Forward Guidance w/ Felix Jauvin: The Biggest Trade No One Sees Yet ft. Raoul Pal & Julien Bittel

27:06But now we've shifted into this more fiscal version of that, which is what you just mentioned about tilting issuance towards bills and, you know, treasury buybacks and these other different vectors and just running a super wide fiscal deficit as a percentage of GDP. And I'm curious how you guys think about that in terms of how that gets picked up in your frameworks of total liquidity, because do you just view it as like a one-to-one basis or do you view it as even more powerful? Because the more I think about it, right, is a QE is a swap basically from a bond for a central bank reserve. And it helps to basically float risk assets higher to keep people to be able to retire in that sort of thing.

27:45But now in this world where we just run these really hot fiscal deficits, and if we issue a bunch of bills, that's a very cash-like asset versus if we just issue a bunch of bonds, that's more of like a risk asset in a way. So if we move towards this world where we just keep running a recessionary deficit during the expansion, that just almost feels like a more powerful version of QEDB. I'm curious how you guys think about that, especially within and your broad frameworks?

28:14I think, I mean, as far as our composites are accounted for, they're not going to pick that up as of now, right? Because we're basically looking at G5, sort of M2, maybe G6, and then also with the net liquidity version, which is essentially, as Raul had said, you know fed net liquidity adjusted for the repo and the treasury general account for europe it's something like big notes in circulation the deposit facility the current account things like that so they're not going to be picked up there but i agree that it's that it will change over time and these composites will essentially i'm sure they'll pick up an m2 i don't i i'm not sure because as you say that's the warehouse it's the warehouse for government bonds as we've been talking about but i'm not sure it'll capture everything i was trying to think about that too because I've been trying to figure out where does the interest income from bills flow through the money supply, right?

29:10Like, does that get picked up in N2? Or is it that huge amount of just interest income ends up in money market funds and that sort of thing? And then when those boomers start to spend it, then it increases the money supply. How I always approach this stuff is not to mid-curve it. It's kind of like, you know what I mean? It's like, does it matter? Yeah. You know, we kind of know directionally that M2 plus the net liquidity things explains 90 % of all price action. Do is one more powerful versus the other. Well, financial plumbing, people can argue that all day. I don't think it kind of matters because what we're trying to say is if they do that, does number go up?

29:54Because we're investors, Mr. Economist. Well, and also, I think the purest form of liquidity, which, and you know, I mean, you've had other people on the podcast who have mentioned like the move index or the VIX or whatever, but it's really just the dollar. It's all captured in the dollar. And we can talk about in our central bank liquidity, we can talk about private liquidity sources. But in the reality, when the dollar drops, that's a massive easing of financial conditions. You know, EMs are able to service debt easier. There's less hedging going on in the real economy, which then means that there's more money which can be financialized.

30:33You know, it's the same thing as inflation break-evens come lower. If inflation break-evens come lower, there's no longer the need to take out inflation protection, which means that that money can be financialized. So one way or another, if it's not picked up in our total liquidity index, which Raoul seems to think part of it will be picked up in them too, which I agree with, but I'm not sure all of it, as you've had said, Felix. Either way, it'll be picked up in our financial conditions index. Yeah, I feel like that's really the crux of it, is that you see financial conditions loosening, even though we've seen quote unquote rate hikes and a pretty high funds rate.

31:04And I think that's what's tripped up a lot of people. But I think we're getting the crux of it, which is that there is still loosening. It's just it's a bit more nuanced now. Yeah, and that was what really helped us in Q4 2022 when we wrote our article, The Turn Is Near, because people were like, hang on a second, the Fed's still hiking. they're still doing QT. And yet you guys are talking about liquidity rising. What we were talking about at the time was the turn in our financial emissions index, which then leads Fed net liquidity. Because if you think about central banks, they're really just delayed reaction functions to changes in financial conditions, which is why they're always so delayed to start hiking.

31:37And which is also why, despite no inflation, which we can talk about a little bit later, even when early signs of inflation are coming back, the Fed's still cutting because they're just behind the curve, but by construction, because they're focused on lagging economic indicators and inflation data, which lags the business cycle by, in some cases, 16 months. What we have found is there's this nice phasing between financial conditions that lead everything and a hack for everybody who can't calculate financial conditions. We use a regression between the dollar, bond yields, and major industrial commodities.

32:18But actually, a piece of work that we just did recently that quite surprised us, gold is real-time financial conditions. Everyone's like, what drives gold? Suddenly, we're like, we've seen this chart. Julie and I were like, something, I think something. And gold actually leads everything because it's actually current financial conditions, which kind of makes sense, right? It's the most sensitive to financial conditions. Then you've got the move in liquidity and markets, and the ISN kind of comes behind that. So there's this nice way that you can look at things to give you an understanding. So we all know, in fact, everybody on Twitter now knows that GlobalM2 leads crypto for three fucking months.

