ASH BENNINGTON: Welcome to Real Vision Daily Briefing. It's Friday, March 11, 2022. I'm Ash Bennington, and I'm joined today once again by Real Vision's own Raoul Pal. Raoul, couldn't be happier to have you back on the show. We got the old band back together. It's great to have you here.

RAOUL PAL: It's always good to hear your dulcet tones on a Friday, and your smiling face.

ASH BENNINGTON: [LAUGHS] Well, I'm smiling because we're doing Real Vision Daily Briefing together. What better way to cap out the week? Raoul, obviously, a tremendous amount happening right now. A lot of news cycle activity, a lot in geopolitics, inflation, market volatility. Big picture, what's happening, and how are you thinking about it?

RAOUL PAL: So let's start with the geopolitics. I outlined it all on Monday. If people have not watched it, you can go to the YouTube channel to find it, or on Real Vision, explaining the three outcomes. We're still awaiting. I said there was a two-week window, and we're in that window, are is there going to be some sort of dirty, horrible compromise that everyone's a bit stinky knows that, but it appeases the markets? Or, is this going to get into something worse? We have to wait and see.

So the markets have been thrashing around, trying to digest news flow, which is always why I've said be careful of trading geopolitics. But there are more structural things going on that are interesting. Obviously, equities are still in a bear market. Whether they're trying to find a low or there's something bigger, we don't know yet.

My thought process is it's probably more likely to be getting closer to a low. But if we start playing out the full recession card-- which the yield curve doesn't yet suggest-- then, OK, that could be different. So I'm looking at that. I'm looking at the dollar. I'm looking at the bond market, looking at gold, looking at crypto. So there's a lot of things to look at.

ASH BENNINGTON: Yeah, and much to talk about. By the way, I should say, Raoul, the comments on YouTube right now are flying by so quick that I'm having a hard time scrolling on them. But we should say, we are doing an extended Q&A after this ends, I believe, at 6:30 PM Eastern time on Twitter Spaces. So don't miss that. We're gonna cover some of your questions here. But much, much more to talk about.

Raoul, you talked about the bond market. I you're thinking about this as a reflection on valuation, a reflection on geopolitics. What are your thoughts right now on the bond market?

RAOUL PAL: So I have been following something called the Chart of Truth, which is the long-term trend in 10-year bond yields. And it has a couple of times got to two standard deviations overbought. I don't if Brian's showing the chart now, but two standard deviations overbought.

But generally, it gets to this kind of zone between 1 and 2 standard deviations overbought, and it reverses. So OK, we should be on alert for something changing in bond yields. Why? Everyone's screaming, "inflation," but I think of the inflation at 8% as a massive tightening of monetary conditions. Because neither corporations nor people can offset it with increase in earnings or cost rises, and price rises.

So what you've got is a tightening of monetary conditions, particularly on lower and middle-income households, because the earnings gap is massive between wage growth and the inflation numbers. And that tends to slow growth. And we're seeing forward-looking indicators suggest that growth is slowing down quite fast. And that will play out not immediately, but in the next six months.

So I'm looking at this, thinking, could everybody be kind of wrong at bonds? I mean, the last time it got to two standard deviations was when Jeff Gundlach was talking about yields going to 6%. They didn't.

People are now talking about a structural shift in inflation. Is it possible? For sure. I still think the probability lies in the chart of truth.

So then, something else is going on in the bond market, which is the yield curve. Now, everyone's talked about this, but this is a really nice chart that shows the yield curve. Now, it goes up and down. It goes 300 basis points on the upside, and maybe negative 50 on the downside. And usually, when you get to negative, a few-- maybe a year later, you get a recession.

So what's weird this time around, it's kind of peaked really early, which plays into the argument I'm having that monetary conditions are actually-- the inflation is actually, essentially, like rising interest rates 200 basis points already. So once the Fed start to rise, on the next chart, you can see what happens.

So Brian, if you flip to the next chart, so these are the last two rate rises, and the yield curve is in orange. The yield curve flattens as soon as they start rising. So we're currently, today, 25 basis points from a yield curve going to zero. So I can't see how you can get interest rates to rise more than 50 or 75 basis points before you've actually created a recession.

So that makes you think that, if that's the case, that the forward-looking indicators suggest that there's going to be a potential recession ahead, then normally, demand destruction comes. Along with the rise in prices causes demand destruction. The answer to higher prices is higher prices, is an old commodity market saying. So therefore, bond yields should come off, and particularly at the long end, because the long end is essentially the inflation element of it.

So if we go to the next chart, here's the chart of TLT, which is the 20-year essential equivalent ETF. This looks like it's a big wedge pattern. It's right at the bottom of the range, and wedges like this, these triangle patterns, tend to lead to breakouts one way or the other.

I think the balance of probability with a slowing economy, a risk-averse world, and inflation likely to peak over some point-- I understand that the geopolitics has clouded that issue somewhat-- that this looks like it's an interesting risk-reward when everybody in the world hates bonds. So that's something I've been focused on.

