Arthur Hayes and Tom Bilyeu: A Great Depression Worse Than 2008 - Survive & Thrive During The New Economic Reset

This video by Tom Bilyeu was published on Oct 3, 2023.
Video length: 02:43:42.

The video by Arthur Hayes and Tom Bilyeu is about the potential for a major financial crisis, possibly as bad or worse than the Great Depression, to occur in the near future.

The speaker, Arthur Hayes, is a controversial macro investor who provides a master class on navigating these difficult times. He discusses the signs that indicate a financial crisis might be on the horizon, such as rising inflation, potential banking failures, and a large amount of debt. Hayes believes that the government's intervention in the economy, which is aimed at removing the business cycle, has led to a situation where every time there is a disturbance, central banks print money and enact regulations to prevent the failure of certain sectors.

However, this has led to an exponential increase in debt, and Hayes predicts that in the next three to six months, there will be a major market disturbance in the US Treasury or other large global bond markets.

• The next 5 years will be a period of radical disorder, money printing, rising inflation, and potential banking prices.
• A financial crisis, possibly as bad or worse than the Great Depression, is expected to occur near the end of the decade.
• The government's intervention in the economy has led to a "whack-a-mole" effect, where disturbances are addressed with central bank intervention.
• The Federal Reserve in the US prints money and enacts regulations to prevent market failures.
• The government does not want the creative destruction that is associated with capitalism.
• The global debt-to-GDP ratio has increased from 100% to about 360%.
• The population is declining in many countries, which means there are fewer humans to pay off the debt.
• The only way to ensure the solvency of the system is for governments and central banks to start printing money.
• A major market disturbance is expected in the next three to six months, possibly in the US Treasury or other large global bond markets.

A Great Depression Worse Than 2008 - Survive & Thrive During The New Economic Reset | Arthur Hayes - YouTube

Introduction

• Tom Bilyeu is interviewing Arthur Hayes, a controversial macro investor.
• Hayes is going to provide a master class on navigating difficult times.
• The next 5 years will be a period of radical disorder, money printing, rising inflation, and potential banking prices.
• A financial crisis, possibly as bad or worse than the Great Depression, is expected to occur near the end of the decade.

Signs of a Financial Crisis

• A large bull market in stocks, real estate, crypto, crypto art, and other assets is expected.
• This will be the largest bull market seen since World War II.
• Europe, China, and Japan were destroyed by wars and civil wars, leaving only the US as a strong country.
• Keynesian economics, which involves government intervention in the economy, has been widely adopted since the end of World War II.
• The government has been attempting to remove the business cycle and save the system by destroying parts of the free market.

The Impact of Government Intervention

• The government's intervention in the economy has led to a "whack-a-mole" effect, where disturbances are addressed with central bank intervention.
• The Federal Reserve in the US prints money and enacts regulations to prevent market failures.
• The government does not want the creative destruction that is associated with capitalism.
• Every five to seven years, a new sector of the economy is price-fixed, and the central banks attempt to remove market forces.
• The only part of the financial economy that has not been affected by government intervention is the government bond markets.

A Great Depression Worse Than 2008 - Survive & Thrive During The New Economic Reset | Arthur Hayes - YouTube

The Debt Crisis

• The global debt-to-GDP ratio has increased from 100% to about 360%.
• The population is declining in many countries, which means there are fewer humans to pay off the debt.
• The only way to ensure the solvency of the system is for governments and central banks to start printing money.
• The government has promised to provide for its citizens, which is expensive, especially as the population declines.
• The government is adding on debt because it is the only way to stay in business.

Conclusion

• A major market disturbance is expected in the next three to six months, possibly in the US Treasury or other large global bond markets.
• The financial crisis is expected to be as bad or worse than the Great Depression.
• Hayes believes that the government's intervention in the economy has led to a bubble in the financial markets.
• Hayes recommends that investors should be prepared for a significant market correction.

