JACK FARLEY: Welcome to the "Real Vision Daily Briefing," where our team of journalists analyze the most important events of the day within the framework of a key Real Vision themes. Whether it's macro, liquidity, market structure, or crypto, we cover it all.
Hi, I'm Jack Farley with Real Vision. We have Real Vision CEO, Raoul Pal, standing by with our managing editor, Ed Harrison, ready to give their analysis on the crazy time in the markets. But before we go to them, we're going to quickly go over the latest news and data on the coronavirus as well as economic statistics.
It's 3:30 PM, April 3rd. Yesterday, there were nearly 80,000 new cases worldwide, setting yet another record. The total confirmed case count is set to breach 1.1 million, while the active case count is just shy of 800,000, and is set to break the 1 million barrier over the next five or six days. We're seeing alarming growth of the disease in Brazil. And in France, the daily death count is growing at a truly terrifying pace.
Case counts in Europe are surpassing the GMI forecasts, and in New York, they're doing the same thing. Now let's quickly go to the Market News. The month on month payroll number dropped to negative 701,000, an astonishing statistic, while the US U3 unemployment rate jumped to 4.4%. And while that's incredibly alarming, it only takes into account a small slice of the jobs lost that we have so far seen in this month.
On this news, the US dollar continued to rally. Now let's go to Raoul Pal and Ed Harrison with their analysis of this ominous economic news.
ED HARRISON: Ed Harrison here for Real Vision. I'm talking to the co-founder and CEO, Raoul Pal. Good to talk to you.
RAOUL PAL: I'm the island castaway.
ED HARRISON: Yes, you are. And, you know, I'm thinking about like-- I think there's a song by Loverboy or something, "Working for the Weekend." I mean that's what's on my mind right now, I have to say.
RAOUL PAL: Yeah, although I'm realizing I'm filming an expert view over the weekend, so I'm like, there is no weekend. We were just talking about this off camera. It's like, in this kind of COVID time, I mean the work-life balance is really difficult to do, because you've brought your work into your home.
ED HARRISON: Without a doubt, yeah, I have to say. And you know, at home, I probably feel like I spend less time doing things that I should be doing than before I was at home. But you know, let's talk-- you know, I already told you before what was on my mind, the first thing that was on my mind. I want to frame it. It's the jobs number.
So this is how I'm thinking about it. The jobs number came out, OK, for the US. It's 700,000 people lost their jobs. 57,000 more lost their jobs in January, February than we thought, or 57,000 more were added than we-- fewer were added than we thought. So this is how I'm looking at it is this number is for the first half of March. All of the data comes from things that happened up until March the 13th.
And the number was seven times the level that was anticipated. 100,000 lost is what they anticipated. They got 700,000 for the month through March the 13th. So when we saw what happened in terms of the market reaction, there was no reaction. The market did not move. It was barely into the red. It was already in the red futures before the market opened in the US. How is that even possible? That's my question to you. That's how I'm going to kick it off.
RAOUL PAL: Yeah, look, I mean even-- the Fed's Bullard today came out and said expectations could be as high as 40% unemployment, OK? These are never before seen numbers. Spain had 50% in the financial crisis. So why didn't the market move? It's really simple.
The market didn't move on most of this data. It's because everybody's gone. We don't care. We don't know any longer. So it's not driving-- the market's not moving on economic fundamentals, because nobody can price it. So it's basically an epic nuclear event is priced for now.
Anything that upsets that apple cart, if the narrative change is-- let's say, for example, if Italy saw increasing cases again, and the trajectory of the virus wasn't slowing down, that would sell off the market. If Florida starts accelerating in its rate faster-- and you and I were talking about this today, earlier off camera about some of the other second tier cities in America. Once-- if they start accelerating, people aren't looking at that yet.
So people are saying, listen, we understand all economic data is now worthless. Let's assume a zero for everything. Italy had the worst piece of economic data, I think, in all recorded history of any economic data series, which is their services PMI. Market knows that. It knows that it's going to be awful. And it can't price it. It's kind of shell shocked. So that's my view is that it's the panic narrative that needs to change, not the economic narrative.
The market's caught up with the economic narrative, which is, this is truly awful. Its narrative is, it won't last that long. Anything that changes that narrative will sell the market off.
ED HARRISON: Right, yeah.
RAOUL PAL: So you have to follow the right narrative.
ED HARRISON: And we're going to get into that, actually. Maybe even we should go with that right now. I mean, the concept that, actually, this is-- I tweeted something out, because I saw it in the Swedish newspaper today that Sweden, which has been a laggard relatively speaking in terms of shutting down, they said that no flights-- we're going into this lockdown through June the 15th. You know, you are not-- the no non-essential travel within Sweden and outside of Sweden. So that tells you right there that this is not a one-month and you're done. We're going to be done after Easter or after the end of April.
RAOUL PAL: This is the single most important point that the market is not understanding, and I've got an expert view on it. I'm going to be releasing my Global Macro Investor. Probably one of most important ones I ever wrote was last weekend. We're going to be releasing it to Real Vision Pro subscribers. I'm also doing an expert view for everybody, because people need to understand this. If you look at China, China reopened partly. They shut their borders once. That's not a reopened economy. You can't get in or out.
