The Game of Investing, Vol. 15
We’re buckling up for Part 1 of one of the most important lessons any investor can learn — the importance of the business cycle.
- This issue will build on several of the key macroeconomic elements that we’ve covered in the past.
- (For a refresher on past issues, search “The Game of Investing” in your email or check out the blog.)
Today’s expert is none other than the master himself — Real Vision co-founder and CEO Raoul Pal.
- “Once you have a framework of understanding, everything becomes clear,” says Raoul. “It took me a long time to understand what to look for. But once I understood the business cycle and how it fits with secular trends, I could see the whole world.”
In this issue, we’ll cover 3 things:
- Secular trends and themes that drive economic growth.
- Spotting new secular opportunities.
- The magic formula that powers global GDP.
Welcome to the Game
Welcome to The Game of Investing, a bi-weekly newsletter bringing you “aha” moments and actionable lessons from Real Vision experts. No matter your level of expertise, markets are tough — which is why we all have to put in the work. Ultimately, the game of investing is a competition with yourself. Our mission is to help you navigate the path to success. Prepare to level up.
Let’s get started.
LEVEL 1 — Secular Market Drivers
Secular drivers are “the real things that drive big, structural shifts in our economy,” says Raoul. “Themes like demographics, debt cycles, technology, and globalization are all structural drivers of our world.”
- When Wall Street created new derivatives in the form of household mortgages — and people took on that debt in droves — that was the beginning of a secular debt cycle.
- And when Baby Boomers flooded the U.S. workforce in the 1960s and 1970s, that began an ultra-capitalist, secular era of high corporate earnings and low wages.
🔑 “Once you realize what’s driving these themes, you can invest in the solutions and opportunities that come from secular problems,” says Raoul.
- For Raoul, one such opportunity was being long U.S. Treasury bonds.
“Bonds have been one of the greatest secular trades of all time,” he says. “And now crypto is a new secular trend born from a generational loss of faith in the banking system.”
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LEVEL 2 — The Magic Formula
As economies grow over time, asset prices like equities tend to follow. Why? Because the stock market is made up of earnings and valuations of the companies within that economy.
But according to Raoul, it’s easy to lose sight of the big picture when so many additional factors skew that relationship in the short-to-medium term. “There are regularly whole periods of time when bad economic news is good for markets and vice versa,” he says.
Raoul emphasizes the importance of maintaining a 30,000-foot view and focusing on the business cycle over the long term.
🔑 To Raoul, understanding the secular dynamics of demographics, productivity (including technology), and debt is essential for a long-term understanding of how the world works.
- GDP growth = Population growth + Productivity + Debt growth
- Raoul calls this the “magic formula.” Some of you may have seen him discuss this in “The Everything Code,” which he laid out for all Real Vision viewers back in June.
“Once you understand the magic formula, you have the answer to everything,” says Raoul. “It’s straightforward — and what technology does is create more productivity per person. And debt growth is the catch all because it drives economic growth… until it doesn’t.”
Before You Go
If you’re interested in watching the entire 3-part course, Investing with the Business Cycle, featuring Raoul, Andreas Steno Larsen, and Julian Bittel, you’re in luck.
This series is available for Real Vision Plus members and higher. Find out more about Plus and the Real Vision Academy right here.
Thanks for reading. In our next issue, we’ll pick this up with the specific stages of the business cycle. In Part 2, we’ll explore how a new secular regime is changing the way the cycle functions.
See you then.
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