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Double Happinessby@cryptohayes
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Double Happiness

by Arthur HayesOctober 5th, 2023
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The feeling of happiness at its most basic level is having enough to eat, a place to sleep, and a chance to reproduce. We require calories, which are converted from the potential energy of the sun and earth into edible food. Is the universe happy we reorder energy into a less entropic form? I don’t know. Regardless, our happiness doesn’t emerge in a vacuum – it is relative to our ability to change the nature of the universe's energy. There are no absolutes, and we may discover that even the speed of light is not a constant. In that same vein, market states are all relative; you can’t have a bull market without a bear market. In this essay, I’ll be exploring a very specific brand of happiness: the pure nirvana I expect us all to experience when this dreary crypto bear market ends and we enter a mind-blowing, first-of-its-kind bull market. That is, a bull market driven by an explosion of fiat liquidity to levels yet to be seen in human history, as well as the excitement over the commercialization of artificial intelligence (AI). To date, we have experienced crypto bull markets that resulted from either an increase in fiat liquidity or a greater appreciation for some facet of blockchain technology, but not both concurrently. A bull market in fiat liquidity and technology will produce Double Happiness for the faithful’s portfolios.
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Any views expressed in the below are the personal views of the author and should not form the basis for making investment decisions, nor be construed as a recommendation or advice to engage in investment transactions.


This is the last of my articles about the intersection of AI and crypto. I gave a short presentation entitled “Double Happiness” on 13 September 2023 at the Token2049 conference in Singapore. Here is the video recording of my keynote speech:

The feeling of happiness at its most basic level is having enough to eat, a place to sleep, and a chance to reproduce. We require calories, which are converted from the potential energy of the sun and earth into edible food. Is the universe happy we reorder energy into a less entropic form? I don’t know. Regardless, our happiness doesn’t emerge in a vacuum – it is relative to our ability to change the nature of the universe's energy. There are no absolutes, and we may discover that even the speed of light is not a constant.


In that same vein, market states are all relative; you can’t have a bull market without a bear market. In this essay, I’ll be exploring a very specific brand of happiness: the pure nirvana I expect us all to experience when this dreary crypto bear market ends and we enter a mind-blowing, first-of-its-kind bull market. That is, a bull market driven by an explosion of fiat liquidity to levels yet to be seen in human history, as well as the excitement over the commercialization of artificial intelligence (AI). To date, we have experienced crypto bull markets that resulted from either an increase in fiat liquidity or a greater appreciation for some facet of blockchain technology, but not both concurrently. A bull market in fiat liquidity and technology will produce Double Happiness for the faithful’s portfolios.


First, I will step through why the world’s major central banks – the US Federal Reserve (Fed), the People’s Bank of China (PBOC), the Bank of Japan (BOJ), and the European Central Bank (ECB) – will collectively print the most fiat in a 2-3-year window in human history in order to “save” their government’s respective bond markets. Then I will describe the craze I expect to see around new AI technology, which will be funded in large part with this toilet paper money. Finally, I will explain why I believe a certain shitcoin – Filecoin (FIL) – will regain its 2021 all-time high on the backs of these two coinciding trends.


The Formula


Crypto Price = Fiat Liquidity + Technology

Filthy Fiat

The happiness of the faithful does not exist without the sinner’s sorrow. In this case, it’s the central bankers who must suffer so that we might be happy. They have a tough choice to make: due to inflationary pressures, they can either safeguard the purchasing power of their domestic fiat currency in terms of energy, or they can ensure their federal government can afford to service its debt load – but they can’t do both. As I have argued repeatedly, governments never voluntarily go bankrupt, making it much more likely that the overly indebted governments of the world give their central banks the green light to do whatever it takes to keep bond yields “affordable”, at the expense of the purchasing power of their fiat currency.


A quick refresh on why a currency weakens vs. energy when a central bank manipulates bond yields. If the market is willing to lend at a rate of 10%, which the government can’t afford to match, the central bank can buy bonds to artificially drive rates down to a level it can match (maybe closer to ~5%). In order to buy those bonds, though, the central bank must print money to purchase them. This printed money expands the money supply, which means there is more fiat chasing a finite amount of energy. Therefore, the currency loses value relative to the energy it is being used to purchase. In our current civilization, the master forms of energy are hydrocarbons like oil and natural gas.


