Arthur Hayes Blog: The World is Splitting into the West and the Eurasian Continent

Author: Arthur Hayes

Compiled by: GaryMa Wu Says Blockchain

Note: SBF responded to this article, stating: "I obviously strongly disagree with many specific expressions related to FTX here, but I largely agree with your higher-level points. This is a variation of something I hear over and over again. I think you might be a bit surprised by my perspective."

It is clear that the world is splitting into two camps: the West and the Eurasian continent. The West consists of the United States, Western Europe, and their allies. The Eurasian continent is a mix of China and Russia, with China as the primary partner and Russia as the secondary partner. The war in Ukraine is a tangible manifestation of this competition, as it has quickly become a proxy war between the West and the Eurasian continent. The semiconductor chip/trade war between the U.S. and China is another example of the non-lethal/economic aspects of this conflict.

In between the West and the Eurasian continent, there are some non-aligned countries that possess what both sides need. These countries have young, productive workers who can produce goods at affordable wages. They have key resources such as hydrocarbons, cobalt, lithium, nickel, and copper. These materials will power the next phase of economic and technological advancement for humanity. These countries can choose who to trade with. This choice is based on sentiment (i.e., how they feel they are treated in bilateral trade relations) and actual economic trade conditions. Economic trade conditions include both the amounts paid and the currencies accepted (such as dollars, renminbi, gold, etc.).

In this article, I will explore another case of Western financial exceptionalism: SBF/FTX. With the help and unwitting complicity of Western financial and media institutions, the world’s perception of the West may begin to shift after the plundering of the rest of the world (ROW). I say ROW because the majority of affected individuals and entities are neither American nor Western European. The global East and South are the places most harmed by this fraud. I believe that these countries are once again letting the fox into the henhouse due to a misalignment of trust created by social conditions over centuries, which historically allowed a small "white" boy like SBF to automatically gain a seat at the well-known table without any issues.

This is important because if we are to navigate the financial markets of the coming decades, we must analyze which will prevail in terms of investor returns: the consuming Western countries or the producing non-Western countries. Many, including myself, believe that the long-term trend of Western countries feasting at the expense of unfair trade with non-Western countries will slowly reverse. The confidence of the rest of the world in challenging the West is growing, driven by a historical sense of unfair treatment (both perceived and actual). I believe the FTX incident is a perfect example of the dissatisfaction felt by the rest of the world towards such behavior, which may prompt them to stand up further against the West. This means that when producers choose to adjust trade terms in their favor, investors allocating capital to various tools and enterprises will achieve above-average returns.

The Game Between the West and Eurasia

The population on the Eurasian continent accounts for 70% of the world's population, and until recently, it was the engine of human civilization.

Until recently, India and China accounted for 50% to 60% of global GDP. It wasn't until the 16th century that Western Europeans (and later Americans) began to replace their primarily Asian competitors and created respectable empires, such as the British Empire and the American Empire.

These "whites" are few in number, but they compensate with powerful political organization and technological advancement. The reasons for the West's victory over the East over the past few centuries are complex and have been a topic of heated debate among historians, each with their own theories. However, regardless of your specific views on how the West leveraged its advantages to rise from its historically disadvantaged position, it is undeniable that the West has always been insufficient in terms of the number of its human subjects (i.e., its users) and the natural resources it brings to the world. (The Eurasian continent contains most of the world's manpower and key natural resources, most importantly, its hydrocarbons).

To overcome the lack of domestic labor and resources, the West resorted to slavery and colonial conquest of other colored peoples.

Thousands of armies sailed away from their homelands, capable of conquering billions of people. At first, overwhelming technological power played a role. But as the foundational sciences and technologies spread with information and education, it became increasingly difficult to subdue the locals purely by force. Realizing that their iron-fisted rule was declining, Western countries adapted to this situation, synthesizing a social hierarchy that represented them by purchasing the loyalty of local colored elites.

