RAOUL PAL: I didn't think about two weeks off the recession watch, I'd have to do a Recession Watch update. The things are moving fast. And I had that sense in recession watch that things were going to start accelerating in August. And it's typical because I'm just about to go on holiday. Normally, when I go on holiday, all hell breaks loose. But in macro terms, the technical term for what's going on right now is a shit ton. There is so much going on, I can't quite get the grips with how much is moving.

We've seen the Chinese tariffs situation, we've walked apart from that. The Chinese have allowed their currency to go through the seven level, that's a really important thing. It means that the dollar strength story is in play. Yes, it's a little bit choppy right now but focus, look at things like the Australian dollar. Things I've mentioned before in the previous pieces, that's now falling like a knife through butter. We're seeing the same with a Korean won, which is like the Asian weakness trade, the global trade issues. That's all underway now. And the Korean won is starting to accelerate in its weakness.

That knock on effect of the dollar rising, yeah, it's a bit choppy in the Euro. But it'll probably play out. There's a lot of people that have Euro funding trades on against things like Mexican peso, all that needs to get washed out first before the Euro can start falling, or come on to Europe in a minute because it's a big part of the story that's developing. But in Asia, that data is incredibly weak. So, some of the bounces that we're fearing, they're going by the wayside. I do not see any recovery in the data, I see further deterioration of conditions, particularly in Asia.

We're seeing it in China, we're seeing it in Korea, Singapore, Taiwan, all over the place. The tensions in Hong Kong don't help either. They're ratcheting up things even further, the risks are that America says something about Hong Kong status as a sovereign territory. That would be an enormous issue. Everybody's fixated, are the Chinese going to walk into Hong Kong? This is something on Real Vision that Kyle warned us about months and months and months ago, about where this was all leading.

So Asia is moving fast, the currencies are starting to break down and interest rates are being slashed. Remember in Recession Watch, I said there is no way the US can organize, orchestrates a weaker dollar, because every time the US cuts, so they cut 25, New Zealand's already cuts 50, everybody's going to cut faster and harder than the US will. And that's a big problem.

So, let's go to that US situation. It's a real problem for me. And I explained it in the piece, and I've been writing about it on Twitter is the Fed were going to make a mistake. And they were going to make a mistake of only cutting 25 basis points. The underlying economic condition was worse than people expected. Too many people are looking at delayed data, like unemployment, which is basically looking past 18 months behind us. Same with consumption data.

And so, people are looking at the wrong data, I thought the Fed needs to cut 50, the Fed cut 25 and removed QT. So what happened, the day that happened, the dollar exploded higher, the RMB broke through seven, and things started creaking at the scenes. The last time the RMB started devaluing, six weeks later, my God, volatility hit everywhere. And I think that same process is about to play out. There is a massive dollar funding shortage in China that is playing out in front of our eyes. And the markets are not yet fully focused on it.

Now, what else is going on is the Treasury now have to replenish the Treasury general accounts after they had drawn it down over the period of the government shutdown essentially. So, with the government ceiling, debt ceiling, not being raised in the past, the Treasury were helping smooth it over by funding the government from their own reserves. Now, the debt ceiling has been raised, the Treasury will rebuild that account. But they also have to start issuing new Treasuries and the existing Treasury schedule.

So, what we've got is we've got a drain on T-bills of $600 billion to come out of the market from September to the end of the year. This will be one of the largest drainings of liquidity in all history. Don't forget, this is following on the largest increase of rates in a Year on Year rate of change, in a 2-Year on 2-Year rate of change in all recorded history. The market is too fragile to deal with that, and only have a 25 basis point cut. I think the Fed are going to the Treasury in what they do, and the Fed not having done enough, are going to ignite this dollar further and you're already seeing bond yields melting lower.

So, the bond yields are picking up, the yield curve is inverting even the 2s, 10s Swap Curve which has never inverted, well, it inverted in 1990. Since then, has never inverted, it's now inverted. It's absolutely yelling and screaming at everybody that there is a recession baked in the cake. And it's coming hard and fast at us. So, we have to take the signal seriously.

