WBD238 Audio Transcription
WTF is Going on in the Markets? With Raoul Pal, Caitlin Long & Travis Kling
Interview date: Monday 29th June 2020
Note: the following is a transcription of my interview with Raoul Pal, Caitlin Long and Travis Kling. I have reviewed the transcription but if you find any mistakes, please feel free to email me. You can listen to the original recording here.
This interview is from a panel I recently hosted for Real Vision’s The Crypto Gathering, with Raoul Pal, Caitlin Long & Travis Kling. We discuss the early warning signs of systemic issues in the global macroeconomy, what might happen next and where Bitcoin fits into this.
“This isn’t going to be Trump’s problem, this isn’t going to be J. Powell’s problem, this isn’t Biden’s problem, this isn’t Mnuchin’s problem. It’s not going to be any of their problems, it’s going to be our problem.”
— Travis Kling
Interview Transcription
Raoul Pal: Guys, I think we're live. So Peter, I don't know if you're kicking off for us?
Peter McCormack: I am kicking off. Well Raoul, thank you for the invite to do this and to be a part of this event you're putting on Real Vision. When I spoke to your team, they asked me any specific sessions I would like to do and I was very quick to say I would have to have yourself and Caitlin and Travis together, because over the last 18 months I've had at least both of you on my show at least twice and you've all been alluding to very similar things with regards to the economy pointing to systemic risks within the financial markets in different ways.
But all three of you have essentially been pointing in the same direction and all of these conversations we were having was before coronavirus hit. All the warnings that all of you put out in different ways were happening before that. We've had coronavirus, we've had this acceleration now, so I felt like, I'll pick my language carefully despite the name of the session, I said I kind of want to do a WTF session about what is going on in the markets and an opportunity to get the three of you together to discuss this because you've all been saying the same things.
So as a starting point, and we'll start with Caitlin first, because Caitlin was the first person I had this conversation with, and then we'll work our way through. But it'd be great for all of you just to explain how you think we got here, and that could be an hour session on its own. So it'd be really important if you perhaps maybe just kind of pick out one thing or one or two things that really are one of the really important issues and one of the reasons we've ended up in this quite weird and scary position in the market. So over to you Caitlin.
Caitlin Long: Hey! Thanks Peter, good to see you all. Just as an introduction, I think we've ended up here because we're in a debt bubble. We've been building a debt bubble since 1968 in the US specifically, but of course it's global as well. Speaking to the US, since 1968, the US has consumed more than we've produced every year, except for the 2009, which was the year after the financial crisis.
Every year, we've put more debt on our balance sheet than we as an economy have saved, which meant that we've been drawing down our equity and so the folks who predicted the dollar crash in 1971, when Nixon took the US off the Gold Exchange standard, were not wrong, but what they missed is that we had a tremendous balance sheet that was bequeathed to us by our grandparents and their grandparents etc.
So we were able to outlive our means, to consume more than we've produced and it's lasted a long, long time, and that's made those who are concerned about debt be on the defensive because the MMT-ers of course think that doesn't matter. But I will close by saying it doesn't matter until it's the only thing that matters, and we don't know when that's going to happen, but the deflationary pressures we're seeing now are caused by the collapse of the bubble, and the inflationary pressures are caused by the reaction to it, which is to create more credit and draw down that last bit of balance sheet that remains.
Peter McCormack: I'll go to Travis next. The order I'm choosing is the order I've spoken to you about this, so that's my fairness! So Travis, same question over to you.
Travis Kling: Yeah, I think the three of us had our conversations with you before anybody ever said, "COVID-19." I've been calling COVID the great accelerator, because it has meaningfully accelerated so many trends and major global macro factors that were already in place and those go back to Caitlin's point, you can go back decades and decades. You can also look to the Fed's reaction to the financial crisis in a way, which that in and of itself took us further down a path and just in an incredibly short amount of time in March, in April of this year, the other term I've been using a ton is "Crossing the Rubicon".
We covered so much ground in such a short period of time in the face of this kind of unprecedented a global pandemic... Well, you met that with this unprecedented level of monetary and fiscal response and you've now gone so far so fast, that it's easy to lose track of the fact that we did QE1, QE2, QE3, the aggregate size of that!
You rip that in a couple weeks in the back part of March and the first part of April, and Andrew Yang ran on a platform of universal basic income with an MMT underlier. He basically got laughed out of the room for being so radical in those views, and now you fast forward 60 days, and that's exactly what we're doing! We're doing UBI with an MMT underlier, and so we've crossed the Rubicon in a lot of ways.
