Real Vision managing editor Ed Harrison welcomes Raoul Pal, CEO and co-founder of Real Vision, to the Daily Briefing to discuss the changes in the macro policy paradigm globally. Pal will be analyzing the impact these shifts will have economically, whether global macro investments can still perform in light of these shifts, and whether crypto ultimately benefits in the aftermath. He will also be unveiling the legendary headline guest at the upcoming Festival of Learning (June 23-25). Don’t have your ticket yet? You can get it through this link:http://realvision.com/festival-of-learning-2021
Video Transcript
ED HARRISON: Real vision daily briefing on Friday. Hi, Ed Harrison here. I’m talking to Real Vision founder and CEO Raoul Pal. Raoul, it is great to talk to you.
RAOUL PAL: It’s always a pleasure to talk to you on a Friday, Ed.
ED HARRISON: Yes, and, actually, there’s not a ton to talk about in the global macro world. Excuse me, if I have brain farts, et cetera. I’m looking at your Twitter. And I’m just like 557,000 followers. That’s really the– I’m sorry, but that’s the number that I’m thinking about. I’m not thinking about 5% inflation, which we’re going to get to.
RAOUL PAL: My mom sets up a lot of accounts.
ED HARRISON: It’s amazing. I think just going to the macro picture, global macro, it’s because we’re in a new world. And I think that my goal in this conversation is to weave a web in terms of the lack of volatility in the global macro world, the inflation print that we just had now, and then the new world that we’re talking about in terms of the exponential age, and crypto, and all of that. Let’s see if we can get that all into one little paradigm, if we will.
RAOUL PAL: Yeah, love it. Let’s go for it.
ED HARRISON: Yeah, so Raoul, let’s start out with inflation. Because really, if you can think about the data that’s coming out of the United States or out of the global economy, that’s really all anyone thinks about today is inflation. What are your thoughts there?
RAOUL PAL: It’s kind of hilarious. Because this time last year when the world stopped, we knew that when the economy restarts, the year on year rates of change of economic data is going to look ridiculous. And all of us said, oh my god, the inflation prints are going to look like 4%, 5%, et cetera, et cetera.
And everyone’s like, yeah. The Fed was saying, listen, that data is going to look super when it gets to this time of year. And everyone goes, oh, year. Comes this time of year, everyone goes, oh, panic, inflation. And it’s kind of madness.
Now so there’s a couple of things going on. I’ve talked a bit about this before is, obviously, there are still supply issues. So we would put supply issues in transitory inflation issues.
ED HARRISON: Definitely.
RAOUL PAL: Restarting of the economy, that kind of stuff, the inability to get labor. So some wages go up, rent prices catching up, all of this, transitory. Doesn’t mean it goes away again. The increase in prices actually sticks. But the rate of change slows down very quickly.
But the bulk of what’s going on is the fact that in June last year, we had the exact low print in inflation, if you look at the CPI index itself. So a year later, even if it had gone back to where it was in, let’s say, January of last year, it would have showed a massive gain.
But because of the supply constraints and everything else, the gains look huge. But it’s just a year on year comparison. So if we go out a bit further, we will see the rates of inflation come down anyway. So this was always going to be the high print, this June number, because of the comparison versus last year. And then incrementally, it should soften.
So this is what the Fed is talking about transitory. And the actual truth is we don’t know what’s going to happen next year. And that’s where the real debate should lie, not this year. This year, it’s almost impossible to have generated meaningful sticky inflation.
And my view for a long time, as most people who know me, is I’m generally a disinflationist. I don’t believe you can generate structural inflation. I think that the monetary printing is a debasement issue, which is a different type of inflation than the CPI thing.
So I’m going to show you some charts on how I’m framing this, just so we’ve got something to chat about. So if I’m going to share my screen now– this is some work I did for [INAUDIBLE], like 22 pages about inflation.
And my conclusion is yes, there’s commodity inflation. Yes, there’s inflation somewhat. But generally, a lot of what we’re seeing is fleeting because of the numbers. But I think there’s another thing that I want to kind of own a bit is the fact that I think that global growth is going to slow in the second half of the year, which is a surprise and is what I think the bond market is telling you.
ED HARRISON: Right, yes. That’s where I want to go to. That’s great.
RAOUL PAL: So everybody’s screaming, oh my god, bonds are manipulated. Can’t you see the inflation? Inflation is out of control. No, the inflation number is a false number. Where is the real rate of inflation in the economy? We currently don’t know. So we can’t really tell.