So, the 600 billion is going to come out. What are the Fed going to do? They are going to be in a panic in September to start cutting, they'll cut 50 in September, I'm almost sure of it. And the market is going to force them into it. And it's still not enough. As I said, I thought they were going to cut 100 this year, I still think they will cut 100 this year. I think they will try and get to zero as fast as they possibly can. And I was speaking to John Burbank, he and I talk a lot about this, we're thinking they will get to zero by March. That's how fast we think this is going to have to play out.

So, that euro/dollar trade, the bond trade, there's a lot of juice to be had. We think there's an enormous move to come as the Fed really realized that they got themselves into a big trouble. If the dollar keeps going higher, it makes the situation worse, it makes the probability of these cuts higher. So, watch that dollar. The dollar is breaking up everywhere.

Gold is screaming another signal. I've never before seeing gold rallying and the dollar rallying. I've been warning about this for years now, saying this is what the end part of the cycle is going to look like. The dollar is going to rally. Gold's going to rally and eventually, gold will be the last man standing. That process is playing out. I think the gold will have a correction because there will be some liquidations. I think that September, October, November, situation could be a little more extreme than most people are imagining.

I could be wrong. Again, you know by now I'm dealing probabilities. I'm reading the charts. I'm seeing it the best way I can call it. So, I'm not saying it's definite. But I really think the chances are- they're really ugly, two or three months is extremely high. And that rise in the dollar, if that happens, is going to make the whole situation really extreme.

But that's not the worst part of the situation if that's all bad enough. These are the general moves that go into recessions. Yeah, it's going to be pretty hard and fast. We're going to have to move quickly, we'll see rates plummet, we'll see the equity markets finally starting to fall. And we'll start to see that doom loop starting to slowly ignite as things like high yield bonds start to see their spreads widened. And things like ETFs like HYG or JNK start falling. Those the things I've prepared you for. I've told you a lot about these things.

The other one is something I have spoken on Real Vision about many times, I've spoken on Twitter, I've written on Macro Insiders, and I've written in Global Macro Investor, ad nauseum is the European banks. The European Bank charts, the SX7E is simply what I term the GMI worst chart in the world. It is the biggest top pattern of any market I've ever seen in my entire career, or any market I've ever seen in history. And I say that without trying to sound hyperbolic, it is what it is.

Today is Monday, August 12th. So I'm not sure what day you'll get this, but today, the market broke that key support. Some of the banks were down 4% or 5% across Europe today. And I think they're going to go into freefall. That's a big problem. I get a lot of pushback about the banks, people are like, well, they've got plenty of capital. Yeah, they've got plenty of capital, but if their share price keeps falling, they're going to become insolvent because people are going to take money out. The capital is fleeting, and this situation is serious.

The ECB is still on holiday, there's nothing they can do. When they come back in September, they are going to panic. They will have to do something very quick about the banking situation because it's going to get ugly as hell. So, I really worry about that. I really worry about what signal that is telling us about the world, about the banks breaking down across Europe. I also worry about the Japanese banks as well, I can see that those are breaking down, as we heard of in the recession watch. So, we're very close to that break as well.

Now, people say, well, the ECB are going to do some tiered interest rates to allow the banks to have a steeper curve. But what I know is bunds trade in the real market as 2 Schatz or 2-Year Notes, and their yields are going to keep on falling. My bunds target, if you look at the long-term chart, my bund target is probably negative 3%. We have enormous moves to come here out of Europe, out of European rates. And that worries me that the banks cannot deal with it. And the banks are going to go into a death spiral.

So, even though the ECB is going to try and keep them inflated, I don't think the share prices will hold up. And the share price is not holding up eventually means the share prices go to zero. And I think that's what's at play and is going to happen. I think Christine Lagarde is going to have to deal with a bailout or restructuring of the entire banking system across Europe, and potentially, a move towards a fiscal and political union within Europe. If that doesn't happen, it's a total fragmentation of Europe.

