Raoul Pal & Julian Bridgen: Understanding How to Navigate These Global Markets

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0:45No risk involves while you familiarize yourself with the platform. The company has been operating in the trading space for over 20 years. Download the Plus500 app. Trading in futures involves the risk of loss. It is not suitable for everyone. Not all applicants will qualify. Hey, everyone. Today's Real Vision Daily Briefing is sponsored by CraneShares. Learn about their KRBN ETF at craneshares.com forward slash KRBN. Now to the top analysis of today's markets.

1:23Hi, everyone. Welcome to the Real Vision Daily Briefing. As you know, our mission here at Real Vision is to democratize financial information and help all of you achieve financial independence. So, in honor of the 4th of July independence holiday being observed here in the U.S., we've decided to unlock parts of a couple of great conversations we've recently had on the Real Vision platform. These are the kinds of smart, in-depth discussions we have with our community every day. First up, Real Vision co-founder Raoul Pal and his favorite sparring partner, MI2 founder Julian Brigden. So my view has been for, well, since November, that we're in a bull market and it will continue based around liquidity and based around the fact that I thought that the markets priced in a recession last year, year-on-year rate of change of the Nasdaq, for example, priced in the ISM at around 37.

2:19So even though we've still got more of the economic weakness to come, I think the markets are now looking forward to more cowbell. So I kind of remain very bullish equities, very bullish crypto, and bullish bonds, which has been a shitty call. It's been a total waste of capital right now. But I remain in that camp. And I've been long, a whole bunch of technology, both for GMI and also for Macro Insiders. And that's worked out really well. Now, we're wildly overbought. So we've got to correct at some point. So I think we'll probably get a couple of weeks correction. How steep is it? Who knows? 5%, something like that, before we continue higher.

3:04I don't see anything changing in the interim. him. But we do have summer markets, and summer markets can be just a little bit boring. I think it gets kicked off again later in the summer, probably with the banking sector. I think that story is not done. Even though we reached the oversold levels, we've got weekly demark counts, and it bounced right off that, I still feel like that story is yet to play out. RAOUL PAL, So in what sense, Raoul, you're saying that they look extended and there's more bank weakness to come through? Or what do you think? RAOUL PAL, Yeah. Basically, they got overextended in the short term.

3:38RAOUL PAL, Yep. Bounced. RAOUL PAL, Bounced. RAOUL PAL, Bit of summer nothingness. Then we often see this later in August, it starts slip sliding away because the yield curve is still negative 90-year basis points. RAOUL PAL, Yeah. RAOUL PAL, And the money market funds are at 5%, and the banks are at half a percent. RAOUL PAL, Right. RAOUL PAL, And then we got the commercial real estate mess. RAOUL PAL, And the losses, I mean, you look at some of these net interest margin announcements. I can't remember which one it was, just came out the other day. And it was like a 20 % drop in net interest margin because they were funding at 50 basis points or 100 basis points.

4:14And all of a sudden, now they're borrowing from the Federal Home Loan Bank, the penultimate lender of last resort, as they're referred to, at 500 basis points. So, their profitability is just squeezing out. And we'd written about this where we said, you get the kind of heart attack, the liquidity event, you overcome that, but you've still got ongoing cancer in this sector. It's just not going to get better. Because they can't make profits. To your point, we haven't even started seeing losses yet. And those are coming. And if you look at the Fed emergency lending window, it's still rising. So there's still stress.

4:53But we're at the point where the market price in a reasonable amount, it needs to digest all of that. And then, as you said, the profitability issues and other issues will start coming out. Some commercial real estate's already starting to get marked to market by some holders. And that alone is a huge issue, as we know. Oh, God. It was interesting. I was in Europe a few weeks ago. And I met with a very large distressed debt, a bit vultury fund, let's say. they certainly described themselves as quite an aggressive lender. And they were talking about the only difference between places like Sweden, where we've seen catastrophic price action in the REITs, where we saw one, I think it's SBB is the big lender there.