They then opened up factories to, let's say, 60% capacity. They are now manufacturing goods that have no customers. You're basically a ticket to bankruptcy, because you're building inventory and getting no orders. But the state has said, you must do this. Then when you look at the TomTom traffic of Shanghai and Beijing, it's fascinating. And I haven't looked at it this week, but up until last weekend, the traffic had gone back to like 80% of normal during the week, because people were going back to work, because they were told to. Weekend-- down 80%. So people are acting differently in their personal lives.
We've also seen, within China this week, cities being closed again, because there's outbreaks of cases. Then we saw Singapore today, and Singapore, the prime minister had already talked about the fact that he thought it was going to be a two-year event at least-- well, one or two-year events, because he said, we're not going to open our borders. We're going to protect our citizens, and we're going to have outbreaks, and we're going to have to shut down parts of Singapore for it. And we won't have customers, and we're going to lose supply chains. So this is what we're living with, and get used to it.
Cut to today. Singapore closes down. Lockdown again, because the virus has come back. And we'll probably see that in Japan, and we'll see it in Italy at various points, and we'll see it in Spain. We think we've cured it. We bring it back. That process, plus the fact that different nations are behind, so Sweden is behind Italy. And it's behind the UK. And the US is behind Europe. And Brazil is behind the US. And India is probably behind Brazil.
So what we've got is this huge, rolling destruction of global supply and demand that even when countries think they've recovered, they haven't recovered either. So there ain't no V shape. There's no U shape. An L shape would be a miracle. It's something else. I think somebody said it's a lightning bolt shape, and that's probably right.
ED HARRISON: [LAUGHS]
RAOUL PAL: It's a Harry Potter recession.
ED HARRISON: Right. You know, the first thing that comes to mind for me is not a market-based question. It's what I would call a policy question, and it's about deglobalization, because as soon as you said that, I said, you know, there's going to be a hit to supply chains over the short to medium term. But if over a medium term horizon, I, Apple, can not make Mac Minis, I can't make iPhones, because everything shut down in China, and I'm just going to bring it all back, is that the solution? Are we going to see much more of that going forward?
RAOUL PAL: The writing was on the wall with the Trump policies, which kind of plays in line with some of China's policies, some of Russia's policies. You know, there's been a huge global shift in the acceptance of the rules-based global order system. And I've talked about this in Real Vision quite a lot. It looks like it's getting rejected, and globalization, with this event, this was the accelerant.
So now if you're a European policymaker, and you're trying to keep Europe together as a bloc, then you want to make sure that supply chains remain within Europe, so to close it off. Like, India's supply chains are mainly within India, and that will give it some level of robustness in the end. It will still take an enormous amount of pain. And the US has that ability, too, and I think it'll focus people.
So I think you're right. I think it's a different world. I think we also move into a more regionalized world, and that will also play through to currency markets and a number of things. I think the structure of the world is, in Neil Howe's terms, we're approaching a Fourth Turning. It's not yet clear what that is, but we're approaching a massive rejection of the previous system, and then acceptance of something new.
ED HARRISON: Right. But, you know, the caveat to what you said that I find the most problematic is Europe. You know, when you talk about regionalization, I feel that that's where we're headed. But when you look at the internal dynamics in Europe, what you see is a squabbling that is almost systemic in nature, that they can't even decide whether they're going to use DSM or they're going to do Eurobonds. I almost feel like this is more existential to Europe in terms of their regional nature than it is to-- than the European sovereign debt crisis was.
RAOUL PAL: I mean, I think you're dead right, and Julian Brigden and myself on Macro Insiders just did a live broadcast and talked about this. And there are two outcomes, I think, and only two. One is, it gets destroyed, and it splinters, because Italy leaves, and Greece leaves, and et cetera, et cetera. Or the opposite happens, which I think-- it's my hunch-- that we go to the full fiscal union, because countries decide that they can't operate on their own.
Now that's very contrarian, and I don't have a strong view that I'm strongly right. But I'm just kind of thinking through which way is it going to go. So I don't really know. It could splinter to smaller states or actually combine to a superstate.
ED HARRISON: And ultimately, I think that the Germans have already shown that they're willing to capitulate. They know that they're getting a lot out of the European Union, that it would be catastrophic for them in terms of their export model, if the European Union were to fail or the Euro area, the euro were to fail.
RAOUL PAL: Well, obviously, because they're the main exporter into the rest of Europe, and their currency would explode higher, because they're so fiscally austere. And then they're going to lose to Italy and Spain, and they won't be able to export. So it is a real deal for Germany if this happens, because they'll have to deal with the strong currency if they were to exit. So yeah, and it's really complicated, and I really don't know how it's going to play out. Maybe it'll be down to a knife edge, but we kind of restructure Europe, and we keep it in some mechanism, a third way, maybe. Who knows?