Peter McCormack: Raoul?
Raoul Pal: I agree with everything obviously that the others have said. I think it comes down to two simple things, and it came after Nixon. It's the size of the dollar standard and how it's dwarfed everything and basically broken the world's financial system, then that's intertwined with what made it so weak was the financialization of the global economy.
That's the debt story, plus a whole bunch of other things, the outsize of banks and the lending markets overall. Then its demographics. When you've got this massive aging population, those three intertwined create debt demographics and deflation, the three Ds that many of us have looked at that come together and what happens in the end of all of that is the drugs don't work. The central bank drug just doesn't work any longer. So the answer is only more.
But if they don't work, then you get yourselves into the bigger problem and as Travis said, the accelerant was here, this was it! This was the event, because we didn't know the time horizon. We all know where it was going and now suddenly, somebody lit the match, poured the kerosene on and threw the match on it and we'll see how fast this is going to play out now.
Travis Kling: It's kind of funny Raoul, because I think probably for all three of us a lot of people, prior to corona, over the year or however long leading up to that, people were asking us what was the thing going to be? What was the catalyst going to be? I don't think very many people said, "A global pandemic," although there's plenty of people that have been waving the flag in terms of the magnitude of the risk that was present for something this to potentially happen.
I used to say that when people would ask me that question, I would normally say, "I'm not really sure, but I'm pretty positive you're going to know it when you see it." Then here comes this thing, and I think pretty quickly, it was like, "Oh, this is probably going to be the thing," because of...
Raoul Pal: Imagine if it's not, then I can't get my head around it. We've had the biggest economic event of all of our lifetimes and arguably in all recorded history. The UK had the worst recession in 350 years of data and if this doesn't trigger it, then we're all wrong, then debt, and GDP growth doesn't matter, and nothing matters. The study of macroeconomics doesn't work and so it kind of it's now or nothing.
Caitlin Long: And then the MMT-ers are right. Actually, I wanted to play devil's advocate and actually throw it out there, are you all surprised that the dollar has held up as well as it has, given that it's pretty clear that the debt bubble has been pricked and there's really no credit impulse in the private sector? It's all coming from fiscal and monetary stimulus right now.
Raoul Pal: I'm a huge dollar bull and I think it goes higher. The problem is, at the simplest level, we've got this massively financialized world, and it's all in dollars. The US accounts for 25% of the global economy, but it's 79.5% of all trade transactions, the dollar and everything is backed by debt. So the problem is that the actual lack of credit impulse drives the dollar higher, falling GDP growth drives the dollar higher and trade tariffs drives the dollar higher.
Now the dollar is not doing as well as gold or Bitcoin, and that's telling you something. So the reality is the dollar of the fiat currencies is absolute king without question. The dollar standard rules all, but it doesn't rule the gold standard and it doesn't roll Bitcoin right now.
Travis Kling: Raoul, I saw in the news this week that in Zimbabwe they have banned the use of apps which allow you to use dollars. Do you think there is a risk in emerging markets, first we've seen a collapse of the currency in Lebanon, that there was a flight to the dollar, and do you think this is what's holding the dollar up?
Raoul Pal: Yes, of course, everybody needs the dollar. So there's a good friend of mine who runs a family office in the Dominican Republic, and he keeps saying to me ... He's a big dollar bull as I am, and he keeps reminding me, "Raoul, do you understand?" His family produces an agricultural commodity, they export it, they have other businesses and he goes, "We need dollars. We have cost base in dollars, we get revenues in dollars and the central bank limits our access to the dollar. We don't have swap lines, it's not easy to get dollars."
People don't understand because if you live in Europe or the UK or the US, we can buy and sell dollars, no problem. But that's not true of anybody else. The ability to buy and sell dollars is almost impossible for some.
Peter McCormack: We've seen a lot of weird things happening. Both Caitlin and Travis previously had to explain to me negative interest rates because it was something I'd never been exposed to and then in our last interview Raoul, you were explaining this, how we achieve negative prices on oil, which is something I couldn't even comprehend before ever happening, with oil becoming even more volatile than Bitcoin.
Raoul, you've talked a lot about bond rates heading towards zero, we've had stocks flying, whilst the economy has been essentially paused in many parts of the world and something me and Travis talked about is the arrival of the Robinhood day trader, which has seen some crazy things happen in equities. How do you each interpret what's going on here? I'll start with you, Travis, because we spoke about this yesterday.
