ASH BENNINGTON: Today, Raoul sits down with one of the true giants of the cryptocurrency hedge fund world, Pantera Capital's Dan Morehead. The two discuss the current state of play in the markets and the global macroeconomic situation in the wake of coronavirus. There's also plenty of content about cryptocurrency, digital assets and the future of blockchain. There's something more here too, I think. Two veterans at the height of their powers, who unpacked the way they think about the world, how they see crises, and how they see the inevitable opportunities that will arise in the wake of the difficult times we now find ourselves in.
RAOUL PAL: Dan Morehead, good to get you finally back on Real Vision. It's the first time we've sat down to chat for a long time and you reached out recently because of your macro views and I thought who better to talk through macro and then where we potentially could go with this than you. I'd love for you just to quickly let people know why you're involved in macro, because people now know you from a different space than the world that I knew from originally. If you could give a bit of background about yourself, I think that'll frame everything nicely.
DAN MOREHEAD: I started out as a fixed income mortgage trader at Goldman in the '80s, actually right before the '87 crash so I've seen one of these cycles before. Then you and I met when I was at Tiger Management, we were trading global macro, big disruptions around the world, trying to see things from a very global macroeconomic standpoint, and in 2011, I got excited about Bitcoin and had been full on blockchain since then, and up until recently. Global macro really had no impact on blockchain. The reality is the worlds are now all interdependent and global macro is going to have a huge impact on blockchain. In particular, the fiscal and monetary policies that are going to impact cryptocurrencies.
RAOUL PAL: I must admit, it was a genius move of you to do what you did. That was the best macro expression I've ever seen, which is basically to say, and we've seen lots of our friends go through the same cycle, but you were by long way first saying all of the macro opportunities added together is less than this one opportunity set. This is the macro view. That was essentially what you did. It was incredibly prescient of you to do that. I just thought it was just an amazing thing to have done and you got in at the right time and understood it a long way before everybody else.
DAN MOREHEAD: Thanks. I've been fascinated by these disruptions that come along, Russian privatization, or Argentine farmland or Tesla Motors, every three or four years, some little shiny object in the forest that I pick up and try and figure out and spend a year or two investing in it, but I do think blockchain's literally orders of magnitude bigger than all of those trades and I think it's the second half of my career. I'm really excited to stay focused on it.
RAOUL PAL: Talk to me through how you're perceiving the situation now, let's dig into the macro because there's a lot going on. A lot of people are confused where we are now and some of the probabilities of how things play out. Then we can dig in and chat about things as we go.
DAN MOREHEAD: The first main thought is I'm not an epidemiologist, so I'm going to leave that to others, but having studied 35 years of global economics, this thing is just bigger than anything since World War II. I think even I'm trying to get my head around that. I think a lot of economists and market participants are still not yet appreciating how large this thing is.
Here's just one quick thought experiment is the least bad way to combat the virus is for everybody on Earth to shelter in place for two weeks. At the end of that two weeks, we test everyone and those who are infected get medical treatment and the rest of us go back to work. That is absolutely the least bad alternative. Even that, if you take two weeks divided by 52, that's 4% of global GDP. That is just such a huge number. Yeah, some of us can work remotely like you and I are, adding a little bit to GDP here but for most people, most industries, it's very difficult to work remotely.
The least bad outcome is 4% to global GDP. Then the unfortunate reality is this virus is ebbing and flowing around the world in a very asynchronous way. China who led us into this crisis a few months ago, is actually starting to come out of it, right at the same time, countries like the US and Canada and Europe are right in the essentially the nadir of it. Then there are other parts of the world that have yet to experience it, but unfortunately, are likely to. As this thing washes around the world at different times, it's essentially extending the amount of time the global supply chains are down.
RAOUL PAL: My big concern is the market wants to believe in the old world, which is, it's an event like 9/11. You take the hit, there's a bit of a shock, and we return to normal. I look at two factors within this, one is the rolling nature. Countries like Brazil barely started in this cycle, while other countries are more advanced like South Korea, Singapore, or even Italy. The US has really messed this up in terms of how that works.
I worry that this rolling cycle continues as huge and much longer than people anticipate. It's not a three-month event that the market's hoping for. I also think that it's a lot more psychological damage that comes from this even when you reopen the economies. The Prime Minister of Singapore made an amazing speech explaining that, listen, Singapore is not going to open his borders, probably not for a year, because I can't. He said, look, we're going to have to take this hit, but nobody's going to be freely traveling, nobody's going to be congregating in groups. Barring a miracle, this thing's around for a long period of time so if you don't get a one-off GDP here, you end up with a drawn out recession.
