Drinks with Raoul Pal - Round 2

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1:35hey everyone welcome to the i don't know what the fuck i'm doing summer edition um as you know i am put brian caputo and peter cooper who you can't see just kind of leave me on my own there's no maggie there's no flunkies there's nothing it's just me trying to figure out what the hell to do and how the hell to entertain you guys. So what that usually requires is a drink. It's hot as balls here in Cayman right now. So I'm having a tall, cool Campari. As opposed to just with soda, I've got orange lacroix, which is fantastic. Gives that bitterness that you have to have with it. Now, obviously, I know I'm speaking to a lot of Americans who don't understand civilization, but you cannot have a drink without a snack.

2:16So today I have almonds from Valencia again, this time with the salt. It's sea salt, the Maldon sea salt. Salt matters. Can't just put your usual bloody iodized salt. It's shit. Civilization counts around here. So cheers before we start. It's a delicious campari. It was actually reminding me dinner last night. I'm out with some friends. And this is, you know, that's an aperitivo, right? That's what you have before dinner. It gets your appetite working. You might have a cocktail, some people like a martini or a whiskey sour or whatever it is. But then this is, again, where civilization falls apart.

2:58When you go for dinner, you stop drinking cocktails. That is for tramps. What you do over dinner is you drink a glass of wine. You drink wine, and then you have it by gestif after dinner. You cannot simply go through dinner like a friend of mine did last night drinking, I can't remember. It wasn't a whiskey sour. It was a Manhattan. I'm like, you're a philistine. You cannot do that with food. You can have a snack with it. It has to be before dinner anyway. So we need to teach you guys civilization here on Real Vision because it's an important part of all about education in life. Okay, how am I going to try and add any value at all to you today?

3:35Well, I'm going to answer your questions as ever, and they can be about anything. I can give you travel advice, food, drink, wine, markets, anything. It may be completely terrible advice, so bear that in mind. My views on markets and where we are, I mean, really is a summer lull right now. Everybody's on bloody holiday. Everybody on Twitter is still in. All the Americans are in Greece and Italy this year. All the Europeans are as ever in Spain. And the rest of the DGENs are in Ibiza. And it's not until I think European kids get back in September. And obviously, we're waiting for the Labor Day holiday.

4:15So markets are just sloppy. There's nothing really going on. There's no new money around. Everybody's in the Hamptons. All of that kind of stuff is going on. So you have to be patient in summer markets. And usually, once you start getting through August, September, things start kicking off. The things that I'm looking to kick off are as rates have been decoupling from the market. So I actually got stopped out of my bond trade. Finally, I got out of that bloody pain. It was a terrible position because bonds basically decouple from the business cycle this time around. It's nothing to do with inflation.

4:46It's actually to do with liquidity because of how the Treasury are issuing so many new bonds to pay the interest on the bonds because rates are so high. They're doing it in the bills market. That's draining the reverse repo, but it's still flowing through into the rest of the bond market, and yields have been rising. That whole process has started pushing the banks lower again. So I'm keeping my eye on that. My view has been, and it's not a precondition, but my view has been that we're likely to see the banks starting to fall. I'm looking at, for example, I put on Twitter, the long-term chart of Citibank looks like the cliff of death, looked like all the European banks did.

5:30I've been looking at Bank of America, doesn't look great. And then the regional banking index, the KRE. So that would be a tipping point that would start changing the equation. What else can uncouple markets? Well, the bond yield issue in itself can uncouple markets. But what it's telling me is we're getting closer to more cowbell, that point where the Fed have to go, oh, and that happened last time, if you remember, in December 2018, when suddenly the repo market broke and the Fed was like, we're stopping QT and we're not going to hike anymore. And then they started cutting six, nine months later.

6:10We're in that phase, I think. Let's see what Jackson Hole has. Powell still thinks he's Volcker and it's a ridiculously different environment. But that's what they want to believe right now. So my guess is that the payback for this is I think they're going to undershoot inflation. So I'm strongly of the opinion inflation is well below 2%, maybe even as low as zero by the end of the year. And that's been my call for a while now. And I think core inflation goes to zero by summer to this time next year. So I think we've got all of the inflation domino to play out from the GMI business cycle dominoes.

