#980 - Raoul Pal: Will AI Shake up Financial Markets? w/ Angus Shillington & Jordi Visser

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

0:56hi everyone happy friday we are wrapping up our two-day crypto gathering it's been another great day of conversation about what's happening at the intersection of macro investing, crypto, and AI. Are you thinking about these things in silos? You shouldn't be. The pros aren't. And that's why we are bringing you this conversation with Raoul Pal, Jordi Visser, the CIO of Weiss Multistrategy, and Angus Shillington, the Director of International Equity at VanEck. In the chat and Q &A, they talk about the impact of technology on today's markets. Welcome to February's Pro Macro Insider Talks. I'm Ash Bennington, joined today by Raoul Powell, of course, our founder and CEO, Jordy Visser of Weiss Multi-Strategy Advisors, and Angus Shillington of VanEck.

1:42Guys, we've already been having a free-for-all off-camera here. Where do we start? I don't really know because there's a lot that we're going to talk about. And I think hopefully we'll be doing this on a repeated basis because I think it's going to be a lot of fun. If everybody watching this just realized we've never done this before, we just think there should be some real value of getting the three of us together. I think let's just start with a very big picture view, what we're focused on right now, as opposed to going through the full macro framework. I think maybe getting that out is a good start, Ash.

2:20So let's just dive right in. Raoul, do you want to kick us off? What are you thinking about right now? I'm still super focused on the time horizon of right now is where I think the business cycle sweet spot lies, which is growth recoverers, inflation remains low, and it starts super charging my secular themes, which are technology and crypto. Both benefit from debasement of currency, the added liquidity. But in addition, there is this exponential age of technology that's playing out, and the adoption effects of that, of which probably AI is the fastest, but it may not be. Who knows what else is coming?

3:01There's a lot coming. The robots are coming fast as well. We've got lots going on there. And then crypto, which is actually part of the same thesis, has been on fire as we've got the ETF flows driving things. But really, what that is all about is adoption. So we've got new technology adoption, which has been growing in a secular trend. And then it gets exponential every time you add the business cycle to it. So I'm really, really hyper-focused on that. If I look at, and just to tie in something Angus has looked at as well, I've gone through kind of every market versus debasement, this dividing things by the Fed balance sheet.

3:39I think, Jordi and Angus, I've shown you this before, this you divided by the Fed balance sheet. there's only one emerging market that actually comes out to be growing, which is, again, on the same basis of debt demographics and deflation as India. So you've got a very limited emerging market set that's really working and a very limited set. But those three markets alone are giving you enormous return. So I'm super focused on that. Well, that's a pretty good way to begin, Raoul. Let's continue that thesis. Well, let's find out what the other two are. I think let's find out what the other two are, and then we'll take it from there.

4:14Jordi, I'm going to go in the order you're on on my screen. Jordi, what's most important to you? What's most interesting to you? What jumps out at you most right now? Well, let me do it within the context somewhat, since Raul and I agree, at least on the structural forces. And I think if there's one message and one linkage between Raul and I, and I think why we started to talk so often, structural forces in the world that you have to make investment decisions on that we know are going to have an impact on things going forward that are having an impact today and picking the little themes out of them where you can make money.

4:47So let's start with demographics. So on the demographic side, by 2029, the last baby boomer will be a senior, and they're having an impact in the world, and they're attached in a meaningful way to what's happening in the labor markets across the world. So on the one side, that keeps the economy probably stronger than it otherwise would be from the basis of there's just a structural shortage in labor. And that's a real problem that continues to happen. And when you add in the work from home and all the movements on the other end, you're really caught in a situation where when people get negative on, let's say, business cycles, connected to all business cycles or job losses, and if you have a structural labor shortage right now, regardless of AI and the things happening, that is something that has impacted our world over the last four years, and I think will continue.

