ASH BENNINGTON: Welcome to Real Vision. It's Friday, October 31, 2020, just after market close in New York. This is the Real Vision Daily Briefing. I'm Ash Bennington, joined right now by our CEO and co-founder, Raoul Pal.
RAOUL PAL: Happy Friday, Ash.
ASH BENNINGTON: Happy Friday, Raoul.
RAOUL PAL: It's exciting, actually, because we're doing this Real Vision Daily Briefing live on YouTube and everywhere, just to try something new and get people to get engaged in our YouTube channel as well. Which, don't forget, if you're watching this on YouTube, make sure you subscribe to it.
But the Real Version Daily Briefing is always a great highlight of my week-- this Friday kind of wrap up of what's been going on.
ASH BENNINGTON: Yeah. I'm miserable the other 23 hours of the day. This is fantastic. And now, we've got the additional energy of being live.
RAOUL PAL: Yeah, and hear in Cayman it stopped bloody raining. It's been raining for like three weeks, and now it's perfect weather. So I'm happy.
ASH BENNINGTON: Yeah, you know, winter hit New York today around noon. The temperature just dropped and it is really cold out.
RAOUL PAL: Yeah, I don't know what that "cold" thing is. We don't have that here.
ASH BENNINGTON: Yes, I remember. Raoul, we're doing this live on a day that couldn't be any busier. Lots of activity happening. Lots of risk on the table. Lots of motion in markets. How are you thinking about this from the broadest context?
RAOUL PAL: Well, look. I've been building a thesis since-- well, actually since about March when I started talking about the unfolding. Now if people remember, it's a three-phased affair. Where I thought that into March, we would have the liquidation phase. Then, we'd have something called the hope phase. Which tends to happen in all recessionary periods, where everyone thinks actually, it's going to be OK. The market signals were wrong. And then the hope phase kind of fades away. And you get normally, the despair phase. Which I've labeled the insolvency phase, because of the credit issues and the slowness of the economy to recover.
And I've been-- almost on every Daily Briefing that I've been appearing on every Friday, I've been flagging-- listen, I'm sorry to see signs of this. And that's been for maybe a month now, maybe longer that I've started to see signs of it. We saw the market top out a while ago. And it kind of fell sharply. And then rallied back up near the highs. Didn't quite make it. And I said, listen. Be careful of this. This could be causing a GMI crash pattern. And that's when the markets fall. They almost retrace the previous high, fail, and then take out the low. We haven't taken out the low, but it's looking a little bit dicey out there. But it's part of the thesis, because I've been watching the banks and I've been watching anything to do with credit not doing well.
Now, last week was an exciting week because crypto was starting to do really well, following the narratives of this space. But this week, we got a lot of signals. Really big signals. First to break was oil. Oil just started plummeting this week. And oil really is a function of global demand. So global demand is clearly slow. And why is that? That's because, as I talked about-- and again, I've talked about it in the last few weeks in the Real Vision Daily Briefing-- watch for Europe. They made a mistake with coronavirus in the summer. Everyone went to Spain and France on holiday, and they all came back with coronavirus as a holiday gift.
That is spread like wildfire. Nobody was ready for it. And the government's obviously been slow to do anything about it. People didn't quite believe that it was happening. And now, it's exploding across Europe. I mean cases globally are now exploding. That European situation-- I flagged it last week in the Daily Briefing-- I'm like, be careful. This is going to cause a risk off.
And why is that? For me, the issue here is the reaction function of humans. So ignore whether you think government should look down or not. I understand this huge debate about it. It's irrelevant. What you need to follow in markets is what is. What is is governments are going to stop-- are going to restrict economies because they have to. They went through lockdown before in Europe. They can't just say, oh, we're not going to do anything now. So that was coming. And we know that with a massive elderly population across the world-- the whole baby boom generation-- that the likelihood that people stop spending or slow down their spending patterns.
The markets suddenly took notice this week as they realized that Europe was in deep trouble. So markets that I've been focused on-- stuff like the IBEX in Spain-- have started falling sharply. Because, I don't know how Spain gets through this. I mean, those of you who know me, I lived in Spain for 10 years. I've had a house there for 20 years. My mother lives in Spain.
Spain is in deep, deep trouble now because their banking system is a mess. Their banks have been in freefall. And they've got more coronavirus-- huge. And they've already had it. They're already starting into various lockdown procedures. And not fast enough, so this is going to continue for a while. And they don't have any fiscal room to do anything about this.
I mean, I honestly think the Spaniards, and probably Italians, and maybe the French, and probably the Germans, are going to have to nationalize or do something about their banking system. It just-- there's nothing that's resolving this. So that's just part-- I mean, I could talk-- there's a lot going on, as I said. It's spreading all across the markets right now.
The other big mover this week was the dollar. The dollar is something I've been saying, I don't believe in the dollar weakness story-- not yet. Everyone says the "blue wave." Therefore, it's good for the dollar. Oh, it's bad for the dollar because of stimulus. I don't think that's the case.