But the bond market is saying, actually, the inflation pressures are easing off. Why? So I’m going to show you why. One is China has started slowing. So its credit cycle leads its PMI and its business cycle.
And ISM follows, because China is actually the largest manufacturer in the world. So this actually drives a lot of the global business cycle. That’s not just the US. So we can see that the China economy is rolled over. And that tells us, ISM later in the year should be peaking out to.
Now whether it’s done it already or whether it lags a bit, not clear yet. But we’ll find out. But it just tells me the balance of probabilities are that the US economy, so the ISM Purchasing Managers survey is correlated to GDP suggests that the peak of this post-recovery bounce is in. And that’s normal. And I’ll come on to that in a bit.
It’s actually normal to see a slowdown after the initial recovery. The City Bank Economic Surprises Index for China, which is a measure of that economic data coming out better or worse than expected, is now coming out significantly worse than expected versus economists’ forecast.
That’s another measure to say, China’s slowing down faster than people expected, which was that previous chart. What’s interesting is the US is starting to see the same. So its Economic Surprises Index has just hit zero.
And it’s likely to go negative, which tells us the economists are going to have overforecasted growth, which is what the bond market starting to tell us. Because yields have started falling in the middle of this big inflation print. Because bonds look forward and try and speak the truth about the economy.
But there’s some structural issues that haven’t gone away. In this– and I’ve talked about this for a long time– part of the solvency thesis is the fact that people aren’t going to get jobs back again. I know there’s a record amount of job ads out there. But the reality is there’s a jobs mismatch now. Because not all of these retail jobs are coming back.
There’s whole swathes of the economy that’s not coming back. And so we can see that the US employment population in the labor force is actually below it was at the lowest level it’s been for a very, very long time. And that’s concerning.
People are basically coming out of the economy. That’s also to do with baby boomers retiring, because they can’t get a job again. If they got laid off, the chance of a baby boomer at 65 years old getting a job is pretty close to zero now.
ED HARRISON: Unless they go to McDonald’s.
RAOUL PAL: That’s right. So they’re coming out of the labor force. And that’s deflationary, because they now have a fixed amount of assets to be able to live off. So they tend to spend less. It tends to be highly deflationary.
Also, in the midst of all of that is the fact that we’ve also got all of the various things that stop people having to pay rent or getting other subsidies and payments on mortgages, all of this stuff all comes back with a vengeance from now until the end of the year.
So a lot of people who’ve been used to spending pattern that had more incremental income are suddenly going to find they’ve got less. Probably slower for growth. And I don’t know if I– the labor force participation rate, which is another way of looking at how many people are actually in America in the workforce, it’s super, super low, as these baby boomers come out in the structural unemployment.
And that’s leading to velocity of money remaining extremely subdued. They’re very correlated to the baby boomers, because they tend to save assets, put them in a pension plan, or save them and not spend them. And it tends to lead to low inflation.
So those things haven’t gone away. Also, if I look at the chart of bond yields going back to 1962, every time we’ve had a recession, there’s been a little spike in bond yields afterwards. And that’s the rebound inflations coming oh my god phase. That happens every time.
It’s behavioral, because they see this economic data coming out stronger, because it’s versus the comparison of the previous dip. And what happens is that inflation dies very quickly. So in 2010, we saw it die off very quick after the recession had finished.
And bond yields collapsed 2001, and 1991 as well, and actually 1984. But just using the ’90s with the kind of active Fed in the way they are, this is a very typical pattern. And it’s because the market over anticipates recovery.
So it anticipates recovery faster and then gets it wrong in the end. So that process means that we should expect bond yields to fall, not rise, not yet. So then I would like to use dmarc indicators and these bunch of green nines you see on here.
This is the monthly chart. And every time you get a nine signal, you tend to get a reversal. It’s kind of a pre-signal to reversal. Now if you look at the nines on the top of– this is the famous chart of truth of the bond yields over the last 30 years– is when you get to that nine signal, it reverses.
And we’ve just put one in. In fact, it’s got 100% track record there and thereabouts for calling the top in yields. So contrary to expectations of every single economist, the market is suggesting– and some of my economic research– is that inflation is going to be less of a concern.