ASH BENNINGTON: You know, what's so interesting about that chart series that you walked through is you start with, literally, the 40-year chart, the Chart of Truth, looking back over 40 years. Really extraordinary to see that steady rate decline, and then coming into the 20-year chart, and now, here, looking at a little bit narrower here, on TLT.

RAOUL PAL: That's how to build a macro framework.

ASH BENNINGTON: Yes.

RAOUL PAL: You have the secular trend, the cyclical trend, and then where we are now, where you start using technical analysis. That's a very-- well, that's how I've always approached markets, because I tend not to like to trade against the secular trends, so I'm almost never short bonds until we prove that the secular trend has changed. So when I see all of these things added together, I could have overlay DeMark indicators, RSIs, where we're seeing divergences. Things are stacking up to, you know what? Maybe the macro picture is going to change for bonds.

ASH BENNINGTON: Yeah, absolutely. And that's what you are able to do with macro. Really interesting, also, to contrast that with some of the things that you've been saying about the geopolitical situation, which I think is so interesting. One of my favorite quotes was saying, don't get too clever, don't get too cute, don't get too brave. This stuff is almost impossible to predict in the short term.

RAOUL PAL: That's right. But let's think about bonds here again. So let's assume that things get worse. We go to my scenario two or three. OK, that's a more risk-averse world. So the most risk-averse asset in the world is the US bond market and the US dollar. We've seen the dollar scream higher because of this.

So everybody's record underweight, pretty much, the bond market. So therefore, money comes into the bond market. And we've seen those kind of moves in stuff like 9/11 and others, where those kind of events move bond yields.

OK, let's assume the other side. Let's assume that there's a truce that gets called tomorrow. Well, we're going to see crude oil down significantly, et cetera, et cetera, as people start to think, well, the Europeans will cut a deal, and they'll be able to get oil and gas, and commodity prices will flow-- in which case those things turn around, and in which case the inflation pressures come off as the bond yields fall.

So I kind of feel like we're in a sweet spot. Unless I'm gonna be wrong-- we can see where I'm wrong on that chart, roughly speaking-- and that would be if there is a structural cyclical-- a structural change in the entire bond market dynamics. Now, in 10-year bond yield terms, could it get to 2.25 and still be in the Chart of Truth? Yeah, fine. But it kind of feels like we should be looking for the change.

ASH BENNINGTON: You're talking right now about 10-year Treasury yield, which is trading at almost exactly 2% right now, I believe, as we have this conversation.

RAOUL PAL: Yeah, and you can see-- Brian, if you flip up the chart again, of the Chart of Truth, you can see that we're in the zone. It could chop around, or it could make a burst for the green line, which is the two standard deviation overbought versus the regression channel. So that's, I think, interesting to me.

ASH BENNINGTON: Yeah, we just lost the two handle since we started. 1.995 right now on USD 10-year Treasury yield.

RAOUL PAL: There you go.

ASH BENNINGTON: So Raoul, we talked a little bit about the macro picture. We've talked a little bit about the geopolitical picture, obviously, which is very unstable, to say the least, right now. How do we-- one of the things that you've been speaking about very eloquently on Real Vision, in Raoul's adventures in crypto, are your conversations about the crypto space. How do you fit it in, and how do you reconcile all of these positions? And where do you see crypto going right now?

RAOUL PAL: So in answer to right now, I don't know. The chart looks like it wants to go lower again and have another spike low, and that's been my view for a while. However, the crypto markets have not made a new low versus last year, and I think we've thrown 8% inflation, the market pricing in at one point eight rate hikes and a war, and you haven't made a new low. It's like, OK, that's telling us something.

Now, maybe that can change, but I mark that down as interesting. I've got a lot of technical divergences. A lot of on-chain activity is very interesting. So I'm still thinking that we probably capture the downside in this 50% down bracket that we've been in with Bitcoin and Ether.

So that's where I think we are, but I'd like to zoom out. So just like we did before, where are before? So Brian, if you pick up the first chart, so I've talked about this before, and I just updated it for Global Macro Investor, my research service, which is crypto users versus the internet.

What we did here-- well, Remy did it for me-- was we started at 5 million users each. When they both hit 5 million, we then stopped measuring. And what we found is that crypto has been significantly outperforming the internet in terms of adoption. We're way ahead of internet adoption. So if we just continue at a kind of slightly slower pace, we get to 5 billion users by the end of the decade. So that's basically total adoption of crypto.

ASH BENNINGTON: And by the way, it makes sense that we'd see that rapid increase in the rate of adoption because "it's being monetized by the users. Facebook is a great platform, but it's been monetized by Mark Zuckerberg, the early founders and investors. What makes crypto different is the capacity for people who are using the network to profit from some of the economic upturn. That's, I think, maybe the most significant --

RAOUL PAL: Of course. But, like, the internet, we didn't profit. We couldn't buy tokens or shares of the internet. We have to find the companies that were going to win. The internet won, clearly, but here, we can own the network, right? This is how powerful it which.

And there's something called [INAUDIBLE]. So Metcalfe's law is the network effects but there's the other thing called Reed's Law. And Reed's Law is when you build network effects upon network effects and you get true exponentially.