5:46It's down 90%. And they said the only difference between that and the rest of Northern Europe was just time. and that they just simply haven't marked these deals to market. You've had some deals in Sweden marked, so you could actually mark portfolios accordingly. And I have to think that's the case here in the US, that if you really did start to mark this stuff to market, the losses would be absolutely profound. I can't remember what they call Brookfield, walked away from a whole bunch of stuff in downtown LA. Yeah. RAOUL PAL Yeah, because the reality is the world has changed. Nobody's going back to the office.

6:25And if they do, they go for one or two days a week. So everybody is still stuck in leases. So when we look at the commercial real estate, the office stuff, and it says 50 % occupancy, that's because people are still paying leases. RAOUL PAL Yes, correct. RAOUL PAL When you start looking at the cell phone usage, and you see some of it's down 60 or 70, then you know that it's very problematic. Look, I don't disagree with you. RAOUL PAL I was speaking to somebody yesterday about repositioning some of this stuff. And it's like, there is no way most of this stuff can get repositioned offices into housing.

6:59London's doing some of it. But a lot of the plumbing and all of the stuff, the construction and shape of these things aren't very useful. Also, London generally has some of these smaller buildings, which I think would be easier to do. New York just has these mega massive tower blocks, which are quite hard. in big, like a city block-sized building. And it's quite hard to split that up into condos because you don't have enough windows. No. And also, you've got, apparently, the guy said the issue is they're made of poured concrete, so you can't move walls around. So you can't change the configuration.

7:34The plumbing's not right. And as you said, half of them don't have windows. So you don't really have much. What he did say was interesting is that he's starting to see use of out-of-town shopping malls, which are now dead. I mean, Amazon killed those and COVID stuck the knife in it. Starting to see them repurposed as like sports facilities, recreation facilities, because they're huge indoor spaces. So if you're in somewhere cold and miserable like Massachusetts, you can use that empty shopping mall to put tennis courts and pickleball courts and football fields. Absolutely. You know, everywhere I go, I come across shopping mall facilities that are now trampoline parks for kids where you exhaust them so that you have actually got a chance of getting some in the evening um otherwise your kids are too you know will never go to sleep and you know it's everywhere i think this thing is already like swept north america i wonder how much of it is going to come to europe because you're going to see these climbing wall places crossfit gyms uh trampoline parks go-karting centers problem is it's all second best use so whatever pricing you had for that footage it's got to be worth less in this second best because you're not getting you're not getting macy's as your anchor tenant correct right and you know that was millions of dollars of turnover like yeah that's how you price all this stuff was these anchor tenants, the gap and all of that stuff.

9:09And they're just not going to be there. So you're right, Harry. I mean, the value of this stuff has to go down to make the yields attractive to do it. And that means you have a residual value problem on the fixed income that was issued against it. So we haven't taken those losses. Yeah, so it puts things back in perspective. I think that this bank thing, I think is pretty serious, frankly. I think, you know, when I look at net interest margins or a difference between basically what they're earning on their books and what they're paying to fund those books. Remember, banks make hedge funds look pedestrian when it comes to leverage.

9:45Banks are 15 to 25 times leveraged. They are balls to the wall leveraged. So if you're funding at five. That's quite a problem if your assets are yielding 3.8. So, I think their profit starts to deteriorate or continues to deteriorate on their net interest margin. I think we haven't even started to see the loss. I was looking at credit card losses, for example, and while they're very, very low in absolute terms, the rate of change of credit card losses now is approaching the sort of highs of 08, just before we went to the recession there. You're about to see commercial and industrial loan losses start to accelerate, I think, materially.

10:33So, the banks are going to start to have to take impairments. And I think this becomes, this is a slow but cancerous burn for the underlying economy because this is, you know, have to have credit. You get growth off credit. So, I think this continues to suggest to me that the recessionary risks are real. Now, I would concur with the liquidity thing. I mean, I'm not as bullish as you, but I had back a while back and we told you guys we had a buy signal on the S &P. around 3 ,900, we got a buy signal.

