Research: How the Pros Do It — Raoul Pal & Andreas Steno

0:00Hi, on the 5th and 6th of June 2024, I'll be speaking at the largest AI event in Asia, Super AI in Singapore at the iconic Marina Bay Sands. Alongside brilliant minds like Edward Snowden, Benedict Devon and Balaji Srinivasan, I'll be on a stage exploring the extraordinary potential of AI and the profound change it represents, not just for financial markets, but also for the world as we know it. With over 5 ,000 attendees and over 150 side events, Singapore will become a vibrant hub for a full week from the 3rd and 9th of June. visit superai.com to register and join me with 20 % off tickets using the code realvision use the link in the description and i'll see you there it's going to be incredible join me ral pal as i go on a journey of discovery through the macro crypto and exponential age landscapes in the journeyman i talk to the smartest people in the world so we can all become smarter together

1:07research how the pros do it. That's our special series this week. And we couldn't have bigger pros than Raoul Pal and Andreas Steno-Larsen. Thank God it's Friday, right, guys? Indeed. It's been a week already, although Andreas has had more of a week than we have. Absolutely. Congratulations on your second little one, Andreas. Are you getting any sleep? Not really. So bear with me if I say something stupid today. We'll give you a break just this once. This has been a really fascinating and fun week. This is actually all birthed out of the Real Vision marketplace. And this was this idea that really came from you, Raul, about connecting people to all the other research out there.

1:44Most people don't do as much research as Andreas or you do, Raul. But we wanted to get people the best deals possible. We didn't know how this would go. And the response has been overwhelming. People get better deals than what's out available on the market through realvision.com slash marketplace. place. And there we've got the macro investing tool. And the response to that with you and Julian Battelle has been incredible. We've got a special offer right now. Folks want to go and check that out. And if you'll see the comments later in the show, we'll get some of the comments beneath today's video with the macro investing tool.

2:21I mean, just really incredible content. People can't praise Julian and you enough, Raul. Yeah, I mean, it's great. I mean, what we're trying to do with this marketplace is it's really difficult for people to find research. So how do you find Andreas? Well, you see him on Real Vision, but then you can't connect to his research. Then you need to find his website, or you find him on Twitter. It's actually a really difficult process for anybody who's an independent research provider or somebody who wants research, the right research for them. And the idea with this marketplace is to put it in one place, make it really easy for people to find the research that they want.

2:54They see the Real vision favorite. So they see Andreas on real vision. They think he's a smart guy. Um, I'd love to get more research from him and you find it easily. It's just, I don't know why nobody's done this before, but it just makes total sense. Yeah. People watch steno signals on real vision. If they want more, they're not forced into anything. They don't have to bundle anything. They have complete control of the package and then they get steno research and the response there also really strong. The words that come across most often, Andreas are sharp and honest. They love the mix of geopolitics that you do in your research.

3:28That's available for a significant discount right now, almost$100 discount, actually more than$100 discount in the marketplace. So if folks want to check that out, they'll get a taste of it today. And this week, we've done research how family offices approach it, how traders like Tony Greer, Jared Dillion approach it. Yesterday with David Matten, a real incredible look at just how he uses his frameworks for technology and all the futurism he has. So I just want to take a step back and really look at how you got to become a researcher, because that's not really how either of you started. So Andreas, give us a little background.

4:07What took you to that point? You said, you know what, this is what I have to do to move forward. So I guess my first experience in finance dates all the way back to just after the Lehman Brothers crash in 08-09. And I entered the trading floor in the northern European bank Nordea with basically zero experience. And I went through both trading roles, sales roles, and I quickly found out that the research produced within these large investment banks had quite a significant bias towards selling products of that same investment bank. And when I ended up leading the research team at Nordair, I slowly but surely over time found out that I lacked the independence needed to say exactly what I felt about markets at every single time.

