Bond yields fell a little last week, volatility is coming down, and markets were trying to move around but not really getting anywhere this week, Raoul Pal said during today’s Real Vision Daily Briefing.

Pal said that the hope narrative is somewhat fading, and we’re likely moving toward the final phase of his framework, which reflects the common bear market pattern of a sharp move down, a retracement, and then finally a rolling over.

Pal calls this final phase the insolvency phase, which begins as the reality takes shape that growth won’t get positive enough for people and companies to cover their debts. 

This real economic damage has hardly been mitigated by the Fed’s stimulus, which isn’t really enough to paper over the cracks for more than three months, he said. 

“The world has set itself up for a big cliff and we’re getting to the end. Then what?” he said. “There’s going to be a gap before we get another stimulus. That’s a big gap in markets, a big gap in demand, and that’s going to scare the hell out of people.”

While the insolvency phase takes hold, Pal said he is watching the BBB market in particular. Corporations like GE, Ford, AT&T, and GM have been wasting capital buying back their own shares and issuing debt instead of putting it to productive use and now they’re massively indebted. If any of them get downgraded to junk, everyone will have to scramble for capital and share prices will go to zero, he said.