Travis Kling: So the world is collectively trying to figure out how to react to a global pandemic in the face of unprecedented monetary and fiscal stimulus and I think a lot of the things, a lot of the weirdness that you're seeing in equity markets, like Wallstreetbets, Robinhood, Davey Day Trade Global is like this mutant child of quantitative easing that we all probably could have seen coming, but nobody was really talking about it before it happened.
I think they're all interconnected in a lot of ways, but what I think we're seeing is risk assets taking the adage of don't fight the Fed, and when sprinting, that is as far in one direction as you can go and almost like daring the Fed, whether or not it's going to renegotiate on that contract. Yeah, it's a really precarious situation, incredibly precarious.
Peter McCormack: How about yourself Caitlin? How do you interpret everything that's happening right now?
Caitlin Long: It's playing out not that different from expectations, except I guess, I'm surprised to Raoul's point that the dollar has held up as well as it has, precisely because I've known about the dollar short, both Raoul and I have been talking about the magnitude of the dollar short for years now and I think some folks are just starting to learn about it, it's probably north of $100 trillion.
We don't really know, because there isn't any statistical body that keeps track of it and because of the real problems with the accounting rules that allow multiple financial institutions and multiple owners of government bonds, any asset, but especially government bonds, to the multiple... That same single asset is recorded as an asset on multiple parties' balance sheets and so each individual owner of that asset, like a bank or an insurance company or an individual looks they actually have that asset in hand, but there's really only one asset and the magnitude of that double counting of assets is not known because accountants allow that to happen. It's called repo accounting.
In fact, actually accounting changed after the 2008 financial crisis that attempted to fix what was called the Repo 105 problem that Lehman actually made it worse, it made it even more opaque and so we don't really know how solvent the financial institutions that we're dealing with really are, is if you were to strip out all that double, triple, quadruple, probably many multiples counting of the exact same assets.
Chris Giancarlo, the former head of the CFTC, who's also a big Bitcoin fan, has also talked about this. The regulators don't have the tools to understand what the real capitalization of financial institutions is because you don't know how much double counting there is. The whole accounting profession, when this finally does come crashing down, it is going to have a lot to answer for, in my opinion.
Peter McCormack: And Raoul?
Raoul Pal: So I think I've used been using a framework that I've stuck to, and it seems to be working, which is that big events like this tend to roll out in three phases. One is the liquidity event, which was into March. That's the panics, buy/sell of assets earning cash. Then you get the hope phase. Normally, it starts in March and finishes in June. That was the case in the Nikkei 1990, the S&P 2001, the S&P 2008, only 1929 was longer and slightly different in terms of timings and I think the next phase is the insolvency phase, when cash flows don't return back to normal and the debt loads that we're all talking about become unserviceable.
So we've not had this demand and supply shock ever before. The 1930s was probably the closest, but this is a truly extraordinary event. So where are we now, this kind of madness of markets? Well, I just wrote GMI over the weekend, and I spent some time thinking about it. Why March and June? Why does that keep coming up? Why do those two dates come up magically? In short, it could be coincidental, but it's not. It's to do with pension funds and how they come in. So at the end of the year ... Pension funds basically are market followers, they follow EPS forecasts from the investment banks.
At the end of the year, the investment banks were forecasting record earnings per share for 2020. So their allocation was about 65% equities. Well then the market collapsed into March, so now they find themselves... They got down to about 45% equities. So that a lot of equities to go by, to go back. Now, EPS were coming down a bit, so they don't buy back the full amount that gets them back to 65%, they buy back the amount where the EPS assessments were, which was about 57% allocation to equities.
Okay, so that ignites this big rally because that's a lot of money, and then Davey Day Trader and everybody else stopped piling in on the back, because it's all about the Fed. But today, we're coming into month end. So when you look at it now, EPS are now at $125 for the end of the year, which basically means that these guys have to take their equity weightings down to 45%, back to where it was at the low.
So we've got this potential shift, along with all of the other things I've talked about in the past that people are familiar with, is the lowering of the rates of stimulus, both from the central banks and the governments, and a lot of other things all come together, including the second wave of the virus. That means that we've got this huge pocket where the pension funds are sellers, the state pension funds don't have any tax receipts, so they're not buyers, and there's a bunch of retail weak holders. So I'm very concerned that we're at the tipping point into the next phase.
Peter McCormack: So the next phase sounds to me as the kind of calamity that you've all been alluding to, a kind of unwinding of the economy. Have you actually thought about how that happens, how serious it is? And is there anything that central banks can do now, or are we at the point of no return? I'll start with you on that, Raoul.
