Raoul Pal: Quick Crypto Market Update

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0:45Learn more and join the community now by going to realvision.com slash polkadot. Hi everyone, Raoul Pal here, and this is my show, The Journeyman. Well, actually, this is a quick update. I want to try some of these to see if they help you. And there's a lot going on in crypto right now. So here's something for you. Now, don't forget, please subscribe to the channel. Comments below. I do read the comments. I will reply. I just want to make sure we build a community here. And the more that you subscribe to the channel, the easier it is to book guests, stuff like that. So please, please, please just subscribe to the channel.

1:21Anyway, enjoy the quick piece. I hope you find it useful. The idea is don't panic. Join me, Raoul 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.

1:43Hi everyone, Raoul Pal here and my show The Journeyman. I thought I'd give a short update. I've not really done one of these before, but I thought it'd be helpful to people. I want to talk a little about the crypto market because I know people get concerned, they see sell-offs, many people are new to the market, and I thought I'd try and give some guidance. As I've always said, crypto markets are volatile by nature. It's a 70 % volatility asset class. It has deep drawdowns and it has tremendous upside. In fact, it's the best performing asset class in all recorded history. But with that best performance comes volatility.

2:22It's something I warn about in this don't fuck this up thesis, which is don't take leverage. Don't try and trade around or FOMO into stuff. Just be careful what you do and stick to the basics, stick to the bigger tokens. If you're going to degen into stuff, do it in the smaller stuff because that stuff's much more volatile. Your probability of getting it wrong is very high, although you can get 100x in the space as well. I understand that's attractive to many people. but I'm trying to keep everybody on the straight and narrow. And when you see these drawdowns, it always feels terrible. And I've been doing this since 2013 and they always never feel great.

3:01But the reality is it's normal. So it's normal in the fact that in the last 12 months, you've probably forgotten this, but this is our fifth or sixth 20 % pullback in Bitcoin. So you've dealt with this many times before. You just kind of forget it, which is weird. And I think Coinbase put out a super interesting tweet, which was, there have been five Bitcoin bull markets. In an average bull market, you will have to survive the following to ride it to the top. Six 5 % to 10 % drawdowns, three 10 % to 20 % drawdowns, two 20 % to 30%, one 30 % to 40%, one 40 % to 70%. And that's all during a bull market.

3:44So it takes a certain kind of gumption. It takes an ability to turn off Twitter, to turn off your screens and say, has my thesis changed? Is the adoption of this technology stopping? Is there any other reason that it's going to slow down? Where are we in the business cycle? I spend enormous amounts of time trying to educate you guys that this is a macro asset is driven by the business cycle. Just happens to be forward-looking like technology stocks and it's driven by the liquidity cycle. So has something changed in the business cycle that would tell us that we're going to have a failed crypto cycle?

4:23Well, in all probability, that's a no. So therefore, it's corrective price action. And if you happen to have extra money on the sidelines, use these corrections to add. That's what I did. I was lucky enough to have a bit of cash and I added to my Solana position. Great. And I found that that compounds really well over time. It's a key way to make better returns out of this space is use the drawdowns to your advantage. Even the big cyclical ones. I didn't sell out of anything last time. I had no intention of it. It wasn't like I missed the top or anything else. I knew that to get back in is really hard.

5:02If you take X sum out, you never put X sum back in again. You go smaller because you don't want to risk it all. your whole psychology screwed up. So what I prefer to do is say, well, this is a longer term trade. When we get the big drawdowns, I just want to add. And then you compound and you're back to all time highs well before the market is. And that is really, really a superpower. So what's going on now? Why is crypto so shaky? It's the same reason tech's been shaky. It's liquidity stupid. Remember, I've told everything about this everything code cycle. And those of you in Real Vision Pro Macro and even Pro Crypto.

5:39Kevin Kelly and myself talked about it yesterday in Pro Crypto. Liquidity is the big driver of all asset classes and particularly crypto. It's the most receptive to liquidity injections or withdrawals. So I correctly managed to time the bottom in 2022 based around the liquidity cycle. and the forward-looking elements of the liquidity cycle continue well into 2025. So I don't have anything to concern over. So therefore, we're looking at the wiggles in liquidity. And those of you who follow Mike Howell, who's on Real Vision frequently, he also follows liquidity. He's probably the expert on liquidity.

