient snake oil, here’s the link to the story for the uninitiated: https://www.vanityfair.com/news/2021/02/the-rise-and-fall-of-bitcoin-billionaire-arthur-hayes?utm_source=nl&utm_brand=vf&utm_mailing=VF_Hive_020521&utm_medium=email&bxid=5bea13073f92a404696934fc&cndid=39476039&hasha=dafb295278b825ce941afbdb0493b43a&hashb=414b101cc5be390ed23d575493f4f3e0437428f1&hashc=a0638a234b407961a3d196c0e91b7e2f07a1e5eb838d9f00c4aff6526cedefb2&esrc=bounceX&utm_campaign=VF_Hive_020521&utm_term=VYF_Hive)

But why let Hayes’ rap sheet hang him when we can let the factual errors in his writing do the job instead?

Should the Medicine Serve the Patient or Vice Versa?

“They never let the system completely reset by forcing losses on those who profited in the boom.”

This is the old “liquidate everything” Austrian austerian approach to economic policymaking that Hoover’s Treasury Secretary Andrew Mellon tried with catastrophic results in 1929–33:

“Liquidate labor, liquidate stocks, liquidate the farmers, liquidate real estate. It will purge the rottenness out of the system. High costs of living and high living will come down. People will work harder, live a more moral life. Values will be adjusted, and enterprising people will pick up from less competent people.”

The result: 50000 homeless living in tents in Central Park and 40% of the draftees in 1940 classified as malnourished:

“One Brooklyn defendant, who pleaded guilty to sleeping in a vacant lot for forty-six days, was an alumnus of the University of Colorado and had served the governments of Panama, China, Chile, and Venezuela as a civil engineer. Another was one of the most famous chefs of the Twenties; he had been living in a condemned attic and tormenting himself reading his old menus….In twelve months, the Southern Pacific Railroad reported, its guards had thrown 683,000 people off freights. Prison was often regarded as a godsend; as Agent Mitchell told Senator Costigan, when nomads were threatened with arrest, “they would laugh at the officers and say, “ That is what we want. That will give us a place to sleep and eat….Henry Ford said, “Why, it’s the best education in the world for those boys, that traveling around! They get more experience in a few months than they would in years at school.” (Manchester, 1972, page 38)

Hayes and Herbert Hoover have a shared monetarist faith. Government’s

“function was to bring about “a condition of affairs favorable to the beneficial development of private enterprise,” he explained, and he added that the only “moral” way out of the Depression was self-help: the people should find inspiration in the devotion of “great manufacturers, our railways, utilities, business houses and public officials….He believed the gold standard to be sacred- even though eighteen nations, led by Great Britain, had abandoned it.He was convinced that a balanced budget was “indispensable,” an “absolute necessity,” “the most essential factor to economic recovery,” “the first necessity of the nation,” and “the foundation of all public and private financial stability”” (Manchester, 1972, page 46)

Complete reset killed the patient in Germany and gave us the Nazis. Austrian economics’ belief in it is like faith healing, but real doctors know better. Hayes should watch the Keynes vs Hayek rap videos and then remember that JMK was the best investor of his 1921–46 generation, while Hayek predicted a depression in the early postwar period.

Hayes writes: “Unconstrained by the straightjacket of the gold standard, all currencies were suddenly floating against one another with no hard money anchor. All types of monetary folly became possible at a scale unprecedented in the history of human civilisation.”

FDR took the US off the gold standard in 1933, devalued the dollar and banned the private ownership of gold. He saved the patient from being killed by Mellon’s monetarist medicine, the economics equivalent of a medieval doctor treating his patients with leeches and bleeding.

“the most amount of global debt ever in human civilisation.”