6:49We have, I think, a rise of unemployment will come over this period. I don't think it's going to be huge because there's some complications in the labor market as people are leaving the labor market, et cetera. And I think rents are coming down, all of that stuff. So what we're likely to see is the Fed going, oh, my God, sorry, we've undershot, which gives them the cover to cut rates, which they need to do because they cannot pay the interest and the debt at these levels ongoing. They've got about 13 trillion of debt to roll over plus new issuance. They need to get rates lower, and they need to then monetize the interest payments.

7:29That's part of the everything code thesis, those of you who have been following along at home. So the everything code thesis suggests that Q4 is going to be when this start of action starts happening. And maybe QT stops, maybe we get a rate cut, maybe we don't, but we start flagging it. And then we start to see, I think, another leg of the economic slowdown. And I think we're actually bouncing out the forward-looking indicators of ISM. All of this stuff I've been talking about in Pro Macro on Real Vision, that's where you get all the juicy stuff. So you guys watching this, most of you are Pro Macro subscribers, you don't get all of the research that I put together.

8:10But we do a lot of stuff. And that's suggesting that we are seeing a sharp economic rebound. That was forecasted by liquidity and the GMI Financial Conditions Index. It is starting to slow down a bit because of these yields and the dollar stabilizing. And so that suggests that Q1 next year, so we might get a pickup in growth at the end of this year. Now, that won't come into GDP. GDP is lagged. Everything kind of lags in this. So GDP should be weaker in Q4. I know that the Cleveland flight has better up this ridiculous 5.9 % number. That'll go away. But we should see GDP low. But the forward-looking indicators, stuff like ISM still have to pick up.

8:52And then we might get another slowdown within Q1. But I think at that point, the market is more focused on the cowbell, more stimulus, et cetera. And then we're into the full election year. And the full election year is cowbell central. Because then you've got stimulus to try and bribe the voters, rate cuts to bribe the voters, the use of the balance sheet to try and not get the Treasury to end up with ridiculous debts on there, trying to issue ridiculous amounts of bonds and the market not being able to do it and crowding out the private sector. Sorry, I'm speaking very fast because there's a lot in the everything code, and I can't really get it across in a very short day.

9:30Anyway, all to play for, Q4, when it gets interesting, everyone needs to get back from holiday, and then we can see from there. So, wet the whistle. Let's get into some questions. I'm going to randomly pick people. I'm only going to ask questions. I know this is on YouTube and LinkedIn and probably Twitter. I'm only going to ask questions on the Real Vision platform. So if you are members, pop across to that. Real Vision Daily Briefing is free. You can't actually sign up for Real Vision right now because we've closed the doors on everybody while we're just rolling out the new platform. It's an extraordinary new platform that we're building, which should change the game for everybody.

10:16The first iteration comes out to members in a couple of weeks' time. And it's based around this magic formula that knowledge times tools times network equals success. So knowledge is the information that you receive. You turn information into knowledge. Then you use the tools available. whether it's pricing, charting, portfolio tools, that starts getting you towards wisdom, which is when you've got knowledge that you can apply in ways that you understand. And then the final part of the equation is network, which is a multiplier. We've built this incredible network tool so people can connect with each other around the world.

10:55We've got these incredible sub-communities within Real Vision, people sharing ideas, getting together in real life and digitally, discussing, debating. I mean, it's incredible. So all of that is to come. So we close the doors because we need to deal with onboarding our existing members and get them across the line in cohorts because there's a lot of people to get through on this. We're going to have bugs and stuff that everybody needs that we haven't got right and all of this. And you'll be shouting on Twitter to say it's all broken and we need to go through that dance. And eventually, we'll get there and you'll realize that this is the start of what we're building.

11:28and we've got iteration after iteration improvement, new features coming on an endless two-week sprint cycle. So exciting stuff. Right, so questions. Actually, Zane Tan, love all the wine and snacks knowledge from Raoul. Civilization, I'm telling you, is more important. This is why we go to work. We learn to be civilized human beings and have a quality of life. So thank you, Zane. I appreciate that. I'm just trying to help you all because I know most of you are kind of in North America and you don't really have a clue. And the Aussies, I mean, fucking hopeless. So we need to get you up the learning curve.

12:06Paul English, what is this? The Food Vision Network. Well, you know, sometimes it is, sometimes it isn't. Hey, everyone. We're going to take a quick pause and hear a word from our partners. We'll be right back.