I think there are other factors at play and economic growth trumps all with the dollar. The dollar has something called the "smile." So if the US economy is really weak or the US economy is really strong, the dollar does well. In the middle, it doesn't do so well. But here's a situation where fear will drive people to dollar. Lack of cash flow means that people can't cover their dollar liabilities. And so, we're in a bit of a perfect storm right now. And there's no stimulus, which is something I've talked about week in, week out.
There is no stimulus anywhere right now. The central banks, what are they going to do? Cut rates? Well, they're at zero. So rates are going negative. They've gone negative in the UK, which is the new addition to the negative interest rate club. And I still think the US follows. Although, US bond yields went up this week, which was the big outlier.
So yeah, a hell of a lot going on, Ash.
ASH BENNINGTON: Yeah, it's difficult to even think about it and frame it out. But as you say, there's so many moving parts in place. You know, I was thinking when you were talking about Europe-- limited fiscal space and obviously, a single monetary policy for the entire Union.
RAOUL PAL: Yeah, I mean, it's really difficult. So as I said, I don't how Spain gets out of this. So you've already seen Christine Lagarde talking about, OK, we need to do more. That was another thing that started driving the euro lower. The euro looks like it's forming a GMI crash pattern, too. It hasn't quite taken out the low. It came really close. But if you break kind of 116, I think it goes all the way back down to 110 before we even start thinking about it.
So you it's very similar to the setup we had when we knew the coronavirus was coming back in February, and I warned people in advance. The same setup is happening now. We've got no stimulus. People aren't ready. Governments don't really want to take restrictive actions, they're going to be forced into it. The longer it takes, the faster the virus grows, the more the reaction function is to shut down more. And we've seen France starting to have really big lockdowns again across the whole country. It's a mess. And the US has just lagged. So we can see it all across the US, too.
ASH BENNINGTON: Yeah, and precisely to that point-- 17 states now in the US at all-time highs. 90,000 infections per day. That's one per second.
RAOUL PAL: Yes, and you're also seeing the R0 above one in every state in America except one I think now. Same in Europe. So the R0, just to remind everybody, is the rate at which it spreads. And anything about one means it tends to go exponential. And we've got some pretty high rates of spread right now everywhere.
So yeah, I'm really concerned about the growth outlook and it just reiterates my view that the global economy has not recovered. It's not a V-shape. It's not really a K-shape. Really, the reality is we're going to have an economic overhang almost all the way through 2021. I mean, having been a student of economic cycles my whole life, there's very, very few recessions that last less than 18 months. So why people thought you could have the biggest economic and recession outcome of all of our histories-- you know, anybody who is alive has never seen anything like this-- and it'll all be over in three months or six months, they're smoking crack.
ASH BENNINGTON: Yeah. I mean, there is this optimism that said it fell very quickly, it will recover very quickly. But there's so much unknown. There's so much risk still on the table. I'm looking at-- you know, one of the indexes for me is the fact that when I go up and when I check asset prices, I'm also checking the CDC website. That's not a good sign, right? And when you look at that chart of case counts, the daily case count numbers basically have three peaks. The first comes in April. The second comes in mid-July. And the final peak as where we are today-- and we are at the highest point of the peak today on that third peak rising consistently.
RAOUL PAL: Yeah, and then you go to look at the charts of Europe. And they've gone-- they looked like a classic second-wave pattern you saw in the Spanish flu. Again, it's not as deadly. We understand. We've made some progress. But hospital beds are filling up. Death rates are going up. This is no laughing matter. And what you saw was the first peak in Europe, and then this exponential rise. And again, there is an increase in testing. We also understand that.
But what I'm really interested in here is the reaction function of people. And the more people get it, the more people know somebody who's got it, the more they become evasive, the more they don't want to get parents concerned by it. And you and I talked about our mothers, and that they're not going to go out. They're not. My mom is in Spain. And she's not been out really-- really, she's not been out for eight months now. And she's still not going to because the virus is back. And she thinks, well, she's-- I don't how old mom is. 76 or something. And she's like, I'm not going to take the risk. And I get it. So her expenditure is collapsed.
ASH BENNINGTON: I won't list my mother's age because well we're live and she'll start calling and screaming at me.
RAOUL PAL: She's about 60, right?
ASH BENNINGTON: Yeah, 58. It's 58. You know, interestingly enough, the one good news piece, if you're looking for a positive story, and we're not trying to be bearish here about the virus. The death rate-- if you look at the three peaks that are associated with the rise in case counts, precisely as you point out, some of that's an unmasking effect. We're doing more and better testing more consistently, so we're seeing a rise.
The peaks on the mortality rate spiked very high in mid to late April. There's another rise in July that coincides with the last peak in case counts. And today, we're rolling upward but we haven't seen anything that looked like what we saw in April or July in terms of mortality rate. That's a good thing. We can't be sort of complacent about it because we know that this is-- mortality is obviously a lagging indicator. But a good sign.