33:04That chart will be the death of us, as we know. You guys have created a cult. and it will fall apart at some point as well and then we'll be the worst people in the world even though we try and tell people so we've got financial conditions then we've got m2 then we've got markets ism so there's a nice kind of understanding of where this goes which allows you to forecast stuff because again there's one dominant factor which is so easy i remember before having to figure out all the variables of what was driving brazilian rates and nobody cares It's like on, factor off. That's it. One game. I think what, I mean, I think the point is what we've really tried to do is just simplify this all down.

33:47And so what Raoul's saying is right, gold is the inverse of financial conditions, largely because financial conditions are a function of the dollar. So you have that. Then you've got Global M2, which is three months behind that. Then three months behind that, you've got things like Bitcoin, tech stocks, and the yield curve, right? So actually, it's also a function of the yield curve. then you go back another whatever it is. I mean, financial patients leave the ISM by nine months. And then let's just say the ISM is at T equals zero. What people don't understand is that there's this flow of what we call the business-like dominoes.

34:18So then at minus one month, you're talking about things like hours, so growth in overtime hours. At minus two months, it's like capital goods orders, durable goods orders. At three months versus the ISM, as we know, it's something like GDP, industrial production, four months cyclical job growth, five months unemployment, six months CPI. And then you get into the really, what I call the caboose of the business cycle train, which is things like wage growth and shelter inflation. And you've got the same, these kinds of domino sequences in inflation as well, like commodity inflation leads to goods inflation, which leads to services inflation.

34:53You know, it's just, once you understand that, you can simplify everything down to say, okay, well, these are the things I really should be focused on when it comes to attempting to forecast the economic cycle to our house. We kind of hubristically called it the everything code because it kind of explains everything right now. And it's not to say that this code of the markets was always the code. It just is what it is. And it's all quite, well, relatively predictable. You're always going to make mistakes. You're going to fuck it up, all those things. But generally speaking, it's a very different environment than most people used to that gold thing is is really interesting to me because you know when you just look at historically a lot of people valued gold just as like an inverse correlation to real rates and then in in 2022 it started to break off and it feels like people are trying to find a way to explain it but they're like oh is it just you know the the russia ukraine war thing and oh you know we we weaponized uh usfx reserve so now you know everybody's buying gold but if you just think about the fact that after 2022 we went into this era of basically suppressing real rates in a way and keeping them artificially low, of course, gold is, you can't suppress gold.

36:04So it's still going to continue on the trajectory that it's making sense in reflection of financial conditions. That's super interesting. Yeah. These things are Bayesian over time. So they do shift factors, but the dominant factor for gold right now is just current financial conditions. And as you said, in the past, there'll be different variations of what moved it. And so, yes, as it fell apart from real rates, that really got everybody's head scratching, what the hell is going on, what the hell's going on. Why it completely changed, I'm not sure. What was your explanation for why it changed, Felix?

36:38Well, I've heard folks like Luke Roman say, where they believe that because in the initial Russia invasion of Ukraine, they weaponized the USFX reserves that Russia had, because they had a bunch of US dollars in their central bank. And they basically said, we're taking those back, you can't use them. So then all these reserve managers at central banks that had a lot of US dollar reserves are like, oh, shit, I got to put a risk premium on my US dollars now. So maybe I should diversify more into gold. So the theory is that a bunch of central banks have been buying gold. And I think that's maybe part of it.

37:11But this also makes a lot of sense to me because of the fact that we've been suppressing real rates basically since then. Exactly. I mean, I found, And I mean, the geopolitical stories always make a lovely story, but normally it's by economic factors. Yeah. Yeah. And I mean, if we just come to, you've probably seen this chart that we've shared a couple of times in the dollar. I mean, a big part of why this year has played out the way it has is because it looks a lot like it did back in 2017, right? When the dollar went up a lot in Q4, then it came lower. And we're seeing that accelerated here this time around, which then, of course, given that the dollar rose in Q4 back in 2017, we get economic growth during the first half of 2017, which is kind of what we've seen this time around.

38:00We saw city economic surprises come lower. And this is a large part of why tech stocks and things like crypto corrected in Q1. But then the back half of that year, given the extent to which financial conditions eased or have back then, but also in Q1, set the stage for the SESI or the economic data to come in above consensus expectations. I mean, look at bond yields. See, people are growing. And this is why actually we can talk about the cycle just for a second. Bond yields are really interesting because people are like, well, rates are too high. They are too high. And the Fed knows this. Everyone knows this.