The Solution

• The solution to the Fiat Financial system is to print more money to try to save it.
• This will create a massive bull market in anything with a fixed supply, such as stocks, crypto, real estate, etc.
• However, the government cannot save everything and cannot fix the price of their bonds.
• This will lead to a generational collapse and may coincide with a major global conflict.
• The overarching macro cycle thesis is that a massive top will occur between 2026 and 2030.

The Great Depression

• A Great Depression-like situation may occur towards the end of the decade.
• The progress of human civilization over the past 150-200 years is predicated on hydrocarbons.
• The moment we started extracting oil commercially and turning it into thousands of different products, it powered modern life.
• Debt has been piled on and there has been no innovation on another form of energy that makes us more productive.
• If the world started adopting nuclear energy immediately, it could have a chance at growing out of the debt.

The Debt

• The debt has been piled on and there has been no innovation on another form of energy that makes us more productive.
• It takes 18 years to make an 18-year-old, so it's impossible to create humans on thin air.
• Certain countries are saying hydrocarbons are worthless and want to use other forms of energy that are less productive.
• This is mathematically impossible and will lead to massive inflation and social unrest.
• Printing money is not growth, it's just a piece of paper that will eventually lead to inflation and social unrest.

The Cycle

• The cycle of printing money and inflation will eventually lead to a bear market.
• The predictability of this cycle is what freaks out the speaker.
• Getting the timing right on this is next to impossible.
• The speaker wants to go through the different things that build up to this moment.
• The speaker hopes that this doesn't all happen in a moment of political instability.

The Current Economic Crisis

• The current economic crisis is characterized by inflation.
• The crisis has set the context for the current political climate.
• Western Europe and America are currently at odds with Russia.
• The Global Home Island theory suggests that whoever controls Eurasia controls the world.
• Great Britain's foreign policy in the 19th century was focused on preventing a strong continent.

World War I

• World War I was a result of a series of alliances that aimed to prevent Germany and Russia from becoming friends.
• Hitler's rise to power in the 1930s was supported by many Western powers.
• Hitler's strategy was to create space for the German people to assimilate the Slavs in Russia.
• Hitler's plan ultimately failed, leading to the outbreak of World War II.
• The United States and Russia are currently at odds, with the US focused on containing Russia's influence.

The Marshall Plan

• The Marshall Plan was a program implemented by the United States after World War II to rebuild Western Europe.
• The plan was aimed at preventing the spread of communism in Europe.
• The plan was successful in rebuilding Western Europe and containing the spread of communism.
• The plan also contributed to the division of Eurasia.
• The plan set the stage for the current political climate in Europe.

The Global Home Island Theory

• The Global Home Island theory suggests that whoever controls Eurasia controls the world.
• The theory was first proposed by a famous war strategist in the early 20th century.
• The theory has been used to justify military intervention in various parts of the world.
• The theory is still used today to justify military intervention in certain regions.
• The theory has been criticized for promoting a narrow view of global power dynamics.

The Current Political Climate

• The current political climate is characterized by tension between Western Europe and America and Russia.
• The tension is rooted in a variety of factors, including economic and political considerations.
• The tension has led to increased military spending and a focus on containing Russia's influence.
• The tension has also led to increased nationalism and protectionism in some countries.
• The tension has the potential to lead to further military intervention and conflict.

The Russian Ideal

• The Russian people believe that their suffering through the end of the Soviet Union was not their friend.
• The West was not their ally and they were tacitly supported by China and the rest of the world.
• The message of their leader is to rebuild Russia for the Russian people.
• The situation has escalated with Russia invading Ukraine and the West pumping in resources to fight them.
• It is a proxy war between Russia and the West, with NATO Europeans fighting but not directly involved.

The Conflict

• The conflict between Russia and the West is being fought in Ukraine.
• The United States has authorized billions of dollars to ship weapons into Ukraine.
• NATO is also shipping weapons and providing intelligence to the Ukrainian forces.
• There are no boots on the ground from the West in Russia, but the war is being fought.
• It is being argued that World War II has already started, but it is not a super kinetic war.