5:38RAOUL PAL, JR.: Geordie, let me interrupt with a quick question. Something I'm trying to think through is, do you think that going forwards, aging populations always have a tight labor market, like Japan has always had, and that we don't get that pickup of employment again until the structure of the labor force changes? Is this a real shift now? And it's going to confound economists for a few cycles? GEOFF BENNETT Yeah. And again, this gets back into this comment I make all the time, which is I think for that, it's the end of business cycles, the way we've traditionally done these overlays of, well, this is what happened in the 70s and the 80s and the 90s and 2000s.

6:19The structural situation, particularly of demographics and innovation, just it really ruins that. And so in that conversation is I just don't see a situation where we're going to lose a lot of jobs. We just had a jobs number in the US, which is 333 ,000. If you go back and look over the last whatever amount of months, you're still doing numbers that are surprising everyone. And it's really been during times people call recession. So I think this is going to be here, Raul. And I think without having job losses combined with the amount of consumer net worth that's been created through QE, through ZERP, through everything that's happened, And you can't have a combination of aging demographics and baby boomers controlling most of the money in the world at the same time of them not needing to work anymore.

7:05So it's this combination that just is different than we've ever seen before. I guess, have you got a view on this? I was trying to think how I sort of pull it all together. So I'm a pure equity guy. So that's sort of important first part. So I'm focused sort of very much, very similar, right, sort of implementation of thesis and ideas. But when I think about execution and my piece of value, it's more macro takes a sort of risk management perspective rather than a sort of leadership perspective. So not totally dissimilar. I kind of agree with all you guys say. I mean, my sort of scopes are tech hardware, so good crossover and India.

7:53and I think the one thing I'm so struck by right now is how the sort of implementation linkages have really broken down like a lot of what both of you have said just a sort of general misunderstanding of the value of businesses or the value of things or you know for example you know intangible assets are now I think the core driver of most businesses right so when you think tangible it's like your plant equipment and that stuff's obvious you can see it in the balance sheet intangible the stuff you expense or the stuff that runs through your income statement like people right have you got the right people are these people innovative teams work together you know the software you're implementing the stuff that you just don't really generally see So it's about getting an understanding of business sort of right from the bottom up.

8:44And I think, you know, I believe in agency, right? And I believe that there's never been a better time for agency, inequity specifically. And I think talking to a lot of the themes that you guys are talking about, but I think I close on this and we can talk about it as much as we want, which is this sort of idea that old school research vectors have become really unsophisticated engines for expectations, right? I think scope has become too short. And I think a lot of, I read your GMI, a lot of what you said in that about, you know, capital stacks and price to book and all that kind of nonsense from the past.

9:26That stuff really, you know, it doesn't take an account for the intangible stuff and the network effects. And so I think, you know, I think there's a lot of difficulty understanding the value of individual businesses right now, but the value of individual businesses are what are going to drive the implementation of your thesis, your macro strategy. So the whole thing has never been more in match. Hey, everyone, we're going to take a quick break right now to hear a word from our partners. We'll be right back with more of the day's top analysis on the Real Vision Daily Briefing. Join over 5 ,000 attendees for the largest AI event in Asia at Super AI Singapore, June 5th and 6th, 2024.

10:04Raoul 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. Visit www.realvision.com forward slash super AI for 20 % off tickets with the code realvision or click below. Have you ever wanted to trade Bitcoin but haven't dared try? With Plus500 Futures, you can trade crypto without the hassle of opening a wallet.