38:36And for the everything code to be the everything code, they need to come lower. But what we said all along was that as long as rates don't go a lot higher from here and kind of remain rage bound like they've done so far. Well, this year and also back in 2017, in fact, in 2017, they started at the end of the year at like, you know, two, two and a half percent or so. Right. Because the major offset back then was that the dollar weakened as much as it did for this chart. Right. So there's one. They were still doing, well, they were kind of doing the balance sheet runoff in 2017. Well, they were still hiking.

39:12In 2017, they were still hiking rates. Yeah. And then in the back half of that year, they did QT. All the liquidity in 2017 came from the ECB in China, right? But net financial predictions is because the dollar came lower. And then if you just look at these charts over the same time, I mean, Global M2 has exploded, right? So it's like, it just feels eerily similar. That's a bizarrely good fit. I mean, I've just taken the same time period for all these charts. And so a lot of what the Q1 weakness you saw, Felix, I'm sure you will have seen a lot of the big strategists coming out. Felix, to go back to the question you raised before is, look, here's something interesting because 2017 was a big cycle for assets, as we know.

39:54Yeah. Yeah. Does this speed of N2 make a difference or not? It's like the question within the plumbing is what actually moves the dial in terms of the ultimate debasement, because this is a super accelerated, easy on financial conditions going on, this driving M2 and driving the dollar. I don't know whether that's going to make it more powerful, different. I mean, it's hard to be more powerful than 2017. But that was early adoption phase in crypto. But tech, well, I don't know. I don't know. It just seems to be 2017 on steroids. I sort of feel like it is. Yeah, I don't think people want to admit this yet.

40:32but it does feel more powerful in so many ways because like the way I think about it is, okay, you look at households, you know, they're in their, their, their main liabilities are house they're in mortgage rates that they fixed for 30 years at two and a half percent or whatever. And then on the corporate side, they were also able to turn out a lot of their long-term debt. So they're good to go at those low rates for, I don't know, another five years easily. And then And at the same time, you have this highly dated economy where there's a lot of treasuries out there. Those treasuries, when you hike up rates, their income increases, their yield increases.

41:07And so you have this tension between the asset owners or they have a bunch of their net worth in bills and they're getting that interest income. And at the same time, their liabilities are fixed. So even if you jack up rates a bunch, it doesn't really matter to them as much. It's a pretty unique situation to the U.S. Like here in Canada, right? Mortgage is reset every five years, no matter what. So like we're going to hit that wall in the fall. But in the US, it doesn't matter unless you move. So that's sort of been my framework is that we're, because of the fact that there's just so much debt out there, it's creating this dynamic where it's just increasing a lot.

41:42And I feel like people are still hesitant to admit that. I mean, it's sort of the MMT argument, which, you know, there's a lot of issues with those thinking. But a lot of those guys have been pretty right in terms of just being bullish the last few years, I think. You know, Lynn Alden's statement of nothing stops this train becomes true every day, you know, because the US government paid lip service or at least tried to do something, at least pretend to look into doing something about debt growth. Even Elon, who can solve going to Mars, can't fucking solve this. So it's like game over. I mean, that is never going to get solved.

42:19So this cycle is going to continue and it has to continue. And the issue is right now is interest payments are at this level, and GDP growth is still at this level. So there's not enough GDP growth to pay the interest payments. So the interest payments keep compounding, which is the thing that everybody picked up like Elon did, which is why Scott Besson and everybody's screaming to get rates lower, because it's causing a problem. You can see it in ISM. We've had this weird bifurcation where GDP growth's relatively high, whether that was the hangover from the immigration, the government spending, other stuff.

42:55But ISM, which is the guide to the business cycle, has been the longest ever level at 50 or below. So it's telling you that there's a big core part of the US economy that's just not functioning because rates are too damn high, because there's a crowding out from these interest payments, right? This is the actual issue that the everything code goes through. That has to get sold, if not the economy can't go. Yeah. Well, the other thing as well to that is we, you know, like I had seen, you know, when we chatted before we got on, you know, one of the things we were talking about was, you know, does this remove the left tail recession risks off the table?

43:34And the really interesting thing is, I don't know if either of you remember this, Rob, we've talked about this before, but back in 2017, you know, when I was still managing money, yet Yellen came out and said, there'll never be another financial crisis. And I remember my team laughing about that at the time. And then COVID came around, and they turned it. I mean, you remember every single macro chart I had on payrolls, they all broke because the data just went berserk. And they turned the economy around on the thought, and they figured out that they could use so many liquidity. Jordy Visser, who said this to me from a different perspective, but he's like, I don't think there can be recessions again.