Ensure your people work hard but receive far less than they could as imperial citizens. Protect the property rights of your group and foreign industrialists who own all the farmland, factories, and natural resources. Export all essential minerals and food to the West at low prices in return for importing more expensive manufactured goods. If your country finds itself in a current account deficit due to inverted trade conditions (e.g., your imports exceed your exports), you can borrow from Western banks using the empire's reserve currency. When you inevitably face a financial crisis and cannot repay your foreign debt, you dare not default. Instead, sell more of your country's productive resources to foreigners to "repay" the loans.

Now you can bask in the worship and glory of the West, becoming an enlightened wealthy gentleman, wandering around the cultural hotspots of the empire, flaunting the wealth you obtained from your country's people.

When some of you receive a bit of education and protest against this imbalanced economic arrangement, label them in various ways. You and the workers who toil under your long boots have no voice in the construction of the aforementioned order and have not benefited from the "free" democracy of the West. You just happen to have the "right" surname or belong to the "right" religious sect, thus inheriting your unearned power.

This formula worked very well, allowing Western countries to become wealthy to such an extent that the elites forgot that the universe is constantly changing. Due to post-World War II arrogance and/or incompetence, Western political elites made two huge mistakes that, in the eyes of this armchair historian, allowed the Eurasian continent the breathing space it needed to reorganize and regain strength over the past 80 years.

They set aside their differences and focused on defeating the Japanese Empire. After the war, they resumed fighting among themselves.

The following chart shows how China has successfully replaced the United States as the world's largest trading partner in record time.

The second major mistake was the failure to integrate Russia into the Western world after the Soviet Union collapsed in the early 1990s. Whether due to arrogance or another round of isolationism represented by American elites, a significant opportunity was wasted again. Instead, the West allowed a group of Russian opportunists to control productive state-owned assets at extremely low prices and confiscate all wealth to the Knightsbridge.

Then he appeared, committed to correcting what he saw as historical wrongs and rebuilding the once-powerful Russian motherland. This is a viewpoint—many readers may see him as a bloodthirsty egomaniac. But your opinion of him does not matter. In his view, he cares about Russia's progress. Now, he has embroiled Russia in the latest proxy war with the West in Ukraine, and the only direction Russia can turn is southeast. The West has confiscated Russia's sovereign wealth in Western financial institutions and refused to engage in any trade with Russia.

Due to the West's estrangement from Russia since the 1990s, Russia is now a steadfast economic ally of China. Given the recent sabotage of the Nord Stream pipeline, Russia will do everything possible to build pipeline infrastructure connecting its energy with China's manufacturing base. The Eurasian continent will now have the cheapest energy in the world, powering the largest manufacturers globally. Germany and Japan should tremble for their space boots.

Imperial Agents

In terms of resource sharing, the global monetary system is extremely important. Currency is merely a means of converting the Earth's potential energy into a tradable form. Every form of currency represents a claim to energy. If you control the monetary system, you control energy. If you control energy, you control the course of human civilization.

The Western financial system underpins the world’s reserve currency—the dollar. Most global energy and commodity trade is priced in dollars. This means the West can print energy at will. Clearly, if they abuse this privilege, a new currency and financial system will emerge to challenge the corrupt old regime. Bitcoin and cryptocurrencies are a natural response to the West's profligate dollar-based financial system.

TradFi systems are based on trust. You trust some centralized Western financial institutions to handle transactions, fulfill contracts, and generally keep the system running smoothly. In return, we the people allow them to profit from our money. Bankers get rich without doing any actual tangible work. I am not disparaging the profession of financiers I have worked with in the past, but this is the brutal truth— we do not make money.

Human political organization, also known as government, is a complex adaptive system that evolves over time. At some meeting centuries ago, a group of old men wrote the script for how the West would project and maintain its financial power globally. It simply evolved naturally over time into a system that makes sense from a self-protective perspective.