10:50With just a few clicks, you can register and start practicing with their free and unlimited demo. See a trading opportunity? You'll be able to trade it in just two clicks. Feel ready? You can move to real money with as little as$100 once your account is approved. And the great thing is that in addition to crypto, Plus500 gives you access to a wide range of instruments. S &P 500, NASDAQ, gas, and much more. explore equity indices energy metals forex and beyond with a simple and intuitive platform you could trade anytime anywhere experience the fast accessible futures trading you've been waiting for with plus 500 with over 20 years of experience plus 500 is your gateway to the markets visit us.plus500.com to learn more trading and futures involves the risk of loss and is not suitable for everyone not all applicants will qualify plus 500 it's trading with a plus

11:43RAOUL PAL So let's say you're right is that people don't value businesses correctly anymore. And Jordi's right that, let's say, the business cycle has structurally shifted. That sounds like it's going to be an extremely positive backdrop for markets that most people don't understand. Last year was a typical market where nobody understood what had happened. But really, what you're talking about here is a change in how people approach markets and economies, and people haven't got to that understanding yet. Maybe that's one of the reasons the markets were so ludicrously strong last year. You just need the Fed to take its foot off the neck of the market.

12:24Before you know it, this beach ball shoots out from underwater because things have changed. RAOUL PAL, MD, PhD Well, can I just add, I think so whenever I can find a chart that blows my mind and I put it in the context of what we're saying, And it's really important to me. I'm going to give you one from last year that when it came out, I had to really kind of check my mind. And it's an equity one, Angus. So it's a macro thing that fits in the equity theme. But I think it fits really importantly with both my side and yours, which is last year, all of a sudden, we got the net corporate interest payments.

13:04And when they released it, I figured, well, rates went higher, so net corporate interest payments are going to be high because they had been going higher continuously for 30 years. But instead, they collapsed. And they went back to levels in like 1980. And I don't know if you guys saw the chart, but the reason behind this can fit into this context of debt demographics and exponential innovation. So the reason they collapsed is because the mega cap tech companies cash holdings are so enormous that by moving rates higher, they're getting positive cash, positive dollars on their cash that more than offsets the interest expense that will happen over time or that has happened so far from these old industrial and these older companies that have debt.

13:57first of all, because they turned a lot of this stuff out. So they took advantage of the ZERP world. But then secondly, it's that in the enormous size of the mega cap or the magnificent seven or whatever you're going to do cash-wise. So that chart, when you think about it, it fits in with a lot of what we're talking about in terms of swallowing up. And I think that fits in with one of the reasons why there's no business cycles. You can do the same thing to some degree with, hey, rates have gone higher, look where mortgage rates are, but yet mortgage payments, because so many people have fixed-race mortgages, their mortgage payments didn't go up, but they get to invest their money in the money markets at higher than where their mortgages are.

14:32So there's a lot of these net corporate interest payments which fit in with this thing of no more business cycles. RAOUL PAL, And I wrote about this actually in GMI, this exact thing, having not seen that chart. But I'm just thinking through is like, and again, it was a conversation Geordie and I had had, Angus, that is interesting to you, I think, as well, is that we grew up in a world where businesses were financed by debt. the general electrics of this world. And all of these, they were debt finance businesses, and interest matters. Basically, the entire leadership of the S &P 500 has never had a single debt in its life.

15:07Or if it does, it's just for cash flow management purposes. And they're equity driven. Everything is equity driven now. If you think of all of the VC business, that used to be your local bank. You'd have to beg and say, I'm setting up a new business. Now, we call it a startup, and a startup actually means equity funded thing. And therefore, maybe the business cycle matters less. Angus, what are you seeing? Because a lot of the tech companies, stuff like that, there is a difference between people who borrow money and people who don't. I mean, in your world, Ambani was a great example. He switched from one to the other very fast.

15:44Right.

15:47Yeah, I mean, really to sort of step it back, I think sort of the question is, what is equity, right? And what's the purpose of equity and how does equity build wealth, right? So like the wealthiest people on earth don't get paid massive salaries, right? They build businesses and the equity in those businesses grows over time. That's just a reality. What is the purpose of debt?

16:11But it's because it's available in many cases, right? Because really the way to build a business, and this is, I'm in Mumbai right now. I've been charging around India for the last couple of weeks. And it's really interesting because India, interest rates have always been high. Inflation has been high. Currency has been an issue. So the businesses here have grown up with no access to debt. I don't say no access, but very little access to debt. So the way that they've built and scaled is high free cash flow, high margins, persistence of business, low cyclicality, volatility. Because they don't have access to equity investors either.

