BitMEX’s Arthur Hayes Speaks Up About the US-Japan Situation, Expects Surge in Risk Assets

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As a researcher with a background in finance and economics, I find Arthur Hayes’ article “Shikata Ga Nai” to be thought-provoking and insightful. His analysis of the economic relations between the United States and Japan, and the potential impact on the crypto sector and other risk assets, is based on extensive knowledge and experience.

As an analyst, I’d rephrase it this way: Arthur Hayes, a co-founder of BitMEX, the renowned crypto derivatives exchange, has penned down a fresh article entitled “Shikata Ga Nai”. In this piece, he delves into the intricacies of the economic ties between the United States and Japan. He sheds light on how these relations might shape up in the future and what implications it could have for the crypto market and other risk assets.

Shikata Ga Nai by Arthur Hayes

In his article titled “Shikata Ga Nai” or “It Is Inevitable,” Hayes explained how Japanese banks unwittingly succumbed to the monetary strategies of Pax Americana. He asserted that these financial institutions participated in a dollar-yen carry trade through the US Treasury (UST), allowing them to generate substantial returns on their yen deposits due to the negligible yields on Japanese government and corporate securities.

Despite the COVID-19 pandemic causing inflation to surge, Hayes noted that the US Federal Reserve was compelled to raise interest rates at a remarkable speed not seen since the 1980s as a response. This rate hike brought unfavorable consequences for those holding US Treasury Securities (USTs). Furthermore, Hayes commented:

As a crypto investor looking back at the past few years, I’ve noticed that the yields on bonds have been on an upward trend from 2021 to 2023. This is quite unusual, as it marks the worst three-year stretch for bonds since the War of 1812. It’s a challenging situation for bond investors like myself.

When major American banks required massive bailouts due to significant financial losses, Japanese banks holding US Treasuries were potentially in jeopardy. Consequently, Hayes observed that Norinchukin (Nochu), Japan’s fifth largest bank by deposits, would sell off approximately $63 billion in foreign bonds, the bulk of which consisted of U.S. Treasury Securities.

Based on Hayes’ observation, each Japanese bank participating in such transactions with USTs is likely to offload their foreign bonds. The IMF reports that these banks collectively owned approximately $850 billion worth of foreign bonds as of the beginning of 2022.

According to the BitMEX executive’s statement, Japanese banks have been disposing of their U.S. Treasury holdings due to the shift in the cost-benefit dynamics between holding dollars and yen before 2023. Previously, the difference between the two currencies was insignificant, but now the expense of hedging dollar exposure within these USTs outweighs the added yield.

As a crypto investor, I’ve been watching with concern as Nochu takes a brutal hit, even more so than those involved in the FTX/Alameda partnership. The UST tokens, which I assume were purchased around 2020-2021, have seen a significant decline of approximately 20% to 30% on a mark-to-market basis. To add insult to injury, the cost of FX hedging has skyrocketed from being negligible to over 5%.

Effect on Risk Assets

In essence, according to Hayes, Japanese banks offloading U.S. Treasuries could compel the Federal Reserve to engage in quantitative easing, fueling a surge in risk assets. He drew parallels to late 2023 when the UST yield curve steepened, causing 10-year and 30-year USTs to trade above 5%, while the S&P 500 plummeted by 20%. Conversely, Bitcoin and other cryptocurrencies started to rally from November 2023 due to SEC’s approval of spot Bitcoin ETFs.

As some started pondering the source of the next wave of dollar liquidity, the Japanese banking system unexpectedly showered crypto investors with stacks of crisp dollar bills folded into intricate Origami cranes. This unexpected move serves as an additional foundation for the ongoing cryptocurrency bull market, according to Hayes.

As a crypto investor, I’ve been closely following the insights of popular crypto analyst and commentator “CryptoWarz” (Hayes). Recently, he made an intriguing prediction that Aptos (APT) could potentially surpass Solana (SOL) in the near future to become the number 2 L1 (Layer-1) chain following Ethereum (ETH). Given Hayes’ critical stance towards the Federal Reserve and traditional finance systems, this prediction holds significant weight as he often shares his perspectives on the alleged manipulations and malpractices orchestrated by central banks.

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2024-06-21 12:16