URGENT: Market CRASH Flash UPDATE with Raoul Pal

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0:45Hey, everyone. I'm Raoul Pal, and welcome to a flash update from The Journeyman, and also from Real Vision itself. You see, we were born for these times, the times when people are asking questions. We're here to try and provide answers. Now, my answers aren't all the answers. I represent myself here as Raoul Pal of Global Macro Investor or of ProMacro. The other part's not as the CEO of Real Vision. And we'll have many people on the platform who are going to help you navigate this week when things are complicated and nobody quite knows what the hell is going on. And so make sure if you're watching this on YouTube, just go across to realvision.com and there you'll see lots of updates from really great people guiding you through this and what the hell's going on.

1:36Anyway, to my bit. So everyone's like, what the fuck is going on, Raoul? I'm getting millions of messages. Where's our fucking banana? I get it. You know, these things, these macro spasms, they happen from time to time. So let me talk about what's going on right now, the slightly bigger picture framework, so you can understand why I think what I think, and then we'll tie it back down to markets and even a bit about the banana zone. Now, remember, my timing is not your timing. My timing is a longer-term time horizon. I'm really trying to time this as a business cycle. So that's into the end of 2025.

2:16That's my time horizon. I don't trade around. All I do in sell-offs is add if my view hasn't changed. And I'll show you how my view hasn't changed. So if you are a shorter-term time horizon, I can't really help you because I think that's a very, very difficult thing to do in crypto markets. Some of my all-time favorite traders and investors, kind of legends of the industry, who are very big into crypto, say, I'll never trade it. Even though these guys were famous for trading, they're like, buy and hold works much easier, it's much less stressful, and you don't get caught out with a massive volatility.

2:52Anyway, so what the fuck's going on? Why are the markets puking? Why is everybody gripped with fear? Well, it's a story of the yen. but the yen is not the whole story. The story is actually much bigger. You see, what's been happening is we have needed stimulus into the global economy because the economy has been slow. The ISM survey has been bumping along the bottom. China's slow. Europe's slow. And you see, one of the component parts that allows for this all to move hadn't really been playing ball. Firstly, it was US rates, but the Fed gave us that signal. So that started moving. But the big one is king dollar.

3:37The dollar has been strong, and a strong dollar is a tighter financial conditions, which doesn't help markets and doesn't help economies. You see, at this point in the cycle, when there's no inflation, or inflation is falling fast, generally, you need a weaker dollar. That brings global growth. So if you remember, Janet Yellen went to China twice earlier in the year. Those conversations, I believe, were about how we can allow China to stimulate without sacrificing the yuan. You see, if China had stimulated with the dollar strong, the yuan would have collapsed, and they can't deal with that. They really want to keep their currency stable.

4:24So they will have said to the US, we get it, we need to stimulate, we've got a debt deflation going on, but we can't stimulate, you need to help us. And Yellen would have said, of course, what can I do? And the answer is, well, obviously, you need to cut rates. And that's like, yes, we understand that. That's on the cards. But then it's like, you must weaken the dollar. So cut to the Bank of Japan. The Bank of Japan is the big player in all of this. and the bank of japan had been suffering from a weaker and weaker yen and the stronger and stronger dollar and had started to make noises that it wants to do something about it so that the chinese the japanese banking market is the euro dollar markets the global lending of dollars really comes out of japan and japan didn't really have enough dollars so what they had to do Oh, sorry, the world doesn't have enough dollars.

5:19So Yellen will have spoken to the Japanese, as will a Powell. And the idea is this, is listen, you intervene in the currency, that's injecting of liquidity. Help us start lowering the dollar. You can be the big driver here because this is how you operate your currency system. We will reciprocate by cutting rates. And the Chinese will be able to stimulate their economy without losing control of their currency. That's something I wrote about for a while, and I've talked about that this was the big plan. So we start to see yen intervention. Now, the thing about the yen, as the Japanese also raise rates, the thing about the yen is that a lot of people borrow in the currency because it's cheap, and then they invest in other assets.

6:04It's called the funding trade. And that's all well and good, and it can deal with normal volatility. But once the Japanese started to intervene in the currency, it starts knocking people out of their positions, those positions become less profitable. So what happens is they are forced to reduce risk. In banks, it's called VAR and hedge fund, which is value at risk. So if the currency moves a lot, their funding currency, or in fact, any major currencies, what they have a tendency to do is start having to liquidate other positions. That started knocking into the NASDAQ, riskier assets, as people start reducing the higher volatility positions, and it knocks all the way through the chain of all assets.

6:45That's why you get this correlation of one event when everything moves together, when they weren't correlated before. It's because everybody's forced to puke risk at the same time. So the risk puking had started and then really started to gather steam. Now, for all of us, this is like, what the fuck are you doing? You're nuking my bags. I get it. But again, there's a bigger game to be played. The bigger game is they want liquidity into the system. And to do it, you're going to have to have a regime change, and that creates a macro spasm. Now, these macro spasms are not uncommon. You tend to get one every business cycle, particularly around regime changes.

