The Exponential Age

Published on: April 28th, 2021

Instead of looking at the linear progression of asset prices in nominal terms, we should be deflating them by the engorged denominator of central bank balance sheets. As soon as you perform this exercise, the trends become clear… and they are non-linear, exponential trends. We are at the beginning of a journey to a digitalised economy where innovation will force us to change, ultimately for the better. The Metaverse is in its infancy. Embrace it and adapt or face the consequences.

Comments

  • Dd
    David d.
    19 June 2021 @ 21:11
    Raoul, How about spending more time answering your Pro subscribers questions, and maybe a bit less answering every non-subscriber's questions on Twitter?
  • Dd
    David d.
    8 May 2021 @ 14:20
    Raoul, Excellent report, thank you! So, do you no longer see an equity crash pattern similar to 1929, and what about the insolvency phase bringing the market down? Previously, you have shown charts of the Great Depression and compared equity markets to illustrate that while the market bounced up hard after March 2020, we would have a fairly violent leg down coming. Do you still believe this, or do we have blue skies and clear sailing in equities into the foreseeable future? Thank you!
  • WM
    Will M.
    4 May 2021 @ 02:11
    Raoul has now generated some visionary papers over the past few months. They are stretching my “average” brain to its limits I will admit. I like the supporting evidence provided which is sufficient to give me confidence to get involved and see what happens. Raoul you should submit a formal economics paper and if you are proven right, who knows perhaps in 15 years that Nobel Prize for economics could be yours!😉 My only “fly in the ointment” in all of this is your optimism that this will lead to a better world. I worry that humans (and political powers) will do what they seem to do best and screw it up. As a famous UK politician once said “Chance will always play the winning hand and probability has no memory”. We seem to be approaching some form of climax globally and I am not sure it’s a pleasurable outcome. Thoroughly enjoy your work.
  • JS
    Justin S.
    1 May 2021 @ 17:30
    Raoul, Brilliant insight, thanks, love the "both ends of the telescope" context, so important, things are never one thing. As an ex gold bug who was always uneasy about the re-introduction of a gold standard, how do you feel about deflationary / hard money? What effect would the hoarding tendency (rather than spending, as there will always be more value tomorrow with hard money) have on the world's broader economy? The idea of hard money is great but what about the reality and unintended consequences? For me this is a really difficult nut to crack, can't see the wood for the trees. Thanks for all you do for us :)
    • RP
      Raoul P. | Founder
      1 May 2021 @ 22:57
      Thanks. I share your existential concerns about a deflationary currency and what that means for the world, where saving wins out. Not sure yet what it means...
    • JS
      Justin S.
      3 May 2021 @ 06:35
      Thanks Raoul, this started as a trade but it looks like I'm going to have to hold some of this stuff forever. Hmmmm...
  • GP
    Geoff P.
    30 April 2021 @ 11:46
    I appreciate you putting yourself out there. This is pretty much the thesis of every inflationist out there (CBs run amok / hyperinflation). However, a denominator problem will have a universal impact, not a select impact. What you're proving it that it is ONLY impacting prices of mainly US equities and mostly US speculative issues (tech/crypto; I'll get to why below). To prove a denominator problem you need to be able to show it in all things denominated by said denominator. Why for example are milk or eggs, etc not going up 15% per year? Why are earnings per share (denominated in dollars) not keeping up with prices per share (using that same denominator)? Why are revenues (also denominated in the same dollar) not following your thesis? Why are dollar wage earners not seeing the same benefit? All of this should scream fed flag on the denominator thesis. A denominator has indiscriminate impact. To prove this to yourself use your Venezuela example and model revenue / earnings / wages, etc as you've done with share prices. Obviously high/hyper inflation will reduce revenues and earnings but you'll see a much more correlated denominator problem vs the dollar today. What I think you're instead witnessing is the incredible wealth creation from the internet age and now with the crypto age. This wealth isn't interested in old industry. It wants to go into the next 100x thing and why not all they know is success. AI, new Tech, Genomes, etc. Trendy assets are in short supply vs all the wealth being created (and yes money does leak from the Fed / BOJ / Ecb etc into assets by design; every secondary issue the fed buys creates a buyer further out on the risk curve lessened by new issuance from the treasury; we can't discount this). Why aren't you seeing it in volumes? Because you need to transact to show up in volume. People are holding (see the passive work from Mike). In fact Mike's black/white marble is the best analogy to use when understanding these bubble dynamics. The asset price issue highlights the problem when too much money chases too few assets. Will it ever become a denominator problem, yes. For every dollar in new deficit matched by a Fed purchase that money goes into the economy and not the asset markets. But in order for that to continue you need to see an ever expanding deficit. If the deficit just stays at this level then all new Fed buys go back to assets. To fix the debt issue they will have no choice but to eliminate it thru the denominator.