6:20And he talks about the liquidity air pocket that I've looked at as well. The liquidity air pocket was happening. If you think about the US liquidity, it's driven by the Fed's balance sheet, which they've been doing QT. So they've been tightening it, making liquidity less available. But that's been offset by the treasury, by the draining of the reverse repo. The reverse repo is an offset to what the QT was doing. And the meantime, the other part of the equation is the treasury general account, which is the checkbook of the US government that Janet Yellick controls. And she's been building that.

6:58But these have meant the liquidity based back in 2022, and it's been going vaguely higher. The everything code cycle taught you that there is no way of financing the debts. It's now become a word people use, fiscal dominance. This is the everything code cycle I started talking two years about. The everything code cycle says, well, if GDP growth is too slow, then the amount of debt in the system is too high. So you need either interest rates to come down or you need growth to go up. Now, growth is driven by demographics over time. There's not much we can do about that. You get cyclical growth, but you don't get the overall trend row growth, which has been slowing.

7:42So the available GDP has to pay the interest on the debt between the government sector, that's 100 % of GDP in debt, and the private sector is 120 % in debt. So we've got not enough GDP to cover the interest payments. This gets really exacerbated when interest payments are high. Trend rate of GDP growth is about 1.75%, probably 2%. Whilst interest payments right now are, let's say, two-year bonds are 5%. 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.

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9:20okay and if you double that taking to count the private sector you've got 10 of interest payments and a nominal gdp growing at whatever it is five so there's not enough gdp which is why the bond market's been freaking out um over time yields have have risen even though the fed have been talking about cutting rates and this is the issue of not having enough gdp growth this is the everything code cycle. So what it leads to is what's known as more cowbell, which is stimulus. Stimulus can come in a number of ways. So the most obvious way is reducing interest rates themselves. That has been a typical path.

9:59The other way is the backdoor mechanism of injecting liquidity into the system. Quantitative easing is the best known one. The other one is draining the reverse repo and also draining the treasury general account. So those tend to be those. And then there's some more coming and I'll come into that in a sec. So where are we today? Why did we have the air pocket? Well, QT was going on. So they're selling bonds. The treasury had started building up cash reserves because tax payments have come into the system. They come out of money market funds and go into Janet Yellen's checking account, and that's taken liquidity out of the system because she hasn't spent it yet, so it's just sitting there.

10:43She's been trying to help the market by issuing short-dated bonds. That's drained the reverse repo. But now today, the markets reverse very quickly. On another piece of news, the other piece of news was Jay Powell has said, hey, we don't want to sell as many bonds, quantitative tightening, which is we're going to ease liquidity conditions. Janet, on the other hand, hasn't said that she's going to issue more short-term bonds yet. Well, it's a bit impossible because the reverse repo is almost drained anyway. She's going to wait till closer to the election to unleash her checkbook and throw out money to everybody.

11:22And she will do that. And that will come in the second half of the year. So what she's done is another bit of magic. She said, well, what I'm going to do is I'm going to keep issuing these shorter dated bonds, and I'm going to buy back some longer dated bonds. And it's the illiquid off the run ones. But really, it's a recycling of liquidity. It's adding liquidity into the system. So Janet started to add liquidity, and Jay is making sure that he takes less liquidity out of the system. The reverse repo's almost drained. There's a bit more to go, but then it'll come down to Auntie Janet, and she will then start throwing her checks around and handing out money.

12:02There's another piece of magic coming for next year that's not on people's radar screens, which is Basel 4. Basel 4, the Basel agreements are basically bank capitalization regulations after the banking crisis. They imposed Basel 3, which meant people had to hold more regulatory capital. That is code word for owning more government bonds. Basel 4 is going to tighten that even further. So they're going to force the US, the UK, and the European banks to hold more government bonds. How convenient, because you need a buyer of the bonds to add liquidity into the system. And so that is coming. It starts with Europe, I think, in January 2025, and the US and the UK will come by about June, July 2025.