Thus, similarly, if you are a complex political organism facing a reactionary technological currency called Bitcoin (the hardest and purest form of energy currency ever), wouldn’t you want one of your own to stand at the forefront of adopting Bitcoin and incorporate it into your sphere of influence?

Now, I want to quickly step back and clarify that I do not support some conspiracy theories that suggest the Western financial Illuminati put SBF in place to control the crypto capital markets. What I mean is that the TradFi system will unconsciously try to cater to individuals and companies it believes will continue to support the hegemony of the law-based financial order.

SBF made it very clear that running a centralized crypto business was the best way to make the most money in the shortest time so that he could donate all the money for the betterment of humanity. The organization to which SBF entrusted the spoils of his business success is Effective Altruism (EA). I have friends who currently or previously worked there, and they are all good people. However, I find it hard to believe that as someone with funds to allocate to charity, I should hand over all agency to a group of highly educated individuals from elite Western universities. They do not represent the interests of all humanity—no organization can represent the interests of all humanity. But they arrogantly believe that only they can foresee the necessary ways to protect and save humanity, which is disgusting.

In SBF's own words:

If you really want to maximize your impact, then when does your marginal return start to decline? Well, when it comes to doing good, there is no such thing as "more good is more good." It’s not that you did something good, so whether it’s good or not doesn’t matter… It means you should be very proactive about what you are doing, really striving to hit home runs, rather than just making some impact, because the benefits are absolutely enormous.

To give a flippant example, consider the idea proposed by effective altruism that we should change our diets to minimize the amount of animal protein we consume to reduce our carbon footprint. What right do they have to dictate the best diet for everyone on Earth? If you want to eat bugs, go ahead. If they wish, everyone should be able to experience that sublime joy; who am I to tell them not to? If you think only you (or your organization) know what is best for society and should have the sole right to guide the correct behavior of the poor, unwashed masses, Fxxk.

When certain TradFi people heard through the grapevine that SBF had no real interest in the spirit of crypto and just wanted to support effective altruism, an organization that firmly perpetuates the current power pyramid of humanity, they knew SBF was their ally. He was a young white boy educated at MIT, which helped. He checked all the boxes of the standard Western financial institutions. If SBF were to lead the development of a new technology-driven currency and financial system, it fits the popular narrative that he should be a young white male who went to the "right" Western STEM-focused university. If he were a former managing director at Goldman Sachs, many people globally would roll their eyes at any implication that this person could be anything other than a perpetuator of Western financial capitalism.

Every tentacle of the Western TradFi system supported SBF's global expansion. Doing so served their interests. Asking too many questions about how SBF ran his business did not serve their interests. Retaining plausible deniability was the preferred approach. Therefore, the system's lackeys did not thoroughly scrutinize SBF, which was detrimental to them. Supporting what we now know to be one of the largest financial frauds in human history did not serve the interests of the Western financial system.

The common people, accustomed to trusting the agents of the TradFi system, are experiencing a "what the hell" moment. The TradFi system has concocted a series of stereotypes that have deceived their brains into thinking that SBF and FTX were trustworthy. As gatekeepers of the Western TradFi system, it is the establishment's job to properly scrutinize those they have touted as guild-certified members. These individuals have been told from a young age to embrace change and new technologies. They entrusted their trusts and funds to FTX, which was considered a pillar of the Western financial system, establishing a new financial system, and then poof, this little boy took their money so he could cover the losses of the hedge fund run by his girlfriend, who admitted she was not good at math. So, the natural reaction of the people has been a universal, "What the hell?!"

Now, we the people will watch the public trial of SBF in a federal court in New York, the seat of the West. Regardless of the outcome, this trial will not affect the recovery of lost FTX customer funds. Ignore these details and focus on how to adjust your portfolio for the future. The future belongs to the Eurasian continent, while the past belongs to Western exceptionalism. Let’s look at what my theory means and what will happen next.