7:26So we saw one in 2018. That was at the end of the hiking regime. We saw then this spasm as the market essentially forced the Fed to pivot, the Powell pivot moment. But actually, the most similar was 2016. Early 2016, the dollar had been so strong, it had pressurized global commodity markets. The Chinese were under huge pressure with their economy, as were the Europeans, and we needed to do something. Yet again, the Japanese started the ball rolling by starting to intervene in the currency markets. That pushed down the dollar, and a big unwind happened. Markets puked for a short period of time as this happened.

8:07But the Fed then stopped hiking. They was just starting the hiking cycle. And if you remember, they then stopped for an entire year. But others managed to massively inject liquidity because of the weaker dollar. And what did that do? Well, it set off markets after this spasm into a huge bull run. 2018, a huge bull run, because what you're allowing is the injection of liquidity, more cowbell. So that's where I think we are today. We're setting ourselves up for liquidity, but we need to digest the volatility of the currency move first. Now, how long will that take? Usually, it takes a week, two weeks, three weeks, sometimes four weeks.

8:50We've got the added complication of what's going to happen in the Middle East. I don't know the answer to that. But anyway, these are the kind of factors we're playing with, and I think of them as spasms. These are short-term macro things that don't affect the view. You see, something like this can be really problematic if the business cycle peaked and we're on the way down. That's what tends to exacerbate slowdowns. If the business cycle is rising, driven by liquidity and financial conditions, which is what it has been, and I'll some stuff on this in a set, then these tend to be short, sharp corrections, a pause that refreshes, a kind of resetting of leverage in the system that allows the markets to recover, and often very sharply because it's followed by liquidity.

9:40You see, when the cycle's falling, it usually means inflation's too high, and therefore they can't inject liquidity and don't want to. But this is the reverse, right? So this is actually a magic setup. So let's talk a little bit about the magic setup so I can frame it. So I'm going to share my screen now. Now, what I'm going to cover is a small part of what Julian Bittle, my partner in Global Macro Investor, who also writes the macro investing tool, which is an unbelievable tool that comes out weekly in Real Vision, where he talks you through all of the business cycle, how it affects assets, liquidity, flows, everything that you need to know.

10:18Now, he's got an update coming out later this week. So I stole a few of his charts. I'm going to add some more of my own so you two can understand. Now, if you're on Real Vision watching this and you're not a Plus member, this is only for Plus members. So make sure you upgrade to Plus because that's where the real magic, the real value is. And MIT is worth it alone. It is an incredible macro research tool that all of you will find useful and help calm you in the moments of panic and guide you in how to asset allocate and how to think about what's going on in that nexus of markets and economies.

10:57So that update will be coming up. So again, if you haven't signed up to Real Vision Plus, do so. Those of you watching this on YouTube, just come across the Real Vision and see what we've got from that. There's going to be a lot of free content coming out, but then maybe you want to sign up for Real Vision Plus, which gives you the macro investing tool. It gives you the whole education academy. It gives you trade ideas from incredible people and a whole lot more features. So it's really important. So this is just a subset of that, but it should help you understand where we are. Okay, so let's go.

11:32Now, the business cycle. Remember I said, well, the business cycle is bottoming and not peaking. I know there's a lot of noise about recession, recession, recession. A lot of that That was priced back in 2022 from the forward-looking indicators. What we've got is the cyclical elements of the economy, car sales and stuff that are slow, miners and stuff, that are driven by the business cycle. The business cycle is still chopping. Now, people say, yeah, but look, it rolled down. Yes, it did roll down. It happens at every low of every cycle. You tend to have this correction. And that's where we are now.

12:09So you can see the last few, well, the last two decades worth, you get this secondary dip before you get the recovery. So that's where I think we are now. It's kind of noise because most of the markets I concentrate on, crypto and technology, are priced off liquidity conditions and financial conditions. But we are at the relatively slow point of the economy where rate cuts are now kind of preordained. And the things that back it up are things like unemployment. I've been talking for a while that unemployment should rise. I don't think it's going to go super crazy. But now we're at the point where we're beyond the unemployment rate of the most negative Fed member.

12:56So obviously, the signal is there to cut rates. And the Fed have made that clear. Maybe they come sooner, maybe they don't, maybe they inject liquidity in different ways. But either way, unemployment has been rising, and that is a key factor for the Fed, and inflation has been falling, which is the key factor for the Fed. So it's green lights all round to cut rates, and cut rates allows liquidity to come into the system. So what happened is this mix of the DXY, which is the dollar, and the 10-year bond yields and Fed rate cuts all came from the Fed starting to suddenly say, well, the market's starting to realize the Fed were going to change course, and then the Fed changing course by saying they're probably going to cut at the next meeting.