To appreciate why governments are so willing to throw their currency under the bus to fund their debt habits, it’s important to first understand why they have become so reliant on using debt to grow their economies in the first place. Raoul Pal has a handy formula for the drivers of economic growth – aka, Gross Domestic Product (GDP).


GDP Growth = Population Growth + Productivity Growth + Debt Growth


The creation of stable and liquid credit markets suddenly granted governments the ability to time travel. They started borrowing from the future to build things today. They believe that things built today will make us more productive in the future, and that there will also be a larger cohort of humans to use them. If we become more productive and more numerous at a faster rate than the interest on the debt used to finance that productivity, society’s wealth increases.

Demographic Decline

Unfortunately for the politicians looking to supercharge their countries’ GDP, there’s a major roadblock to the “Population Growth” piece of Raoul’s formula: rich folks ain’t fuckin’.


Alright, that’s not entirely true – there is actually lots of fucking going on, but it’s just not resulting in many babies being born. In the rich, developed world, women now receive reproductive education and are given access to forms of contraception that allow them to decide when to conceive (if at all). Prior to that, the preferred form of male-directed contraception – known colloquially as “pull and pray” – led to a healthy growth in the global population.



Starting in the late 1980’s, developed countries started dying one after another. The above chart clearly illustrates that by the 2010’s, the entire productive world’s population began declining. It makes sense – an urban population that earns a living in an office or on the factory floor doesn’t need kids. In fact, kids are a net drain on a family’s resources. When the global economy was predominantly agrarian, children represented free labor, and as such were a net economic positive for the family unit.


If the formula for GDP growth is GDP Growth = Population Growth + Productivity Growth + Debt Growth, and population growth turns negative, then governments have to double down on growing productivity.

Productivity Postponed

A few past mega trends have driven most of our productivity gains to-date, and they are all unlikely to be repeated. They are:


· The entrance of women into the workforce.

· Offshoring global manufacturing to China, because China underpaid its laborers and was willing to degrade its own environment.

· The general adoption of the computer and internet.

· Expansion of hydrocarbon production due to the growth of American shale oil & gas drilling.


These are all one-time phenomena, and we have already realized all the possible gains from each of them. Therefore, until some new, unforeseen trend emerges, productivity must stagnate. It’s possible that AI and robotics will be one of those trends that ushers in a new wave of productivity growth – but even if that proves true, it will take many decades for those gains to be fully reflected in the global economy.

Gospel of Growth

The entire world economy is predicated on the fallacy that growth must continue ad infinitum. For example, the way you typically estimate a company’s stock price, the Discounted Cash Flow model, assumes a terminal growth rate. This valuation metric is flawed because obviously, no company lasts forever – and yet, it is still the most widely used model for “valuing” a company.


Applying this idea at the nation-state level, politicians and their bankers like to promise more funds to build more shit, on the premise that the global economy will always grow at such a pace that the investments will be profitable over the long term. China exemplifies the flaws in this philosophy, as they built infrastructure and dwellings in amounts they will never grow into (since their population will halve by the end of this century). The problem is that we have failed to appreciate that the factors that have caused global growth to boom over the last 100 years were one-time events that are now well past their expiry date.



The global debt-to-GDP ratio passed 100% in the 1970’s and, as expected, grew exponentially as more time passed and governments took on more and more debt to drive future growth.


In order to keep the creditors – i.e., the filthy fiat financial system – solvent, governments run deficits to achieve the GDP growth needed to service the ever-increasing debt load. It’s a vicious cycle: In hopes of one day paying off their existing debt, governments try to fuel future economic activity by taking on even more debt and investing the proceeds. But as their debt loads increase, the GDP growth required to offset the new debt also increases, so the government has to take on even more debt to further juice the economy, and on and on – with no once-in-a-generation events to help the government get over the GDP growth hump.


There is nothing new here about my and others' prognosis for increasing debt loads globally. But earlier in this essay, I made a very audacious prediction that over the next 2-3 years, all the major economic blocs will print more money combined than they ever have in history. That requires America, China, Japan, and Europe to all do the same thing at the same time. I expect them to all act in concert because their economies are interlinked and their actions are constrained by adherence to the America-led, post-WW2 order.


But before I get too deep, I need to first walk you through the architecture of post-WW2 global trade and illustrate how current trade/capital imbalances necessitate the printing of ever more money to keep a flawed arrangement from failing.