The Shift in Trading Partners

The fact that any sovereign nation uses dollars to price its exports and purchase your imports inherently means they possess the Western financial system within their borders. It is understandable that many countries are willing to do this—when the whole world uses a single currency in global trade, it benefits the cost and speed of goods exchange. However, when the system supporting the global reserve currency throws a con artist at industry leaders and says, "Trust them, it’s fine," the trust in the aforementioned financial infrastructure often diminishes.

Today, the Eurasian continent (led by China) has an alternative financial system they hope to offer to the world’s non-aligned countries. This event has the potential to significantly impact how these countries trade and with whom, as non-aligned trading partners from the Global South can turn to another ready-made system. Non-aligned countries are not on the Western orbit, nor are they on the Eurasian orbit. These countries will trade with both sides, depending on which side offers better deals. Extremely important non-aligned countries include India, Indonesia, and the Democratic Republic of the Congo. These countries are significant because they have large and growing numbers of young productive workers and/or key natural resources needed for the future "green" economy. India is the largest country in the world with a continuously growing educated young population. Indonesia is the fourth most populous country globally, also with a growing educated young population. Indonesia also possesses significant resources like bauxite. The Democratic Republic of the Congo is the largest cobalt producer in the world, and cobalt is a key mineral needed for various advanced technologies. Such examples are numerous.

Former U.S. President Trump may label these countries and other non-aligned nations as "shithole countries," but rest assured—what is buried in these shitholes are the seeds of technological advancement, not human waste. Now, these non-aligned countries can choose the currency used for their labor and goods, as well as who gets what. There is a global shortage of reasonably priced young productive workers and natural resources. (As an aside: this is why inflation will continue to exist, regardless of what central bank officials wish were true.)

The question is whether these non-aligned countries will, like their predecessors, export raw materials and import expensive manufactured goods, thereby harming their economic interests? Or will they attempt to elevate their status by demanding that trading partners invest in them, allowing them to produce intermediate products and manufactured goods domestically and export these manufactured goods to the global market at higher prices? My prediction is the latter—starting in 2023, Indonesia will ban the export of many key resources and require companies to invest in building facilities to export higher-value versions of these resources. I expect other countries to adopt similar policies.

The biggest trading partner for these countries is China, which uses the renminbi; will they continue to price their trade in dollars? Will these countries continue to grant preferential status to Western financial institutions? When these institutions and the people operating them repeatedly mess things up, as just happened with SBF and FTX? (For this, New York Magazine published a very sad and poignant article about how ordinary Nigerians entrusted their meager savings to SBF's scam.)

The Western financial system offers the same things in the same way, but China has a different message. China does not offer a foreign policy of "you support us or oppose us." Instead, China seeks to engage in what it considers fair resource transactions without political issues. Whether you believe these statements or not, this stands in stark contrast to various historical examples of Western imperialists enforcing trade conditions at gunpoint—their violent coercion, in turn, ensured that certain Western currencies continued to be used for international export pricing. The African Financial Community Franc is an example, issued and managed by France and used by many West African countries.

In the near future, we will know whether my theory and perspective are correct. However, those who are addicted to being absolutely right miss out on the economic returns that relative correctness can bring. The starting point for the Eurasian continent—and the Global South—is historically lower (see the first chart above, which describes each region's historical share of global GDP). A decline of just a few percentage points in the U.S. share of global GDP could mean a doubling or more of the share of certain "shithole" countries. As investors, we want to experience rapid growth on a low base rather than die by going long the S&P 500 index in the face of its recent underperformance compared to emerging markets and inflation.

As I mentioned earlier, the extent to which a resource-rich country decides to trade more with the West or China is a combination of positive or negative sentiment and who is willing to pay the right price. In today’s situation, as non-aligned countries gain more trading opportunities, sentiment is more important than ever. If a country historically feels it has been treated unfairly within the colonial and neo-colonial structures of the Western world economy, and has just seen Western media and financial institutions steal its people's money under the guise of some novel tech thing, you may be angered enough to venture into a renminbi-based financial system that actually has commodities (Russia), gold (Russia and China hold the largest gold reserves globally), and manufactured goods (China), without a colonial history.