This is pure economic history illiteracy. In 1815 Britain’s debt to GDP ratio was 225%. In 1945 the US debt/GDP ratio was 125%. Japan’s debt/GDP ratio has been above 240% for the last ten years. All are higher than the current US debt/GDP ratio. Also, about 1/3 of the debt is between govt agencies, the Social Security Administration and the Treasury, for example. So the current 105% ratio is actually about 72–75%. So this phrase is historically illiterate hyperbole. I wrote about this here: https://ljgolden55.medium.com/zombienomics-or-nikki-haleys-day-of-debt-reckoning-c63ac5e3635d

US Savings and Loans Crisis — drop rates and guarantee bank deposits in S&L institutions that committed fraud in some cases with how they managed company and depositor funds. “In some cases”. No, the fraud was structural, endemic and epidemic. Charles Keating of Lincoln Savings was just the pinnacle of a fraud epidemic that led to the jailing of 2000+ bankers. After 2008 only a few lower level bankers were jailed. There’s the difference.

At the other extreme: raise rates, which in turn depresses asset values, causing debtors to default and forcing them to hand their assets to creditors. These assets fall in value toward their fundamental ability to generate cash flow. Those earning wages benefit as their labour can buy more real and financial assets.

Their fundamental ability to generate cash flow is a moving target and driven by macroeconomic policy. His Andrew Mellon-like “liquidate everything” policy will destroy the cash flow of good and bad assets. Aphorism from one of my hedgie classmates: “when the cops raid the bordello, they arrest the good girls and the bad.” Those earning wages won’t benefit in a deflationary spiral like 1929–33. JMK was proven right in WWII. The timid stimulus of 2009–12 led to an anemic recovery. GBOGH. Unemployed or underemployed workers can’t buy anything.

Previously, policy makers could operate in the belly of the barbell. They didn’t have to print excessive amounts of money, nor was the act of raising rates slightly so debilitating. However, the current situation does not afford our high clergy the luxury of being able to tweak around the edges.

Really? Look at all the unconventional asset-buying by the BoJ and the ECB.

That is why raising rates is the nuclear option. Instead they go with the palatable, feel good option, which is to continue piling on debt in the hopes that some transformational technological breakthrough allows productivity and output to accelerate so quickly as to expunge the crushing debt load.

Ark Invest’s 5 innovation platforms, genomics, next-gen internet, autonomous vehicles, robotics and AI are highly deflationary, just as oil, widespread electrification and automobiles were 100 years ago. Hayes also ignores the role government plays in taking the lead with the highest risk investments: rural electrification in the 1930s, DARPA, the space program, GPS and the internet in the 1960s and 1970s, clean tech in the Obama presidency that drove down battery, wind and solar costs. Again, the usual Austrian economics’ historical illiteracy.

As I mentioned earlier, the end game of rampant inflation is always war and/or revolution. Show me a regime change, and I will show you inflation.

Let’s point to numerous regime changes without rampant inflation: Chile, 1990, Tunisia and Egypt, 2011, post-Communist Eastern Europe, 1989–91, post-Napoleonic France, 1815, 1830, 1848, 1871. Post-fascist Portugal after 1974 and post-Franco Spain, 1976 had inflation along with the rest of Europe and America.

The symptoms of inflation are populism, social strife, food riots, high and rising financial asset prices, and income inequality.

Show me the return of structural inflation and a step change in inflation expectations more credible than the boy who cried wolf about inflation with QE1, 2 and 3 in 2011–13. Europe saw a populist wave after a deflationary debt crisis beginning in Greece in 2010. Populists took power in Poland, Hungary, the Czech Republic and Italy amid deflation and a bear market in asset prices. Populists became the second largest parties in France, Germany, the Netherlands and Spain because of deflationary austerity policies, not inflationary QE and asset bubbles.

Did your portfolio appreciate at or above the increase in the broad money supply, M2? If not, you underperformed.

Monetarist nonsense. He ignores the velocity of money, which has declined. The beneficiaries of asset bubbles can’t buy ten times more steak and champagne than they already do.

With the threat of hyperinflation on the horizon, A broken clock is right twice a day. Austrian boys crying wolf again. your job as a steward of your own and other’s capital is very simple: find a way to store financial wealth today, that will allow you to outpace inflation and purchase energy tomorrow The decline in wind, solar and battery tech’s costs are highly deflationary, as fusion will be.