The End of an Era



This chart is the key to understanding the economic structure the US created after WW2. Japan, China, and Germany were allowed to export their way to recovery after the war. So long as these countries behaved, the US agreed to absorb their goods – and subsequently, their surpluses – in the form of financial investments. By selling stuff to the US, the savers (blue bars) amassed wealth, but that wealth was paid for by the US (red bar) with dollars borrowed from the savers. As you can see, everything balances – the assets of the savers match the liabilities of the spenders.


This arrangement only works as long as a few things are true:


  1. Wage growth in the exporting nations must be less than productivity growth, and the nation must invoice their goods in dollars. These dollar savings, caused by under paying labor in productivity terms, must be invested in the US financial markets.

  2. The US must allow exporters to sell goods tariff-free and invest in American financial assets with no restrictions.


The system cannot work any other way. Asians and Germans must save, and Americans must spend. Resist the urge to interpret this behavior in any moralistic fashion. No nation is good or bad; the system always balances. It’s your perspective which gives rise to a moralistic opinion.


America can only buy so much stuff. China took over being the largest consumer of commodities and other goods after America, but even her market is saturated. This is even more true as both countries’ populations are declining. Therefore, the exporting nations who continue to invest in infrastructure to become more efficient and keep prices low now face fully saturated foreign markets, and their infrastructure investments fail to earn their return on capital.


But rather than let a vast swath of firms go bankrupt and drive an unemployment spike, their governments have and will continue to step in and hand out cheap credit to industrial firms to keep building more production capacity. Whenever growth slumps, China always responds with more loans to industrial firms because it allows comrades to stay in the factory and out of the people’s square.


On the flip side, American finance refuses to invest locally apart from big tech firms (Apple, Microsoft, Google, Facebook, Amazon). Why invest locally in a manufacturer that has zero chance of competing against cheaper offshore firms? Because of this, the banking sector instead deploys capital abroad to companies and/or countries that are believed to have great “growth” potential with a higher risk of non-payment.


It shouldn’t be a surprise when these higher-risk foreign borrowers cannot repay their loans and a financial crisis ensues. If the American banks recognized their losses, they would be insolvent – but instead of allowing them to fold, the Fed and US Treasury will inevitably step in and 1) change the capital adequacy rules to give the banks more breathing room, and 2) print money to ensure the banks’ solvency. The financial sector must be bailed out to avoid the collapse of the entire American financial system, which would render the financial investments of the export nations worthless.


On the flip side, the export nations can never really spend their savings because any sizable liquidation of their assets would collapse the US financial system. Exporters have close to $10 trillion of trapped assets. Not even Sam “Alabama Tabasco” Trabucco of Alameda Research can sit on the bid and handle that size. The US cannot shut out the exporters’ capital to fight domestic asset price inflation because it would destroy the ability of the exporters to keep wages down and goods cheap. This arrangement’s past success guarantees its future failure.


In both cases, the only means for exporters and the US to save their manufacturing and banking sectors, respectively, is to print money. It is important to remember that printing money is always the answer, forever delaying any adjustment to the architecture of the global trading and financial system.

Cheaters Never Win

The real systemic problem, at least from the perspective of the wealthy elites, is that the plebes always want to up their station in life. In Asia and Germany, workers want higher wages, more purchasing power, and a larger government safety net. Why shouldn't they receive these things if, on paper, their countries are so “rich”? In America, the plebes have enough knickknacks, and they just want their jobs back. They rightly believe that they should make the goods they consume, rather than letting a former foreign peasant work in their stead. Again, this is a reasonable request given the American middle class is the end consumer of all this stuff. Ricardian equivalence don’t mean shit in the rust belt.


Because the political and financial elites have no desire to make wholesale changes to the system on either side, they start cheating around the edges. The breakdown of the relationship between China and America – whose economies and political systems are diametrically opposed but inexorably linked to one another – illustrates this point.


The Chinese proletariat were promised a healthy economy, which requires constant high growth. Therefore, after China saturated the American market with its goods, it needed additional places to sell its products in order to continue growing. China branched out and became the largest trading partner of most of the world, supplanting America. Importantly, more and more of this trade is being invoiced in yuan, rather than dollars. That’s a big no-no. Muammar Gadafi (ex-president of Libya) and Saddam Hussein (ex-president of Iraq) both fell victim to “regime changes” when they attempted to break free of the dollar.


