Crypto derivatives exchange BitMEX co-founder Arthur Hayes (who pleaded guilty to charges of violating the Bank Secrecy Act after being accused of willfully failing to establish, implement, and maintain anti-money laundering (AML) programs at BitMEX), notes that thankfully, (unlike many others around the world) his experiences of war “are sanitized and indirect.”
Hayes writes in a blog post that two of his mother’s brothers were “conscripted into the Vietnam War.” He added that one of his uncles decided fighting in the steamy hot Vietnamese jungles was “not his idea of a good way to spend a portion of his youth, and was imprisoned for not fighting.”
Hayes also shared that “another went, and when I asked him what it was like, he said he felt like two angels were there protecting him from getting maimed or killed by enemy fire.” He pointed out that his father fought in the Korean War, but he “never talked much about his experiences, so I don’t have any idea on what he thought about the topic.”
Hayes further noted:
“As a child growing up, my knowledge of war came from the television. The video game of war played out on nightly news broadcasts. Americans fighting in Iraq, Bosnia, Afghanistan, Iraq again and various other proxy skirmishes dotted the news casts. Luckily I did not suffer rationing of food or consumer items, or experience the effect of crushing inflation during the times America was at war.”
He added:
“Many in the world, likely including some of you readers, have experienced real hardship as a result of war. Family members you loved were injured or killed. You might be a refugee displaced by conflict. Or you have gone hungry because food was scarce or extremely expensive so that the soldiers could eat.”
When viewed from a macro humanist perspective, war is “always destructive and energy wasteful,” Hayes noted while adding that human civilization “converts the potential energy of the sun and the earth into food, shelter, and entertainment.”
Hayes also mentioned that war is “the act of spending energy to destroy the fruits of human civilization.” Although one side “wins”, and achieves some political or resource-driven goal by defeating their enemy, humanity “loses because the things destroyed by kinetic energy weapons must now be rebuilt using additional energy.” Hayes pointed out that the potential contributions of the humans slain on both sides “are also lost forever.”
He continued:
“Our currencies and assets are for the benefit of everyone, not just one particular imaginary construct that is a ‘nation’. There is no righteous war at a systemic level. Forget what the media on either side tells you about the justification for why this war is good for some nation state. Rather, consider that every life lost and structure damaged took energy to rear and construct. That energy is not inexhaustible, that is waste. The more we waste, the more negative consequences will be visited upon humanity as a whole. And the most obvious outcropping is inflation.”
Hayes further noted that the war effort “always crowds out the ordinary consumer.” In order to supply the armed forces, production must be “shifted away from satisfying the needs of the ordinary consumer to satisfying the needs of the military.” Hayes also mentioned that the side that musters the most resources and energy with the least impact to the everyday life of their citizens “is the side that usually prevails.”
He added:
“As we enter a period where the global order of flag-waving nations shifts and the probability of possible conflagrations rise, the prospect of persistent global inflation caused by military needs crowding out civilian ones is here. Now, putting aside the misery and suffering that war visits upon humanity, what should we do with our portfolios?”
He also noted that we “must prepare ourselves and our financial assets in an attempt to maintain a certain lifestyle vis-à-vis our personal and familial energy consumption.”
He continued:
“The spectre of global conflict exists against a backdrop of the most accommodative monetary policy ever. I know that every major central bank talks about rising inflation and their commitment to dealing with it, but almost every major central bank is still printing money.”
He also shared:
“As you can imagine, the average Zhou, Jane, Johny, Jaewon, Jesus, et al. aren’t too happy that their wages are not keeping pace with prices of food, energy, and transportation. The politicians are now instructing their “independent” central banks to tame inflation. Central banks must now raise policy rates – that bit is not controversial. What is controversial is how much they decide to raise rates by and how quickly they want to accomplish it.”
He further noted that the financial world “paints an apocalyptic picture should the Fed raise rates six times this year.” That is what the Fed funds futures markets predict. “If they raise rates by 0.25% six times, that would leave them with a policy rate of 1.5%.” Even if the 7%+ US CPI inflation rate halved by year end, “that would still leave real rates at negative 2%.”
Hayes added:
“The politicians gave a directive – “fix inflation”. The central bankers will comply, but only to a certain degree. Why? Because the level of nominal policy rates that is likely to cause a financial crisis creeps lower and lower each recession.”
He also noted that every asset class has “an ever-shifting narrative around whether or not it will make a good hedge against inflation.”
He continued:
“Instinctively, many believe that as a scarce asset, Bitcoin and other cryptos are great inflation hedges. And over a multi-year time horizon, they are likely right. However, lately, Bitcoin has behaved in a more “risk-on / risk-off” fashion rather than an asset that always appreciates if real rates are negative.”
He also noted:
“Bitcoin obviously benefited to a large degree from the COVID-inspired global central bank money-printing bacchanal. It still needs to digest that massive move higher, and it doesn’t help that liquidity conditions are tightening. But, let’s remove negative rates from the picture for a moment.”
Hayes pointed out that Bitcoin “rose from $4,500 in March 2020 to close to $70,000 in November of 2021.” But then central banks changed their tune – “saying that they would do the right thang and tame inflation.” Just those comments “were enough to pump short-end rates, and the crypto bull market stalled.”
He added:
“Gold, however, finally began stirring in its grave. It began marching higher towards $2,000 as rates persisted in negative territory. Short-end nominal rates rose, and gold still rose because real rates were still negative. As a result, gold’s historic tendency to hold value against a depreciating fiat regime has recently regained mindshare with investors. I expect Bitcoin will experience a similar narrative rediscovery eventually. Eventually is the key word, though – patience and the ability to tame your itchy buy-button finger is required to properly time a re-entry into or re-allocation of assets in the space.”
According to Hayes, the political response of the West to Russia “cracks open an opportunity for the global central banks to walk away from their pledge to fight inflation.”
He added that he’s “not certain that they will be able to politically do that because again inflation will only go up as the world attempts to remove Russian energy from the mix.”
Therefore, Hayes says he is “turning cautiously bullish on Bitcoin.”
He also shared that he is “dipping his toes into some very out of the money call options on Bitcoin and Ether.” He acknowledged that he is “probably over trading a bit, but I just love markets.”
On a somewhat related note, Hayes recently agreed to pay a penalty to the SEC in regards to allegations of breaching the Bank Secrecy Act. Hayes no longer manages BitMEX.
You can read the full essay by Arthur Hayes here.