5:06And it annoyed me, first of all. But it also annoyed me that the most visible research houses out there had such significant biases in their research processes. And I think it's just tremendous to see how Real Vision has transformed into the platform for independent research providers to a large extent. I really love that. And I think it's of great value to investors out there. Yeah. And I think that is why we hear that word honest with you. people feel like there's no BS when they're looking at you, Andreas. And Raoul, back us, and lots of folks know about the big trajectory you've had. So when did you actually make that shift to the research being such a significant part of what you do?

5:51I think I had a skill, which was communication, distilling down complex things. And I learned the habit, back in the old days, Bloomberg messages would give you one page. And so you had to distill everything down to one page. I had this incredible Bloomberg list as a salesman at Goldman, and before Goldman and out West, where it became famous. You get on Rell's Bloomberg messages, and everybody, the great, the good of the industry would read my stuff from Stan Drucker Miller to Paul Tudor Jones. I realized that. Then we created an in-house chat called Equity Euro Chat that Lex Van Dam, who you know, Samuel, had built this thing out.

6:31I used to write on it, and it became an in-house chat channel before that really materialized anywhere. This is like AOL days. Then I went to the hedge fund and somebody told me, the best way as a salesperson to learn to become a portfolio manager is to write your ideas down and then hold yourself accountable. So I started doing that. And then I started writing down my ideas down. I went on a business trip to China when everybody was really frothily bullish about China. And I wrote a piece called The Something Wrong in Paradise on the Plain Home. I didn't sleep because I was so disturbed by what I saw of empty buildings in China.

7:10That went viral. And that gave me the idea that, hey, you know what? I could opt out of this miserable industry and go and live in Spain and start writing independent research. Now, investment bank research, as Andrea said at the time, was either overly dense. It didn't speak how we spoke, it spoke in this kind of weird corporate speak. And the best analysts were the people, Barton Biggs was good at it. There was a few people that spoke normally, but that was rare. It was just horrible research, wasn't engaging. And I was a hedge fund guy, so I knew how everybody spoke. And so I wanted to write for them, short sentences, lots of graphs, make it easy, simplify complex things down.

7:54That was the journey that I went on. That research started with just hedge funds reading it. Then it suddenly went to the bank trading desks. Then it went to family offices and asset managers. Now, high net worths as more and more people have realized the value of independent research and how it can help them manage their own portfolios. The idea is not to copy what we do. Yeah, I've got an amazing track record, probably the best recorded track record of anybody in the entire research industry over the last 20 years. But it's not about copying my trades. It's about seeing how I think or how Andreas thinks.

8:32That's what you're really paying for is how to learn to think yourself and put these things together. I've got many subscribers of mine at Global Macro Investor that have said, I really don't agree with 70 % of what you write. and I said but you've been 18 years paying for my research they're like because you always make me think that's really interesting it's interesting because we were talking about actually plays to something that Peter Bookvar was talking about with Maggie during this series this week was you really can't emulate anybody that will only take you so far you have to find your own voice and certainly I don't think anybody's ever accused you of having a corporate tone in anything you do Far from it and pretty irreverent.

9:16So it's funny that that thread keeps on coming up in what's core to doing research. The other thing here is really the foundation has to be these frameworks. So Andreas, walk us through your kind of core frameworks that you use as you put together your research each week. Well, first of all, I agree with Raoul on the state of investment bank research. I still think it's an issue for investment banks that they write research in a very corporate tone. They probably have to. I left Nord Air Bank because I wrote in a non-corporate tone. I think that's the short version of that story. But my philosophy is pretty simple.

9:56If I cannot show it in a chart, then it's not true. I simply need to be able to visualize all my ideas. And when I look at my framework today compared to three, four years ago, it's incredible how much it's been moving in the direction of automated ideas via loads and loads and loads of data processes. So what we do now is that we track as many time series as we can in real time via Python setup. So the whole idea is that we want to be able to pinpoint strange moves in markets when they happen as they happen, because that allows you to be agile and faster than the crowd. And furthermore, when you look at enough data, you also end up finding anomalies from time to time.