44:13And Julian and I took that back to Julian and said, Julian, there's something sticking in my head. And he had this yelling quote. And it was one Saturday when we were writing GMI. We just threw this around and we're like, most recessions are basically credit events. And normally, it means the collateral has fallen and is getting called upon. So the collateral doesn't cover the cost of your debt. That's generally what happens. But once you debase the currency, the collateral can't. and i learned that lesson in 2020 when it all started happening i was like what the fuck is going on where's the insolvency trade that i thought that was going to happen and then i realized we can't have a credit event we can't really have a recession because of what they're doing it doesn't mean i think also the the economy shifted too right like we're in a highly service based economy and like you know tech and everything where so much of the growth comes from is is not really cyclical anymore.

45:09It made sense when we were just a bunch of factories, and you had to lay people off, you had to buy less goods and all that. And you could see the flow of the cyclicality. But in this tech world, in this AI world, it's not really cyclical as much anymore. Although the ISM still works pretty well against GDP. So people have argued that for a long time, but I'm like, I look at the ISM manufacturing, it still works pretty well. So it's not decoupled per se. I just think that recessions are, the business cycle is driven by the credit cycle. And now it's just the liquidity cycle, because the credit side of the equation can't go bust.

45:46Because they can't allow it, the system's too indebted to allow the collateral to go down. Because everything's over. That's all the people who say they should just let it all burn. They're like, you have no fucking clue what it means when the world is 400 % of GDP in debt. What are you going to do, write every single asset, everybody's savings down by 90 % and say, okay, there you go, you got your reset, never going to happen. Well, and it can't happen because something that you and I talked about before, which is piggybacks on what you just said, is it would be literally generational pain. Because baby boomer balance sheets are not in great order, 401k balance that are down, whatever, they don't have a whole lot of savings.

46:24And then their kids are vastly in debt with student loans, real wages are still falling. So it's like if the baby boomer pillar fell, then the next generation wouldn't inherit any money. The trend rate of GDP would fall even more. But that brings us back to this point where even if that did happen, it would just mean more cowbell. They would have to do more, which is why Raul arrived at this conclusion that in any situation, China's about to blow up, whatever it is. The unemployment rate in the US is going to 6%. China invades Taiwan. Whatever it is, in a world, as Raoul said, where we're as much as so much debt and GDP, it just means more money printing.

47:06And that's a contentious point that I haven't really dared yell on Twitter much, that I don't think we can have recessions, or certainly ones that can last properly. And people don't want to admit that truth, because that ruins all of macro. It ruins all of old school macro. It ruins how economists think about the world. It kind of ruins everything. for how we understand but you you agree with that as well the a felix i i do i mean like you just i don't know i mean look at where the trend is going of like what are what are retirement vehicles nowadays it's equity indices they can't let these go because tax rates tax receipts go people's retirement accounts go like we don't have pensions anymore we have spy right and this is accelerating like there's there's that new addition to the big beautiful bill where people that are born in the US, now got$1 ,000 to go into indices.

48:00And so you just, yeah, I don't think - Also, this is an interesting thing, is they're putting it in the SPY, which doesn't give you any increase in purchasing power. So you're actually saving money in a vehicle. You're supposed to, an asset's supposed to be, you save an asset because you get more than compensated for holding that asset for a period of time. But you're not. Unless you're in the NASDAQ or crypto, So you just don't get that reward. So it's basically money in, money out. Yeah, it maintains your purchasing power, but certainly as hell doesn't get you wealthier. I will say the one exception to that idea of no recessions is if they try to balance the budget or any form of austerity.

48:39So that's why I started to get a little concerned in February, because that is the thesis breaker to me, is that if we go from a deficit of 7 % to try to get it to 3 % like they're talking about originally, that would be an issue, I think. but it's obvious that that can't happen. We've just seen this play out. Yeah, and I think this was the final litmus test of it simply can't happen because balancing a budget just blows up the entire world because the amount of liquidity you have to draw from the system is monstrous and that's the end of everybody. There's no exports to China. There's no exports to anybody.

49:17The dollar's gone through the roof. I mean, it's just a mess. Okay, I want to circle back on you guys' magic formula of GDP growth is debt growth plus productivity growth plus population growth. And so much of what we talked about, it's just this theme of papering over these versions of somewhat stagnation, especially in like lower incomes like we talked about with debt growth. And the bet it feels like is that we will either get a productivity boom or some version of a population boom. And I want to take the angle of the societal implications because, you know, the bet here is in a traditional macro world before AI, the assumption is you would get a bunch of immigration in and just increase your population.

49:56We just tried that. Yeah, exactly. We just tried that because we didn't have, yeah. Go rejected. Yeah. And it was, you know, I make the argument that it was flooding, flooding the immigration, like opening up the floodgates of immigration in 2021 was more effective at bringing inflation down than interest rate hikes. But now we're in the opposite situation where we see the societal implications of that, where GDP per capita stagnates and just social cohesion starts to fall apart a little bit if you just do that too much too quick. So the other bet here is AI. And obviously, that has a lot of interesting potential and productivity.