America was a bit more subtle in its response to China’s trade expansion, enacting semiconductor trade restrictions and sanctions intended to stymy China’s technological advances. Huawei was the first major China tech casualty; when they lost access to the most advanced chips and American mobile operating systems, their domestic and international smartphone sales plummeted.



Being good is ok, being too good is treasonous.


Just like America, China wanted to ensure its trade routes were militarily secure. The Chinese beefed up their military to secure trade via both the Silk Road (overland) and the String of Pearls (sea lanes). The military guarantee of trade had historically been America’s job, and she bristled at China’s resurgent “aggressiveness”. (For what it’s worth, China wouldn’t characterize securing its own trade lanes as “aggressive”. Perspective is everything.) The US responded by increasing weapons sales to Taiwan and encouraging a military buildup in Japan.


The world now trades more with China than America.



China ensuring it can protect its littoral region.


To placate its proletariat – who just wanted their good-paying manufacturing jobs back – former US President Trump started a trade war with China. Current US President Biden has continued the onslaught by signing into law the CHIPS Act and Inflation Reduction Act. These acts give generous government subsidies and outright payments to companies for building domestic semiconductor facilities and clean energy infrastructure. These outlays will be paid for by issuing more debt in the form of bonds, which in turn are purchased by the US’ trading partners.


America is cheating by using the savings of China, Japan, and Germany to rebuild domestic industry so that American firms can make goods for America. Obviously, that diminishes the market for Chinese, Japanese, and German goods. As expected, many export-focused nations have cried “protectionism” (as if American politicians give a fuck when faced with losing at the ballot box).


Predictably, US Treasuries have lost value in energy terms, as the amount of debt in circulation has grown exponentially. If I were a large holder of these pieces of trash, I would be fucking pissed. China, Japan, and Germany obviously see the writing on the wall, which is why they have ceased re-investing their export earnings into these bonds. That is cheating as well.


The Bloomberg US Treasury Long Term Total Return Index / Spot WTI Oil Price Index at 100 as of 4 January 2021



Long term treasuries on a total return basis have underperformed oil by over 50% since the COVID fiat-printing bonanza.



As America’s debt outstanding ballooned, her two major trading partners China and Japan went on a buyer’s strike. In stepped the US banks (they got rekt buying this dogshit), and the Fed (soon to be rekt buying this dogshit) as buyers of last resort.


Errbody’s cheating, and for valid reasons. It is obvious that a new global economic system will eventually be created, whether the elites like it or not. The imbalances cannot continue. But as long as those in charge refuse to acknowledge reality, money will be printed in hopes that “growth” is just around the corner – and we can thus Make America, China, Japan, and Germany Great Again!


I don’t know what the new global economic arrangement will be, but I am certain that this is the last credit cycle the current regime will experience. It will be the last one because no one wants to voluntarily own any government bonds. The private sector doesn’t want them because, due to inflation, they have to hoard capital and purchase increasingly expensive inputs if they are a business or food/fuel if they are individuals. The banking sector doesn’t want them because they just became insolvent buying government bonds during the post-COVID boom. The central banks don’t want them because they must fight inflation by reducing their balance sheet.


Governments will attempt – with varying degrees of success – to force central banks, the banking sector, and then the private sector to purchase bonds with printed money, depositors’ money, or savings.

The Bond Bubble

What follows is my estimate of the total amount of government debt that must be rolled over and issued by the US, China, Japan and the EU to cover deficits for 2023 to 2026. I chose 2026 as the end date because the average maturity profile of America, the largest debtor and ringleader of this economic system, is around 3 years. Every other country / economic block is in a codependent relationship with America, so they will all rise and fall together. For the debt maturity profiles of every other country, I used the DDIS function on Bloomberg.


The US


Line Item

Dollar (trillions)

2023 US Treasury Borrowings

$1.85

2024-2026 Maturing Debt

$7.00

2024-2026 Estimated Budget Deficit (Surplus)

$5.05

Total Debt to be Issued

$13.90


For the estimated budget deficit, I took the figures from the Congressional Budget Office.


Japan


Line Item

Yen (trillions)

2023-2026 Maturing Debt

113.00

2024-2026 Estimated Budget Deficit (Surplus)

246.79

Total Debt to be Issued

359.79

USDJPY

150.00

Total Debt to be Issued USD (trillions)

$2.40


For the estimated budget deficit, I took an average of the last six quarters of reported data from the Ministry of Finance, annualized that figure and multiplied by three.