10:50And those anomalies are typically tradable. And what do I mean by anomalies? Well, if, let's say, energy stocks move three standard deviations on a day, but you don't see a three standard deviation move in the underlying commodities, such as net gas and oil, maybe something is worthwhile looking at. And therefore, I've built a framework based on a tremendous amount of data telling me when to look at something. So when you see stuff moving fast without necessarily anyone having an explanation of why, I think it's very relevant to look at that asset. And therefore, every morning, my first thing every single morning at the office is to look through this dashboard of signals that we have and look at stuff that's moving.

11:44Because when we look at macro traits, you typically want to shoot at something that's moving. instead of shooting at something that's not moving. Hey, everyone. We're going to take a quick pause and hear a word from our partners. We'll be right back. Join over 5 ,000 attendees for the largest AI event in Asia at Super AI Singapore, June 5th and 6th, 2024. Raoul Pal, Benedict Evans, Balaji Srinivasan, Edward Snowden, and over 150 others will join the industry's most influential to explore and unveil the next wave of transformative AI technologies. Singapore will become a vibrant AI hub for a week from June 3rd through June 9th with over 150 side events that will make for unparalleled networking opportunities.

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13:41your show on real vision steno signals is a lot like your research it's just one big chart one after another any producer who produces your show here just knows you're going to walk up with a huge amount of charts and that's what people are looking for going through them uh one by one and your frameworks yeah mine has evolved over time when i started when i was in the hedge fund at GLG, I had really developed business cycle frameworks similar to Andreas Hughes's. And it was very early in. There was very few people doing that. ISI were doing it. A couple of people with Morgan Stanley. That was about it.

14:21And yeah, there was a few people doing that. I would have started with a chart and usually a price chart. I'm like, what the hell does this mean? And I would look at the different time horizons. When I started, I was much shorter term time horizon. I was probably three months to six months. And those were the trade horizons. But over time, I started using the business cycle and realizing, OK, the business cycle actually gives you some sort of 18-month, two-year time horizon, or recessions were like six months or a year. And so I started working within the business cycle time horizon. But over time, I realized that that was just part of the picture, and the secular trends were another huge part.

15:05So I started putting all of these together to see how they all interact, price charts, secular trends, and cyclical trends. And then with bringing particularly Julian Bittle on board, much like Andreas, we really created a process around that. And that's what people are seeing with the macro allocation tool, the MIT. that there is basically a process-driven structure of people to understand asset allocation. So we use that. That's part of GMI. What people see in the exponentialist is another part of what we do in GMI, which is like technology is a megatrend. And so how do we do that? That's another component part.

15:45What people see of me of crypto is another one of these secular trends. And people see that both in pro-macro, but also elsewhere where I write about these things. These are the secular trends. And then I apply a business cycle framework with Julian on top of this to give us an understanding of where we are, where we're going. Then we're looking at a lot of forward-looking stuff. So I kind of operate in a time horizon most people don't operate in, even though the basis is the business cycle. I'm actually trying to get larger outsized returns out of not being in the same time horizon. And that is what I proved over time from GMI.

16:24That was the hunch when I started GMI, is that time horizon is actually the biggest alpha, the way to outperform. And if you change the time horizon, so you're not competing with the market over data points, but you're looking for longer term trends, particularly with secular backdrops, that that makes a huge difference. And that's really that whole process of iteration of learning that has driven the returns from GMI, just realizing that I have a particular edge. And just to underscore, if folks haven't used the macro investing tool yet, it tells you where we are in the business cycle. There's actually a great course that you get along with it.

17:01I mean, really a master course from Julian and input from you, Rao, and Andreas as well. Then it takes you through these charts, where we are in the business cycle, spring, winter, et cetera, and then asset allocation. Yeah, so it tells you when and it makes it easy because it's a complicated world. Andreas and I have spent thousands or tens of thousands of hours looking at the business cycle and how it relates to assets. For most normal people, it's not so intuitive. They don't have time. They're doing other things. This is our main job, so we can do it. So when you bring it down to a model output, it helps.