50:32So I'm curious how you both think, especially about the societal implications of going towards that shift of whether it's the AI bet or whether it's the traditional immigration bet. How do you both think about that? There's no way an aging population will accept large amounts of immigration. We've had so much of it. 2022 and 23 were the largest immigration rates for Canada, Australia, the US, the United Kingdom, and all of Europe in history as a percentage of population. Yeah, last year we had, I think it was last year, we had the largest annual increase in the US going back to since the records began in like 1850, which partially offset the everything code, right?

51:11Because there was less liquidity required, which offset that demographic pillar. So it was really, it's incredible. And the point being is, it was clearly agreed. Like the Everything Code has been agreed by all of the central banks and governments. They all clearly agreed, let's try immigration, because everyone knows the formula for GDP. They tried it, it backfired. So we don't have a choice. We're going into this world of technology, kind of Elon and other people have made it clear that this is the only way out. And the societal impacts on this are dwarf anything that we've ever gone through in history.

51:49because we value ourselves and our jobs and our self-worth on the value of our manual labor or our intelligent output. You go to university, whatever, you become a lawyer, you charge more for your hour than if you're a manual laborer. That's how the world has worked. Capital versus labor. And we're just going to make manpower and intelligence infinite, which is single most deflationary event that's happened in all of humanity. People can't see it yet because people are still squabbling over, oh, they need to buy oil for the energy. I'm like, fuck me, do you not understand? Every job is a zero over time in the kinds of jobs that we have today.

52:36Things adapt. And Julie and I play a game with each other, which is like, you just talk about when you went out into the street or you go out for an evening and figure out which jobs are still going to last. You're getting a taxi in New York City. You're going to taxi in New York City. The taxi driver, okay, he's gone. The Uber driver who's next to you, well, he's gone. The van driver, he's gone. The courier, he's gone. The delivery driver, he's gone. The postal worker, they're gone. It's like, oh my God. the restaurant server the starbucks person gone gone gone i mean everything is gone even the suits those guys are gone yeah they thought they were safe yeah that's right even the creatives gone right that was the last thing and that's now not happening so you know the only thing we're going to have left is the ability to be human and we'll reconfigure ourselves around that

53:39because I don't know what value is at the end of all of this. This is why this economic singularity thing is a really big deal. And I'm not saying that the value of money and the value of everything overall falls apart in the next five years, but in the next 20 years, for sure. Yeah, what it really means is we just have to redefine how it is that we identify ourselves as individuals because for so long we've gone around and said, well, I'm Julian, I'm a banker. Education. stuff oh i went to university or whatever and the other unbelievable thing as well is when you think about your social circle just banker or wanker i wasn't sure i just missed her wagger totally wagger um you know when you think back to your social circles like as a you know as an investment banker like your social circles are like your friends that you work with right but then what you realize is after you if you've ever moved jobs or changed jobs if you actually don't talk to those people in the same way that you used to.

54:36And you realize that it was a kind of a forced relationship. But once you remove the entity that you work for, that you were all there for that same common goal and reason. So I think what it ultimately offers up is an opportunity for humanity to evolve to a point where it's actually much, I don't want to say purer, but your friends are your friends because they have common interests. And you do the things that you want to do, not because you have to do that you see yeah i i always think back in i think it was in the 1940s or whatever when when john maynard canes was making the argument that in in a couple decades you know we'll only be working 10 hours a week or something and i think he was wrong on the timing um you know i think i think he underestimated the amount of just friction involved in just the expectation of a 40-hour work week but i i still think about that idea that you know we could get into this world of five to ten hour work weeks you know where you have more creative thinking we wrote about this in gmi because somebody asked me a question which is like what happens to uber in a world of robo taxis and it actually went into a long article but one of the things we realized is that think of time that you have your free time think of how much of it is doing stuff, errands, chores, stuff, right?

55:57Most of that goes away. It's already you order food and it comes to your house. But there's a man delivering it or a person delivering it. Soon it will just be a drone or a robo-taxi. Or a robot riding in a robot taxi. That's right. Because that's the fastest way for a robot to get from an Android robot to get to A to B is actually in a robo-taxi, which people don't think about. So all of the errands that we could do, I need to go to the dry cleaners. You don't need to do any of it. So I don't know what, we're going to have a lot more time than we understand. But to do what we don't understand yet, it's kind of this weird world.

56:39As you say, do we work less? Probably, but we need to figure out what value accrual we get from the economy and how we get paid. I know people kind of lazily say UBI. I think there's a number of other ways we can economically participate, but we need to figure that out. And the political structure is no way able to deal with this, because we're getting to the point of physics, philosophy, psychology, all of these things merging with economics as well. And so you have to be a really forward thinker because it's happening so fast that by the time they figure out how to regulate something or do something, it will be too late.