It is better to accumulate a financial asset or monetary instrument that will stay constant or rise in its value vs. the dominant form of potential energy.

He’s doubtless still thinking of oil and gas, which are legacy businesses on the chopping block of terminal disruption.

Multiple expansion is when belief trumps reality.

Historically, 60% of stock market returns consist of multiple expansion. Always has been, always will be.

Invest poorly and the road to serfdom is real.

He should worry more about the serfdom created by monopolistic surveillance capitalism due to lack of antitrust enforcement. Quoting Hayek’s book title as a conclusion will not alter what the real road to serfdom is: concentrated economic power in Big Finance, Big Insurance, Big Pharma, Big Tech, Big Sports, Big Defense Contractors, Big Agribusiness.

Stocks are a very narrative sensitive asset class where the narrative is not constant across the entire universe of securities.

This is not news. Humans think in narratives. Always have, always will. The 2013 taper tantrum shows how the Fed could now lose control of the bond market and risk asset prices could tank. But how much would that change growth in a recovering post-COVID economy?

I myself am a gold bug. I own the barbaric relic in the physical form, and shares of gold miners.

Confession is good for the soul, but not for literacy with respect to economic history. Gold is negatively correlated with interest rates because rate rises raise the opportunity cost of ownership. If you believe inflation will cause the Fed to raise rates, gold will drop. Also, if rate rises crush inflation expectations, gold will crater, as it did after the peak of the 1980 gold bubble. But I still bought NEM for the gold price indexed dividend. I also sell puts on SIL, SILJ, SLV. Watch the gold to silver ratio. Having some precious metal exposure makes sense to benefit from the herding behavior of the inflation expectations crowd that views gold with the same touching faith as the believers in the faith-healing preacher in a 1920s revival tent.

Every other trading product is some financial actor’s liability, and if the system is inherently unstable their promises will be found null and void in a time of crisis.

George Soros’ reflexivity principle. And Buffett’s when the tide goes out you find out who’s swimming naked. But this is old news.

People think banks hate Bitcoin; no, they hate when a form of money or financial asset escapes their ability to rehypothecate it and/or charge commissions to trade it. It is also likely not the existential threat to banks that some people think it is.

The extinction level event for commercial banks is not Bitcoin or any other private digital asset, it is their domestic government allowing the populace to hold accounts directly with the central bank using a Central Bank Digital Currency (CBDC). Stay tuned for my essay on this topic. I wrote about central bank digital coins too: https://medium.datadriveninvestor.com/central-bank-digital-coins-crypto-catch-and-kill-d6917ef11a3c

where mark to market losses are assured

He means mark to market and should edit properly. But there are so many liquid wrappers holding illiquid assets (CLOs, bond ETFs and CEFs), that mark to market is like 16th century astronomy — hard to distinguish from astrology. VAR isn’t that different when markets move from mediocristan to extremistan. That’s why we have a government EMT ambulance for when markets have a heart attack. Would you prefer J.P. Morgan walking onto the floor the NYSE in 1907? That’s the only alternative to Fed elastic money, the World Bank, the IMF and the ECB. Get over it.

A good metric to monitor is the number of wallets from which nothing has moved in the last year, and their percentage ownership of the total Bitcoin float. If that percentage is increasing, it means less supply is available for sale, and if it is falling, more supply is available for sale. Another similarly interesting metric reported by glassnode is the amount of Bitcoin leaving exchanges (ostensibly to private wallets to be hodl’d).

Sounds like a put/call ratio useful for measuring sentiment. I found this idea interesting. This is his sphere of competence, not economic history. Hayes should stick to this.

Either you believe the price appreciating creates a positive feedback loop that encourages money managers to disregard the difficulty in putting on size, and just YOLO, or you believe this will dissuade money managers from allocating a sufficient amount of capital — forcing them to continue acting as marginal buyers that push up the last traded price. Remember, it’s about the flow, not the stock. The marginal buyer sets the last price, not those who bought before.