11:14Sorry, I think it was a bit higher. But we got a buy signal, and I kind of struggle with that. But I do think short term, and I just wanted to show you this, if I look at the liquidity ratio and some of the FAANGs, because we know really that's what the equity market bullish is. There's nothing more than just a bunch of FAANG names. And if I look at So this right here, right now, if you look at the ratio between underlying liquidity and the FAANGs, we're as extreme as we were in February of 2001. And back then, the FAANGs fell 16%. Our ETA model short term is going max short today based upon, and this is not, we don't give you trade recommendations based upon that, but we're going max short based upon a close in S &P futures below 44.23 and NASDAQ futures below 15.273.

12:20And it's not fundamentally short, interestingly. It's just saying, to Raoul's point, we are so stretched in the range that we have to have some sort of correction. I mean, how much that is? Is it 5 %? Is it 10 %? Is it in fangs? Is it 16 % like it was last February? I don't know. But we've written a lot about how these parabolic moves are non-sustainable. The rise in doesn't mean that it won't be a good company long term. But when you see a parabolic move in a stock, It's a great time to make profits, but parabolic moves don't continue. If they start to lose momentum, you have to start getting quite worried because they are classic crash patterns.

13:10Are you starting to see a classic crash pattern in the NASDAQ? I think it does look a bit like that. How far it goes, I don't know. A lot will depend on what happens to liquidity as we move into September and October. And there are signs that you will start to see quite a lot of stress in some of these liquidity metrics come September, October as the banks, as Treasury starts to move from issuing bills, which is what they've been doing, which hasn't come out of money markets and they've reversed repo. So, it hasn't drained a lot of liquidity from the system to issuing more duration. The banks are not going to be able to take duration risk as we move in towards the end of the year because they've got some regulatory requirements to meet.

13:55So you could end up with more liquidity. But right here, right now, all I would say is things look a bit extended. They look a bit extended. Just a quick moment to remind you, today's Real Vision Daily Briefing is sponsored by CraneShares. Learn about their KRBN ETF at craneshares.com forward slash KRBN. Now back to today's analysis.

14:25That was part of a monthly conversation Raoul and Julian have on our pro tier called Macro Insiders. They're two of the best macro thinkers out there, and the fact that they face off and challenge each other each month only makes them better. Next up is Andrea Steno-Larsen in an excerpt from Buy Side Meets Sell Side with CIO of RoboCap Asset Management, Jonathan Cohen. So we're going to touch upon today how to actually classify a stock as an AI investment. And you're already starting to dig a little bit into this topic because, I mean, as a layman, from a technological perspective, I tend to think of AI as something related to generative AI, right?

15:11Something related to chat GPT or the likes. But if you look at AI from a broader perspective, which sectors are actually impacted and where can we find AI stocks on a broader scale? So what is really interesting about AI is that it touches every sector without exception. There's really not one that is not touched. So you have different kinds of AI. You have, I mean, just to start with AI is when you use, for example, computers to mimic human intelligence. And that's probably the most basic definition of AI. And then you have machine learning, which is used to analyze data. You have, and I won't go into all the different classifications, but you have some that are using neural network, reinforcement learning.

16:11But it is definitely more than an algo. What is really interesting when we analyze stocks that call themselves AI stocks is that about a third of the time, at the end of the conversation, there is no AI. on sometimes we've had multiple conversations with the CTO, sometimes with members of the advisory board. We have Professor Paul Newman from Oxford, who is an expert in AI. Depending on the use of the data, depending on the type of staff that they have, it is sometimes just an algo, but AI has become a buzzword and you have to place it somewhere. Now, companies need to have an AI strategy. But already, I would say for the last three, four years, a lot of software companies or quantitative funds have been calling themselves as AI, but they were not using machine learning, not using neural networks, sometimes just an algo.

17:12Now, in terms of the sectors which are impacted, so for me, cybersecurity is probably one of the most interesting applications. So I guess everyone right now has an antivirus, but the majority probably of the people who are on this call are using some of the incumbents. Let's say Kaspersky, Norton, McAfee, systems which are updating a database of known virus signatures every day. and then simply comparing how if they see this virus signature in the files that are being opened. So it slows down the computer. It's only effective to known virus signatures. And that's why you have sometimes massive government-sponsored attacks that are very effective.