The EU


Line Item

Euro (trillions)

2023-2026 Maturing Debt

2.37

2024-2026 Estimated Budget Deficit (Surplus)

1.41

Total Debt to be Issued

3.79

EURUSD

1.05

Total Debt to be Issued USD (trillions)

$3.98


For the estimated budget deficit, I took the five-year average budget deficit of the Eurozone and multiplied it by three.


China


Line Item

Yuan (trillions)

Central Govt 2023-2026 Maturing Debt

11.877

LGFV 2023-2026 Maturing Debt

10.575

2024-2026 Estimated Budget Deficit (Surplus)

74.64

Total Debt to be Issued

97.09

USDCNY

7.3

Total Debt in USD (trillions)

$13.30


Unlike the other countries or blocs examined above, China’s central government authorizes its provinces to issue debt with an implicit central government guarantee. Due to a tax reform in 1994, Beijing wrested control of the majority of tax revenue from local governments. In order to allow local governments to cover the difference, Beijing enabled them to issue implicitly guaranteed by the central government. It wasn’t made explicit because Beijing didn’t want the central government's credit worthiness questioned as local government debt metastasized.


Every year, the local governments are given a loan quota. These debts are collectively called Local Government Financing Vehicles (LGFV). As you can see, the LGFV debt load is almost equal to the central government's. This is a major political problem because the central government does not want to formally guarantee the LGFVs’ debt and impair its own finances, but it also cannot allow this debt to default because it would destroy the entire Chinese financial system.


For the estimated budget deficit, I took the five-year average budget deficit of the Chinese central government and multiplied it by three. I don’t have accurate figures on the budget deficits of the local governments, so I undercounted the amount of debt that will be issued in China.


The Total


Country

Total Debt USD (trillions)

The US

$13.90

The EU

$3.98

Japan

$2.40

China

$13.30

Total

$33.58


Just because a government borrows doesn’t mean the money supply will increase and subsequently drive inflation. The debt burden only boosts the money supply if there are no natural buyers. At a high enough yield, the government can easily crowd out other financial assets and suck in all private sector capital. Obviously, this isn’t the desired outcome, as the stock market would collapse and no businesses would receive any funding. Imagine if you could make 20% on a one-year government bond; you would find it very difficult to justify investing in anything else.


In theory, there exists a happy medium in which the government funds itself and doesn’t crowd out the private sector. However, with global debt-to-GDP at 360%, the amount of debt that must be rolled over and issued to cover future deficits will definitely crowd out the private sector. The central bank must be called upon to print money to directly finance the government by purchasing the bonds the private sector shuns.


We can’t know a priori what percentage of the debt issued will be purchased by central banks. But, we can do some thought experiments and assess how different scenarios might play out.


To start, let’s look at some precedent. When COVID hit, the world decided it would lock everyone in their homes to protect the boomers from a virus that primarily killed old, fat people. In their “generosity”, the boomer-led governments gave out money to individuals and businesses in an attempt to ameliorate the economic damage of lockdowns. The amount of debt issued to fund these stimmy checks was so fantastically large that the central banks printed money and bought bonds to keep yields low.


Let’s recontextualize the amount of debt to be issued and subsequently purchased by the large central banks between 2023 and 2026 as a multiple on the total amount by which the large central banks’ balance sheets rose during COVID.



End in Local CCY

Start in Local CCY

Total USD (trillions)

Fed (millions)

8757460

4151630

$4.61

BOJ (millions)

723765.9

578335.2

$0.97

ECB (millions)

8566.372

4671.365

$4.09

China M2 (millions)

238289.95

202306.66

$4.93

Total COVID Money Printing



$14.59


% of Debt Central Banks Buy

Number of COVIDs

100%

2.3

75%

1.7

50%

1.2

25%

0.6


Because the private sector was corralled into buying government debt at 5,000-year-low yields during the COVID years, their portfolios are sitting on trillions of dollars-worth of unrealised losses. The private sector will be unable to participate as much during this round of debt issuance. Therefore, my base case is that central banks will buy at least 50% of the issued debt. The result is that from now until 2026, the world’s fiat money supply will increase more than it did during COVID.


Debt-to-GDP increased by over 100% during COVID – how high will it go in this episode?

Where it All Goes

Now that we have a sense of the extent to which the global fiat money supply will increase from now until 2026, the next question is, where will all that money go?