Raoul Pal: I've never thought the central banks are omnipotent. I've thought that they've been able to slow the descent, much like Japan, and they create other problems, as we're all aware of. So again, if I just think in a simple probabilistic framework, we've had the biggest economic event of our lifetimes, it's ongoing, so what is the probability that it unwinds the debt bubble, considering that everybody's earnings, their revenues and cash flows are down, whether at household level or a corporate level?
Well, it's pretty high. If I think about all of the dollar borrowers who are corporations, not governments this time around, unlike 1998, but their cash flows are down too, because global trade is the worst in all history. So the probability that this ends up being an insolvency event... The last mass insolvency event we had was actually 1930-1933. We've never had one since. So it's very interesting, and I think that is the kind of framework that I would look for. Do we try and get to a solution faster?
Possibly, but if we all believe that central banks will be the answer, we won't get to the solution yet. The solution will come in a number of different ways, of which part of this is what we're all involved in, which is the parallel building of an entirely new financial system that's going on at the same time.
Peter McCormack: We will get to Bitcoin, that's obviously part of the conversation. How about yourself, Caitlin? How do you feel about this?
Caitlin Long: Yeah, I think Raoul's right, I look a little bit further down the road and look to ... It is ultimately all going to be about cash flows disappearing, absolutely. But I think the signs that we can all watch for that the end is nigh so to speak, which we have not seen yet, to be clear, is shocking levels of volatility in the dollar against other currencies and the dollar against gold and in financial markets.
A lot of folks were shocked, just shocked after all these years of the Fed suppressing volatility successfully that we were seeing 1% daily swings. We didn't use to see that, except for probably in the 90s, which was the last time we really saw those kind of daily swings and then we were getting 5% daily swings, and it was shocking everyone. I suggested, go read the book "When Money Dies" by Adam Ferguson, which was a historian who wrote this tremendous book explaining what happened to both the Austrian and German currencies as the money died and the answer is the volatility gets to be just staggering towards the end, and we have not seen that yet.
When folks were upset about 1% or 2% daily volatility, much less 5%, that's when everybody needs to just understand your history, read your history, and realize that you're going to see 10% daily swings, 25% daily swings. Towards the end of the German currency, literally there were 50% intraday swings, and there were multiple periods of time... We tend to look at hyperinflations on log graphs, and the log graph makes it look like it's sort of a straight line. It's never a straight line.
We have these unbelievable head-fake rallies that Raoul was pointing to, where it makes it seem like things are calm and better and under control, and it's finally over and it's not over when you're on this path until it's really truly over. To answer your direct question Peter, I don't think there is anything that can be done. This is fundamentally an insolvency. One last thing to share is that financial institutions and even whole economies can be insolvent for years, if not decades, as long as they remain liquid and all that the central banks are doing is just creating liquidity.
That doesn't mean that they're solving the solvency problem, which is actually at bottom what's happening, and so we need to recapitalize. But the last comment is, don't be afraid of bankruptcy. Bankruptcy doesn't mean a business closes its doors, necessarily. Liquidation does, but not bankruptcy. Bankruptcy means you're getting the productive assets of the economy into stronger hands, into people who know how to generate real economic growth and real economic value from those assets and that's what we'll be going through.
Peter McCormack: Well that was something you and I were discussing yesterday Travis, with regards to how... In the US, for example, we discussed how so much money has been lent to some of the big business, they've not been able to fail. Mnuchin famously said recently he's not even going to announce who the money was lent to and how much. But actually, we discussed, or you pointed to me that some of these companies' survival is a matter of national security.
Travis Kling: Yeah, I have this view that the absolute level of the S&P500 is a matter of national security for the US government and they have this tool, this arrow in their quiver, quantitative easing, that makes stock prices go up. They're willing and able and incentivized to print with a track record of printing, so I think it's a good base case assumption to work off of that they're just going to be tremendously accommodative.
So the original question was kind of like, "Can the central banks or can the Fed do anything? Can the Treasury do anything?" And this dollar shortage situation, again, the great accelerator, something that had been in play for... The repo market blew out September of last year, Fed funds flipped the overnight interest rate and the overnight offer rate in April 2019. We cut interest rates three times in 2019, before anybody ever said, "Coronavirus."
A lot of his dollar shortage situation was coming to a head before anybody ever said, "Corona," and then you have this event. In my opinion, the ferociousness with which the Fed and the Treasury responded was a clear indication that they understood how tight that situation was and how dire it was if they didn't act big and fast and it's always, whatever the most dangerous words in it are in investing or this time is different, and I understand that.