DAN MOREHEAD: Raoul, I think you're spot on. It's unfortunately our central case is that this will be drawn out for many, many months and there is a psychological impact to it. If you think about all other recessions, they're created by a lack of either credit or income. If the government provides those things, we can all get back to work and it's all fine. In this case, it's a psychological impact. This is all very distressing, and it'll be really hard to get people back to work in a lot of the economies, the consumption of services.
I was thinking about how tough the Fed's job is here. One problem is they're already so close to zero like all other central banks when we came into this that they really had little to do but their last cut was 100 basis points, I think that's impudent like hey, honey, the Fed cut 100 basis points today, let's go to the movies. Like it doesn't have any impact. They could cut rates thousand basis points and wouldn't go to a movie theater. I think that is going to make this last a lot longer than people think.
China's trying to reopen and there's a great photo of a movie theater absolutely empty like even if they're officially open for business, the psychological damage is going to take months or you even suggested, potential years. Then your point about 9/11, we actually mentioned that in our investor letter, there's already talk of this being a V-shaped recovery and it's just going to be right back to business as usual. I think there's so many things that I have no idea what's going to happen. This is incredibly uncertain time.
One of the only things I really believe strongly is it's not going to be V-shaped, that comparisons to 9/11 are really starkly different. In that case, every aircraft was grounded for three days. Then three days later, every aircraft was in the air and commerce could restart. This is just the effect has been slowly percolating. The CDC knew that this was a problem in China in late 2019. This already, we're going into our fourth month of this. We're just starting to attack it. It's going to take many, many months to really bring this under control.
RAOUL PAL: Yeah, but I've been looking at China because if China started this first, then we should be able to understand what lies ahead for us, it's worked pretty well to use them as a roadmap. Now, obviously they lied about that the numbers and et cetera. That's irrelevant for now. What's interesting is they've forced people back to work. We've seen factories start up again, we've seen pollution go back up. Problem is one, who do you think they'll sell those goods to? You're creating I think a default cycle not only in China but around the world.
I think there's a solvency crisis that we have no parallel for that is coming. Additionally, if I look at simple stuff, like really fascinating, TomTom produces traffic data for any city in the world. You look at the traffic data for Beijing, it's almost at normal during the weekdays as people get to work, weekends down 80%. People aren't going anywhere. I just spoke to somebody who was in Beijing, and they're talking about restaurants. Yeah, restaurants are open, the problem is there's only 10 tables and you're only allowed three people in a table and there has to be social distancing.
In a restaurant business, which is low margin business, you basically, you're compounding negative returns. It's that destruction of cash flow that really worries me in this that we end up with a default cycle. As you rightly said, the governments have started to try and inject money to repair balance sheets, i.e. at household level. The problem is they're not offsetting people's wages so you're basically just giving them subsistence living. That doesn't drive consumption, it's not stimulus. It's just trying to paper over some of the cracks.
DAN MOREHEAD: I agree. I think it's unfortunately true that in past recessions, fiscal or monetary stimulus always could cure the problem. I really think they have very, very little efficacy here, unfortunately, because even if you replace the lost income, nobody wants to go to a restaurant, or nobody wants to go to a movie theater. I do think China and other countries like Korea and Taiwan are really good case studies of how to combat the virus. I think it's very important to note that China basically walled off 60 million citizens in Wuhan on January 23rd when they had only 17 deaths, and most other countries have taken less drastic measures way later in the cycle and so I think we'll end up with a larger economic hit and China is going to endure.
RAOUL PAL: What's your view of the US situation? Because that's the one that seems quite concerning and I think it's the one which will drive potentially monetary policy and a whole bunch of other stuff, fiscal stimulus. What's your view of the US situation and how that's going to evolve?
DAN MOREHEAD: I would say I don't have any deeper insights than the experts on it. I'm not the guy to say it, but from an economic standpoint, it seems like this is going to be a really big hit. The call now from Goldman Sachs is the 34% annual rate fall in GDP. That's just the number you and I've obviously never seen, will leave GDP 6.2% lower than it was. Honestly, I think that's highly likely, if not more. Again, if you go back to just the, if we all just didn't work for two weeks, and then we all went right back to work doing 100% of what we used to, that's a 4% hit to trend GDP. If trend was 2%, that's minus two. I think we have to keep in mind that the US is not even really into the worst part of this problem and so it's going to be many, many months until it's worked out.
RAOUL PAL: What is the role you think that the government and central banks are going to play in this on a global level? What are they going to do? Because that's the next phase, is looking forwards and is trying to understand what they do, and whether they can address any of this and how excessive monetary and fiscal policy becomes.
DAN MOREHEAD: Well, yeah, they certainly can be helpful, and I'm encouraged that they have been engaged very quickly. This is a totally different thing we're fighting. We're fighting an invisible virus rather than a lack of income or lack of credit. The coordination that we're used to where the Finance Minister and the central bank governor of all the countries who are used to working together and used to using monetary and fiscal policy tools, to combat these things that are very well studied, very well known what to do with a lack of income or a lack of credit.
