The Breakdown - Raoul Pal on the Coming Transformation of Monetary and Fiscal Policy

Episode Date: December 22, 2020

Raoul Pal is the founder and CEO of Global Macro Investor and Real Vision and one of the leading voices in modern macroeconomic discussions. In this conversation, he and NLW discuss bitcoin's monster 2020, how DeFi compares to ICOs, and why we should be paying more attention to central bank digital currencies. Find our guest online: @RaoulGMI  The Breakdown is produced and distributed by CoinDesk.com   Follow on Twitter: NLW: https://twitter.com/nlw Breakdown: https://twitter.com/BreakdownNLW

I think that Stock to Flow worked or is yet to be disproven was brilliant, right? You know, because it was a hypothesis. We all kind of grabbed hold of it and thought, maybe, maybe this is the one. And it's worked perfectly. It's actually implicitly the behavior of crowds, but I think it was one of the features of this year. You know, if there was one thing we all pinned our hopes on was that hypothesis. Welcome back to The Breakdown with me, NLW. It's a daily podcast on macro, Bitcoin, and the big picture power shifts remaking our world.

The breakdown is sponsored by crypto.com and nexo.io and produced and distributed by CoinDesk. What's going on, guys? It is Monday, December 21st, and that means we are kicking off the breakdowns' end-of-year extravaganza. For the next two weeks, every episode is a fast, fun, 21-minute look at the year. in macro, Bitcoin, and Beyond, with some really amazing guests spanning the Bitcoin space, the crypto industry, and of course the larger macroeconomic sector. I thought this would be a really fun way to round out the year to get a ton of different takes on what mattered and what we should be thinking about going forward. And we're kicking it off today with Raoul Paul. Raoul is the founder and CEO of Global Macro Investor and Real Vision. Raoul is always outspoken,

has a love-hate relationship with Bitcoin Twitter, but remains irresponsibly long Bitcoin. So without any further ado, let's dive in. All right, Raoul, welcome back to the show. It's great to have you here. It's great to be here as ever. So we were just joking about how, you know, I think you were on the show a few months ago, but I feel like it's probably been a hundred years in both crypto and COVID time combined. It's just ludicrous. I know. It's what a year. What a year. Yeah. And you got, I mean, you guys have also launched, I think, probably a half dozen new media products since then. I know the crypto site has come up, so there's been lots going on all around. I'm sure we're going to talk about it. But basically, as I said, the idea of this is just a fun rip through the year that was. And so I want to

kick it off with maybe the biggest, most obvious question. What was the most important economic story of 2020? It's kind of weird. The whole thing is this bifurcation. There's COVID, and then the fact that the equity markets didn't give a shit. That was the most surprising. biggest story of the year that nobody really foresaw. Yeah, I completely agree. I think, you know, it has, this has been a year of reconciling, acceleration of certain trends, and then reconciling with ourselves, a lot of things that we, that maybe, you know, in retrospect,

we could have read the tea leaves on, but has been very surprising. And I think this kind of the just absolute disinclination to care, you know, of the equity markets to COVID has been remarkable. And there's also another story within that. Who'd have thought the millennial generation would have decided on mass to start trading in the pandemic? I mean, that was, that was again, was nothing anybody expected. I mean, that's the kind of year we've had. Because everyone's like, how are these guys going to get involved in financial markets? When are they going to start saving? And they basically picked the low and went for it in the middle of the pandemic. I mean, extraordinary.

Yeah, I think it was so fascinating. We do this thing often where we kind of like, I remember when that first started happening, we were doing a lot of pearl clutching right around this. It's like, oh, these guys are going to get washed out. They're so cynical about markets. And it's like, well, yeah, like they're cynical. That's the table stakes is this sort of cynicism, right? This is a meme generation. And they literally have the most important representatives of the central bank establishment and everyone else telling them. them, they're going to do whatever it takes to prop up markets. So why, you know, why not dive in and certainly validate it? Now they just look like very intelligent bulls, right? Yeah, made everybody else look stupid. And that was, you know, one of the great stories of this year. I love it. So let's, listen, I want to reframe the question just slightly. What was the most important economic story that people didn't pay enough attention to? I still think it remains the underlying story of insolvency. You know, again, we get obfuscated by what the media tells us and by the markets going up

and, you know, the quarter on quarter GDP bounce. But what you forget is GDP is still below where it was in the year-on-year terms. It's a larger drop than it was in the Great Recession. And then the problem is not at Wall Street level, it's at Main Street level. You know, barbershops, restaurants, bars. I mean, it's a gutting out of the country. And that's still kind of hidden from the news. The fact that no stimulus came. I mean, who'd ever thought that would happen? Zero stimulus after the first round because nobody could

agree it in the US. And that left people hung to dry. And now here we are again, everybody having to lock down. There's nothing to help them, really. Yeah. I mean, do you think that it has to do with almost our propensity for big numbers and exclusive macro focus? I mean, certainly I'm guilty. All I do is talk about the big macro picture. But in that, what's gotten lost is that there's sort of, I mean, they're just the gutting of small business in America, but around the world, too. Yeah. And, you know, we talk a lot about the 1% and the 99%. And here was one of those events that absolutely accelerated it. And everyone just looked the other way. It's astonishing to me. You know, the amount of actual pain that's happened to ordinary people here is gigantic. But nobody