But I've also been saying for a while that the US dollar in 2020 is not your parents' world reserve currency, and it's definitely not your grandparents' world reserve currency, because this dollar shortage situation, to the best of my knowledge, and there's definitely folks that have done a decent amount of monetary history, there's certainly folks have done a lot more, but I don't think there's ever been a time when a specific currency has had the global economy on lockdown the way that the US dollar has right now.
I'm not a big fan of giving the Fed a lot of credit, but if you were going to give them the most credit possible, you would start asking questions like, "Did they set this up like this on purpose, where you've got the whole world short dollars and knowing that if anything ever really bad happened, you would be able to support the US and Americans, you'd be able to support Americans to a degree previously unfathomable." About six weeks ago, I saw a stat, Raoul, you may have seen this, from Goldman's research that said that consumer disposable income in the United States in 2020 was projected to be half a percent higher than in 2019. Higher!
How the hell does something that happen? Well, it happens when a big portion of the United States population goes on unemployment, gets the extra federal level unemployment and a lot of people don't have to pay rent right now. Then here comes the PPP, here comes the EIDL loans, here comes all this other stuff, and you end up in a situation where people are better off than they were when they had a job, for a big portion of the population. Then in the meantime, what's the Dixie done? The Dixie's unchanged over this period of time. You've done $3 trillion plus of balance sheet expansion...
Raoul Pal: This has got to be warning people, and Caitlin alludes this in the beginning. So the dollar bear view was that the Fed are going to print. They've just done the most amount of printing in all recorded history and the dollar didn't fucking move!
Peter McCormack: That's right.
Raoul Pal: Right? Now the Fed have stopped, and the ECB, the BOJ and the BOE are full printing presses, like this, for the next one to three months.
Travis Kling: We've seen this movie before, right? They all take turns, we've seen the take turns movies...
Raoul Pal: What's really interesting, is I did some work from the BIS, looking at currency flows. So what people, we all fail to pick up is a trillion from the ECB is not the same as a trillion from the Fed, because a euro is 60% less liquid. So basically, when the ECB do their two trillion, it's six trillion in dollar terms, because the euro is less liquid.
So now we've got this lovely setup, potentially, where the Bank of England doing huge, and it's a less liquid currency. The Europeans think huge, and the BOJ are being huge, so my guess is we'll see both Bitcoin and gold move very fast in this environment, and the dollar just keeps rallying but will be the third of those, you know? It won't be as good as a Bitcoin or gold, but it will continue to rise versus everything else.
Peter McCormack: The US dollar's the best monetary policy house on an extraordinarily shitty monetary policy block, right?
Raoul Pal: Well, the point is it's not a point of them doing anything good now, it's 79.5% of every single trade transaction on Earth. It's just set in stone, everybody needs dollars. Now I've always argued that the dollar ate all of its competitors, and now it's going to eat itself because they're truly strong dollar. Well if that happens, well then we're in a really big problem because everybody defaults.
Caitlin Long: And that's the irony of it! Again, we saw this happen and currency collapses, it happens all the time. But you get the incredible head-fake rally that makes everybody think that the naysayers are dead wrong and the question is, or the reality is, they're not dead wrong, this is exactly how it was always going to play out. You just didn't know how far and how fast, and you didn't know exactly what the sequence of events was going to be, but...
Raoul Pal: The one I've been looking at was the 1930s. So the dollar sucked in all the world's capital in the 1930s in its debt deflation...
Caitlin Long: Which it's doing now.
Raoul Pal: ... And eventually, they had to devalue it 40% because it was far too strong, which I feel that somewhere within this is everybody walking away from the dollar and moving away from that 79.5% and bringing it somewhere like 40%, as the world decides we can't deal with this any longer.
Caitlin Long: Yeah, I was just going to add that we've done this before. We did this right after the 87 crash in the plaza accord. We've done this mass agreed devaluation, and look what that did! That triggered a series of have debt deflationary collapses that began with Japan within a year or two. It did not usher in a new stability, it just moved the instability outside of the US for a few years. We may end up doing that as well in the next year or two, precisely because everybody is screaming about the lack of dollars.
Travis Kling: In my opinion, having a setup like what you guys are talking about, is your base case assumption ignores the body of evidence that we have about US politicians and now the Fed, which has become entirely politicized, those individuals' willingness to kick the can by any means necessary, for as long as possible. I really think boomers are just trying to die before this whole thing blows up, so that they can just hand it off to another, and then we get to deal with it, right?