It's all to play for. And this is how serious the stakes have become. This is really is a key moment in time for all of us. And again, these pieces sound dramatic and five years' time, maybe I'll have egg on my face and wasn't Raoul the idiot who called it. Well, I had that pushback on Twitter the other day from Joe Wiesenthal from Bloomberg, push back at me and said, oh, well, Raoul said this in 2013, about an article that he actually leaked in Business Insider.

And what was outrageous about that was 2012, you got overly excited about that. The world didn't end. People have no fucking idea what happened in Europe over that period of time. Literally, people got wiped out. Unemployment went to 50%, youth unemployment in Spain, unemployment overall hit about 25%. Friends of mine, everybody lost their jobs, people went bankrupt. The banks, they converted people's deposits into preference shares, and then defaulted on preference shares wiping out so many old people I know living in the village that I lived in, they took their money wiped the whole lot out.

They wiped out bank here that went into government hands, and many other banks went by the wayside. That was just Spain, Spain was so bad that I had to buy canned food for my house, and rice and a generator because we were within days with the banks going bust. The ECB eventually forced the Spanish to take 10 billion to bail out their banking system because it was going to go under and the banks were going to close.

But that wasn't the worst there. Greece went entirely bust, Portugal where pretty much bust, all of the banks, part of the banks got bailed in. Some of the banks went bust, the whole thing was hold out. Greece as a country went bust. It's still recovering to this day. But that wasn't the worst, little Cyprus, it got completely obliterated. So, in Cyprus, they bailed in the entire banking system, screwed everybody with any deposits screwed all the businesses, the banking system shut down entirely and the British Army had to bring a plane full of cash in from the ECB. That's how bad it got in Europe. And for anybody said I was alarmist, last time that I saw this happening, which is back in 2011-2012, really has no grasp of the magnitude of the history that occurred, that in Europe was the largest economic event since World War II.

Now, where are we in this situation? I honestly don't know how big this is. I do know that the US is fragile. I do know that there is complacency in markets in the US. It worries me that the baby boomers are going into retirement just at the point that they are about to see the markets collapse. I worry that they also have a lot of corporate bonds. And I talked about this in the Recession Watch. I think the corporate bond market is on the very edge of a big problem. If this business cycle goes negative in the US, the corporate bond buyers leave and the issue of corporate bonds and the buyers of shares, the share buybacks, the corporations, but the bonds of shares and the bonds of corporate bonds leave the market. That is a huge problem that we may face in the US.

Europe is the accelerant. We're seeing it breaking those lines. I said, I'm extremely worried about what that means. Can Europe move fast enough? And what's going to happen? The IMF wrote a paper recently that said that the only problem with interest rates is they weren't negative enough. If you want to believe that, that is the IMF, Christine Lagarde, IMF, the first thing she's going to do is go more negative. Interest rates are going to negative 2, negative 3 in Europe, and nobody's going to be able to stop it. And then they're going to stop people transferring money into cash.

That is all coming. So, we need to be super careful of that. Super careful how that plays out. In Asia, we have the trade war. Europe, we still haven't seen the rest of the trade war, Trump is going to come back and start imposing issues on Europe. But in Asia, we're seeing the trade war, we've got other issues playing out with China, we got China strapped for US dollars. We've got countries all across Asia now exhibiting extreme weakness signs. And we haven't even started the easing cycle yet.

So normally, the easing cycle and the downward cycle of a recession is an 18-month period or so, maybe two to two and a half years before full recovery. I'm fearing that this is something that we're now gotten to the point of no return, that this is what's baked in the cake. That's my fear now. Could something change? Possibly. Could they've suddenly magically weakened the dollar? Well, I hope so. Because that will save a lot of pain for everybody else.

But we've got to say focus now. This is really, really an important point of the market. This is the real reason we started Real Vision. And it is crucial that I stick my neck out like this and Real Vision sticks its neck out to say there is truth in finance and truth in finance sometimes is ugly. It could be wrong. But you have to know that there's a probability of this and it's a reasonable probability. Thank you.