    • RP
      Raoul P. | Founder
      1 May 2021 @ 23:00
      Its the issue of scare supply assets versus assets that have unlimited supply at a higher price or assets where technology is increasing productivity so lowering prices....labour being the key example.
  • JW
    Jim W.
    30 April 2021 @ 11:56
    Raoul, either you've lost your mind or you are a true visionary....thanks for doing the work to lay out your thesis on the great digital pivot. I understand your thesis, but I agree with others that we face a number of bumps in the road....social disrest, war, climate issues, the stress of citizens migrating from the analog economy to the digital economy (I think this is bigger than most people think) will make adoption from analog to digital a very bumpy, geometric progression. Thanks for the courage for taking a view and putting yourself out there...not too much original thinking back in the analog world.
    • RP
      Raoul P. | Founder
      1 May 2021 @ 22:58
      Thanks so much. Yes, it is not a clear path but I do think it will redistribute wealth in the end.
  • PS
    Patrick S.
    30 April 2021 @ 20:52
    Raoul, you either have spent too much time diving and the lack of oxygen is having an effect on your thinking, or you have emerged from numerous days in the metaverse where you can't differentiate reality from the metaverse. This piece expands on themes of past years of work. It is a fascinating theorem that does leave out the human factor. Humans do not like change, and those that do not adept well to change, tend to revolt. The fourth turning may in fact become reality if your metaverse, AI world becomes a reality and thousands find themselves under-employed with a lot of time on their hands or hopelessly enslaved by the metaverse addiction. (Worse than opioids) Just my cynicism rising to the surface. For a guy who doesn't like sci-fi you certainly espouse a lot of it. Keep up the good work. Cheers
  • DF
    David F.
    30 April 2021 @ 18:26
    Raoul, thank you for sharing. I don't doubt you for a minute and what an exciting couple of decades ahead. Brilliant.
  • JM
    Jake M.
    30 April 2021 @ 06:13
    Interesting you mentioned Taiwan, Raoul. Is it a better bet to simply buy TSMC stock? The whole Taiwanese semiconductor ecosystem pretty much revolves around TSMC.
    • DF
      David F.
      30 April 2021 @ 18:24
      It was once the domain of Texas Instruments but the board refused to make him Chairman, so he upped and went home and started TSMC. The rest is history and a lot of cry over spilt milk. There is a lot to learn from this event, collaboration being but one.
  • RM
    Rohin M.
    30 April 2021 @ 06:43
    Excellent Raoul. Thank you. If your target for Bitcoin is around $400k this year, which is about 7x from current price of $55k, then has your target of $20k for ETH changed? $20k from current price of $2750 is also 7x. Are you still expecting ETH to outperform BTC for the rest of 2021?
  • PM
    Philip M.
    29 April 2021 @ 17:19
    Neal Stephenson would be an interesting guest to provide colour to the Metaverse discussion (did he coin the term?)... much like Neil Howe's prescient observations about our real-world demographic changes, Stephenson long ago imagined the world Piers Kicks described, in the rather dystopian book Snowcrash.