ED HARRISON: You know, talking about currencies, I think, before we got on this, I was telling you I had two things that I want to talk about for sure. One was those jobs numbers, and the second was currencies. I think we had a question, in fact, from my RVDB with Roger about what the mechanism for a dollar liquidity crisis is.
That is, what we see now is the current system is a dollar-based system. And that system is problematic for those people who don't have enough dollars. How does it work that suddenly you have a liquidity crisis in dollars? What's the mechanism by which that operates?
RAOUL PAL: Yeah, again, there's a massive article about all of this in that Global Macro Investor that's out on Real Vision Pro on Monday. But the essence behind it is there's been a huge amount of regulation in capital markets, both in Europe and the US. And in that previous world, a dollar in New York was the same as a dollar in London.
So Deutsche Bank would need-- could have its New York branch and supply dollars to its European customers. It now can't do that. They're non-fungible, because of Basel III and Dodd-Frank. So it can access dollars in the US system, but it can't give them to its European.
Meanwhile, the magic of euro dollars mean-- and euro dollars being the offshore interest rate market-- allows you to generate dollars from nowhere. I'm just going to lend you dollars, because I'm creating an agreement. The problem of a lending dollar arrangement is you need dollars somewhere, and that's OK until you can't get them. Now what happened was the dollar was so non-volatile and relatively weak and benign for so long in the period after the financial crisis, that the entire world saw low interest rates. We can borrow in the dollar. Why wouldn't we do that?
So they borrowed $13 trillion. It's the biggest position in the history of world financial markets. And it's been driven by the corporate [? sector, then. ?] This is not sovereign debts. These are companies in South Korea and China and Brazil and India, and they've borrowed all of this money-- and Taiwan and tons of countries. They've borrowed all of this money, and then the banking system has been under pressure in Europe and Asia. So they're not able to give the dollars to these corporations.
Now the problem is once the dollar starts going up because of trade tariffs and reduced world trade and lower oil prices, means there's less dollars going around the system. So then it's a game of musical chairs. It's the easiest way to describe it. So you need dollars, only dollars. They need dollars. Whoever can grab them first, and that is the person who's the best creditor.
So if you're the best ability to pay, you get the dollars. But then maybe I'm the shitty credit, so now I can't get the dollars. So I'll pay more for them, or I may default. And the less dollars in the system, there's less chairs around the table for the musical chairs.
And it drives up the value of the dollar. The dollar is the chairs in the game of musical chairs. And anything that the Fed prints doesn't affect those dollar markets, because the financial plumbing of the United States basically is gunned up. And so it doesn't work, and there is no trans mechanism across.
So we've got a huge problem on our hands, because we have the biggest short position in history and no way of covering. It's like the silver squeeze by the Hunt brothers back in the 1980s.
ED HARRISON: Then, you know, I look at it almost as a doom loop, an acceleration mechanism. You know, if you think about like a bell curve in terms of how financial outcomes come, people often talk about fat tails. One of the reasons that I'm thinking of this as a fat tail event is that when you get to a certain point in terms of the dollar's expensiveness, you get to a point where there's a panic. And suddenly, you know, people--
RAOUL PAL: So everybody's short-
ED HARRISON: --dollar up.
RAOUL PAL: Everybody's short the tail. It's been-- and people who know Real Vision will understand the argument of being short volatility. Basically, everybody's short the upside volatility of the dollar, negative convexity, or short gamma in other terms. So if it goes up, you're right. More people have to buy it, and the more desperate they are to buy it. You're dead right.
So if it breaks, call it, let's say 105, the chance of it going to 120 go up exponentially. And if it gets to 120, the chance of it going to 130 go up hugely. So yes, they're dead right and absolutely spot on.
ED HARRISON: Right, and so I mean we're looking at-- the way to think about it, for me, is that we're looking at a crisis that-- numbers that you couldn't think about on DXY, as an example, or pairs between the dollar and certainly EM markets could happen like that overnight.
RAOUL PAL: And again, so let's go back to a conversation we were having earlier in this is China. So here, you've got a relatively closed economy that is the largest dollar borrower on Earth, and it's the corporate sector. They need these dollars. But China doesn't have them. China has reserves, but they've spoken for. And the reserves aren't to be lent to their corporates. It's for the sovereign.
So here you are in a situation where HSBC and other banks have lent them a bunch of dollars. They're not going to lend them anymore. They've now reopened their economy, having just had this huge shock, and they desperately need to sell products for dollars. And there's nobody to buy it.
So the probability of the issue that you're taking is almost every day that they don't get more dollars is every day that the probability of that massive short gamma position explodes, and the RMB doesn't just crawl through 720. It explodes to 8, 9, 10. That's a real risk here.
I mean, again, these sound crazy in normal times, but these are not normal times. This is basically the equivalent of a global war on its impact, maybe even larger.
ED HARRISON: And the way I'm thinking about it is-- the first thing that comes to mind is David Viniar, the Goldman chief financial officer. And he said, in the 2008 crisis, he was like, we've never seen anything like it. It's a 30 sigma event. That's exactly what we're talking about.
RAOUL PAL: Yes.
ED HARRISON: That's what fat tails are about.
RAOUL PAL: Yes, and the point