This isn't going to be Trump's problem, this isn't going to be Jaipal's problem, this isn't Biden's problem, this isn't Mnuchin's, it's not going to be any of their problems. It's going to be our problem, and I think they realize that. In the meantime, from a political perspective, you're so worried about this dollar strengthening, dollar wrecking ball is a term that people use a lot and all you have to do is go, "Bee boo," and print trillions of dollars, oh, and you can just give those trillions of dollars to Americans to make their lives better. The only thing you're worried about is headline CPI...
Raoul Pal: But as Caitlin talked about, it's a relative world. The Europeans are just going to let the US do that without printing their own? They're not, that's the problem. We're in the circular argument and how it plays out, I don't know. But as Caitlin says, somewhere within that is a lot more currency volatility than we've lived with for a long time. It's not a seven bowl world, which is what currency is nowadays. It's something bigger because what you're saying is, "Okay, the Fed now go next, printing money in MMT style."
Well the Europeans are going to have to do it, and then the Japanese, and then the Brits and then the Aussies and I don't know where that ends. Well we do know where it ends, but somewhere within this it just gets worse and worse and worse because the only answer the central banks have to everything is more. There's no other answer they have.
Caitlin Long: Yeah, I would agree with that. The political decision to go down this path was made literally in 1968, when the US said, "Hey, we're going to ignore the restraints put on us by the Gold Standard" and I always like to add, in my opinion, there's nothing special about gold itself. What gold did was literally just put a tether on the dollar, on how much credit could be created.
Literally if you look at the dollar data that the Fed itself produces, the US economy, just look up and add up all the savings in the economy in any given year, and they'll look at how much credit was created, and the two up until 1968 were roughly equal and maybe one year there's a little bit more credit, but the next year there'd be a little bit more savings, there really was no difference. On a cumulative basis, it was exactly the same. We had what I would call an equity financed economy in the US back then and that was exactly what the Gold Standard was intended to create, an equity financed economy.
Raoul Pal: The Gold Standard, a lot of people say, "Well this is the panacea, this is the Holy Grail." But you look back across the history of all currencies, even when they were backed with gold, most of them all collapsed. Gold is the thing that gets left standing, the currency that's pegged to it dies.
Caitlin Long: Ah, because that's a second layer currency. So this gets us into the Bitcoin discussion about different layers of...
Raoul Pal: Look at the excitement on your face!
Caitlin Long: I love it! Yeah, Peter, go ahead.
Peter McCormack: I was going say, so this is something we all share in common. This is the reason why we're all here. We all have our own opinions and thoughts on Bitcoin. Do you think with some kind of unwinding of the economy Caitlin, that there will be strong arguments to return to a form of Gold Standard globally? Do you think some form of catastrophic unwinding of the markets will lead to those discussions?
Or do you think people will avoid them? I'm avoiding saying, "Let's go to a Bitcoin standard now," because I don't see that as a debate within governments right now. But could you see, prior to getting into Bitcoin, do you see there's a potential for a debate to go back to a Gold Standard, or that will never happen?
Caitlin Long: I doubt it because the policymakers understand that that puts it puts them in handcuffs and no government wants to be in handcuffs regarding how much it can never spend. But what I am confident in is that individuals will figure this out for themselves. They will read, they will listen to folks who've done a lot of reading and try to distill what they've learned in podcasts such as yours, and events such as this, and they will make the decisions and walk with their own feet and that is ultimately what I think is happening.
This is the Hiakian world of currency competition, it's a wonderful thing. Let's all have the choice to store our assets wherever we want and let's also face it, I have the humility to recognize that I don't know with 100% certainty that I'm right. So everyone should conclude that about their own situation and walk with your own feet.
Peter McCormack: I just want to add something into that, when I defer to you Travis, because I've read something today preparing for an entirely different interview. But it was talking to somebody who's taken a long look at the moment at a lot of the societal problems at the moment, the things triggered by George Floyd, which really are separate issues.
But this person hasn't really taken a look at the money, and I was reading something, and I read today that the supply of our money and who controls it is the greatest social issue that confronts humanity today. It is the hidden hand behind history. So for you, Travis, what is the role that Bitcoin plays in all of this?
Travis Kling: Bitcoin is a non-sovereign hard cap supply, global, immutable decentralized digital store of value and it's an insurance policy against monetary and fiscal policy irresponsibility from central banks and governments globally. That's what I think Bitcoin is and the more irresponsible central banks and governments are with their monetary and fiscal policies, the more valuable the insurance policy is and this great accelerator that corona has acted as has made that insurance policy, in my opinion, tremendously more valuable.