And that’s usually because you get a slowdown in growth that happens in the first part of a recovery that scares people a bit. And they start thinking, oh my god, are we going to have a double dip? Usually, that’s a false narrative too.
But yields don’t recover, because the central bank and the government will stimulate. So my guess is economic growth slows, economic data comes off, the central bank and the government stimulate harder than we expect. And so that’s how I’m framing inflation, which is quite different to most people’s views.
ED HARRISON: Yeah, I think that is very interesting. And I have heard a little bit of hubbub about people saying, wait a minute, bond markets are telling us something that’s not just technical, that when we’re breaking to below the 100 day moving average, we’re below that now. We’re below the 50 day moving average, obviously.
That tells you that the momentum is in the other direction. And just to add to that, the 200 day moving average for the 10 year yield is up 1.16%. That’s quite a bit lower than we are right now. So that gives you a sense of the room to run that we have if this continues.
RAOUL PAL: Yeah, and I’m not saying this is a home run trade. I’m not saying that this is a economic catastrophe. I’m saying it’s a normal phase that bond yields have got ahead of themselves, growth expectations have got ahead of themselves.
And I think it would not be unreasonable for yields to come back down to 1%. That needs a break about 140 first. Did that, they go significantly lower. So I think the most people who love an inflation narrative– some people love an inflation narrative, some people love deflation narrative. We’re all born one over the other generally.
But the inflation narrative says the bond market’s wrong. Look at the numbers. The bond market, which tends to be more disinflationary, says, the bond market’s right. The numbers have peaked. So we’ll see this play out. And it’s going to lead into how we allocate capital to other markets.
That’s the important part. It’s not about the bond trade. It’s about what trades that we do in that economic environment. And I know you’ve spoken to Darris Dale about some of this stuff. And he’s also, through his different ways of looking at stuff, looking at a disinflationary trend later on in the year too from some of his indicators. So I thought that was interesting.
ED HARRISON: Yeah, I thought that was very interesting. I think that he said that we’re in the reflationary phase based upon his indicators. You might get a flip to what he calls the Goldilocks period. But that’s just a false dawn. You could flip very quickly to the deflationary aspect. And then that’s a reversal.
RAOUL PAL: Yeah, so in my terms, the Goldilocks phase is OK, inflation’s not so bad and growth looks pretty good. So the ISM remains elevated. Inflation print stock coming off a bit. That is a great market for risk assets. That’s the Goldilocks phase.
But what he’s saying and I’m saying from doing different work reaching the same conclusion is, actually, the slowdown in inflation and growth is going to be more pronounced than people expect. And people are going to start flipping into the deflation trade later in the year, which is buying bonds, maybe buying utilities, or whatever it may be.
ED HARRISON: And so what happens, by the way? Because when we think about the exponential age and we think about new technologies, what happens to those parts of the market in that environment?
RAOUL PAL: So over the longer run, they are not driven by the business cycle in terms of their long term logarithmic trend. Within that trend, it’s driven by the business cycle. They have been underperforming recently. We can use whether it’s Kathy Woods Arc or many of the big tech plays have underperformed value, for example.
And that’s because the inflation narrative means that people who are using a discounted cash flow model for these tech businesses said, well, if there’s more inflation, then these things that look like zero coupon bonds to infinity now have to be repriced. So they stopped going up for a while. Many corrected.
But if we’re going to take down inflation, first, we get to the Goldilocks phase, which is like you can basically buy anything that goes up. So that’s great. And then if it starts switching to the actually, the quality of growth is not as high as we thought, these things are going to explode.
And it’s the same– gold, actually, trades in a very similar way as well. Emerging markets too. So I think we’re going to see– well, emerging markets are happier in the Goldilocks phase. So I think it’s we’re setting up to be able to do this exponential age trade properly as a great entry point.
Arc looks like it might be trying to break out early yet. But the bond market will lead the way. And it will tell us– the bond market sells off in yield terms further, i.e. bonds rally. I think all of these will break out.
ED HARRISON: Interesting. Now I told you that I was trying to connect everything that we’re doing together. Before we go further on that, as soon as we start talking about the exponential age, I think immediately about some of the programming that we have coming up.
One of the things that comes to mind is the Festival of Learning that we’re doing. I know one of our colleagues Shannon, she was saying, Raoul, if you don’t get on there and talk about this–
RAOUL PAL: It wasn’t Shannon this time. It was Laura who was policing me. [INAUDIBLE] the guests until today. And I’ve already done it. And Laura called me this morning and got it taken out of a video. So anyway, so I promised Laura.