16:52So there's no VCs for most of those guys, right? Where they came from. I mean, that's changing now. But the reality is that they did it the old way, the sort of business school way. So, right, you take cash flow and you invest that cash flow and you get a return on capital employed, which is greater than your cost of equity. And that compounds over time. That's a beautiful way to build a business. And that's how the equity in the business works. Now, you throw in debt for whatever reasons to do buybacks or to buy capital stock where possibly the returns are not what the cost of equity would be because otherwise you'd have gone out and raised equity.

17:27That doesn't build capital over time. And I think the bit that I've been really sort of, and it's very dispersed, but this sort of the role of earnings per share, right? Everybody's very focused on earnings per share as this sort of core vector of value or growth or something. And it's nonsense, right? You can manipulate earnings per share so easily, right? You can, I mean, China's probably the worst example, but you can sort of see it everywhere. The way to get your earnings per share out is shoot your balance sheet to pieces, right? So as you're seeing in the worst case in China, you let your receivables drift up or your inventories drift up.

18:05But the idea is you can run stuff through the income statement, but you're not capitalizing away in your balance sheet. So the equity itself isn't growing, but you can grow your earnings per share. So debt is more of an income statement thing to grow your business. But if the business hasn't actually accruing value in terms of the balance sheet or what you're paying back to shareholders, it gets really difficult. I think this is the point that you made in your GMI is that how do you get paid as an equity investor? This is the riskiest part of the capital structure, right? It's not, I think it's sort of one side of it, people use it as like an option, right?

18:44It's just like it goes up and down. It's very liquid. And on the other side of it, you can use it as a compounding mechanism. But I think when you reduce debt, and I think of reducing debt in a high-quality way by just simply generating more cash flow and having more ability to fund your own CapEx. And that's really what the core of the biggest, most successful businesses on earth are right now, whether it's the Magnificent Seven, whether it's PENs. Although, to be fair, Angus, most of them didn't start that way. Not the businesses of the last 20 years. Almost all of them were negative cash flow for an extended period of time.

19:20which is a complete change because no bank would fund that beforehand unless it was an infrastructure project. So it just feels like it's different. I don't know, Jordy, what do you think this whole flip between debt and equity means? Yeah, I think I have a different take. and my brain goes the direction five to 10 years. And I think we're in the early stages of, with the rise in AI, we're getting rid of the last piece of the puzzle of the association or the correlation between debt and the market cap of a company. So when we talk about equity or debt, I'm just looking for, they need money to expand their business.

20:07And if you wanted to take your business and grow your market cap, you had to borrow money or raise money somehow or take it out of earnings. And I think we're entering a world now where the debt that was remaining, the one expense that you needed to grow no matter what in the virtual world or the digital world was still people. So whether it's Google, whether it's Amazon, they still needed to hire an enormous amount of people to scale. Being able to scale now without location, like less physical buildings and stuff because you've got a more virtual or software world whatever. You don't need to expand the way that a Starbucks does or anything like that.

20:46You can just do it without that. Now you can do it without people. And we're starting to see that more, or let's say with less people because of AI. And so the way that people think and have worried about artificial intelligence is that it would lead to a lot of job firings. I've written about this. I think the right way to think about it is what will happen is there's going to be a tremendous amount of startups that are able to grow much faster without raising capital the way they did in the past. And you've seen this with some of the bigger AI companies, particularly like Mistral in Europe. They're able to scale their businesses to a billion and a half dollars in record amounts of time and without having to give up as much of the business that they did in the past.