The massive amount of government borrowing will crowd out any business that requires credit. Even if yields are nominally low, credit will be scarce. A business that manufactures things and needs debt to fund its working capital will find itself unable to expand. Some businesses will find it impossible to roll over their maturing debt and will go bankrupt.


Instead, the printed money will flow to the new technology companies that promise insane returns as they mature. Every fiat liquidity bubble has a new form of technology that captivates investors and draws a fuck-ton of capital. As the major central banks printed money to “solve” the 2008 GFC, the free money flowed to Web 2.0 advertising, social media, and sharing economy startups. In the 1920’s, it was the commercialization of technologies developed during WWI, like radios. This time around, I believe it will all be technology related to AI.


AI tech companies do not need a well-functioning banking system. Once funded, if the product or service finds traction, the unit level profit margins approach 100%. Therefore, the few successful AI companies will have no need for capital supplied by banks. That is why everyone wants to find the AI version of what Google, Facebook, Amazon, Microsoft, and ByteDance meant to the Web 2.0 buildout of the 2010’s.


The rush of capital into AI has already started, and it will only intensify as the global money supply explodes exponentially higher.


Don’t Be a Fool

Just because capital will gush into AI companies doesn’t mean it will be easy to make money as an investor. Quite the opposite, in fact – the vast majority of this money will be wasted on companies that fail to create a product with paying customers. The problem with AI is that there are very few business models we can imagine today that have a protective moat.


During Korea Blockchain Week, I was in a car ride with a techbro who worked for a prominent Silicon Valley VC. He remarked at how hard it is going to be to make money in AI. He offered up an anecdote about a recent Y Combinator (YC) class. The entire class was filled with startups building plugins to leverage OpenAI’s Large Language Models (LLMs). Then, overnight, OpenAI decided to roll out its own suite of plugins, and the valuation of the entire YC class instantly dropped to zero.


Most of the companies in which VC muppets will invest are just software enabled services on top of a project like OpenAI. As software is becoming even easier than ever to replicate. o try and write some code with ChatGPT – it’s fucking easy. The vast majority of these “AI” tech companies are walking zeros. If your business is predicated on OpenAI or a similar company granting you access to their models, then why wouldn’t OpenAI perfectly replicate your plugin or tool and bar you from their platform?


I’m sure VC principals aren’t that stupid (LP’s are the dumb ones), so they will try to invest in companies with a defensible business around different sorts of AI models. That’s great in theory, but what exactly is that startup spending money on? Go back to the AI food groups I spoke about in my essay “Massa”.


An AI “eats” compute power and data storage. That means a startup will raise money and immediately buy processing time powered by GPU’s (these are computer processing chips) and pay for cloud data storage. Most startups will run out of cash before they develop something truly unique because the scale of compute power and data storage needed to create a truly novel AI is staggering. I would guess that less than 1% of startups funded today will be around by 2030, and the law of averages says that you, the investor, will almost certainly lose all your money trying to invest in AI.


Instead of trying to find a needle in a haystack, just buy NVIDIA (the leading GPU chip manufacturer) and Amazon (the parent company that owns Amazon Web Services, the world’s largest cloud data provider). These are both publicly listed companies with very liquid stocks.


A VC will never be able to charge management and performance fees by just putting your money into two stocks. Unfortunately for investor capital, they attempt to act “smart” and gun for the <1% of startups that will actually survive (and likely still underperform a simple equally weighted basket of NVIDIA and Amazon stock). Let’s revisit this prediction in 2030 and see whether the 2022-2024 vintage of VC funds outperformed or not. I predict, Total Wipeout!


This concept is very similar to how, during the Web 2.0 buildout, startups raised money and handed it to Google and Facebook in the form of advertising dollars. I challenge a reader to compile the average performance of the 2010 to 2015 vintage of VC funds and compare their compound IRR net of fees vs. buying an equally weighted basket of Google and Facebook stocks. I bet only the top 5% of VC funds (or less) beat that simple stock portfolio.


Investing in NVIDIA, for example, is great because it is liquid. You can get in and out whenever you like. However, it carries the risk of valuation. NVIDIA trades on an insanely high price to earnings (P/E) multiple of 101x.


The problem with that is that it is very tough for NVIDIA to grow its earnings at a fast enough pace to justify that high multiple. If investors assign a lower P/E multiple to NVIDIA, the stock will plummet, even if the earnings growth of the company is stellar.