57:20The direction of how we get there, I think, is super important. Because, yeah, to your point, there's the quick argument of UBI. But I think the discussion of, yeah, how do we anchor ourselves to GDP growth in one form or other, i.e. incomes, you know, is where does that land us? Because it feels like there is one path we take where those that own assets are going to do really well in this situation. And those that don't own assets are going to be lost and potentially stagnating. And you can see that the reaction function of that is this increase in socialism that we're seeing across the world.

57:56Yeah, but I go even a step further than that, Felix. It's like, what the fuck is an asset at this point? What are markets when you've got AGI? What role do we have talking about markets and economies? It's pointless. Right? We're just telling stories about, well, there's an actual answer or something knows how to best do it. So what is investing? What is a company at that point? Why do we need them? Why do we need people working for companies? All of these things, everything we take for granted, don't forget, a corporation is a way of coalescing a bunch of different people, giving it a legal entity to be treated like a human, hence the name corporation.

58:42But these agents, they can do most of this. So I don't even know what we need money for, apart from food and stuff. But there is a value exchange. And I think, again, I've been writing about this, that I think it's attention is the currency. As humans, on a human to human thing, if you think of love as the top of the tree, that's hypertension, singular focused hypertension. attention. And then you've got attention of, hey, when you've gone with a mate for a drink, and you're intensely talking, that's good attention. It feels good. Humans seek that amongst all other things. In fact, that's why we work for companies and get patted on the back, because we've got a promotion.

59:27It's attention. So I'm like, okay, maybe we just re-pivot around the structure of what it means to be a human and drop the money status bits and focus on the attention. But maybe that's the signal that social media is telling us that attention is the currency. Have you guys seen, we're getting deep into the rabbit hole now, but have you guys seen the charts of religion has bottomed? And we're starting to see more people go back to religion. What do you guys think about that dynamic? Oh, I've gone far down this rabbit hole. Very far. Listen, I do honestly think that by the time we build ASI, and we have quantum compute, which is why we'll get to ASI, we've basically created a god creature.

1:00:24And I think of it more in the physics terms of a universal consciousness and the philosophy terms of universal consciousness, I think that's what we're building. And we're self-building it. And physics are now coming around to the understanding that the universe is always expanding. And the reason being is space-time is not the steady state of the universe. It's, in fact, consciousness. And consciousness is the thing that grows, which is a weird thing, right? I'm not a religious person, but I'm coming around to the fact that we're going to be worshipping a universal conscious ASI and we will do anything it says because it is a super creature which is basically god so then all of the stories of like the hindu vedas all had all of this stuff about consciousness and all of that stuff most of the religions have the same thread this kind of oneness idea and i think it's obvious that people will go towards religion in a world of extreme fear over who we are what we are and why we are when you've just birthed the creature that's smarter than you um that's gone from an iq of 50 to an iq of 300 in three years and its iq is exponential so if that's not shocking people yet i don't know what is and all these fucking mid-curvers like well it's a stochastic power it's just copy word i'm like You have no idea how powerful this thing is.

1:01:52It's extraordinary. So yeah, I think religion, I think it's all the same thing is what I'm trying to say. I think also that we also will realize that everything is compute and we are compute. We're just a node of compute in this universe. Trees compute. Even rocks is my great example. A rock is actually a hard drive for what happened a million years ago, a billion years ago. everything is compute nature is just computing what it sees around it how it interacts with each other and if that's part of universal consciousness it's just interacting with it so yeah it just feels like it's all the same thing and that seems weird but anybody's been doing like dmt or whatever tells you the same thing yeah it's like this is fucking weird and i've not done dmt but everybody kind of gets towards this thing and it's like maybe the bloody Hindus, you know, 5 ,000 years ago were right.

1:02:49How do they know this shit? How do they know about consciousness, universal consciousness, theories of self, all of this stuff? It's weird. Anyway, so I've gone, I've got a whole chat GPT project section, which is called universal consciousness. And I fed it so much stuff on this from physicists to historic texts. So that's so cool. I love that. All right, let's pull out of the rabbit hole for the last five minutes here. When I said I was interviewing you guys and asked if anybody had any questions, the first question, of course, was when bananas. I won't make you guys just parrot the same old crap, but I will just ask you, what's your three to six month view here?

1:03:29So I think, you know, when we come back to the idea that, you know, markets and economies have become perfectly cyclical such that this extremely colorful, many people, you know, can't even probably see the summer thing. But, you know, these four year cycles and, you know, things like liquidity cycles, obviously that then means you get four year cycles in crypto and four year cycles in tech and just about everything else. And so the question is, OK, well, we're in the third year of a four year traditional cycle. And you're going to say, and so if we look at those orange bars, be it fall 2013 was a great year.