Firstly, the Festival of Learning, anybody watching this, everything about financial markets, whether you’re Stan Druckenmiller, George Soros, or you’re a student, or you’re new to markets generally, we all learn. There’s no final result where you get cert and you’re now a master.
So learning is everything. And you can either learn from a textbook or you can learn from the best of the best who’ve done it, learned it, learned the hard lessons. The Festival of Learning is all about that, everything.
How great investors get it right, how they get it wrong, how they think about things, how they size their positions, all of the things it takes to be a good investor, including the psychology of investment.
So we put together this unbelievable three day event with literally all the rock stars of Real Vision and amazing stories like Howard Marks talking to his son. His son actually converted him into an exponential age person. And Howard was this great value investor, a business cycle value investor. Now he’s gone, actually, I’ve changed my mind.
And I know that from many, many of the big hedge funds that I know, people who’ve been leaders of the industry for 30 years have gone, no, tech is the answer. This is where the returns are coming from and crypto is part of it.
So that whole thing is going to be great. But the big announcement is– anybody who’s been following Real Vision for the last six, seven years has heard me talk about behavioral economics ad infinitum. And we’ve never had a behavioral economist on Real Vision.
So behavioral economics changes the whole study of economics. Because economics is currently about models. Well, behavioral economics is basically sociology meets economics and big data.
So you can analyze how people are likely to react, and extrapolate that forward, and create incentive systems, behavioral incentive systems. This understanding of behavioral economics, A, won a couple of Nobel prizes already, and it changed the whole face of the global business model.
So Google, Facebook, Amazon, Twitter, everything, Shopify, everything is based around behavioral economics. That’s why you got those little badges. That’s why you’ve got a like button. That’s why you’ve got a comment section. All behavioral stuff to keep you engaged, whether it’s to serve you ads or make sure you stay on the platform.
So why is that important? Well, it’s also happening at government level. So governments are using behavioral economics to create incentive structures to get people to behave in certain ways.
China’s used it at mass. It’s used a weird– because they’ve got negative reinforcement models when, generally, the positive reinforcement behavioral model works better. So that’s getting a like button, gives you the dopamine.
So governments are starting to do this. And we’ve already heard Benoit Coeure from the ECB– now the BIS talking about well, can we use smart contracts CBDCs, Central Bank Digital Cryptocurrencies, to create behavioral incentives?
Can we use behavioral economics on huge scale to create better fiscal and monetary policy? My guess is, of course, you can. Some people won’t like it, because it means you can manipulate population. Because propaganda is basically behavioral economics, as is advertising, which are basically two sides of the same coin.
So this is going to become very important because it’s going to be how we run economies. It’s how we run business models. And the person that we’ve got to talk to us is the guy who sat down with all of Silicon Valley back in 2010 or ’12, I think it was, and taught them the secrets of this and said, if you apply this to social media, you can basically control outcomes.
And out of this became the nefarious uses of stuff like Facebook, but also the positive uses and the addictive behavior of platforms. One guy taught them all this. Amazon is actually a set of behavior incentive systems.
And Bitcoin is probably the best behavioral incentive system of all, because you get rewarded on the network with money. And this one guy is a guy called Daniel Kahneman, who wrote–
[INTERPOSING VOICES]ED HARRISON: Nobel Prize winner.
RAOUL PAL: Nobel Prize. And basically the God of behavioral economics. And to get him on to talk about behavioral economics, incentive systems, biases, and all of the things that he has done a lifetime of research on is going to be fascinating. But what’s even more fascinating is we’ve got the smartest guy in the room to interview him, which is Josh Wolf.
ED HARRISON: I thought you were going to say it was you. You were interviewing him [INAUDIBLE].
RAOUL PAL: No, I’m giddy. I didn’t know how to talk to Daniel Kahneman, but Josh does. So Josh is going to interview Daniel Kahneman. And then in turn, he’s going to interview Neil Ferguson.
ED HARRISON: Nice.
RAOUL PAL: So we’re going to get this incredible triumvirate of these three people talking And they’re all joining a panel. So Neil, Daniel, and Josh Wolf are on a panel together in a three way conversation. So that’s epic.
