MAGGIE LAKE: Hello, and welcome to Real Vision Daily Briefing. It's Friday, January 14th, 2022. I'm Maggie Lake, here with Real Vision co-founder Raoul Pal. Raoul, it's great to see you and it's been nonstop, right? You've done like, what, half a dozen interviews in the past few days? Coming into this hot?
RAOUL PAL: I don't know how it's Friday. It should be Wednesday as far as I was-- it's like, Friday? No, it can't be. But now, I've got to the Friday afternoon. I'm ready for the weekend.
MAGGIE LAKE: Yeah, I feel like a lot of people are probably saying, thank God, it's Friday, because it's been a really volatile feeling beginning of the year, intense market week with a lot of information. This is the first time we're actually doing the Daily Briefing together this year.
RAOUL PAL: Well, we did it live. We did it live in Vegas.
MAGGIE LAKE: But what do you make of the market action so far, where's your head?
RAOUL PAL: My head is the market is still thrashing around with, oh, my God, look at the inflation numbers, versus some underlying changes going on. There's rotations going on, which makes everything feel super choppy. There's every bear is shouting, oh, my God, the Fed are going to raise rates, everything's going to crash.
There's the deflationists who I would count myself into that camp saying, well, the world won't take higher rates. And if you raise the rate of inflation higher faster than the wages, you're going to see consumption fall. There's this battle going on in the markets right now and in narratives, and obviously, the inflation narrative has taken hold, but I'm starting to see forward looking indicators suggesting that it's not going to stick.
And that's contentious in itself, so everyone wants to throw poo at each other over Twitter, even suggesting that that's happening, but that's the world we live in.
MAGGIE LAKE: It's so true that this is a time when there's very little consensus. It's confusing for people.
RAOUL PAL: Yes, it is. And that's usually what happens when you're at the end of a particular market regime. You're starting to see the two different narratives fighting for control. And it feels like that's the situation we're in. Doesn't mean that happens overnight. I think market volatility is the outcome for a while longer, until people get comfortable with, okay, what is happening?
Now, it's pretty straightforward to me is if the bond market, if we look at the yield curve, it's flattening. If that breaks those recent lows, it's telling us the Fed cannot raise significantly more, or even the four times that they're talking about. Then we will start to see the 10 Year bond yields peaking out. That would be at the top of that long term trend, the chart of truth, as I call it, which is the 30-year channel of bond yields.
At about 2% is the top of that channel, sometimes at the peak of the cycle, it goes to a little bit through, 25 basis points through, so somewhere around then you'd start to see the reversion. We're starting to see the ISM, ISM New Orders, the ECRI, we're starting to see retail sales today. All sorts of indicators are saying-- the Atlanta Fed came in revised down growth this morning in their Fed Now model.
I think that's the macro shift that's underway. And we've seen it as commodity stocks are going up, really, some commodities have rebound, but it's been less clear. The inflation trade is less clear in the markets any longer. And we've got this value growth rotation. The core tech, super long names still getting smashed. But soon as the bond market turns around, they'll turn around too.
MAGGIE LAKE: This is really important. And this is why you watch the bond market because you think that that's leading. Some of what we're seeing this rotation is maybe paying more attention, or is the tail, paying more attention to the lagging.
RAOUL PAL: If you were a bond trader, your entire job is to analyze inflation and GDP growth. That's it. If you're an equity trader, you're trading sentiments, you're trading earnings, you're trading buybacks, you're trading all sorts of things. Bond traders do two things, inflation, GDP growth, which is why they tend to be right, because that's what they get paid to do is look at two things only. Over time, very rare the bond market dropped, and 1994 was the only time in my entire career the bond market's been really wrong about things. I always pay attention to the bond market because I call it the bond market is the truth.
MAGGIE LAKE: The inflation debate is very interesting, isn't it? And I have to say we are so fortunate to have so many really smart minds, market watchers, a lot of experienced guests coming through the programs on Real Vision, and you've noticed a lot of them saying what you're saying that I think it's peaking, I think inflation is peaking. What about the other side of that argument when people say look at wages and look at things like housing and rent? You locked in for the year and that isn't even starting to hit the inflation print.
RAOUL PAL: They're hat all lagged for starters, because it's the slowest, hardest thing to do. Secondly, look at wage inflation. And think as, is net incremental demand in the economy going up? Well, wage inflation is less than inflation, so we've got negative real wages. Secondly, there are more people leaving the labor force than ever before. The labor force participation rate is super low. Many of those are baby boomers who have high incomes, and high earning power.
You're offsetting millennials, giving them an increase. They earn a lot less than the leaving. Net net, you've probably got a fall in total demand and you're seeing it in the numbers already, I believe, which was the retail sales numbers that came. Partly as Omicron is not clear yet, but my view is that we're actually lowering the trend rate of growth, but people can't see it because we're still dealing with the machinations after the pandemic.
MAGGIE LAKE: Yeah. What do you think this means for the Fed then?