Let’s use a simple mathematical example to illustrate the problem.


The best run and most advanced semiconductor company in the world is Taiwan Semiconductor Manufacturing Company (TSMC, Ticker: 2330 TT). TSMC trades at a P/E multiple of 14x. Let’s assume that the market opens and believes NVIDIA has matured and should match the P/E multiple of TSMC.


For those of you who were watching TikTok instead of listening to your maths professor, let me walk you through the arithmetic.


$1 of earnings at a 101x P/E equals a stock price of $101.


$1 of earnings at a 14x P/E equals a stock price of $14.


That means the stock instantly drops by 86% or [$14 / $101 - 1].


“Arthur, that's all well and good, but NVIDIA is a beast. Their earnings are going to zoom higher in the future. I'm not concerned,” you might retort.


Let’s calculate how much earnings must grow so that the stock price regains $101 using a 14x P/E multiple.


Target Stock Price / P/E Multiple = Total Earnings


$101 / 14x = $7.21 of Earnings


Earnings must grow 621% or [$7.21 / $1 - 1] over some time frame to regain $101.


Growing earnings 621% for a high-flying tech firm is not difficult. The question is, how long does it take? And more importantly, what could your capital have earned in the meantime while you waited to just get back to breakeven?


Using the same two stocks, NVIDIA and TSMC, let’s change the timing of your investment. What about instead of investing during the mania phase, you bought NVIDIA after its multiple contracted from 101x to 14x?


Now the company goes on to grow earnings by 621% in a span of one year. Obviously, this is highly unlikely, given that NVIDIA would need to increase profits by over $37 billion. But let’s play pretend.


NVIDIA at a 14x multiple rises from a price of $14 to $101 on strong earnings growth. That’s a great trade – your capital appreciated 621%. Investing during the euphoria phase generated a loss of 86% as the mood quickly changed from happy to sad. NVIDIA never stopped being a kick-ass company, but the market came to believe NVIDIA was like other large semiconductor companies and should have a valuation to match.


Price is the most important variable. When it comes to my portfolio, I want to participate in the AI manic bubble, but I have some rules.


  1. I can only buy things that are liquid and tradable on an exchange. This allows me to trade in and out when I please. This would not be possible if my investments consisted of money held in a VC fund that is invested in pre-IPO or pre-token companies or projects. VC funds typically only return capital after seven years.
  2. I can only buy things that are down substantially from their previous all-time high (ATH). I want the multiple I pay on earnings of another key metric to be substantially lower than where it traded when the stock or project was The It Thang.
  3. I know and understand the crypto capital markets well; therefore, I want to invest in something that connects crypto and AI.

No Ozempic for AIs

Because I have no clue as to which AI business models will succeed, I want to invest in the things I know AI will rely on to function – i.e., its food groups. Either I need to invest in compute power in some way, or I need to invest in cloud data storage. For both food groups, an AI craves decentralization. An AI faces existential risks if human-controlled, centralized companies decide to restrict access to their services (due to coercion by governments, for example).


A cryptocurrency powered blockchain enabling humans to come together and share spare compute power would be interesting, but I haven’t identified a coin or token with a network that is built out enough to suggest it will survive and thrive over the next two to three years. So, as far as I can tell, there’s no decentralized way for me to invest in compute power.


That leaves me with investing in data storage. The largest decentralized data storage project by storage capacity and total bytes of data stored is Filecoin (FIL). Filecoin is particularly appealing because it has been around for a few years and is already storing a large amount of data.






Without data, an AI can’t learn. If the data is compromised due to a single point of failure, or the central data storage entity changes access rights or its prices, an AI that is dependent on that storage entity will cease to be. It is an existential risk, which is why I argue that AIs must use a decentralized storage solution.


This is why I don’t want to own the stock of a large cloud data service provider like Amazon. I fundamentally believe what Amazon is –  a large, centralized company governed by human laws – is not compatible with what an AI needs from its data hosting provider. Amazon could, at the behest of a government, unilaterally shut off access to data. That is not possible in a censorship-resistant decentralized network. I know that, due to their consensus mechanisms and economic rewards, blockchains can help create coordinated “sharing”. That is why the decentralized data storage network powered by FIL is a must have for the burgeoning AI economy.


To read more in depth about my logical arguments on why an AI needs decentralized money, services, and networks in general please read “Massa” and “Moai”.