So I’ve waited for this day forever. I’ve been begging Shannon and Laura to get Daniel Kahneman, because I want to hear him talk. So anybody who wants to join this thing, just so everybody knows– if I don’t do this, Laura will kill me. So Laura, this is for you.
If you’re a Real Vision Pro or Plus member, you’re free. So just make sure you click on the registration, register for the event. Anybody else, if you are an essential member or anybody in the public, you can buy a ticket for $499. Or you can upgrade your essential membership for $499 and get the whole ticket.
So basically, you are buying the whole thing. It’s basically the ticket and you get Real Vision Plus membership for free. So I’d do that for you. It’s a pretty smart way of doing it. Ticket prices go up on June 16th. They go up to about $599.
So I’d get in quick. Thousands of people are joining. There’ll be Slack channels open, everybody chatting with each other, lots of ability for Q&A. And you’re going to learn tons of stuff.
ED HARRISON: What day did you say this was happening?
RAOUL PAL: I don’t know. Laura’s going to kill me.
ED HARRISON: Because I know that. I did know, by the way, that it was Daniel Kahneman, that he was involved. I did not know about Josh Wolf and Neil Ferguson.
RAOUL PAL: Yeah, and also, so anybody who wants to look at what we’re doing here with the Festival of Learning, it’s really unique. It’s really Real VIsion. It’s absolutely incredible. Go to realvision.com/festial.
The dates of the festival of June 23rd and 25th. Thanks, Nick, you’ve just saved me from Laura killing me. 23rd to 25th, realvision.com/festival. And look, we did one last year. It was a runaway smash hit success where literally thousands of people just thanked us and said, my god, that was so helpful.
ED HARRISON: So I don’t want to be a downer, but when you say this, you were saying, some people won’t like this. I want to talk about the people who don’t like this. Because this whole concept of manipulating stuff immediately makes me think about cryptocurrency, and Bitcoin, and getting out of the Fiat system.
As soon as you started talking about incentives and central bank digital currency, I was thinking about this guy Ken Rogoff who’s talking about using negative interest rates with central bank digital currency. And so immediately I thought about Bitcoin.
So the reason is partially because you know we have a ton of questions that are loading up here. And I know that you talked to Chris Dark. I listened to some of the stuff that you were talking to on Twitter.
And you answered this question. But I think you should answer it here about do we really care about El Salvador? Here’s the first– I think it was actually the first question, Mature Saddam Hussein. He said, Ed Harrison and Raoul, what’s your thoughts on the recent correction in Bitcoin? That’s number one. That’s a separate issue. But the issue I’m asking you about Raoul is El Salvador making Bitcoin a legal tender.
RAOUL PAL: So that the Bitcoin correction question, I’ve said all the way through, you’re going to expect a 50% correction in the middle of this. We’ve had a 50%. Could it go to 60%? Is it finished here? Who knows. But it’s going to take a while to digest. So it’s not going to rally and go in a V shape.
But in a few months, my guess– and I have no idea– my guess and all the work I’ve ever done on this is that we should be seeing higher prices for the rest of the year. So around the space, buy the dip if you can. If you’re able to, again, don’t use leverage. Be cautious. Understand what risk you’re taking. But I think it’s a great opportunity. So that’s the general rule of thumb for that.
El Salvador, the honest answer is, I don’t know. I know everyone’s got a hot take, oh my god. The point being is, they’re allowing it not as their main currency, but as another one.
So you can use it. And they’ve said, all businesses, et cetera, have to accept it. The issue is here is El Salvador is an interesting case, because their currency is actually– their economy’s dollarized.
ED HARRISON: Right, exactly.
RAOUL PAL: So they’re not having currency volatility. They’re not Argentina. So they’re not looking for an escape from currency volatility, which people are confusing it with. So why are they doing it? Because their currency is not being devalued. So they’re not living with an economic shock.
A lot of it is remittances of which the strike network is great for remittance payments. So a lot of it’s for that and also gives them access to a saving product that has historically done very well. It’s a 213% return a year over the last 12 years.
But the flipside is it’s incredibly volatile. So if you’re a poor farmer and you’ve suddenly made what looks like $1,000, because you put your savings in Bitcoin, and it’s gone up 300%, and then your savings fall by 70% in the crypto winter, that’s going to scare a lot of people.
And if they’re not used to currency volatility, because they’ve got a currency board now, I’m not sure how good that is. But I think it’s interesting. I think people will figure out how to use it, what it’s use case is.