12:20David Kelly, afternoon, Raoul. How do you see real yields playing out? Well, real yields are a real issue. They're too damn high. I mean, they're super high right now. And that is going to continue to erode inflation and economic growth going forward. So my view is that countries high in debt cannot run long-term positive real yields and that the trend rate of real yield is probably negative 1%. So I think in the next cycle, we go back to trend rates of real yields. And I think that is the only way you can get around an aging population with massive debts. And we see that all over the world. So I think what we're seeing now is an aberration and not the trend.

13:00I understand that most people think the opposite. But hey, it takes two to tango. Somebody, Ashish, you're talking about bloody Cheetos and Doritos again. None of that shit. We've warned you all. No Pringles today. Yeah, none of that good. um Raoul ever consider going back to revisit old episodes of the journeyman it'd be great to hear your thoughts on the interview with Felix Zulauf from I you know it would be lovely if you can make three of me because I just don't have time um so I just bring Felix back I don't really get a chance uh Grant Williams and I used to do this on the podcast where we go and review some old content.

13:42It is a lovely idea, but sadly, I just don't have the time to be able to do it. It'd be fine if I did one interview a week and I didn't have a day job of running all of Real Vision, trying to build a new platform, and then an asset management company and macro research shop and all of the other things that I do. I would love to. I'm sorry, I can't add the value.

14:11Okay, sorry. You'll also get used to these where I have the gormless face thread where I'm going, I can't think without my tongue out. So you get that as I'm trying to read something at the same time. I don't know why I do it. My wife says it's endearing. I think she's lying. Raoul John Kitchener, I'd love to hear your thoughts on Citi. I don't know, but I've used these very long-term charts of banks since the European crisis in 2012. And I've called it the cliff of death. And one by one, many of these banks have gone over the cliff of death and they need to be bailed out. What it was, the Italian banks, the Spanish banks, the German banks, the Swiss banks.

14:52And there still seems to be an ongoing rolling thing. It's like the broken banking system globally. And Citibank is one of those. It just looks like that. It never recovered. It just fell like a stone and then has been trading sideways ever since. And that cliff or that plateau feels like it just wants to jump off that. So I don't really know what, well, we know why. Rates are too high. The yield curve's inverted. The banking system's not fully functioning, et cetera, et cetera. So there's a lot of reasons why not to like banks. But cyclically, at this point, they should start to improve once the yield curve improves.

15:29Banks aren't always negative. And as soon as we start to get the yield curve steepening and rates coming, then banks tend to do okay. So that's usually fine. Okay, more questions, more questions. Barry Cormier. So we're back to the food guide. I'm sorry for those of you who want the macro alpha. Sometimes it's the food alpha. What's your favorite restaurant in Grand Cayman? My favorite restaurant in Grand Cayman is Tilly's at Palm Heights, which is an incredible kind of ultra boutique hotel we've got here. A friend of mine owns it. And the restaurant is fabulous. It is kind of like, and only some people will understand this, but it's like, what would a hotel or restaurant be if Princess Margaret were in the Caribbean in the 1970s?

16:22It's got this kind of vintage, luxury, cool. It's just everything about it is amazing. Even the menu has a bunch of this like baked Alaska and like flambéed steak Diane. But then there's lots of different types of food as well. It's just a really bloody good place. So I'm there a lot. In fact, I was there on Tuesday night. Last night I went to Aria, which is like a Mediterranean, Middle Eastern Spanish. So they do incredible squid ink paella, arroz negro. They do a lovely meze platter with great mutabel, hummus, and other bits and pieces. So I did that last night with some boys, which was fun.

17:06Trillinex macro. Raoul, do you think the bear steepening will last? And will we see 5 % on 10-year yields by the winter?

17:17Listen, there's a risk. there's a risk that we do see the final squeeze to 5%, which is the point where the Fed really are forced to do something. So look, yeah, I definitely think it's a risk. It's one of the reasons I closed my bond trade out, that painful, terrible, wrong bond trade that I've had for a while. I finally took off the pain. It's like taking off a Band-Aid. It's so nice. Oh, my God. Finally, the pain can go away. Because I've done really, really, really, really well in equities, done really well in crypto this year, nailed those and completely fucked up bonds. So when you can get it off your mind, so I don't care about it anymore, it's much better.

17:53But yes, I think the 5 % is possible. Maybe I've had to sacrifice my position to the market gods, which I'm very used to doing, which is when you close out your stop loss at the high, because you have to, because the market gods demand their sacrifice, and I shall be that sacrifice. So maybe it's that. We don't know yet. We'll find out. The steepening, well, if it continues to 5%, the steepening will continue, and then we'll get the bull steepening after that. So I think it's all part of the process. So yeah, I think that's right.