The Backdrop

• The conflict between Russia and the West is happening against the backdrop of a financial crisis.
• Human civilization is a transformation of the potential energy of the Sun and the Earth into useful economic work.
• Cheap energy prices equal prosperity.
• Russia is the largest commodity exporter in the world, with oil, natural gas, metals, and food.
• Ukraine was also a major exporter of wheat, sunflower seeds, oils, and other commodities.

The Policy

• The West has decided to stop trading with Russia on paper.
• India, China, and other countries are buying Russian stuff, refining it, and selling it back to the Europeans and Americans at a higher price.
• The result of this policy is raising prices on energy inputs globally.
• Central banks have to fight inflation by raising interest rates, which then bankrupts the banking system.
• The ideology of fighting Russia to keep the Eurasian Island fractured is the proximate cause of the inflation that's causing the financial crisis in the West.

The Need for Energy Perspective

• The world needs to focus on defense to ensure access to oil flows.
• The prices of energy will be affected by the defense measures taken.
• The world will have to rely on more money printing to fund the defense measures.
• The world will have to find alternative sources of energy to reduce dependence on oil.
• The world will have to find ways to reduce the cost of energy to make it more accessible to everyone.

Other Inflation-Causing Factors

• The BTFP bank term funding program is a form of stealth money printing.
• The Coid stimulus was 4.1 trillion, which is bigger than the BTFP program.
• The non-aligned countries are looking for ways to become wealthier without choosing a side.
• The non-aligned countries want to keep their natural resources for themselves.
• The non-aligned countries are looking for ways to trade higher value goods to become wealthier.

The Rise of Resource Nationalism

• The non-aligned countries are breaking the ideological positioning of the West.
• The non-aligned countries are gaining their voice and demanding more control over their resources.
• The raw stuff that powers the standard of living in Western Europe and America is becoming more expensive.
• The rest of the world is looking for ways to live the Hollywood movie lifestyle.
• The buildup of stimulus and liabilities is causing inflation in the world.

Stealth Liabilities and Inflation Triggers

• The buildup of stimulus and liabilities is causing inflation in the world.
• The government is ponying up for more defense measures, which will trigger inflation.
• The world is looking for ways to reduce the cost of energy to make it more accessible to everyone.
• The world is looking for ways to find alternative sources of energy to reduce dependence on oil.
• The world is looking for ways to reduce the cost of energy to make it more accessible to everyone.

The Financial Ecosystem

• The financial ecosystem has been predicated on a scenario where there's never been a situation where long-term yields in the US rise so fast as short-term yields.
• The bear steepener refers to the situation where yields go up faster than in short-term yields.
• Banks, insurance companies, and pension companies model the future by assuming that yields will go up and the government will print money to squash volatility in the markets.
• The US government is currently the issuing the most amount of debt ever, with Federal deficits like 7 or 8% of GDP.
• The US Treasury Market is facing a massive amount of debt that must be rolled over by 2026.

Traditional Buyers of US Treasuries

• China and Japan are the traditional buyers of US treasuries.
• China is not buying any more US treasuries because it doesn't want to become more tethered to the dollar from a geopolitical safety issue.
• Japan is also facing an issue in their bond market where their currency is getting trash because they are trying to save their bond market.
• Japan is starting to draw down on the money they saved over the last 30-40 years and not buying new treasuries.
• China and Japan are starting to sell treasuries, and the oil exporting nations are also decreasing their treasury positions.

The Insolvent US Banking System

• The US banking system is functionally insolvent because the regulators made the rules in such a way that it was profitable from an accounting perspective but not an economic perspective.
• The banks collectively bought all these treasuries in 2021, and the prices went down a lot since then, leading to the regional banking crisis.
• The US banking system cannot buy more debt because it can't afford to, as it's functionally insolvent.
• The Federal Reserve is committed to doing quantitative tightening, which means it's letting the treasuries roll off of its balance sheet and not accumulating more treasuries.
• The major buyers of this stuff for all their own reasons cannot purchase it, and the relationships that held them together are breaking down.

Gold as an Alternative Investment

• Gold is holding firm as yields rise in the US Treasury Market.
• Gold's not getting clobbered either as US Treasury 10-year yields are at 4.434 basis points.
• People think that the bank is going to default because the interest rate is high, but gold pays nothing.
• Gold is not getting clobbered in a crazy fashion, but it's not getting clobbered either as US Treasury yields rise.