That's not the issue here. The issue is a medical one, a science one and so we are at war. I think it's a good analog. In physical wars, you have the general give the press briefings and talk about the issues in the war. In this, it should be the scientists that are telling us what the issues are and what are tradeoffs are, scientists and economists because it obviously is a tradeoff with the economy, but those groups are not really used to coordinating. In the United States, good example of three or four different health organizations that each have some remit here and coordinating between them is difficult.
They're not used to coordinating with the Fed and with the Treasury and so it's very unprecedented policy challenge. Unfortunately, I think the fiscal and monetary stimulus are going to have less impact than people would hope. In the last crisis, the US was able to cut 437 basis points. Here, we only had 150 basis points of ammo left. Then globally, the world was able to cut 298 basis points in the 2008-2009 recession. Here, we're only going to get 55 basis points on average of global rate cuts.
We're seeing one fifth of the monetary stimulus we had in the last recession. This is much bigger recession, so if we wanted monetary policy to be effective, we would want much more of it. Unfortunately, the one policy lever, monetary policy is really tapped out. Then the fiscal policy, we've seen a 10% of GDP stimulus signed days before a new stimulus plan has been talked about. These are just numbers that are literally off the charts.
I think it's almost certain that the United States is going to exit this crisis with more debt than after the battle against the Great Depression and World War II. That's just an amazing place to be. We entered it with a very large structural fiscal deficit, the US was spending 31% more than it was taking in even with record employment, record stock prices, record real estate prices. Essentially, just creating a ton of money, increases the quantity of money. That's the whole objective of quantitative easing, is to increase the quantity of paper money.
It's already having its intended effects, a very clear policy goal was to raise the level of stock prices relative to where they would have been otherwise. That is obviously working, but it's like hydrostatic pressure is going to raise the level of all assets that are not quantitatively usable. It's going to raise the level of real estate. It's going to raise the level of gold and cryptocurrencies and dozens of other things.
RAOUL PAL: Using your macro viewpoints, if you weren't in the crypto world, what would you be doing now? How do you see this evolving in market terms?
DAN MOREHEAD: That's a great question. Since I hung up my global macro cleats seven years ago, I really don't want to get over my skis here. The only thing I would say is relative to what everyone else is talking about, I think it's going to be a much bigger and longer recession than other people are talking about. All things being equal, I think it's probably negative for equities. Then I think in the end, you're going to see a divergence.
There's always this knee jerk reaction in a crisis. Things like the dollar and treasuries always go up, flight to safety, potentially repatriation of assets. Developed countries selling emerging market assets to bring them back to their country. They trade weighted dollars up about 5%, I think. I would have to say, I think in the long run, all of the essentially the easing of the quantity of money in countries like the United States relative to some of the other countries on Earth, is probably negative for the dollar. Again, I haven't looked at the global macro markets very closely for a long time. That's just a hunch, not something I put some money on.
RAOUL PAL: I'm more fearful because if we go through a solvency event, the largest financial position on earth is the $13 trillion short position held by foreign corporations in US dollars. I worry that as global cash flow goes negative, the chance of servicing that debt becomes almost zero. You have to go through a default cycle in generally emerging markets. That makes me fear that we get a much stronger dollar.
My view for a long time has been this cycle breaks not from the weak dollar but from the strong dollar and eventually forces the other central banks who have been talking about this already, that the dollar standard is not something that is manageable any longer. It's broken. Triffin's dilemma is at play and as a reserve currency, there's not enough dollars abroad to deal with this.
That's what I'm fearing, and I pick up a lot from the central banks, Mark Carney was the first one to make it clear that he'd love to move the Bank of England away from this dollar standard. The first step is towards a digital currency world. I don't know what your view is. Okay, we know this is screwed, my view is this is probably going to be the biggest insolvency event of all history. That's going to take a strain on the financial system and possibly force the dollar up. I don't know what your views on that is, and then where does this go?
DAN MOREHEAD: Yeah, I love that US Treasury Secretary Connolly in the '70s said the dollar might be our currency, but it's your problem to Europe. It's a fact of the world that the dollar is the reserve currency right now. That's changed every 80 or hundred years over the last six centuries. It used to be the Portuguese escudo and the Spanish real, and now it's the-- then the pound, and now, the dollar. There really isn't another candidate in the fiat currency world.
I do think in the long run, and this is decades, cryptocurrencies will become reserve currencies. Whether it's Bitcoin or Ethereum, Ripple, whatever, ultimately, some of those will be reserved currencies, but government's very slow to change and so I think that's a 10 to 20-year very slow progression, but that would be the answer. I actually thought the original construction of the Libra project that Facebook created was