12:46So there's liquidity coming in the system at a structural level, i.e. they're creating another larger buyer of bonds. We will see more of those kinds of things over time and we're going to get much more liquidity but this is just the fed over in uh europe well the ecb want to start cutting rates soon that's going to start injecting liquidity into the market they're also still planning their big green energy initiative to lower the cost of electricity in europe which is actually good for productivity i know people think it's a waste of money throwing money around the green um energy activities but it's not because over the time, you'll force down the cost of electricity, and that increases productivity, and that helps GDP grow.

13:25But in the meantime, they will end up financing more of this with issuing green bonds or whatever it is. There's going to be a way that they will inject liquidity via this as well, because they don't want to use the balance sheet if they can avoid it, because everyone knows what the balance sheet is, the printing of money. Okay, so Europe's probably in the equation. The UK's similar. They blew up their guilds market last year. They will do some injection of liquidity for sure, whether it's via rates or whether they can find a backdoor excuse to do something else. Obviously, Basel IV for all of these helps.

13:54Japan. Japan has got a real problem on its hands. Its currency is falling fast. And there's very little they can do. They don't want to raise rates too much because their GDP is too slow. They've got the everything code issue at hand as well. So they've got this problem. China's also got the same problem. It's starved of dollars. It has a bunch of dollar debts. It has a debt deflation going on, particularly in the property sector. It's an unbalanced economy. They need dollars. And they can see Japan losing control of its currency. They're nervous about that. Janet Yellen's been over there twice because she's worried that if China devalues, they're going to dump deflationary goods onto the US and create other problems.

14:35So somewhere here, there needs to be an injection of dollar liquidity into the system, whether that's via swap lines or some other backdoor mechanism to alleviate the strength of the dollar. I think that's going to come as well. And China itself will probably inject liquidity into its system in some way, shape or form. Everyone's been asking them to do so. They will have to do something over time. But they can't do it with the US interest rate so high because if not, currency goes. So it's this problem. There's a bit of negotiation. We've got a G7 meeting coming up in May. so we may see some noise around foreign exchange markets and some change there so look for a change of sentiment coming out of that look for a change of sentiment coming out of the bond market Jay was very cautious not to say we're going to be raising rates he really really wants to cut rates because they know they have to to finance the deficits that air pocket of Janet's bank account growing And Jay doing QT had caused a decline in liquidity.

15:46That decline in liquidity is what caused the decline in crypto. Now, Jay went clearly today to say they want to reverse some of that, and Janet's going to start reversing some of that, and then she'll start spending it. So the forward-looking basis, liquidity is going to come back. Is it going to be this month or next month? I don't bloody know. It doesn't really matter because we're not in it for the short-term trade. What we know is it has to come back because of the everything code and the financing of it. If you've not seen what the everything code is, then please go through the YouTube channel or on the Real Vision platform and look for the everything code, that big interview I did with Nathaniel Whittemore.

16:24I also lay it out in my end of 2023 address there. Also the crypto address that was last month. It's all there. So please go through, take some notes, have a look at that. On the Real Vision platform, you can take these amazing notes. You can share them. The community can see them. So make sure you have a look at those as well. Start thinking this thing through. Start preparing for where this is. The next phase usually happens around this halving period. The next phase is when the banana zone happens. That's when everything starts accelerating. So often we have a slower drag up and then we start going.

17:01That's what I think happens. That's the altcoin season. That's when things start to get really bananas. I'm looking forward to that. I'll keep you posted as that starts playing out. But right now, we should be looking for low in markets as liquidity is signaled to improve and liquidity will start to improve. And then as we go from that, we can look at, okay, how long does this cycle last for? But the back end of this year, it's all going to be about bribing election, making sure you can pay the deficits. And that's pretty much everywhere. Everyone's got to pay the same bills. which is the cost of their government debt.

17:39And there's only one way around, and that's more cowbell. Anyway, nothing to worry about. Pretty ordinary markets. It's just something you have to get used to in crypto. So keep your faith. Stay safe out there. Bye. Okay, as you can see, liquidity is the game here. And liquidity was kind of baked in the cake. This is just a normal correction. We carry on business as usual. Now, if you want to know more about how to invest in crypto, Well, firstly, subscribe to the channel. I've asked you to do that already. And I know 50 % of you haven't subscribed. So I'd appreciate that if I add any value at all.

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19:34Thank you.

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