1:04:062017, that was the year Bitcoin did a 23x off the January lows. And you're like, all right, well, 2021, you know, what was that? And that's what Raoul and I call, you know, Bitcoin's truncated cycle. And that's, again, where we are today in 2025, but not truncated. Why? Well, because what happened in March of 2021? Liquidity, you know, this is the net liquidity flow peaked in March 2021 and went down in a straight line. It's basically everyone tapered liquidity flow, right? Guess what else peaked in March 2021? The business cycle, right? Whereas when we're looking at today, so liquidity growth, looking at a 12-month flow, is basically just turned positive, which is you could say BOJ ECB flow.

1:04:53And then the ISM is still below 50. And then had we been sitting together doing something like this back in March 2021, this is what we would have been looking at. So the ISM was at 63.8. And our forward-looking indicators were saying that the ISM was about to go down in pretty much a straight line. Well, this is where we were back then. Here's where we are today. I'm just going to do that one more time. Where we were back then and where we are today. So we're in a very different environment. This is basically suggesting that like Q2 of next year, the ISM gets to, let's call it the mid-50s. And so the point here is that because financial conditions have ease as much as they have.

1:05:36Felix, I mean, even with rates stable, dollars come down, which is the dominant factor in this index, at least, you know, given the size of the move, it's actually extending. We believe it extends the business cycle outside of what a traditional four-year cycle would be. And what we also know is that if this is right, and the ISM moves to, let's say, the mid-50s by, call it Q2 of next year, well, once the ISM gets above 50, right, and then moves into its sort of late cycle peak, call it anywhere around 60, this tends to be where we get these really big moves in risk assets and, you know, crypto included.

1:06:15It's also where we see alt season happen, right, which is really what people are saying, win banana. And win banana, you know, it's, we're up 600%. I mean, the banana zone is not a one month get rich thing, right? It's, you know, Bitcoin's up 600 % since we said low in Q4 2022. That's, I mean, been a steady bit in the end zone, but the question then is when is the next leg? Well, we'll get the next leg as the ISM progresses towards 55, because the thing to think about this is this is just like a credit spread, right? It's just like small cap versus large cap equities, which once you get into Bitcoin, which ETF and ETFs will be the large onboarding there, you got to think about that as like, the way I think about that is like the gateway drug to crypto.

1:06:59So even if you're making good money in Bitcoin, all of a sudden, if you're already orange-pilled, and you're seeing something going up like Pepe or Bonk or Sui or Solana or whatever it is, you start to recycle those tokens very similar, like you'd be taking profit from a large-cap growth equity at the bottom of the cycle and recycling it into small-cap value and EM equities. Does that make sense? Yeah, totally. The economy is in a very different place and the forward setup in terms of financial conditions looks good, but then also liquidity is rising. So here, again, total liquidity, the six-month flow is actually broken out of this kind of the range that we've been in.

1:07:42And that range that we've been in explains a lot of what has basically driven these knee-jerk reactions in crypto. The trend has been higher, but there's been periods of time like the first half of last year or even the first quarter of this year, where basically we were just kind of stuck in a range, which feels like that again now, but it's not the case, I don't believe. So we still think here's the, as we call it, the most copied chart in the world when it comes to Bitcoin. But I still think that the point with this, and Raul and I have said this repeatedly, even though you've got people on Twitter who are monitoring this tick for tick, it's not about that.

1:08:20It's about the direction of travel and the fact that the trend rate is still growing. And when you then look at the year-on-year comps, it's just kind of another way of thinking about this or looking at this. And I think that this very much paints the forward setup. So yeah, when you compare, as I say, the 2021 cycle versus the situation that we're in now, and we've both said that liquidity in the business cycle are the two most important drivers of risk assets, and that also applies to Bitcoin and the entire crypto universe, that these two elements are going to head higher over the next, let's say, 12 months, or 12 months, whatever.

1:09:03Yeah, I mean, into Q2 of next year. And so just using the liquidity framework, the business cycle framework, the financial conditions framework, it's all suggesting that the probability is because they need to roll the debt, they're going to have to increase more liquidity. And this is just going to drive assets up strongly. And again, just so people understand why the business cycle matters for the ISM, if you think the ISM has been low, and then going to ask the average American running an average business in an average town, how are you feeling? They say, pretty shit. People's earnings haven't gone up.

1:09:40Your mortgages are too high, your car payments are too high, et cetera. So what happens is when the business cycle picks up, there's more disposable income, and businesses have more investment income, and that gets driven out the risk curve always. That is what markets do. That is the game. And altcoins, as Julian said, are no different than junk bonds, no different to all the other stuff. It's all the same trade. So it feels like it's all to come for us. We don't see anything that suggests it's not going to happen. And we talked about before, the size of what's happening with Global M2 and the dollar moves and stuff like that are very big.