RAOUL PAL: My view and it has been all year, I've been looking at this whole junctional year, because I think it's the bigger trade, is I think the Fed are not going to deliver what they say. I looked at every recession going back to 1963 and almost every single time, there is a growth scare early on, because the economy is not fully stabilized yet. What happens is stimulus comes out of the economy, fiscal stimulus, the Fed start talking about tightening, because inflation has risen, because the year-on-year rate of change and stuff like that.
This time, we got supply issues. And then what happens is the Fed think about raising and before you know it, growth evaporates again, and then the Fed actually end up cutting. I think we will get a couple of rate rises in potentially, maybe only one. That's my view. Because by June, I think inflation is back down to 3% and the ISM is probably closer to 52 than it is to 60. You don't want to tighten into a falling economy going into an election.
I know the narrative now is, well, they need to tighten to look like they're fighting inflation. Best thing to do his talk tough, get a rate hike in, maybe 2, 3, 5 basis points in let the natural ebbing and flowing of the economy work in your favor. You can say we've beaten inflation, and then you can get a stimulus package through.
MAGGIE LAKE: Take a victory lap, we've [?] before we had to actually do.
RAOUL PAL: And then stimulate ahead of the election. That'll be perfect for them.
MAGGIE LAKE: The reason my jaw dropped, obviously, we've all seen the headlines, right? The market pricing in at least four not only interest rate hikes, but lots talk about quantitative tightening. This is impressive.
RAOUL PAL: Yeah, so here's the fact is, I saw it yesterday, I've been following this for two decades now. Every single year of my entire career, every single investment bank has predicted rates too high, without question, a 100% forecast error. And they do it all the time, because they seem to ignore the fact that we're in a secular downtrend driven by demographics with a massive credit bubble, so you can't generate inflation, and you can't raise rates.
But they've ignored it every time. And every time, I remember last time, we hit the chart of truth line, which was back in 2018. The last time I was commenting about I think this dynamic's changing. Jeff Gundlach's like, it's breaking the charter of truth. It's going to 6%. The world's going to fall apart. I've heard every three years of my career, and it never happens. Now, is this time different? There's always a probability, but it's not the highest probability to me.
MAGGIE LAKE: Robert put a question to the RV side, that answered his question. Are they going to raise rate four times? Is this even possible without cratering the economy? Raoul just answered that. What does this mean for risk assets? We do have people asking about, what about this selloff we've seen in tech? Given that outlook that you don't expect that action from the Fed, does this give you any indication about risk assets?
RAOUL PAL: What makes long duration assets less attractive is not increasing bond yields, it's the inflation that we've had, so you discount it by the inflation. If the market is wrong in expecting higher inflation for longer, then growth stocks will explode higher again. Because really, let's face it, we live in an exponential age. Anybody who thinks that tech stocks, high growth, long duration tech stocks that are capturing exponential rise of technology are not going to go up again, that can't happen just because of network effects of what's going on.
We're not talking about IBM here, or GE stock. Some of these things can trade sideways for decades, but you can't trade sideways for decades when you've got exponential growth going on. It just can't happen. Now, you can have periods of a year, 18 months of sideways down markets, which we've been seeing. But then what happens is they end up looking ludicrously cheap versus what's happening. The moment the inflation story disappears, then everyone piles into growth again.
MAGGIE LAKE: That leads Eric asking a second part of his question from The Exchange, what about crypto?
RAOUL PAL: Crypto is similar to growth, it's driven by its own network models and adoption, there's a bunch of other stuff. But similar to that, I said crypto have been trading sideways because wage growth has not kept up with inflation, so marginal dollars to invest by retail has been reduced. And I think that it gets partly caught up in the growth story. But there's no correlation really between bonds and crypto, the dollar and crypto. They're all passing correlations that come in and out.
Suddenly, the S&P is correlated for a bit, and then it's not so I don't worry about that. I just look at the network effects over time. But if the Fed increase the size of the balance sheet, then it's all correlated, because you're lowering the value of the denominator. That's why when the Fed increase the balance sheet, what you find is that everything goes up. Now, does it happen when the Fed decrease the balance sheet? Are they going to shrink the balance sheet? And does that crash the markets?
If they, do it, markets will stop going up as much because of the fact that you're increasing the value of the denominator, so it changes that. Yes, we saw it last time around, there was a period of time as the Fed were reducing the size of the balance sheet. No, they kept the balance sheet stable, stocks went sideways for a while. But then even with a stable balance sheet, stocks took off again because the growth story is still underlying.
What the market won't like is raising rates. It took eight times for the market to crack last time. It never happens on the first couple of goes, the market has a wobble, but then it shakes it off. It's eight times last time, and it took the balance sheet taper, and then the market started rolling over.
MAGGIE LAKE: You feel like sideways-- you and Julian Brigden, head of MI2, just filmed your latest Macro Insider conversation, and Julian seemed a lot more concerned about the risks around that change in--
RAOUL PAL: Julian's from the silver market. His modus operandi, everything in his body is about inflation, and the Fed are going to take your precious metals away. And then to be fair, he nailed the inflation call this year. I was more sanguine. I didn't really get involved. But he really saw it coming. We have that argument because I'm a dyed in the wool deflationists, he's a dyed in the wool inflationist.