RAOUL PAL: Yeah, exactly. But this is something, again, we've talked about in the Real Vision Daily Briefing. And again, to remind all of you on YouTube, just click on that subscribe button to the Real Vision Daily Briefing channel so you can get these updates every week. Because I think that's super useful-- sorry, it comes out daily. But I'm here every week, and it's all about me.
But, yes. I mean, I've been explaining to people is again-- yes, this is all good. The hospitalization rate's lower. The death rate's lower. But it's the economic data that really matters for us in financial markets, to our businesses, our own personal economy. That's what we need to look at.
So it's again, like when you go through selection, you have to learn in finance to leave your biases behind. Nobody cares what your politics are. What you're actually trying to do is trade what everybody else is reaction function is. That's what markets are about. And you know, everybody puts their own spin on this. So we've got a fascinating set up going into the election now.
What's interesting is the market has taken the biggest bet in all history on reflation. So we had the shortest everybody's ever been of the US dollar in speculative positioning terms. The shortest they've ever been by four standard deviations in 30-year treasury bonds. Because they thought inflation, fiscal stimulus, the blue wave. And also, the longest positioning in the commodity markets. Now, oil just got taken out and shot. And the dollar is starting to get taken. The short position, the dollar is it is getting taken out and shot. And you can see this narrative.
Now, the election. People say, well, the blue wave means x. It's almost always wrong. It's either "buy the rumor, sell the facts." So in which case, you fade the whole thing. But think the process through.
The election, let's say, is a blue wave. Let's say it's unprecedented, amazing. The biggest blue wave ever. So what happens? Nothing until January. No stimulus, and you've got to deal with the realities of insolvency. The restaurant around the corner that closes. Your business that closes. Stuff like that that's spreading across Europe. That's the reality. And we can deal with the fiscal stimulus in January and February. And let's also think about that.
This stimulus in the US should have been passed in September. So we're papering over the cracks from the summer. This is not forward-looking fiscal stimulus, considering where we are in the world now. So we're going to be far behind in fiscal stimulus terms. So that's the risk I see. There's also other risks that people have been pointing out, which I think is really important, is that what happens if the polls are wrong? And let's say, the Senate is red and the house is blue.
Well, then you've got a real problem because then you've got nothing that's going to get passed, and a complete warfare between the two sides. Well, that's a really, really ugly situation the market has not priced in whatsoever. Is that going to happen? I have no idea. Is it a blue wave? Looks like it, but we don't know. And nobody's thinking about the risks here. And the risks all seem to be tilted against that reflation trade that everybody jumps into.
ASH BENNINGTON: That's exactly right. A couple of the things that you've said jumped out at me. I'm also curious, one of the things that you've been very eloquent about and we probably have people joining us here for the first time during this live broadcast. You've talked about that the risks that happen from a balance sheet perspective. The idea that we can watch these flows gyrate from day-to-day or week-to-week. But fundamentally, what we're seeing is a deterioration of the balance sheets of businesses.
RAOUL PAL: So I'll give it in two terms. Firstly, at an individual level. So your costs are x and your income is y. Your income needs to be above cost. If not, you need to borrow money. And that's generally how the wealth has worked. Everyone's borrowed a bit too much money, and that raises your cost.
Now, if you lose your job, or let's say you're a freelancer and you've got less work because of the economic situation and COVID, well suddenly, your income doesn't meet your costs and you start to deplete your savings. And if that situation goes on, most people can ride it out for a little bit. There were some government payments that helped. But after a while, you end up running out of money. And that becomes of insolvency. You can't pay your bills.
The same is happening with restaurants and the small shops around the corner and the retail and commercial real estate in New York and real estate in general, where they rented it out in cities. We're also seeing it in big companies, giant companies, you know. People like General Electric with huge amounts of debts and an old business model. They're claiming they're going to be cash flow positive for a while.
But if they're not, what happens if their forecast of the economy is wrong? Well then, they're going to have a problem with their debts. So that's the solvency issue here. And we've got it amplified because all the foreigners with $13 trillion in physical dollars that they borrowed. Now, if the world is slow, then they can't pay. So there's a lot of people that need income. And in an environment like this, cash flows have been depleted and lower, and that creates the insolvency.
ASH BENNINGTON: Yeah. You know, and precisely to that point, to add another wrinkle-- we've had a national ban on evictions that's scheduled to expire in January. There are also a series of state and local measures that are set to expire in January. And I think there are many people who don't realize that renters, in many cases, are on the hook for the background that they were granted forbearance for during the eviction-- during the eviction/foreclosure moratorium.
RAOUL PAL: Yeah, I mean, forbearance is a pause in payments. It is not an extinguishing of payments saying, let's call it quits. Because the landlord needs to pay his mortgage. So the banks have to forgive the landlord. It is not an easy situation to run for an extended period. So people did it quickly-- governments did it quickly thinking, OK, let's just paper over the cracks right now. We'll figure it out later. Problem is is this is going to go on longer than the governments, the central banks, businesses, and the markets expected. That's the issue here.
ASH BENNINGTON: Yeah. Well again, for people who aren't familiar, who may be joining us for the first time, talk a little bit about your framework for