13:41And that set this whole thing off. Now, there's a lot of rate cuts priced in. They weren't priced in before, but I think they're more correct in how they're pricing things in. Will it work exactly how the markets are suggesting? I don't know. But I think rates come down to 2.5 % or lower in this cycle. If you remember, the Everything Code needs low rates because you have to refi the$10 trillion of debt. So you need low rates to do that and liquidity to pay the interest payments on the prior cycle's debt, which is why the Everything Code is so important in this and why we keep repeating the same old cycle.

14:19It's because it's about paying the refinancing costs of the debt. and we're deep into the refi cycle. So I've been explaining for a while, the Fed and all the central banks need low rates. The Treasury needs liquidity within which to roll that, and also to monetize the previous interest payments. That monetization of interest payments is what drives the liquidity cycle and the debasement cycle, which drives up assets. Also, as the business cycle bottoms, people have more money, businesses have more money, gets reinvested, people invest more, and that builds on a cycle. Things like emerging markets do well when the dollar weakens.

15:00So therefore, profits get reinvested in the system, and the virtuous cycle of macro summer and macro fall play out. And that should play out all the way into the end of 2025. Okay. Financial conditions are really important. So financial conditions conditions lead the ISM, the business cycle, by nine months. So we've been ripping higher in financial conditions for a while now with some pauses en route. If you look at the current pause in the ISM, it matches the pause we had in financial conditions nine months ago. But now it's been going higher. This financial conditions index doesn't take into account the fall in yields that happened this morning and the fall in the dollar.

15:43So by the end of the week, if those stick, we should see this even higher. But overall, as the dollar weakens and rates come down, financial conditions will continue to ease and that'll continue to lead the business cycle nine months from now.

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17:02Also, what the financial conditions is, is really gives you a composite of all the countries with their leading indicators rising. So it leads somewhat, and it's telling you that economic recovery is on the cards. And that's what these OECD composite leading indicators are. They're showing you that global economy is recovering, and financial conditions is what causes it to recover, which is important because that's where profits come from. That's where earnings come from in corporations. That's where household earnings comes from. That's where investment comes from. Money goes into the stock market.

17:39All of those things are driven by this business cycle. Okay, when we look at the global liquidity, you hear about me talk about global liquidity a lot. Well, you see, financial conditions lead it. The central banks pretty much act on the financial conditions. So there's a five-month lead. So you can see financial conditions on this weekly basis have been chopping around a bit, but are moving higher. And that should mean global liquidity should follow. and financial conditions should be breaking out once the numbers are updated. And that will have the liquidity also rising. So liquidity is the prerequisite for markets to rise.

18:21And so that is all coming into the play. And now we've been given the reason. People say, well, we need something to break. Well, guess what? We had it today. So we've got that. So global liquidity, when I look at it, global liquidity is about to break out too. I know you might think of this as a sin, doing technical analysis on the global liquidity index. But hey, it just shows the sideways contraction in global liquidity and the likelihood that it plays out, driven by the US, driven by Japan, driven by China, and also eventually driven by the Europeans and everybody else, because they all need to refi their debts.

19:02That's the big game, the everything code game. And global liquidity drives crypto. So if global liquidity is going to break higher, crypto will too. So if you've got to think of these moves we're seeing currently as wiggles on the path of the main trend. And what you tend to do, it tends to overextend in bull markets. And we should see that in due course. So as global liquidity rises, cryptocurrencies will rise, as will other markets like NASDAQ. The other thing is Global M2. Global M2, many of you have pointed out, is starting to rise. It's starting to break out. As that breaks out, that's led by financial conditions.

19:45So Global M2 is rising, another liquidity measure. Global liquidity is going to rise. Financial conditions are going to rise. OK, this is what we're looking to see. This is the macro summer signature, the macro full signature, the times when debasement comes, the times when assets do really well. You can see Bitcoin, how sensitive it is to global M2. As global M2 starts picking up, Bitcoin year on year should start picking up too. So again, I don't see anything concerning in the macro picture. The macro picture is incredibly supportive of higher asset prices. So that's why I think we're dealing with a spasm and not a regime change in macro where we're going into a recession or something like that.

20:29In fact, it's the fears at the bottom of the cycle that's causing this as the cycle starts to rise and things like the dollar needs to start weakening. It's not fears the other way around that the cycle's about to fall apart. You can see the financial conditions index also affects S &P 500. Equities are driven by financial conditions. So there's a six-month lead here. So as financial conditions start easing, that's the number going up, the S &P 500 should follow suit. So again, we expect to see stronger equity markets ahead. Emerging markets, they're driven by financial conditions, six-month lead.