21:24So the owners are going to own more. And Raul, this segues right into what I believe, which is, you know, I always joke with macro, if I can find situations like with my kids that I know at age five, what they're going to kind of, I know a lot of things about what they'll be like at 15. It's very easy to say they'll be taller, they'll weigh more, they'll have more stress. With this world, AI leads to more cyber, it leads to more cryptography or blockchain, and it fits in with the concept of, I think smaller businesses are going to own more of their business than they did in the past, where the banks, the VC places, private equity have owned a bigger share.

22:04And I think the public market size relative to the economy is going to start to shrink. And I think that's going to start to happen. And you're going to have more smaller businesses that are not mom pop, but they're people that are driven by younger people that maybe want to own more of their business and don't have to go this monetization. So debt to some degree is tied to monetization in these things. And I just don't think that's going to happen much over the next five years. I mean, I agree with what you're saying. I mean, I would to sort of push back on the one thing you said, rather than that business is starting at negative free cash.

22:35I totally agree. I mean, as venture is scaled up, that's filled that gap really nicely. And I think we're on a sort of linear track toward what Geordi is saying, right? So less venture required, the cost of setting up a business is relatively low and getting lower. And I think large language models help you get there very quickly. So it's sort of a phase in where, yeah, I think there's less reliance on debt, less reliance on venture, and more equity ownership by the others. One of the things I've also been trying to get my head around is I also think businesses will rise and fall much faster. Like, I was using recently Otter AI to do, when you're on a Zoom call, it transcribes it, gives you some notes.

23:26Zoom, we started using the Zoom one. It's like 10x better. That's the end of Otter. And we're seeing this happen at a scale because people are now using AI to build the AI, to build the business, to build the AI. And it's like hyper fast. I'm worried that venture capital will never be able to capture money in this environment. Sure, in some areas, of course, but in some of the really fast moving areas, we've seen it in blockchain. It's been really hard. It's an ICO market seems to be more effective, because it can trade for six months and be worth a lot or nothing, and it's okay. But I'm not sure the BC survives this.

24:04RAOUL PAL, I think you've got to separate out in tech, specifically hardware from software. Hardware was written off like 10 years ago. RAOUL PAL, Now the hottest thing in the world. RAOUL PAL, It's now the hottest thing in the world. You were talking about our SMH ETF. I mean, that thing is ridiculous because it's the way that has ended up with a relatively small number of holdings. It's just, it's the winners, right? And those winners are now undisruptible. So, while software is very easy to disrupt, the hardware stuff, almost impossible. I don't think you can disrupt TSMC. I mean, there are chips you can take away of it.

24:40And who knows them on NVIDIA, but that looks pretty safe for the time being. So I think, you know, the software side of it, yes, I think your point is very fair, but the hardware part is going to be king, right? How do you? Do the hardware, I'm reading a random book that both of you probably enjoy and you wouldn't think you would, is Yanis Varoufakis, you know, the kind of Marxist intellectual economist. Greased. We're going to take another quick break to hear a word from our partners. We'll be right back with more of the day's top analysis on the Real Vision Daily Briefing.

25:18He's got a book called Techno Feudalism, and it's bloody interesting because his view is these platforms like Amazon, Twitter, Apple, all of these, they are now a feudal-based system. They're not capitalists because it's all rent-taking. So you're a rent-taker at the middle of the system. And if you want to operate in that world, the feudal landlord takes his fees. And I think it's the same in tech hardware. That's where it's going. It's like, literally, the barriers to entry are so high, it's almost impossible, of which Taiwan as a country has a barrier to entry so high, it's almost impossible to deal with, that they become feudal landlords of the hardware.

26:00It becomes very interesting. And maybe the serfs in the bazaar trading things are all of the software companies in the end when it used to be a software owned world. Again, there's something shifting here. I don't know what it is. Yeah. I mean, you have this weird scenario where the costs to build businesses, particularly in the software and services space, decline. But in the hardware space, it almost becomes a nation state driven business. How does that kind of shake out, I guess, as you see it? I mean, these businesses are sort of truly international. How, you know, if you look at their cap structure, they're not, they just happen to have a geographic location.