This is broadly the kind of Paul Tudor Jones view and a lot of other folks' kind of view on this stuff as well too. Specifically, you know how that plays out. I continue to think that there's a high degree of uncertainty there. I don't think that the big wholesale changes... I don't think can happen with boomers still in control of this much wealth and power. There's just no reason to think that some 70 something year olds are going to be a couple years away from kicking the bucket and decide that, "Okay, we're going to go to the gold standard."
It's not what's going to happen, you're going to need to get a different generation of individuals into wealth and power, that have a different worldview broadly and are less tethered to the way things have been going for a number of decades, I think. Then even on top of that, it's going to take a tremendous amount of stress. Some things have to get quite shitty before that's the forcing function to push for real big wholesale changes. But I think that's going to be change that's going to be in the hands of Gen X and millennials over the next 10 years, 20 years, that kind of deal.
Peter McCormack: I want to throw that one to you as well, Raoul, but I just want to add into it. I think Raoul, you're obviously a very good bridge between this kind of Bitcoin world and the traditional finance world, it's something Real Vision does very well. I just want you to add into that, just for those listening, is that for us there's a very natural understanding of Bitcoin. For many people, they don't seem to get it. I've got Peter Schiff coming on my show soon to discuss gold because I want to buy some gold as well.
I have Bitcoin, but I also actually want a bit of gold. One of the difficulties with gold has actually been trying to source it, trying to source physical gold, but our mutual friend Dan Tapiero has been helping me out with this. But I want to ask you the same: what is the role of Bitcoin in this, and are you still hearing from... There's still detractors in this world. Are the people you're talking to, have they still got this fear of Bitcoin and lack of understanding?
Raoul Pal: So the role of Bitcoin at this point in time, because we don't know where it's going to go and how big it's going to be and what role it's going to play, but in this point of time it does have a very similar role that gold has, which is it can be our own personal reserve asset. Forget everybody else, forget governments, we're free to use it. I think it has advantages over gold, but I own both. I think it has advantages over gold because it's digital, it's made of the modern era, and there's other things we can do with it.
So what makes Bitcoin incredibly attractive, it's not only our personal reserve asset, which is the hardest one with money, but it also has a call option on the future and so that makes it valuable. If we're hurtling toward the event horizon, where it's coming almost into the right now, well that call option is going to be very valuable! So that's how I see that part of it. In terms of the detractors, yes, and it all comes down to I think, kind of what Travis is alluding to, people know what they know and all the people know what they know and what they find comfortable with.
Others, in a very confusing world, want to anchor onto one thing. So the most vociferous people anti-Bitcoin tend to be gold people, even though they're of the same ilk. But they just don't believe that anything could have a different property, but still have the same properties overall. The argument goes, well one's electricity can get turned off. Well, if the whole world's electricity gets turned off, I don't know what's happened, we've been hit by a meteorite the size of Saturn or something.
The other one is quantum computing. Those are the two ones that come up, but what happens if, or what happens if governments steal your coin? Well the same with gold, so there's no real thing. What it is, is a fear of change, and that's normal. Society has a fear of change and I was talking about this on a panel earlier with Novo and Mark Yusko, is this group has a fear of change, and even some of us have had to deal with this change and understand it.
There's a group of Gen Zs who believe everything digital has value and that tokens are a normal way of transacting with things outside of the normal fiat currency and as I was just talking about, I don't know if anybody saw the story, but it kind of blew my mind, is that...
Peter McCormack: I know what you're going to say!
Raoul Pal: What about the cinemas? Do you see this?
Peter McCormack: Oh no, I thought you're going to talk about something else. Is it the gilded copper, the term that just came out today?
Raoul Pal: No. So something blew my mind just because it's a world that we don't understand because we didn't grow up in, but Gen Zs did. So cinemas are closed everywhere around the world, so what does the cinema industry do? It releases films in Fortnite. So you go, as a digital person, to hang out with your digital friends and watch a digital representation of this film in another world and pay with tokens to watch it.
Okay, we don't even think in those terms yet. The kids are so used to doing that by socializing in a digital world. We're still used to getting on our bikes and going to see our mates and smoking cigarettes around the corner, so your parents don't catch you. They don't do that. They hang out in Fortnite and now they're paying to watch films or music concerts in tokens. So to Travis' point, once the generations change, everything changes.
Travis Kling: It was a huge step change for me when I saw last year in Fortnite ... Have you ever heard of this DJ Marshmello? You ever heard this guy before?
Peter McCormack: Yes.
Travis Kling: Yeah, 10 million people showed up to his concert in Fortnite. That's one of the largest gatherings of human beings in recorded human history! You just think about that, and then you imagine, "Okay, that's 2019. What's 2029 going to look like? What's 2039 going to be like?" Oh, guess what, a digital non-sovereign form of money that's governed by open source computer software. It's going to be really valuable, it's going to be really important to the world.