This is not to say that the dollar will disappear in the next 12 months. But marginally, the relative importance of this rock-solid alliance driven by China and Russia could easily score economic points. As investors, we are always happy to hit the "simple" button.

The Future

Let’s quickly browse through some chart content that illustrates the opportunity for the Global South to emerge from its current low base.

SPY U.S. (S&P 500 ETF)/EEM U.S. (MSCI Emerging Markets) Ratio

The above chart shows the SPY/EEM ETF ratio. As you can see, over the past decade, the U.S. stock market has outperformed emerging markets by nearly 300%. The past decade has been a peak period of financialization and money printing, as well as a trough for inflation in developed markets. This combination will not reoccur in the coming decades.

S&P 500 Index/Bloomberg Commodity Index Ratio

The above chart clearly shows how the West has outperformed commodities by the largest margin in the history of the Bloomberg Commodity Index over the past decade. A return to the long-term trend line means that the performance of financialized Western countries will lag significantly compared to the global East and South, which have young workers and key natural resources.

From a broad index perspective, I do not wish to have any association with the S&P 500 index, nor do I wish to have any association with the Nasdaq 100 index. Of course, individual stocks may perform well, but as an index representing the best companies the West can offer, I believe their future performance will severely lag behind commodities and emerging markets. This is especially true given the resistance of many former staunch allies of the West (see Saudi Arabia's recent refusal to do so at the request of U.S. President Biden). Similar situations will occur regarding other demands for cheap key inputs provided to Western economic giants. Some specific commodities will always have sufficient and high enough prices, but in the currently over-leveraged form, the West cannot afford to pay too high a price to sustain its current scale of economy.

Investing in commodities is not as simple as picking an ETF from a stockbroker and hitting the buy button. You must understand futures premiums and spot premiums, and you must understand what upstream or downstream position a company is in during the process of a specific commodity from production to sale. In short, passively saying, "I want to invest in commodities" is not enough. Real work is required. Therefore, I expect that in the coming months, the market will seek a simpler way to express and trade this view, in my case, I will seek a theory connecting how the rise of the commodity Zhu-per cycle relates to the rise or fall of Bitcoin and other cryptocurrencies.

This will be the theme of many articles this year. Before I present my own guesses, my current goal is to better understand the theoretical interactions of several potential outcomes. As I strive to achieve this goal, I have several questions:

● What if inflation remains sticky in the West because the global East and South refuse to sell their crown jewels at extremely low prices and demand their fair economic share?

● If inflation persists, will Western central banks continue to raise interest rates to cool the economy and suppress demand? Or will central banks print money to maintain economic growth and full employment instead of raising interest rates to reduce inflation?

● Will Western politicians simply issue coupons to the poor and middle class so that Western voters do not feel the real impact of wage and commodity inflation, leading to massive government borrowing to fund this initiative?

● If Western politicians go this route, will central banks print the difference to keep government bond yields low, or will they hold their ground and let interest rates rise along with government deficits?

All these sub-questions lead to two most important questions:

● Are nominal interest rates high and falling, or low and rising?

● Is Bitcoin's performance linear in relation to nominal interest rates, or is the relationship between Bitcoin and nominal interest rates nonlinear and quirky? (That is, when U.S. short-term Treasury rates rise from 0% to 5%, Bitcoin may fall, but if short-term rates rise from 5% to 10%, Bitcoin may rise).

At present, it is impossible for us to know the answers to these questions—but we can conduct thought experiments to understand what might happen in these scenarios and how politicians, central bankers, and capital allocators might respond. Through these thought experiments, we can construct a portfolio consisting of government bonds, Bitcoin/cryptocurrencies, and commodities, hoping to achieve growth in all scenarios, which is my task for 2023.