The point being is everyone jumps to conclusion. I’m not going to jump to a conclusion. I think at the margin, it’s good for Bitcoin. Clearly, it’s driving the narrative. Clearly, a bunch of other countries are looking at it. I can confirm conversations on that front as well. Everybody’s looking at this.
People are trying to figure out how it works for them. And that’s great. Is this the panacea, is this the great nation moving into Bitcoin? No, but I’ll tell you what was genius out of it is everybody’s now started using volcanoes.
Bitcoin is a volcano. Because when it came to you should mine this for your reserves, now it gets interesting. Should an economy like El Salvador have Bitcoin in their reserves? Without question, they should. But how do they get it without spending other money from their reserves? And they probably don’t have enough reserves.
And the nice part is they figured out they can mine it, because they got volcanoes. And those volcanoes have massive geothermal springs. So basically, free green electricity.
And so now El Salvador, and pretty much anybody else with a volcano with that kind of nice set up, can mine Bitcoin at a country level, generate a asset that they can put in there was a balance sheet that will grow over time, and protect them from the general devaluation of the US dollar in Fiat money terms, the debasement effect. So at that level, brilliant. At remittance level, brilliance. Everything else, unproven.
ED HARRISON: The interesting bit and what you were saying is it goes back to the global macro economy and also a political side of things. Because there is a sort of, I would call it, an anti-dollar view to this.
Here’s a country that was dollarized. It can dedollarize, if you will, by going to Bitcoin. And this is a test case in that sense. Do you think that this is part of a nexus to prevent the dollar from continuing its hegemony?
RAOUL PAL: If you dollarize to 70– if you dedollarized and adopted a 70 volt asset, you’re going to utterly destroy your economy. Because nobody has the ability to forecast or hedge currency in that kind of market. And it’s very expensive to do so.
So we need to understand moneyness, really, in this equation. What works as money? What works as store of value? What works as a reserve asset? And don’t confuse the whole lot. Because you are utterly going to destroy every industry in El Salvador if you can completely convert to a 70 volt currency.
And the moment the currency goes through the roof, their costs change, collapse their cost change. Imports go up, imports go down by such huge swings, that would literally hold out everybody.
ED HARRISON: Yeah, that makes a lot of sense. So talk to me a little bit about Ether and Bitcoin. Because I know that you are legging into Ethereum from Bitcoin. But ever since this El Salvador announcement, there’s been a relative change.
When I look at the assets, I look at all of the assets on a week basis, many of them are down. Bitcoin has seen a bid. Do you think that’s just a spike on the news and then that’s going to fade? Or is there something going on there?
RAOUL PAL: No, I think people allocated more to Ethereum, because it’s been going up. Both spaces were missing a positive news story. Bitcoin gets the news story. People allocate, reallocate money from Ethereum into Bitcoin, pretty normal stuff.
And the Eth Bitcoin cross went quite far. It’s got a significant resistance at about 0.08. I think once it breaks that. it goes much, much higher. But I think a correction where Bitcoin outperforms for a few months, two months, three months, I think would be healthy and normal.
I think then we start coming in to the new Eth 1559 token. And the changes that– that’s probably a pretty good story for Eth. So I think Eth tends to outperform. We had Kirill Sokolov interviewed Joey Krug on the platform. Great interview as ever.
What’s amazing is Kirill is– Kirill’s been around a long time. He’s not a spring chicken. And many people consider him from traditional financial markets. He’s been all over this crypto thing for a long time. Him and I are good friends. And I’ve always been amazed by his thought leadership in this space.
So he interviews Joey Krug who’s the opposite end of the age group and is equal outperforming success. And Joey was actually talking– his view as well as probably that Ethereum outperforms as we start moving into this early next year into the proof of stake mechanism.
It’ll probably be a buy the rumor, sell the fact. You get there and then everybody’s– it’s all in the price. So I think it’s Bitcoin first, then Eth. And when Eth goes, all of the tokens go up as well. So we’re going to see some crazy times ahead. I still remain extremely positive.
ED HARRISON: Now I’m looking at the time, because you told me you have a hard stop at five 5 o’clock. And you told me that I took you a full hour the last time that we spoke. It was only 65 minutes.
[INTERPOSING VOICES]ED HARRISON: So I’m going to go through lots of questions now have you answer some of these questions, because I think there’s some good questions here. There’s one on the Indian stock market. I don’t know how much you follow it.