17:35Now, models aren't perfect. I think you need the nuance of human interpretation on top. But the model just helps you understand what regime are you in and what are the assets that are likely to do well and likely to do badly. If I can put probability in your favor, you're going to do a much better investing job. And your decision making will be more confident. That's really the macro investing tool is making you more confident in the probabilities that you are going to be right. Then the next layer is, whether it's Andreas's research or what I do at Real Vision Pro Macro, or even Global Macro Investor, is to then build around that world because now you're getting my or Andreas's interpretation of this and where the better opportunities lie and what's not working, what's not working, why.

18:26A huge aspect that we've seen throughout this week with everybody diving into their research and their approaches has been sourcing. Twitter lists have come up very often, which I'm sure will make you very happy, Raul, because nobody talks about Twitter lists more than you. But for you, Andreas, I'm wondering who are your sources? What are the unusual ones? That's where it's actually most interesting. David Matten yesterday talking about the semiconductor blogs and Twitter accounts that he follows to help understand what's happening next in AI. What are some of your more unusual ones, Andreas?

18:58So over the past six months, we've developed quite a few now-casting tools. And I think they're very helpful in understanding trends in both inflation, liquidity, and underlying overall activity in the economy. And from my experience at investment banks, again, it's not often that you see now-casting tools being developed within these banks. they lack the creativity to look at various time series that can actually now cast activity and inflation, for example. So what we've done is that we've, first of all, sourced price data from online retailers across Europe, across the US, and various other geographies to look at prices more or less in real time.

19:51I know that Truflation has done something similar for the US, And it's very, very helpful in terms of grasping peaks and troughs in price developments ahead of the crowd. Because it's very typical if you're a portfolio manager at an asset management company to look at the monthly inflation print and say, hey, that's the most timely stuff I can get. But it's not. You can get trends on prices more or less in real time now. So that's been extremely helpful for me to source price activity or price developments directly from online retailers, for example. Then I look at the electricity consumption as an example of a daily gauge of growth.

20:33If you look at electricity consumption, I mean, power is the source of everything. So the ultimate sourcing comes from the power companies, actually. And right now we're seeing quite a substantial spike in the electricity consumption in Germany. I think the main story out there right now is that Germany is stuck in the abyss. But if you watch the daily electricity consumption, something is actually happening beneath the surface. I'm not able to pinpoint exactly which company using the extra electricity, but something is happening. And I guess right now, the market is stuck in a narrative that nothing is happening in Germany, but I can almost guarantee you that something is actually happening.

21:18So sourcing for me is basically a question of getting directly to the actual source of prices and of activity. And power companies, they provide decent information on the actual activity. And online retailers, they provide decent information on actual price developments. When you say steno signals in your show, you literally mean the signals that you're getting from the power company. It's always great when you have something that breaks the conventional wisdom. Rao, it's quite interesting because I've heard you talk on podcasts about all the sourcing that hasn't worked, how you perfected this.

21:55I mean, even paying, I think, a member of a former Middle Eastern military to try and give you something and that didn't work. It didn't help you understand which way a war was heading. So what's not worked along those lines? And what is working for your sourcing over the years? I'm, as you probably imagine, a bit weird when it comes to this stuff. I don't read anybody's research. I literally won't read a single piece of research from anybody. Really? Nope, don't read anything. So what I try and do is approach the world with a question of why. Why is this? Where are people thinking about this but might be thinking wrongly?