The Market's Belief in Risk-Free Money

• The speaker is discussing the belief of the market in risk-free money.
• If people are not fleeing to gold to get into risk-free money, it suggests that the market no longer believes that it's risk-free.
• The speaker uses the term "real yield" to describe the yield of government bonds minus nominal GDP.
• If the economy is growing at 10% and the bond holder is getting 5% yield, it is a negative yield.
• The speaker argues that the government should receive at least the yield of the growth of the economy.

The Government's Debt

• The speaker is discussing the government's debt and its impact on the market.
• The speaker argues that the government should receive at least the yield of the growth of the economy.
• The speaker uses the term "real yield" to describe the yield of government bonds minus nominal GDP.
• The speaker argues that the government should receive at least the yield of the growth of the economy.
• The speaker argues that the government should receive at least the yield of the growth of the economy.

The Bond Holder's Perspective

• The speaker is discussing the bond holder's perspective on the government's debt.
• The speaker argues that the government should receive at least the yield of the growth of the economy.
• The speaker uses the term "real yield" to describe the yield of government bonds minus nominal GDP.
• The speaker argues that the government should receive at least the yield of the growth of the economy.
• The speaker argues that the government should receive at least the yield of the growth of the economy.

The Bond Market's Performance

• The speaker is discussing the performance of the bond market.
• The speaker argues that the government should receive at least the yield of the growth of the economy.
• The speaker uses the term "real yield" to describe the yield of government bonds minus nominal GDP.
• The speaker argues that the government should receive at least the yield of the growth of the economy.
• The speaker argues that the government should receive at least the yield of the growth of the economy.

The Bond Market's Demand for More Yield

• The speaker is discussing the demand for more yield in the bond market.
• The speaker argues that the government should receive at least the yield of the growth of the economy.
• The speaker uses the term "real yield" to describe the yield of government bonds minus nominal GDP.
• The speaker argues that the government should receive at least the yield of the growth of the economy.
• The speaker argues that the government should receive at least the yield of the growth of the economy.

Understanding Bonds

• Holding a bond to maturity does not mean losing principal.
• You lose potential earnings when you hold a bond to maturity.
• You cannot sell a bond before the mature date.
• If you hold a bond for all 10 years, you will get your interest payment and your money back.
• Government bonds are less risky than other bonds.

Difference between Potential Revenue and Loss of Money

• Potential revenue is lost when you hold a bond to maturity.
• You lose money when you need to sell a bond before the mature date.
• The difference between potential revenue and loss of money is important to understand.
• Holding a bond to maturity is less risky than selling it before the mature date.

Mortgage Example

• Mortgage rates have increased in recent years.
• People who bought houses in 2020-2021 with high mortgage rates are struggling to afford them.
• People who need to buy a new house in a different location or with a lower tax rate need to get a new mortgage.
• The new mortgage rate is higher than the original mortgage rate, making it difficult for people to afford the new house.
• The bond math is the same for mortgages as for treasury bonds.

Banks and US Debt

• Banks bought up all the US debt in 2021 to get a return.
• The FED is not raising interest rates, making it easier for banks to invest in long-term bonds.
• Long-term bonds provide a higher yield than short-term bonds.
• The banks' decision to buy long-term bonds is a sign that something weird is happening in the economy.
• Hedging can be used to mitigate the risks associated with holding bonds to maturity.

The Problem with Bonds

• The Federal Reserve (FED) is raising interest rates, which is causing concern for investors.
• Some banks have hedged their risk, while others have not, leading to a potential loss of income.
• The risk-free rate of a US Treasury is currently 5%, which is higher than what banks are paying their depositors.
• People are beginning to realize that they can get a higher risk-free rate with the government, leading to a potential bank run.
• The US government is essentially bankrupting the banking system, which is causing a potential crisis.