18:09If you have a new virus, you can infect thousands of computers at the same time. Now, the market for cybersecurity is growing at about 9 % per year, which is good, but not huge. If you take the incumbents, their growth rate is close to zero. If you take the companies that are using AI, their growth rates in average is probably around plus 30%, 40 % a year. And in some cases, they have become the market leaders. So for me, that's a prime example of use of AI. That could be companies like CrowdStrike, SentinelOne, Cloudflare, just to name a few. Now, in healthcare also, it is very interesting. So AI is already used to identify, for example, cancerous cells on X-rays.

19:07but it's not taking off as quickly as other AI applications because you need to convince the doctors to use it and to recognize that the AI picked up a diagnostic that they would have missed. So what makes really ChatGPT unique, from my point of view, on degenerative AI, which is based on large language models, so you can chat with it, you can speak with it, it doesn't require any form of expertise, is that one, it is very easy to use. Two, it is general purpose. On three, it works incredibly well, even if it sometimes hallucinates. Humans do hallucinate as well, but it works incredibly well. So I cannot think in the world of AI or robotics, a product that came to the market that ticked all the boxes to have so many applications to be a mass product.

20:17So it is really disruptive. So a bit of anecdotal evidence from my side in relation to what you just said on chat, GBT. I had the pleasure of interviewing the Danish version of Paul Newman. So he's heading the AI sector at the University of Copenhagen. And when I talked to him about ChatGPT, when it started airing as a theme in the public media, he said to me, well, we've been capable of this for quite a while. And then I said to him, yes, but this is the first time that we are actually showcased a user interface that is friendly enough for people to use it. So on that note, where do you see similar use cases appearing across sectors from an AI perspective?

21:02Where do you see the friendliness appearing of the AI technology across the board here? So if I understand your question correctly, we don't. I mean, there's some AI that is used for computer vision to make business decisions, but which is publicly available for free and so easy to use. I cannot think of any other application than the generic AI we've seen recently. Fair enough. So the big question here from a stock picking perspective is how to avoid being tricked into an equity claiming to be an AI stock if you really want to invest into this theme, right? And we've seen a clear surge in the amount of companies just on the S &P 500 index, for example, trying to mention AI as many times as possible and earning calls.

22:05So take us a bit through your process on how to evaluate whether a stock is truly linked to this AI theme or not. Yes, so the starting point is to understand what is the technology. So what we have noticed since the start of the year is that the number of stocks that have AI in their name have double, triple, quadruple in price. but in some case they are truly AI companies but they are slow growing AI companies so not all AI is growing at the same speed. The reality is that it is not easy to figure out if a company is really using AI or not. We usually start with the application so is it just voice recognition?

23:01Or is it like a black box, which pretends to do something that you could not do otherwise? That's generally the later parts. That is very difficult to find out because you cannot open the black box. You cannot see the codes. But what you can do is to try to understand what is the use of data. How do they use data? What is the background of the scientific team? In some case, they have background in video games. In other case, they have real proper background in machine learning, in neural network, have written paper about their findings. The more difficult part, I would say, is most of the AI, true AI company do not necessarily mention AI in their name or in their description.

23:58So it doesn't make the job easy, but when you focus on that, you do that only for like the last seven, eight years, you find a way around. What has been, I have to add, the technology is so complex. I'm not defining myself an expert in AI. My expertise is probably be more investments in AI. So we have to work alongside the leading experts in that field, the one which are doing the research on those people are not working for funds. They're not working for banks or asset managers. They are doing research. They're working in labs on their writing history. Andreas has such a fantastic ability to take big market themes like AI and translate them into actionable strategies across asset classes.

24:49The best part of almost all of our shows is that they include live Q &A with you, our community, because that's what it's all about. We hope you enjoy the conversations. U.S. markets are closed July 4th, Tuesday, but we'll be back with you live Wednesday, July 5th with Academy sessions, three ideas, our daily briefings, and much more. We hope to see you then. As always, take care and good luck out there.

25:18Thanks for joining us, everyone. Today's Real Vision Daily Briefing is sponsored by CraneShares. Learn about their KRBN ETF at craneshares.com forward slash KRBN. Have you ever wanted to trade Bitcoin but haven't dared try? With Plus 500 Futures, you can trade crypto without the hassle of opening a wallet. With 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.

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