But Alex M. was asking, I’ve been waiting patiently for a pullback in Indian stocks, he says. When would be the right time to buy INDA, that’s an ETF– and thanks for the recommendation regarding KRBN. Keep up the good work. It is greatly appreciated.
RAOUL PAL: I have found struggles to buy India for exactly this reason. It never gets cheap. It never corrects enough and never stays down. So I don’t know. I’m still focused on crypto so I’ve not put anything on India.
I think the only way to do it is average in. I just don’t know how to do it. Because I’ve struggled with this over the last 10 years. I’ve been invested in India on and off. It just goes up. And every time it corrects, it corrects really sharp.
You think, oh, great. It’ll stay down for a while. It doesn’t. It just goes back up again. So I guess, that’s what happens when you financializing 1.3 billion people and they’re putting money into their pension plans. Stock market doesn’t tend to stay down for very long.
So the answer is that I don’t know how to do it. So in that case, I just tend to average in. But I’m terrified that I’m going to look like the idea of buying the top. I just average it over, let’s say, over three months. Just to a bit every week. See where you get to.
ED HARRISON: Now back to the real economy in the US, this whole mortgage or rather treasury down. I’m relating to what Thomas says to that. He’s asking this. He says, hello, Raoul.
RAOUL PAL: Hello, Thomas.
ED HARRISON: Yeah, hello. With the eviction foreclosure ban set to end in less than three weeks, what is your take on the housing market if the 30 year continues to catch a bid? Could that even put more fuel to this red hot market?
RAOUL PAL: So look, I think all this forbearance stuff and all of this– these are some of the mechanisms why growth is going to slow down. I think there is– the market is not going to slowdown in housing.
Because as I’ve explained before, if you divide the housing market or house prices by the Fed’s balance sheet, which is a measure of debasement of currency, it’s not about the mechanism of how money moves around, it’s just about how do you think about debasement, it actually just means the house price has gone sideways.
So what you’re seeing is the excess money printing is low in the purchasing power of the dollar versus hard assets. That’s what you’re seeing. It’s now being exacerbated by BlackRock and the other– Blackstone and everybody else buying massive amounts of property.
Because as property goes up in value and wages haven’t gone up– part of the problem I’ve been talking about for a long time– wages haven’t gone up enough. It means you’re going to turn the US into a renter’s economy.
And you lived in Germany. It’s pretty normal in Germany. It’s pretty normal in France. Different countries have different ways of doing things, as long as you channel some money into some savings that you have an asset at the end.
So the Germans have a higher savings rate, but they don’t own their houses. So they’re just different ways of approaching the same end goal. But America looks like it’s going to become a nation of renters if this continues.
Because the issue with wages driven by debt, demographics, globalization, and technology is creating all of these– is creating a pressure on wages overall. So the housing market is not going to slow down. There’s nothing that’s going to slow it down.
People are looking backwards to 2008, which was a very different levered market. This is not a levered market so much anymore, but an institutional market. And it’s not good, but it is what it is.
ED HARRISON: Very interesting. Now I have a bone to pick with you a little bit about this debasement thing. Because I’m looking at it slightly differently. And by the way, this is somewhat informed by a conversation I had with Warren Moser, which is going to be on the platform
[INTERPOSING VOICES]ED HARRISON: That was great. I thought it was very thought-provoking, to be honest. He comes at it from such a different perspective that really– in real time to get your head around certain things, you just need to be focused on, OK, what did you just say? Let me see if I can digest that before I ask you the next question.
The one thing that I thought was interesting– and he didn’t say this in the interview, but it was before. He talks about the right hand pocket and the left hand pocket in terms of M2 as an example. What he’s basically saying is that, look, all Fiat currency money is fungible as far as the government is concerned.
And when M2 is rising at a ridiculous rate because the Fed is printing money, adding to its balance sheet, really all it’s doing is it’s swapping one asset for another. And so ultimately, the real economy impact from his perspective is one that is deflationary.
Because they’re sucking interest income out of the real economy. They’re taking interest income out of the private sector and keeping it at the Fed when it could be in the other economy.
RAOUL PAL: So this is a good question. Is QE deflationary or inflationary? I also happen to believe it’s probably at the margin deflationary. Because as you drive down interest rates as well, it means that anybody who lives off interest has less interest.