The BTFP Bank Term Funding Program

• The BTFP bank term funding program was created to address the issue of banks not being able to attract deposits and raise their deposit rates.
• The program provides unlimited deposit guarantees to big banks, but comes with additional charges.
• Small banks do not have access to this program, making it difficult for them to attract deposits and raise their deposit rates.
• Depositors in big banks know that they will get their money back, while those in small banks are uncertain.
• The thought of taking the risk of investing in a small bank is causing people to flee to big banks and socialism.

The Rising Interest Rates

• The Federal Reserve is raising interest rates, which is causing concern for investors.
• The rates are currently at 5.5%, and may continue to rise to 6% or higher.
• People can easily switch their money from their bank to the government, where they can get a higher interest rate.
• The banking crisis is still ongoing, despite the bank term funding program.
• The regulators and government will have to decide how to pay for the losses on the bond portfolios of all banks.

The New Economic Reset

• The current economic system is unsustainable and will lead to a new economic reset.
• The sovereign debt markets are the buyers who refuse to buy long-end bonds of a particular government.
• Global debts and GDP are at 360%, making it difficult for governments to make money over time.
• Investors are not willing to own long-end bonds because there is no way to get paid back in a real dollar or currency.
• If nobody wants to own the long end of the Government Bond Market, rates will go up and the response is either closing down the banking system or forcing deposits to buy government bonds.

Fiscal Dominance and Yield Curve Control

• Fiscal dominance is a theory where the government determines a band of the yield and if the yield gets to a certain level, the government will go into the market and buy bonds by printing money to keep the yield at that level.
• Yield curve control is a similar concept where the Central Bank fixes the price of bonds at a particular level to keep the yields from going up.
• The Bank of Japan has been doing yield curve control for almost a decade, and the United States did it in the late 40s and early 50s to pay back the debt from World War II.
• If large asset holders refuse to own long-end bonds, the only response is to move to the endgame, which is to fix the yield and print money until it's required to keep the yield at that level.
• The question is whether the authorities can keep the money inside their banking systems or if there are ways for people to get their money outside of the system.

The Real Fulcrum of the Crisis

• If all the money is sitting in the banking system and it can't leave, it becomes the real fulcrum of the crisis.
• If people can get their money into a type of money or a type of asset that's outside of government control or the banking system, the system collapses.
• Hyperinflation or high inflation may occur depending on how a country is structured.
• Most governments can survive, but if people can get their money outside of the government control or the banking system, the system collapses.
• The government can earn itself out of the situation, but if people can get their money into a type of money or a type of asset that's outside of government control or the banking system, the system collapses.

The Problem with Yield Curve Control

• The speaker is discussing the issue of yield curve control in the global economy.
• He argues that while it has been effective in the past, it is not a sustainable solution.
• He believes that the global economy has changed significantly over the past 20 years.
• He cites China's entry into the WTO in 2000 as a major factor in this change.
• He argues that China's degradation of its environment and willingness to pollute in order to capture market share has led to higher costs for goods across all sectors.

The End of China's Growth

• The speaker argues that China's population is forecast to be half of its current size by the end of the century.
• He believes that the Chinese government's focus on protecting the environment has led to a decline in China's growth.
• He argues that this decline in growth will have a significant impact on the global economy.
• He believes that China's growth was a key factor in the global economy's growth over the past 20 years.
• He argues that without China's growth, the global economy will face significant challenges.

The End of the "Widowmaker Trade"

• The speaker discusses the "Widowmaker trade," which refers to Japan's economic decline.
• He argues that Japan's economic decline is a result of a combination of factors, including an aging population and a decline in exports.
• He believes that Japan's economic decline will have a significant impact on the global economy.
• He argues that Japan's economic decline is a result of the global economy's shift away from manufacturing.
• He believes that Japan's economic decline is a result of the global economy's shift towards service-based industries.

The Future of the Global Economy

• The speaker discusses the future of the global economy.
• He argues that the global economy is facing significant challenges, including a decline in manufacturing and an aging population.
• He believes that the global economy will need to shift towards service-based industries in order to remain competitive.
• He argues that the global economy will need to find new sources of growth in order to remain stable.
• He believes that the global economy will need to find new ways to address the challenges facing it in order to remain stable.