22:41So yes, I see Twitter and I see all of the sentiment, but I step back from all of that and try and see a larger signal, which is, why is everybody thinking this way? And is that correct? And many times it seems reasonable and other times it doesn't. But really, I spend most of my time, because Julian does all of that business cycle stuff for me, what I spend most of my time is in much bigger concepts of how does this fit all together? What does this all mean in a much larger macro context? and therefore, once you put together this 3D jigsaw puzzle, you find these bigger signals within it. And some of those tend to get ignited by conversations I have with people on Real Vision, to be honest, or weird observations in my life.

23:36Like I went to a friend's house, one of my closest friend's houses on a Saturday in London, outside London, and his son was playing a computer game. But he had headphones on, massive screen in a gaming chair on a Saturday lunchtime. I'm like, Daryl, what the fuck is Harry doing playing games? He's like, oh, he played football this morning, but he's hanging out with his friends. I'm like, what do you mean? So he goes, shows me what Minecraft is like and how the kids are all hanging together and they're in different continents, let alone countries, let alone towns. And they're all hanging out together.

24:12And it was like, that moment was like, oh my God. OK, now I understand the future of the metaverse, online communities, how young people are going to change the structure of society. You know, so it's stuff like that. I had a conversation with Geordie Visser where he dropped a comment that sent me down a multi-month rabbit hole, which is, I don't think we can have recessions again. And I'm like, that is a ridiculous statement, but I think you might be right. and so it's these so i spend my time thinking of the really big ideas how does it all fit together that's what crypto to me you know i've figured out before anybody else that how it's all macro how it all fits with the work how even things like alt season works how nfts work but what does it mean in the larger contextualization of seeing harry on the computer game trading skins I'm like, oh, I see it all now.

25:11So I spend my time doing that. And that's really what people pay for me at GMI to do is these massive conceptual frameworks and then bring them down to an actionable element of business cycle plus technical analysis plus catalysts. Hey, everyone. We're going to take another quick break and hear a word from our partners, and then we'll be right back.

25:36so here's an interesting question that's just coming in from jason coop uh kubka pardon me and and if you have any questions feel free to put them right on the real vision platform we're making this free this week on youtube as well because research is so core to that journey of understanding finance so really remaining committed to our commitment to democratize finance so if you're on YouTube, just come over to realvision.com. You can sign up for free and ask Rao or Andreas a question like this one from Jason. Both Rao and Andreas seem to have similar methods, but Andreas says that inflation is coming back and Rao says it's going to zero or beyond.

26:15Why the divergence timeframe? Andreas, do you want to pick that one up to start? Yeah, I probably agree with Rao on the inflation trajectory, say over the next decade. I think we share the long-term vision on inflation. I'm a bit scared right now that the lack of labor in the US economy, which is still a thing, even though the labor market is coming into better balance, will be challenged quite severely by the border issue. Let's assume that either Biden or ultimately Trump decides to close the border fully. Then we have an issue of labor scarcity in the US economy again. And we're starting to see signs of companies basically hinting that they plan on hiking wages over the next three to six months to an extent that we haven't seen since basically the peak of the pandemic.

27:13So to me, that's a short-term sign that we get a second wave of wage inflation at the worst possible timing for the Federal Reserve. Ultimately, if they decide to hike interest rates into that, That will get to zero probably very soon on inflation. But the next very sort of the wave just in front of us is probably driven by wages again, I think. And Raul, you want to pick up there? Yeah. So we're still looking at the component parts of the current inflation and how it deflates and the lag effects. So my view is this year, it keeps deflating. Now, if what Andreas is talking about is based on, okay, the outcome of the election, what happens?

27:55That's something that happens the following year. So that's 2025. And for it to actually be reasonable, right, by 2025, we'll be in full economic recovery. In fact, we'll be growing a great click. So then the wage inflation kicks in. And by 2026, the Fed are going to have to deal with it. So the cyclical elements of inflation, I can see, but I don't think it happens this year. Could it happen at the tail end of this year? But it's going to be early stage, right? because we're still deflating. So again, there's an element of time horizon. I do think that anybody who's producing that chart of the 1970s inflation all over again is just talking nonsense.