So if we're thinking here, we're building-- the foundation layer was the internet. Then, mobile data, and 3G, and all of that starts accelerating it, and broadband, and all of those things. And then you add the internet of value on top? Of course it's more exponential, by its very nature, and the fact that you can own part of the network makes it more attractive for everybody to be involved.

So if we look at the next chart, I've got another chart of this, just zooming in a bit. So Brian, if we flip to the next one-- so here's a couple of assumptions. So what you can see is, in the first six years, the internet grew at 76% a year, or 78%. Crypto has been growing at 117%. So it's much faster growth.

So we're at 300 million users now. At the same point, the internet was only at 119 million. So you can see the scale of how this happens.

So if we assume that, suddenly, everything slows down in crypto adoption, and we grow at the same speed the internet did over the next four years-- so this is now from year 6 to year 10-- we get to 500 million users. I'm sorry, so 1.2 billion users. If we just assume the ratio lower, then we still get to ridiculous numbers of 2 billion by 2026. So it's incredible. And when you're growing at 100% a year, It's. 4 billion the year after.

And then, so the next chart is another interesting one about adoption. And this is the one I'm pretty proud of. So this is-- I started-- I've been bleating on about Metcalfe's law, network effects, how to value these things, and it's very hard to do, because Metcalfe's law is quite a complicated formula, and you don't what data to use. So I thought, I wonder if I can approximate it.

And Remy and I went through all of the data for writing Global Macro Investor, and what we built was a network value model. And we tried a number of different things and found out you can explain every crypto network by 2 simple things-- the volume traded on a daily basis, monthly basis, and the number of active wallets over that period. Once you mark once you map that out, one multiplied by the other, the charts exactly fit that of Bitcoin.

So we thought, OK, this is interesting. So basically, the network is the amount of activity on the network-- not in number of transactions, but in value that gets exchanged every day-- and the number of people exchanging value. So if you think of a network, if you've got one participant who's doing a billion dollars, it's not very valuable. But if you've got a billion dollars being done by 20 people, you've now got a network. So it kind of makes sense.

So I wanted to, then, test it against Ethereum. So if we look at the next chart, it works perfectly for Ethereum as well And then we would-- lost Brian there. Brian?

ASH BENNINGTON: I think the charger just lagged. There we go.

RAOUL PAL: There we go. So that's Ethereum. So really interesting. And it also works for XRP, which is weird. You wouldn't imagine it would. But XRP works exactly the same. . So then I tried it for Polkadot, and it works exactly the same.

So what it shows you is everything in a network is basically the volume of transactions in dollar terms, or value terms, and the number of people using it, and that's it. And that, I think, is a big breakthrough for the space. I don't want to pat myself on the back.

Now, doesn't. I can yet forecast it using this, but I can show What drives the value of a network. And I'm working on other models now to start having forward-looking indicators to understand, OK, what's really going on?

ASH BENNINGTON: I mean, those correlations are just extraordinary. We look at a lot of charts, and I don't see charts that look like that very frequently. So basically, it's very clearly correlating the price just to the number of users and the dollar volume of the transactions. I mean, it's you're, like, MV equals PQ.

RAOUL PAL: Yeah, yeah, it's amazing. Let's see. ETH model is slightly deviating from fair value, and I think that is because there is a difference in ETH versus all the other networks that I've shown you so far. And that is because so if you look at the ETH price in blue, it it's higher than the network. And I think that is to do with burning of tokens.

So if I were to model this better, in ones where there is a token-burning model, you should see a slight outperformance versus this model. Because, obviously, you're reducing supply all the time.

ASH BENNINGTON: I'm sure we'll see that in Gen 2 of your model.

RAOUL PAL: Yeah, well, I don't. It's complicated. My maths isn't that good.

ASH BENNINGTON: [LAUGHS] Raoul, Listen, I'm curious. You've been talking on Real Vision in "Raoul's Adventures in Crypto," as I mentioned, to a lot of great guests. I've found a number of the recent ones incredibly interesting. Bill Ty, especially, the gentleman who runs ARK Invest Crypto Group, Yassine Elmandra. Tell us a little bit about that journey, what you're learning there.

RAOUL PAL: Well, Yassine is a super interesting one. So Yassine, obviously, works for ARK, and he's very native to this space. And he has different views to me. He's much more of a Bitcoin guy, and I'm much more of an ETH guy, or I'm much more of a multi-chain world. But what was really nice about the conversation was being able to have an open, proper discussion to realize we're talking about different things. One is hard money and the sacrosanct Bitcoin blockchain, and the other is, OK, the internet of value.

And can those things coexist? Are they competitors? And how should we think about this? How should we think about the philosophy?

Because what happens is, if you talk cross-purposes, people clash. And so Yassine and I had a really great conversation about this. And I think we both moved that understanding on of the whole space overall just by riffing off each other. So I love that.

And Bill Tai, you know, Bill's amazing. Always love speaking to Bill. Just getting an idea of where things are going, how the NFT world is moving, how philanthropy, good karma, how that works, and what he's up to and what he's seeing.

So I always like picking these people's brains, because, look, why I love "Raoul's Adventures in Crypto," it's my