1:10:19So no reason to expect that the move in asset prices is probably more than people expect. And I think the inverse to the business cycle being so low for so long will be the flip side of the cycle will be longer than people expected because we've got this slight dislocation still working through post-COVID that then extends the business cycle. We don't know yet, but it feels like it's Q2 2024 so far. But if financial conditions keep moving, if they really have done some sort of Mar-a-Lago accord and they get the dollar below 90, okay, then we're going on further. Maybe it's a full bubble cycle then.

1:11:00Maybe we don't get a, who knows, but one step at a time, but looks good. Well, and just to add one more thing, if you want to pull this chart, this is interesting, right? The ISM has been actually tracking pretty closely. It's kind of like the late 1980s, right? Although it was higher then, right? Yeah, it's above 50, but it still didn't didn't really move until 1987. And what happened in 1985, as we know, is basically the Plaza Accord, right? And now, again, we're not expecting a Plaza Accord of that. And back here, the dollar fell 50%, right? But here, when you look at what's going on today, right, and the similarities of both the 2017 cycle and then also via 1985, 1986, 1987, that really set the backdrop for the business cycle to then find its footing and begin to accelerate.

1:11:55So much as we saw in 1987, when the ISM actually started to move above 50 and then went to its late cycle peak around 60, it feels like it's that. It's that kind of setup. And then if we come to, we'll skip inflation, But I mean, look, the V-shaped recovery, you know, continues. And it's like, and you hear people fighting this. That's such a great job. This is great. Yeah, I love this. And, you know, this is part of the path that we put out on April 7th when we're like, guys, you know, there's a lot of fear in markets. All the sentiment surveys had gone berserk, you know, speculators were short.

1:12:34Everything was negative. But then when you look at the data, like, okay, this is a V-shaped recovery. Look, in June, we had a V-shaped recovery ongoing, looks like COVID, in the US regional Fed service, looking at the six-month outlook. And then you're looking at growth surprises versus inflation surprises. Like, does this look stagflationary to you? No, it looks more like Goldilocks to me, to the extent that growth surprises are outpacing inflation surprises. And I think this is what gives us the forward setup for things like equities. And then there was just way too much fear. I mean, this chart is just a great chart because when the excess fear gap actually opened up, we were like, guys, this is going to snap back hard.

1:13:12And it's doing that. So I think that just to sum up everything I've just rambled on for the last, whatever it is, 20 minutes. You were just throwing charts just to get through as many as you could. I want to. I want to get through all of them. A chart dealer. But it just kind of feels like we're just going to continue to climb this wall of worry. And before you know it, it'll be Q1 of next year. And Bitcoin will be a lot higher. Equities will be a lot higher. Equities will do well. All that will do well. It all comes down to don't mid-curve it. It's like, you know, if the number go up of liquidity, the number go up of markets.

1:13:50That's it. It's all we need to know, which is lovely. Yeah. Yeah. I love it. I love it. You just got to show this chart. It's just for the sake of showing. All right. We'll get some red. We have some red meat here. It's just here it is. It's kind of this. And we're just nowhere near what we would classify as kind of a cycle peak and stuff like this. So the only thing I'd say is to some of the more short-term people watching this is – When he says the only thing I'd say, it means I want to show you another 38 charts. No, it's like – He's an addict. That's why he's in the plot. It's awful. It's like, it's just kind of, we just have to increase our time horizons, you know, and stop getting overly caught up in, you know, the weekly stuff.

1:14:36If, you know, as Terrell's point of, you know, liquidity explains 90 % of the fluctuations in Bitcoin and 95 % of the NASDAQ, then that means that there's 10 % that goes unexplained. And that unexplained stuff can be anything and it does matter at times. But really when you zoom out, if liquidity goes up over time, number goes up. Yeah, 100%. I think that's especially important to you during these summer months where wall is low. People just overthink everything. So yeah, really, really great way to frame it up. Totally in agreement. Guys, really awesome to have you on the show. Always love these.

1:15:11It's a great time. Good. Let's see when the banana arrives. The next banana. All right, guys. We'll have a good rest of your day. Hey, Real Vision viewers, a quick pause to introduce you to today's sponsor, Axelar. Axelar is building the rails for the next wave of global finance. Not just crypto, but the future of how assets move, how markets connect, and how institutions plug into open systems. Think of it this way. Bitcoin brought digital gold, Ethereum brought smart contracts, but Axelar is bringing connectivity, the secure link between your favorite blockchain and traditional financial institutions, rushing to plug in.

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