Caitlin Long: It's going to be normal, absolutely. I'm so glad you brought up the demographic point because I do think that what we're really after, what is money at the end of the day, it's just an honest ledger. Historically, before we had a digital world, the only honest ledger that really has proven out time and again has been gold. But in a post digital world, what is the most honest ledger? Well right now, Bitcoin and gold have approximately the same stock-to-flow ratio, and Bitcoin's about to become even more honest than gold in four years.
Raoul Pal: In generational terms, is the baby boomers in their 20s saw the leaving of the Gold Standard. So if you think the politics of nostalgia is so strong right now, it's always looking back. So Boris Johnson in the UK looking back, Donald Trump looking back, even Joe Biden is looking back to the glory days of the past, because the world is changing so fast right now.
The good days of the past was the Gold Standard, that was something that they could believe in. You just need to free your mind of that and say, "What could be?" I think all subsequent generations are much better at understanding and being involved in changing, not fearing it as much. So for us, we kind of look forward to it, while the boomer's fear it.
Peter McCormack: I'm going to interject here because we've got four minutes left, and I've got a final question. You've got about a minute left to answer it each. But Caitlin, I'll start with you. One prediction for the next 12, 24 months, and also a question I'd like asking all of you, one bit of advice of how people can prepare for what is going to be quite shaky times?
Caitlin Long: Prediction is the cryptoization of the dollar. We are going to see US dollar equivalence, issued and traded on these public decentralized blockchains, especially Bitcoin, also Ethereum, as we're already seeing, and the transactional velocity of those currencies is going to shock everybody. I just did a recent update on the stablecoins.
The three main stablecoins that all have M1 velocity in the range of 45 to 55 times, whereas the US dollar's M1 velocity is only 5, and that's only on-chain transactions. If you start to count the off-chain transactions, Tether is almost at $20 trillion. If you believe the numbers, almost a $20 trillion in annualized velocity and we're going to continue to see more and more and more of that because these are just superior technologies to fiat currencies, but also superior payment rails.
Peter McCormack: Over to you Travis, you got about a minute.
Travis Kling: Yeah, so I'm not going to make a specific prediction, but what I'm going to just tell people to watch carefully is to look at 5 year forward inflation, look at the Dixie, the DXY index, watch those two things, and then watch what the Fed and the Treasury and US politicians do with monetary and fiscal policy over the next 12, 18 months, and triangulate that with to what degree the economy recovers from coronavirus, so whether it's a V or a U or an L, and just watch all those things together very carefully. I think you're going to get a pretty good sense of what their willingness is to do a lot or a medium amount or maybe just a bit.
Peter McCormack: Finally our amazing host, Mr. Raoul Pal.
Raoul Pal: You're the host today, my friend!
Peter McCormack: Well it's your event, but thank you for having me do this.
Raoul Pal: So my prediction is that Bitcoin currently looks like a risk asset because of the leverage within systems like BitMEX. But because of the structure of the leverage within the Bitcoin world, it goes away quite quickly once everybody stops out. So I think there's a lot of leverage in the system, but as things move, that goes away, and it stops being correlated to the stock market overall, so I think it goes from a risk asset to a risk-off asset.
So I think that's something we might be able to observe. You asked the question what advice do I give people? My advice is always, in times like this, secure and create any personal cash flows that you can. There are ways of monetizing, and it's all about that piece of advice that I've told you before, which...
Peter McCormack: Hustle!
Raoul Pal: Hustle, and he who has cash in a recession is king. Just don't get caught without cash. If we're talking about a solvency event, do everything in your power now, before solvency becomes an issue and then you can avoid it, and then you're on the front foot. It's as simple as that. Okay, it's not always easy to do, but focus on that one thing, and Bitcoin plays a part in that as well, because it gives you some aspects of the future too.
Peter McCormack: Well that was as an amazing session, everything I expected. Thank you all for all the times you've been on my podcast. I've always got very high downloads. People are always really interested in understanding more about the financial markets because there's a lot to understand. So I appreciate you all, and again, Raoul, thank you for allowing me to host this fantastic session.
Raoul Pal: Thank you!
Peter McCormack: Thanks, Caitlin, hopefully I'll see you soon and you too, Travis.
Caitlin Long: You too!
Raoul Pal: Yeah, thanks for doing a great job, Peter. And thanks, everybody for coming on, brilliant.
Peter McCormack: Okay, cheers!