    • RP
      Raoul P. | Founder
      30 April 2021 @ 00:35
      Yes, everyone talks about this book. I haven't read it yet as Im not a fan of sci fi
  • DB
    Dani B.
    29 April 2021 @ 13:11
    If you haven't see that already: Cathie Wood and Brett Winton Discuss Big Ideas 2021. https://youtu.be/qKAVn58q5bA
    • BK
      Bogdan K.
      29 April 2021 @ 23:53
      Is there a particular segment you like? I agree that all those trends are important and will continue except for "Virtual Worlds". I personally like ARKG (genomics). I think IP actually works well in bio area and provide protection of future profits. Public co can use acquisitions to enhance their moat. My problem with ARKK is that only public opportunities are available to them and some of them have weak moats, so future profits can be competed away and ARKK won't be able to allocate to competitors. For example ROKU - 5% of the fund, imo it's a good biz but is there a network effect? Should Roku be valued on exponential bases? It feels like ARKK is poor man's VC play. I don't want to hold the bag.
  • km
    ken m.
    29 April 2021 @ 13:08
    Amazing to be able to bring this level of thinking down to a level that 95+% of readers can understand. No doubt this is a brilliant piece and this sort of thing is why RV is such a great bargain. But the world Raoul has outlined seems potentially very fragile in many ways. What happens to the Facebooks, Netflix, Tesla's, or ARKK's for example, if there is a major/destructive war? Or, what if the income disparity that he has convincingly accounted for causes violent societal upheaval that changes everything? Because if history teaches anything, it is that major change usually brings major stresses/fractures (some of which resolve well and some of which do not - i.e. the difference between the American and French Revolutions). I suppose my over-arching question is this: Let's assume that Raoul is very much on target for how things "might well" develop (makes a lot of sense) in a relatively stress-free world. How do we best protect against the risks typically inherent in the often stressful 4th Turning levels of change?
    • WM
      Will M.
      29 April 2021 @ 15:43
      Excellent comment Ken, probably not too out of line with my comments below. "Fragility" of our systems is my main anxiety. For example, using Taleb's "black swan" analogy. I strongly believe that the covid pandemic was NOT a black swan but a grey one. Are we really saying that a pandemic was a total surprise? No, it was probably overdue. However it was not THAT serious a disease for the vast majority of young through middle age humans. Imagine what will happen when a really serious virus emerges that claims several percent of working age adults (and children). Would that be a black swan? I don't think so. I think the next black swan might be a global catastrophe linked to dramatic cooling of the planet just as the majority expect continued warming, or a VEI 6 volcanic eruption that causes significant global solar dimming. Our society, in the west particularly, and the global environmental health is bound together with hundreds of "threads" of progress much like a spiders web. How many of these can be broken before the web collapses. I am not in "fear" of this given my age and blessed life so far, but I am anxious for those under 40 for sure who are still trying to build a happy life with some security for their families and loved ones. They will be most unhappy if their future is "stolen" from them.... and those who have very little stake in the future even now may decide its time to take some of the pie.
  • BK
    Bogdan K.
    29 April 2021 @ 07:17
    Crypto is still in early adoption phase, not clear how to invest. Maybe Bitcoin because of Lindy effect and clear store of value use case. +1 for arkk, other ideas are also interesting. Larger penetration of tech will lead to more regulations. This will slow down innovation. Benedict Evans has a good view on this and other trends. https://youtu.be/6E-r55HS0j4?t=2242 https://www.ben-evans.com/presentations Raul, maybe you can do an interview with him. For network effects deep dive I really like https://www.nfx.com/post/network-effects-manual/ Personally, full-on metaverse is super depressive.
    • SR
      Steve R.
