Pal: Our Institutions Are All Being Tested

Your Real Vision Daily Briefing for April 10, 2020

Raoul Pal joins Ash Bennington for a big picture look at the events of the last few weeks in the wake of coronavirus, focusing on the global economy.

  • Market sentiment has reached a hopeful phase of the coronavirus crisis, but that narrative is likely to reverse as second waves of infection emerge.
  • A retracement of 50% is not uncommon in a bear market; the unusual dynamics and high volatility of bear markets make them extraordinarily hard to trade.
  • Unmodelable uncertainty abounds, which raises philosophical and existential questions about everything from the fiscal future of Europe to crypto markets to supply chains and world trade

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The coronavirus crisis will be marked in three phases: liquidation, hope, and insolvency, said Real Vision CEO Raoul Pal during today’s Daily Briefing.

Pal said the market rally may be contributing to the narrative that we’ve reached the hope phase, but he thinks sentiment will reverse quickly over the next three weeks as second waves of infection emerge in places like Japan, Singapore, Vietnam, and others. As this reality sets in, it will make trading all the more difficult.

“It’s so extraordinarily hard to trade bear markets,” Pal said. “A retracement of 50% is not uncommon, and you never know whether the bottom is in or not, so you’re just wracked with fear.”

While equities are based on earnings and emotion, the bond market is based on GDP and inflation, making it a better barometer for what is happening. Pal said he thinks the bond market will go to negative yields in the optimism phase.

“I think we will see the bond market go negative in the US, which is the bonds telling us insolvency is the big risk,” he said. “People aren’t going to want to believe it, but the bond market is almost always right.”

Volatility and unmodelable uncertainty will continue to be facts of life in the months to come, and Pal touched on some of the existential questions arising out of the crisis. 

Is Europe truly a union or just a bureaucratic structure? Will it break up or move toward full fiscal union? Pal said he is bearish on the euro and he thinks the market is going to push this to get the answer.

He also questioned whether the nature of cryptocurrencies is fundamentally changing. They may be doing what they were built to do – which is operate 24/7/365 independently of nations – but the players in the crypto space are now correlated to the market, making the currencies more susceptible to what’s going on in the financial world.

Finally, Pal considered the future of supply chains and whether the consequences of the pandemic could eventually dismantle the WTO.

“It’s not clear that we have the right institutions for the world that we live in, and they are all being tested,” he said.