Japan's Economic Model

• Japan has a unique economic model where the government and large companies have essentially made a PCT (Productivity, Capital, and Technology) agreement.
• The agreement states that the government will give all the people jobs for life, but the productivity gains will not be kept by all the people.
• The difference between the productivity gains and the profits reinvested back into the United States and Western Europe is essentially given to the large companies.
• Japan is one of the richest countries in the world on a net investment portfolio perspective, with assets worth over $1 trillion.
• Japan's banking system is relatively closed, and the country does not allow foreigners to buy Japanese debt in large quantities.

Inflation in Japan

• Inflation in Japan is rising, with prices increasing by 4-5% in the past 40 years.
• The first time in 30 years, beer prices have been raised in Japan.
• The problem arises when inflation shows up and the country exhausts its cheap labor, energy, and assets.
• Japan's special circumstance is that the collapse of its equity market and property market since the late 80s is no longer valid.
• The United States owes the world around $1-2 trillion and runs a current account deficit and a budget deficit.

Mistakes in Understanding Japan's Success

• People are making a mistake by not understanding why Japan is successful.
• The United States has a completely different financial situation than Japan.
• Foreigners own a lot of the debt in the United States, and the country relies on foreigners to buy the debt at affordable levels.
• Japan's success is fundamentally different from the United States.
• Saying that Japan did it and it can work in the United States misses the differences between the two.

Portfolio Strategy

• The speaker recommends structuring a portfolio to benefit from both situations.
• He suggests keeping some money in cash and putting it in a money market fund with a 5-6% rate.
• He recommends taking a small amount of the money and putting it in something that will benefit if money printing resumes, such as Nvidia stock, Bitcoin, or productive farmland.
• The speaker suggests making sure that in the event that the money starts getting printed, he can easily move out of his short-term money market fund into the risky stuff.
• If nothing happens, he is still earning money and starting to earn yield over his investments.

Portfolio Strategy

• Having an optionality portfolio that costs little to nothing and makes money over time
• Constructing a portfolio with a positive carry trade, where if the market is up, you make money, and if it's calm, you still cover day-to-day expenses
• Timing doesn't matter when you're selling a bunch of stuff and everything is in the risky bucket
• The cost of waiting is zero to making money, versus it's costing money the longer it takes to happen
• Protecting oneself from identity theft, account breaches, and data brokers exposing personal information

Portfolio Construction

• Using a barbell strategy to make sure that you can move one way or the other depending on what's going on
• Participating in the upside to the maximum by investing in high volatile assets like crypto and tech stocks
• Having brakes, which are cash short-term cash instruments that are earning yield, to cover expenses when things don't happen
• Making sure you can cover expenses with cash in the bank or in a money market fund or something like that
• Hiring a yielding instrument to pay some of those expenses so that when shit's ready to go, you can make as much money as possible

Portfolio Management

• Managing your own money and finding it intellectually stimulating and fun
• Knowing that these trades are excruciatingly difficult to pull off
• Understanding that the best advice is to buy low and sell high, but people almost always buy high and sell low
• Assuming that people are emotionally cognizant and won't make the mistake of buying high and selling low
• Knowing which of the risky assets to invest in

Section 1: Personal Preference

• The speaker discusses personal preference when it comes to investing in volatile assets.
• Some people may find volatility too much to handle, while others may thrive on it.
• It's important to understand one's own risk tolerance and investment goals.
• The speaker suggests that people should focus on building a diversified portfolio that aligns with their personal preferences and goals.

Section 2: Understanding Volatility

• The speaker explains that volatility is a natural part of the market and can be both a risk and an opportunity.
• It's important to understand the underlying factors that cause volatility and how they may impact different asset classes.
• The speaker suggests that people should focus on building a portfolio that is diversified across different asset classes and sectors.
• It's important to have a long-term perspective and not get caught up in short-term market fluctuations.

Watch the video on YouTube:
A Great Depression Worse Than 2008 - Survive & Thrive During The New Economic Reset | Arthur Hayes - YouTube