      29 April 2021 @ 10:11
      "Personally, full-on metaverse is super depressive." - couldn't agree more!! What people fail to take into account or simply ignore is the simple fact all this metaverse stuff only works because of its addictive nature. This is both harmful and damaging to us as human beings. Just look at all the teenagers with mental and other social problems caused by the addictive nature of technology. Mark my words, there will be a technology backlash along the way. This is no utopian dream, its a truly hellish nightmare! People need to wake up before its too late. But its creators, the ones that create this misery, will certainly be living it up in the REAL world. Ditch the screen, get out and enjoy the real world! F**k the metaverse. Enjoy a REAL life!
    • TC
      Tascha C.
      29 April 2021 @ 11:50
      You all need to calm down. Smelling lots of fear and anger here.
    • WM
      Will M.
      29 April 2021 @ 15:30
      Tascha, not so sure its "fear and anger", but I will accept 'anxiety and concern'. I did not fear covid and have lost my initial anger at the belief that government can just create currency and credit ad nauseam to solve the increasing social demands (if that had worked before, it would have been practiced successfully in the past). My anxiety is that there is a belief that "it is different this time." I don't believe it is, but I must accept that a new generation are pushing strongly for things to be different and the political parties will cater to whomever and what ever ideas will get them into power. I do think Raoul is tapping into the changing times though superbly and I have little doubt that directionally, and pending major internal or external conflict, certain investments will soar in the coming years. I will suppress my concerns, use alcohol to curb my anxiety, and invest in things that have a chance of maintaining my wealth in real terms. That shall include gold, silver, crypto, agricultural, nuclear, base metals, energy and very unfortunately at some point, defense sectors.
  • MS
    Mark S.
    29 April 2021 @ 06:35
    How do you think Covid will impact your thesis? I think it's early days for the virus variants. There are now over 15 variants in the world, some not of concern but some are. That's in under 18 months. In another 18 months there will potentially exponentially more. I know it feels like we have this thing beat, and I am sure that some countries will adapt quicker than others to new variants. But it feels a tad premature to think this is over by this year. My pharma sources tell me that the vaccines appear to cover the UK and SA variants, but not Brazil. Yes technology will respond, but I can't help but think Covid may change our world for a long time. And many will misjudge how this plays out, maybe myself as well.
    • WM
      Will M.
      29 April 2021 @ 15:17
      Covid is a serious disease for the elderly and people with certain health conditions. I believe the covid threat will mitigate and eventually be shown to have been exaggerated quite a bit. My main concern is not covid (I am retired and in my 60s now), my concern is a truly serious flu pandemic (or some other tampered with virus) that kills several % of the population. You saw how we reacted to a threat to 1% or less of the population, just imagine the reaction to a killer virus pandemic taking say 3 or 5 or even higher %s? Nobody (or less than 0.1%) thought about this stuff prior to 2020. Another economic lockdown like what we have just seen will destroy the major economies, usher in mass civil disobedience, violence, reactionary governments and probably wider war. My 30 year old daughter thinks I am too pessimistic. But then she has read no history.........
  • VH
    Vivian H.
    29 April 2021 @ 06:12
    So if you are only half a Gen X cynic, instead of ARK, would you just replace that with QQQ?
    • RP
      Raoul P. | Founder
      29 April 2021 @ 11:13
      haha... yes, most likely.
  • KH
    Kevin H.
    29 April 2021 @ 04:02
    PROFOUND! Thank you for sharing!
  • TC
    Tascha C.