So you have a recycling of interest. And you can see that in a number of different ways. But the issue I have generally with the MMT construct is that I think there was– I’ve always said there’s an escape valve. And the escape valve for me was the value of the currency.
ED HARRISON: I agree.
RAOUL PAL: And this is what it’s showing. And it wasn’t. We all got it wrong. I certainly got it wrong. We thought dollar– either DXY Dollar Index or dollar against the euro dollar down would be that. But then you get to a world of how can you have any currency going down? Because they’re all debasing their currencies.
And then you understand that’s why asset prices are rising. Because the value of the currency is going down. So the MMT argument, which is isn’t that unusual for the economy? Maybe it’s slightly disinflationary. Absolutely fine.
But what it is doing is lowering the purchasing power of the Fiat currencies against restricted supply assets, which is why art goes up, antique cars go up, gold goes up, diamonds go up, Bitcoin goes up, and stuff like that. So it’s that. And equities go up and real estate goes up.
ED HARRISON: And let me give you a mechanism here. I’ll call it the displacement mechanism. Let’s say that I’m buying– I’m in an asset class and I’m getting 4% or 5%. And the Fed steps on my asset class and now I’m getting 2%. What am I going to do?
Am I going to sit there with 2%? Or am I going to chase yield, chase duration, and chase risk? I’m obviously going to chase yield, duration, and risk. And I’m going to go into other asset class. And then I’m going to drive up the price of those assets.
RAOUL PAL: And when you’re chasing risk and you look behind you and the Fed says, don’t worry, I’ve got your back, if anything goes wrong, I’ll print more money, you are now highly incentivized to take risk.
Because right now, we’ve got weird setup that if anything happens to the stock market, because of its connections with the economy, the Fed will step in. If the economy weakens, which would normally weaken the stock market, the Fed will step in.
So we’ve created this ridiculous call effect for the entire market. There’s no structural way the market can go down and stay down. It could be the sideways trend and fall 15% over three years, that kind of stuff. Or it can have a sharp vast shock, but it will not last.
Because the Fed just jam money back into the market. You debase the currency more. The denominator effect kicks in. And assets go up. It’s a real change of mentality to realize that. Because everybody was looking for the doom. But the doom is actually now the upside.
We’re now in an exponential age economy with this weird skewed risk reward to the upside. And I know some people don’t like it. They get angry about it. I get it. It is what it is. And we have to invest accordingly.
Does it help people did it screw people over? Yes. Does it hurt the 99%? Yes. So then you have to do something about it, if you can do anything about it. And that’s one of the passions I have for crypto.
Because you can buy a small fraction of the Bitcoin equivalent to the same bet that I’ve got in my network that they can take. We’re on a level playing field then. We’re both protecting ourselves and trying to create wealth at the same pace. That’s great. Now Ed.
ED HARRISON: So since we have to protect ourselves, I have one more question. I’m going to protect myself by asking my question. And that’s on NFT.
RAOUL PAL: You’ve 30 seconds, go.
ED HARRISON: I know we’re going to have NFT Week, actually, here. So as soon as you mention that I can buy a fraction, I immediately think of tokenization and the fact that tokenization allows me as an individual to buy a share in a larger asset, which I would normally not be able to afford. Talk to me about NFTs and whether or not that’s a bubble, or an opportunity, or both?
RAOUL PAL: Do you remember we talked about this hard stop at four o’clock, so I’ve got [INAUDIBLE], and it’s now 4 o’clock. I have to go. The NFTs are a fantastic way to own a proportional share of something that is tradable.
So you and I could own a share of a Picasso. And you could put in 10 grand and I can put in 20 grand. And I can sell it to somebody else or a share of it. And that’s amazing. It empowers people that not only the rich get richer. That to me, is the important thing.
NFTs on random pieces of art are a bubble. But most of that bubble pops anyway. NFTs are here to stay. And they’ll be used for tons of different things. And it’s the use cases that come out of after selling art, like real estate and other things, that are going to get super interesting. And then, my friend, I’m going to have to go for the weekend, because I’ve got a call.
ED HARRISON: Excellent. Thank you very much, Raoul Pal. It is always a pleasure.
RAOUL PAL: Yeah, we could have talked for hours as ever, Ed. We should do that. We should do a three hour daily briefing once just for the hell of it. Everybody, have a fantastic weekend. Take care.
ED HARRISON: You too. Bye bye.