21:07Emerging markets really are a function of the dollar, which is part of the financial conditions index. Financial conditions, our measurement is the dollar plus rates plus commodity prices. And we're seeing those ease, and that should put emerging markets higher over time for those of you who trade them. Tech stocks, six-month lead, same thing. tech stocks have been correcting and had obviously overshot financial conditions somewhat. And again, we should be looking for a base over this period of time. This volatility, for those of you who aren't max allocated to this stuff, this is the opportunity you're really going to want because NASDAQ, again, should take off from here around these levels.

21:48Now, again, I'm not talking about today or tomorrow. I'm talking about over the next three or four weeks, we should start to see liquidity coming, financial conditions coming, and equity starting to scream higher again. The big driver here is the PBOC. Right now, the PBOC have this cyclical pattern of every second half where they start injecting liquidity into the system. Additionally, we know they have a bigger cycle, much more like 2020, where they've got to deal with the debt deflation issues at home. So they're going to have to do quite a lot of easing. And they're going to do quantitative easing.

22:24And they're going to do all the liquidity measures necessary to drive their economy up. You see, without the Chinese economy, the global economy is a bit fucked. It's one of the key legs. So the Americans, the Europeans, the Japanese, everybody knows they need China on the game. And so China is now on the game doing what it's supposed to do. And we'd expect that to continue over time, particularly now that the yuan is starting to strengthen against the dollar because the dollar's going down, thanks to the Japanese. It allows the Chinese to be more aggressive, which everybody needed. Okay. So you guys are freaked out by the volatility.

23:07I've tried to explain with my don't fuck this up thesis that 35 % pullbacks are normal and sometimes more. You see, often in crypto markets, we get these. And really, they're opportunities to add and not freak out. This is why I urge the longer term time horizon. So I've been in this market of 2013. So I'm going to show you all the times I've had to deal with volatility like this. So here's a nice one. 2013, I got in around here. It then had a 71 % pullback. Now, this is early stage. So this is like a smaller token now, probably something smaller than Solana, more like an alt would trade. So in what looks like a sideways market, it actually did it down 71%.

23:52And then it did a 15x into the end of the year. So that's kind of how alts act in this. This is when Bitcoin was essentially an alt. It was a small cryptocurrency, not yet with full adoption, not yet proven. Okay. Then we go into the 15-17 cycle, which I think is a very comparable cycle to now. We talked about 2016 with the spasm. Well, before that, we had a sell-off of 35 % in 2015. So that will be something from last year. If we think about those cycles that repeat, The election years are always the macro summer years. So we'd be in 2016 now. So 15 would be last year. Guess what? We had a sell-off last year, and then we had the rally into the end of the year.

24:36OK, very similar. Then we had this 40 % pullback around the banana zone. Sorry, the boring zone. So this is the boring zone area around the Bitcoin halving. And that period, you saw a sharp sell-off, pretty nasty. And then eventually, it broke high. Then we had another 38 % pullback before you really got into full bananas. That's how this works. The banana zone is not about here and today and breakout immediately. It's a process by which prices accelerate over time once they're free of the ranges that they're in. That does lie ahead. I know there's a lot of people like, oh, Raoul, and you're fucking bananas.

25:17You're a top signal. Listen, you're not listening. This is not a short-term timing signal. This is the structure of markets I'm trying to talk about. and I'll show you a bit more on that. But that was that cycle. There was some pretty brutal. It was three 35 % to 40 % pullbacks. And what a cycle that was. But the end of 2018, this thing had really flown. Okay. So this is the 2017. That was after those corrections. we had four more corrections of 30 % to 40%. Four. So this should be sort of where Solana is now, where the size of the corrections, that's the sort of liquidity Bitcoin was, the size in market cap it was then.

26:02So this is, we're seeing similar in Solana now. Bitcoin is now much larger market cap, so its volatility is compressed. But this should be looking like Solana, where you start to see sharp 30%, 40 % pullbacks, and they're just pauses that refresh, and you keep going higher as the banana zone kicked in. So even with four 30 % to 40 % pullbacks, Bitcoin went that year from, I don't know, I'm just eyeballing the chart, 1 ,200 and ended up at 20 ,000. Okay, I'm not saying we're going to repeat that, but this is the kind of thing that plays out. So if you're dealing with too short a term time horizon, trying to top and tail it and time it, I think you'll fuck it up.

26:45I simply do. I think you'll miss the move. The best thing to do is to try and scrape the sofa for change and stick it in the markets when you get a sell-off of any magnitude. Because guess what? It compounds really fast and the games come much faster. You'll be back at all-time P &L highs before anybody else. That's why I prefer to add on the dips and not try and trade it around. because often you get sidelined just when you shouldn't, and the market's ripping, and you can't get back in. Okay, 2019. Well, that was a tricky one as well. We had a 54 % pullback in Bitcoin between June and December.