    28 April 2021 @ 18:31
    "If you adjust the SPX Price-to-Revenue by the Fed Balance Sheet, it actually looks undervalued...This recession saw the cheapest equities in recent history if you use the right denominator." Not sure about the logic here. SPX price and revenue are both measured in fiat currency. If everything is due to fiat currency's overall devaluation, it should affect both price and revenue of SPX. But you're implying it affects only SPX price, but not SPX revenue. For latter, well you can say because real-world inflation is low. But then we're just running in circle of argument. "This recession saw the cheapest equities in recent history if you use the right denominator..." would only be true if you are assuming fiat currency devaluation has no impact on raising SPX revenue. That's hard to justify. You can say SPX revenue is negatively affected by debt, demographics and deflation. But hard to imagine they are not affected by currency devaluation at all, i.e. the actual inflation rate without money printing would be even lower. If both SPX price and revenue are affected by fiat debasement, then you cannot use the Fed balance sheet as denominator for the price/revenue ratio. That just doesn't make sense.
    • HM
      Harry M. | Real Vision
      28 April 2021 @ 19:18
      Hi Tascha. Just my perspective (RP will probably explain why I have the wrong end of the stick) but one might make the case that injections of new money go first into asset prices and then into real inflation. After all, the injections of money come from the Fed and they generally go first to banks. Banks warehouse assets not real goods or services. If this were so, we would see the rating of stocks improve before we saw their revenues increase. I think you can make the case that that is what we currently see. Assets prices are rallying relative to valuation norms.
    • TC
      Tascha C.
      28 April 2021 @ 21:31
      Harry, I agree with what you said. Still, if the proposition is that fiat currency is overall debased, then it should affect both SPX price and revenue (the latter to a less extent but we don't know by how much or by what lag). So dividing SPX price by fed balance sheet makes sense, dividing SPX price/revenue by fed balance sheet makes less sense. And it's not quite right to use the latter as argument that price is not overvalued, or the opposite.
    • JA
      John A.
      29 April 2021 @ 01:46
      Why would currency debasement affect revenue? Companies make revenue from who? Other companies and individuals. How many people are borrowing money to buy goods and services? Capital is not evenly available to both the supply and demand side at all times. The QE programs don't do anything to raise wages. So unless you are in a company that is producing something that is taking market share from others and can attract capital, you are fighting over the same pie that has always existed, and that pie is worth less in real terms. In contrast, people who sell assets are selling to investors and capital. They most certainly are leveraging up and borrowing every dollar they can to buy as much as they can. Because they are valuing the dollars they borrow today knowing what they will likely be worth in real terms later. It makes all of the sense in the world if you think about it. You need those investors to purchase goods and services by selling their assets for a devalued currency and going out to buy goods and services to see it trickle down to corporate revenue. Banks make the decisions on who they lend money to. And in fairness, they lend it to the place that they feel is going to make them the highest return, be that in yield or in fees.
  • TC
    Tascha C.
    28 April 2021 @ 18:07
    "This world of a stable dollar would be wildly bullish for emerging market equities and equities overall" Raoul, is this because less currency risk / more predictability for international investors in equity markets? What else?
    • RP
      Raoul P. | Founder
      29 April 2021 @ 01:29
      1. Stability 2. they are relatively cheap 3. Technology leapfrogs older systems in EM
  • TC
    Tascha C.
    28 April 2021 @ 19:35
    Raoul, this is a freaking amazing report! I have some small gripes but you did an extraordinary job with this. Thank you thank you thank you! Also, please do tell how you manage to be so prolific. Any tips on content creation workflow and time management? Whoever is your research assistant is utterly amazing as well. How do you find and manage your research assistants? Would love to know how you work in general. Anything you can share would be much appreciated.
    • RP
      Raoul P. | Founder
      29 April 2021 @ 01:28
      30 years of experience and 17 years of writing helps! I carry a lot around in my head...
  • JA
    John A.
    28 April 2021 @ 22:17
    "I can hear a bunch of Gen X macro cynics sucking in through their teeth, “Cathie Wood!!! She is crazy, ARK is just a retail speculative vehicle. It’s full of illiquid stuff! It’s going to zero when rates go up!!”" Hahaha, I feel attacked. =)
    • RP
      Raoul P. | Founder
      29 April 2021 @ 01:28
      (Sorry, not sorry) ;-)