Agreed. But you have to wonder about central bank catch and kill plans for digital coins. I wrote about that here:

One way to monitor current real rates — which are absolutely essential to charting out your investment strategy — is to compare government bond yields against nominal GDP growth. Currently, nominal USD government bond yields are rising. But if nominal GDP is growing at a pace greater than the interest rate of the ten-year bond, real rates are still negative. If nominal GDP growth is lower than the ten-year, real rates are positive. As of market open today, the yield for the US 10-year treasury is 1.47%, and given reflation expectations on the back of the COVID vaccine rollout, 2021 nominal GDP is expected to be well in excess of 1.5%. So, real rates are currently negative

This ignores economic history. In 1933–37 real growth rates hit double digits with the reflationary New Deal, while bond yields and inflation and inflation expectations remained low. With the post-COVID recovery real growth will hit 6–7%, while risk-free yields remain negative. This shows how measuring inflation by the money supply is nonsense when there’s lots of slack in an economy and the labor participation rate and velocity of money are still low.

Given that most deals are done with some sort of financing, levered losses on real estate portfolios will be substantial should interest rates rise.

So he’s saying I should dump SLG, WPC, KRC and other cheap REITs that benefit from a rising rate environment. Historically REITs with rent escalators benefit from rising rates. So do mortgage REITs due to lower prepayment risk. Hayes ignores the entire history of this asset class here by painting all real estate with the same broad brush. But careful distinctions and nuance are outside his sphere of competence, as is valuing REITs.

if global fiat liquidity can earn a real return again in government bonds, it will exit Bitcoin / crypto. The whole point of this exercise is to preserve / grow purchasing power against energy. If that can be done in the most liquid asset, government bonds, then liquidity will take the easy option.

The story of human civilization is energy’s deflationary spiral. 1973–1981 and 2010–2014 are anomalous. I would not want to be Saudi Arabia or Russia. Both are rotten oil futures standing like deer in the headlights of clean energy disruption. The oil bubbles of 2008 and 2014 were but blips in a very clear long term trend, as shown by this chart:

Who is a price insensitive seller of interest rate volatility? By law, many supra-national pension and insurance funds must invest in fixed income. The yields are low, so the funds sell interest rate options to banks to enhance the yield. The banks then turn around and sell these options to sophisticated vol funds.

This is interesting. When fear is expensive, sell it, when it’s cheap, buy it. Being a counterparty to a yield-chasing seller of underpriced fear is always a good idea. But who has access to this asset class? Hayes, his buddies and institutional investors.

Because the distortions in the interest rate markets are so large, since every central bank’s stated policy is yield compression in the search for inflation, these interest rate options (swaptions) trade extremely cheaply.

They trade cheaply because it’s so costly to fight the Fed….or the ECB when Mario says “whatever it takes”. Similarly, in WWII the Fed flawlessly executed an interest rate suppression policy. Why does he assume this is now impossible? Hayes underestimates the unconventional tools available to the Fed and even the ECB, a far less powerful central bank.

This is why, if you are able to invest in vol funds that explicitly invest in tail risks, do it. It solves neatly for this side of the inflation barbell

This is a good idea for diversification and hedging. But it’s very hard to execute, just as Naseem Taleb’s buying and taking small losses for years on OTM index futures as tail risk insurance. Financial survivalism is like living in a bomb shelter in fear of nuclear war. Your survival is guaranteed, but what’s the point of spending years eating canned food and never seeing the sun?

References

America, The Glory and the Dream, William Manchester, 1972

Nothing is True and Everything is Possible, Peter Pomerantsev, 2017, https://duckduckgo.com/?q=pomerantsev+nothing+is+truey+and+everything+is+possible&atb=v252-1&iax=videos&ia=videos&iai=https%3A%2F%2Fwww.youtube.com%2Fwatch%3Fv%3D5Au332OG-M4