18:28Okay, now the gormless face, as I'm reading again, just remember that.

18:36Question about chain link, don't really know. What are your top three trades? John Floyd. John, my trades, I'm not a trader, really. I think you've probably figured that out by now. My time horizons are very long. So for me, it is number one, crypto over my time horizon. Let's just use this business cycle, not even going further out. Let's say over the next, into end of 2025, I think crypto is the best performing asset in the world. I think technology stocks are number two. And number three, tricky. Tricky could be something commodity-related, copper. Let's go with copper. So that's what I think.

19:17And no, I don't think commodity prices rising in a business cycle are significantly inflationary. I know everybody gets caught up on that. Stuart Hardy, do you think the Fed will be the first to cut? Or will the clear flakiness in the UK and EU economy allow the Bank of England ECU to go first? Will the fear of currency devaluation linked to inflation prevent this? That's my thoughtful drink.

19:53I don't know. The Fed are usually faster off the trigger, to be honest. The Bank of England might to do. I mean, their economy is a fucking shit show. But they've got very high inflation as well. So it's tricky. Even though inflation, really, most of this is mathematical, the UK has a problem because of Brexit. They created their own bed and then bed of nails, and now they're lying in it. Really? What happened to us? Really? Everybody told you, but you wouldn't listen. So I don't know who's going to go first, really. It's a good question. I don't think it really matters because bond markets are so correlated.

20:35So they all kind of price at the same time the trade and the next trade, the big trade, right? Even if rates go up to 5%, that's 10-year bonds. So let's say even the Fed get to another hike in, five and a half, five and three quarters. Okay, that's like 50 basis points from here. The downside is 1%. So the risk reward is so tilted towards getting the bond trade right. And you're all free to do it now. Now I've been stopped out. You can make all the money in the world because I've sacrificed for you at the altar of the market gods, just so you're aware. That was my kindness to you, okay?

21:19Zane Tan. Zane, second question. Well, no, first question was a compliment. which is why you get the second one. Compliment me, I'm more than happy to help. Hey, Raoul, in the everything code, you mentioned crypto and tech stocks are great instruments to generate great returns. For laypeople, how would you describe what crypto is and why they should explore as an investment? Crypto is just a technology. It is a distributed database, which is blockchain, of which you use a token to represent value on that chain. So unlike other networks, let's say a telco network, you can't own a share of the telco network while you can with a token, which gives you a share of the network itself.

22:06It kind of enhances Metcalfe's law. Blockchain solves some huge problems, which is how to have, I guess the Byzantine generals problem is at a larger level. But really, for me, it's a very simple thing is in an increasingly digital world, we need to transfer, record, store value. And value is increasingly becoming digital. And in the digital world, we can make anything to infinite abundance. And so everything digitally goes to zero in value. And blockchain allows you to create scarcity in a digital world. Also, the ability to have digital integration of contracts and value in a whole bunch of different ways allows payment systems, securitization, tokenization, speculation.

23:01I mean, it's so vast. So basically, extrapolate all that way, it's a technology you can participate in directly. AI, you have to buy NVIDIA. That's the only bloody thing you can do. bit of Microsoft, bit of stuff, but you're buying trillion-dollar companies. How much money are you going to make? 2x, 3x, maybe? Can Tesla get up? 5x, 6x, 8x? Yeah, sure. Crypto cycles, they can be much, much bigger because you're actually owning the network itself. It's like if you owned a share of the NVIDIA, all of the AI networks themselves and the monetization of that entire ecosystem. So that's why it's so powerful.

23:38So it tends to outperform the other technology stuff. So thank you for that question. I'm sure it was a terrible answer, but I tried. Hey, everyone. We're going to take another quick break and hear a word from our partners, and then we'll be right back.

23:56Dominic Santa Cruz, after a phenomenal NVIDIA earnings call, are you even more bullish on the stock? Should we expect much of a pullback beyond today's drawdown? Thank you. I am a bit of a moron. So I don't tend to do a lot of single stocky stuff. I've got SMH instead of NVIDIA. I have no idea. We've all been through bubble cycles. This will end up being a bubble cycle. I don't think we've even started yet. There'll be periods where it'll consolidate over time. Will this be much higher by 2025, by the end of this cycle? For sure. That's kind of how I think about it. So will other semiconductor companies, chip manufacturers, everybody else catch up?