Let’s go through my checklist to see if FIL is suitable.


Is it tradable on an exchange?


Yes. FIL began trading in 2020, and is tradable on all major global exchanges.


Does it trade much lower than it’s ATH?


Yes. FIL is down close to 99% from its April 2021 ATH. But even more importantly the Price / Storage Capacity and Price / Storage Utilization multiplies both contracted by 99%.


Historical Figures

  • FIL ATH: $237.24

  • Filecoin storage capacity (2021): ~4 EiB

  • Storage utilization (2021): ~0.2%


Current figures as of Q2 2023 (Messari report)

  • FIL price: $3.31

  • Filecoin storage capacity: 12.2 EiB (exbibyte)

  • Storage utilization : 7.6%


Ratios

ATH Price / Capacity in April 2021 = $19.45 per EiB

ATH Price / Storage Utilization in April 2021= $1,186.7 per percentage


Current price / Capacity = $0.27 per EiB

Current price/ Storage Utilization = $0.44 per percentage


Investing after multiples take a beating is always best practice. Imagine if the Price / Capacity ratio rebounds only 25% of where it was in April 2021 to $4.86 per EiB, the price would rise to $59.29 up almost 17x from current levels.


Is it a cryptocurrency whose network helps feed an AI?


Yes. FIL is a blockchain based on proof-of-spacetime. FIL is the native cryptocurrency of the Filecoin network.

Let’s Trade

Many readers have commented on social media that I’ve been saying the same thing since the end of the last bull market, and that I’ve been dead wrong. That is true, but I don’t trade one-minute or even one-hour candles. I trade cycles, and I am focused on the 2023-2026 cycle. As such, I have no problem being wrong right now, as long as I’m right later.


I am able to acquire the things I believe will pump bigly at “cheap” prices today. FIL to da MOON! And the market may not respond. In fact, it may trade even lower than my average entry price, but the maths tells me I am on the right side of the probability distribution.


Double Happiness is coming for my portfolio.


Governments now and in antiquity only know one way out of the intractable problem of too much debt and not enough productivity: printing money. Every major empire or civilization can trace a part of its demise to the debasement of its currency. Our current “modern” situation is no different.


I had a hunch about the numbers, but even I was surprised at their magnitude. I am comforted that others whom I respect such as Felix Zulauf, Jim Bianco, the Gavekals, Raoul Pal, Luke Gromen, David Dredge etc. are all highlighting the impossibility of growing out of the gigantic debt pile the world has amassed. The question is when the general bond-holding public consisting of banks, businesses, and individuals refuse to park their excess cash in negatively real-yielding government bonds. I don’t know when this will occur, but the world is entering the hockey stick moment where debt balances go up quicker than our lizard brains can comprehend. Presented with these catastrophic charts of debt balances going up and to the right wagging faster than Michael Lewis’ tongue while fluffing Sam Bankman-Fried, the public will flee and in must step the central banks armed with their trusty, and definitely not rusty, money printer.


The fiat liquidity boom is coming, and I can wait patiently.


AI is experiencing its hockey stick moment of adoption growth. AI has been discussed and researched since computers were invented in the mid-20th century. It’s only now, almost 70 years later, that AI applications are becoming useful to hundreds of millions of humans. The growth and speed at which our lives will change due to the things the thinking machines do will be astounding.


Armed with free money in the tens of trillions, everyone from politicians, to hedge fund masters of the universes, to VC tech dudes and dudettes will be doing everything they can to funnel money into anything tangentially related to AI. Some commentators laugh at how NVIDIA has corrected almost 10% from its ATH. They say “I told you so, it was a bubble”. But their unimaginative pea brains haven’t read enough history or studied the evolution of a bubble. The AI boom hasn’t even started yet. Just wait until the major central banks do an about-face and start printing money to save their domestic governments from bankruptcy. The sheer amount of capital and attention focused on this “new” technological development will be something unseen before in human history.


The gobs of fiat money printed and the lightspeed adoption of AI will combine forces and produce the biggest financial bubble EVER!


And while the current market gives me boring sideways, with a sprinkle of number go down, my hands will be diligently collecting the bulbs that will grow into mighty tulips. But make no mistake – I am not foolish enough to believe all the hype. I respect gravity. As such, as I buy, I look into the future when I must sell.


But fuck all that – let’s party like its 2019!