MAGGIE LAKE: Well, that's what the conversations are so good. And you're very kind to him, entertaining his concerns about that.
RAOUL PAL: See, the issue I have with this is okay, so we've got inflation, what happens? You raise rates. What happens? Markets eventually slow down, the economy slows down, eventually the stock market goes down. And eventually, the Fed come back in because they can't allow the collateral of the market, the equity market, the bond market, whatever to fall apart, so then they stimulate again. I'm like, well, it's a never-ending cycle of even if it comes off, it stimulates. I'm not worried by it really, I guess.
MAGGIE LAKE: And you're not worried that inflation stays high enough that it prevents them from looking after the asset market? Some people think they want to take steam out of the asset markets.
RAOUL PAL: I don't think they do. I think, look, that's the risk of my view is that I'm wrong and growth itself, let's say back end of 2022 is stronger than I expect, and inflation persists at 3.5%, 4%. That, I would be wrong. And if that was the case, then we're going to see a more prolonged bear market in these high growth tech names, bond yields. I don't think bond yields would move a lot on that. But we get more of this market rotation in the equity markets, stuff like that.
MAGGIE LAKE: We have a question from JB on The Exchange. Since we're talking about the potential for all of the tech stocks once again to take off, what's your opinion of Ark and Cathie Wood?
RAOUL PAL: It staggers me that people get emotional about somebody else's portfolio. And people get emotional about Cathie Wood. They don't like it. Why? Because it's all about change. It's all about nontraditional valuation metrics using things like Metcalfe's law. They don't like it. I really respect Cathie's view. And yes, she's dealing with this massive rotation out of the names that she owns. It's normal.
I have a log chart, I have an ark that I look at all the time, a monthly log chart. It's about two standard deviations oversold in the Trend Channel. Most likely, we're at the lower end of the range. $70 is two standard deviations, we hit 78 today. Does it break it? False break, go higher? Probably. I am getting very interested in accumulating.
I've been talking about this trade for a long time, I've been waiting for this to set up, letting the inflation narrative get bigger and bigger and bigger, let people throw the baby out with the bathwater, which is the network growth stocks that you absolutely want to own for the next 10 years. We're getting an incredible entry point, I think.
Now, I understand people think there's technical difficulties because she ends up selling liquid stocks to fund the illiquid stocks, I get that. Let's see how it plays out. I get there's a risk. That's okay. Markets have risks. And we're all adults, and we decide what risks we'll take and what risks we won't take, I'll probably take that risk.
MAGGIE LAKE: Entry point is really important, isn't it? Because we've seen a lot of concern and a lot of angst over the decline we saw in crypto from the November highs. If you bought at that time, it's been incredibly painful and stressful for people. But in your note, in your GMI note to your investors, your think piece in January, you reminded everyone what the gains were in Bitcoin and ETH last year. I think it's worth reiterating that. It depends when you get in.
RAOUL PAL: That's right. Last year, I had one of the best years I've ever had, and Ethereum which was my biggest bet was up 450%. And Bitcoin was a smaller bet, and that was up 60%. And a whole bunch of stuff was up hundreds of percent. And that's not to boast about me, it was about sticking with the plan that I had, and I got the right timing to get in at the right time. If you remember at the time, I'm a macro guy, I wait for the buses to turn up.
I don't try to find every trade. I'm not interested in that. I'm not a short-term guy. I wait and wait and wait. And I waited for that crypto opportunity. I'd been saying for maybe two years, three years that crypto and macro are about to meet and it's going to meet at the next recession. The Fed are going to have to print massively, and this is the time to buy, and I went all in.
And I've been talking about the exponential age for an extended period of time now, saying, listen, this is the big trade. The big equity trade here is, the exponential age, which all of these network adoption models of modern technology. Here we are setting up exactly the right trade, which is stuff like Ark, or Scottish mortgage, all of these things. They're all coming for the entry point. Get the entry point right at the maximum point of fear when everybody says, this is terrible.
That's the point. You can drive extraordinary returns if you're a long-term holder. I'm not a trader, so I don't really care about the next three months. If I buy Ark, if, I'm expecting to hold it for five to 10 years. And if I get it right, it'll go up 10x. That's what I'm thinking.
MAGGIE LAKE: Yeah, I think that's so important because there have been a lot of existential questions in this decline by skeptics who will say, this is proof it's not working and there has to be a more nuanced conversation. I want to circle back to crypto in a minute, but I want to talk about another trade as people are looking for opportunity, because in volatile markets, you also want to find the opportunity. We've had a lot of questions about that.
Can you talk to us a little bit about carbon because that was one of your big winners last year, and you just did an interview, again, in fact, let's play a clip. Before we talk about it, let's play a clip from your conversation with Lawson Steele, who is one of the folks that you talked to last year about this trade. Let's have a little snippet of that one, then we'll pick it up on the other side.
LAWSON STEELE: The whole market, the demand/supply imbalance, it's not