cares because, you know, Amazon goes up every day. Do you think the part of it was, this is something that I think about a lot, or it's a question that I don't have exactly the answer to, but do you think that it had to do with just getting swept up in the existing political rhetoric, right? Like, if this had happened, call it mid-Trump term, you know, maybe there's a different conversation, but because, like, the battle lines were so drawn between the left and the right in terms of what they were going to say, it was just kind of shoving it into a narrative. So it was kind of used as confirmation of the right not caring or the left, you know, being overly concerned about lockdowns or whatever it was,

rather than actually trying to deal with the issue. Isn't that sad that politics, the role of government is to actually look after people and who got sacrificed in the whole political debate, people? I mean, that's, that's an extraordinary situation. Again, nothing that I would have really foreseen happening. where politics became bigger than the people themselves. Yeah, I mean, it's been devastating to see. I think it's one of those things where we're so connected to the day-to-day right now, especially as, you know, we're recording this on a day

that the vaccine has started rolling out in the U.S., and that sort of immediacy has been really profound for people. I think my instinct is that when, you know, we're kind of into the next phase, whatever it is, we're going to look back and maybe wonder, if we didn't spend enough time on that as it was happening? Yeah, because I think the economic devastation caused by this is not short-lived. It's not short-lived.

People's behavior patterns will change for periods of time, extended periods of time. And so I just don't think a lot of this comes back. Over time, it actually offers great opportunities. If you're young and you live in New York City and you couldn't really afford to live in the city, you might be able to now. Before you couldn't start a business in the city, but now you could do something in retail because nobody wants retail. That's a great opportunity to change ever retail, get away from all these awful chain stores everywhere

and build from the ground up a kind of more kind of a real movement of real businesses created by real people again, as opposed to those kind of identicate shops that are spread everywhere across the world. So, you know, out of the ashes rises to the phoenix, and I think that's a good thing in some respects, but a lot of pain to get there. Yeah, and I wonder, you know, I guess this is kind of another question, I'll jump to, you know, so we're entering this new vaccine era, hopefully, this new phase at least in the story of this. What do you think, you know, where are your bets for

long-term behavior shifts versus things that sort of return to normal? I think it's tricky to know. I think there is a shift outside of cities generally. I think people, we saw that after 9-11. I think this will strengthen the story of millennials moving to the suburbs. Don't forget. Half of them grew up in the suburbs. Their parents did the same thing. So that's not uncommon. So I think that movement remains. Obviously, this, what we're doing now, Zoom, the rise of video, as the media that

crushes all media, that's real. That's not going away any longer. The rise of the SaaS business model and, you know, those kind of high margin tech companies become more and more apparent that the old world doesn't work. You can do it at micro level, like we talked about creating artisan shops and stuff like that or, you know, artisan clothing or whatever it may be. But to do it at scale, that's gone. It's gone forever, I think. And that's okay.

You know, there's just different ways of doing business now. It's accelerated the whole online thing and that won't change. What's going to be interesting is how people feel about travel and large events and stuff like that. Because after a year of this, everything feels a little bit different. My guess is people will go back to music festivals and travel en masse, and that'll just have been a hiatus. But a lot of stuff, business travel, I'm just not going to do that any longer. I just not prepared to be on a plane all my life, which is what I was before,

because now I can do this. And I'm so used to it now, it's like I'm sitting with you having a coffee. So it's kind of irrelevant now. Yes, we all like to see people in person, but we'll do that more selectively. So business travel changes. But again, maybe that's a good thing. Maybe half the plane doesn't fill up with business travel people and it makes travel more affordable in different ways. I don't know.

Yeah, no, I think that that's right. You know, it's certainly going to make us ask more question about prioritization, if nothing else. Yeah, I think that's really true. This episode is brought to you by Crypto.com, the crypto super app that lets you buy, earn, and spend crypto all in one place and earn up to 8.5% per year on your Bitcoin. Download the Crypto.com app now to see the 8.com. interest rates you could be earning on BTC and more than 20 other coins. Once in the app, you can apply for the crypto.com metal card, which pays you up to 8% cashback instantly on all purchases. Reserve yours in the crypto.com app today. Looking for the best way to stay on top of your investment game?

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I guess one of the big questions is how much of this, how many of these changes were represented a fundamental or paradigm shift and how many of them were just acceleration. I think a lot of what you just described was acceleration. But even if we kind of zoom up on a bigger level, things like the involvement of millennials in trading, was that bound to happen? Or was that kind of a paradigm shift? And you get to spend a lot more time with people who think in terms of paradigm shifts than most. So I'm particularly interested here. Well, look, demographics is inevitable. And basically, you just need to do the maths. And the maths are as soon as people get to about 30 years old, they start thinking, I was just.

I need to save for my future, right? Because if you go back, if you go back to when the baby boomers were 30, well, it was 19, it was about, it was about 1985. And that was the same period that they financialized as well. So I don't think we've actually changed a lot. It just so happened that this was the, the accelerant. But all of these things were going to happen. They were going to buy houses.

They just decided they didn't need to buy them in the city. Well, that was a light bulb moment for the, many because people realize now I can live where I want and I can use video. I think video was the acceleration of video was a huge changer because we can all work remotely. Real Vision now runs remotely and I never thought that would happen. I just thought it was impossible to manage. But that's liberated everybody to choose where they live. That's a huge, huge shift because that didn't exist before COVID and I wasn't sure it was happening but really, really slow. But the shift in the curve was astonishing.

Yeah, I mean, it's interesting. It is kind of a, in some ways it's a BS question because there are some changes in scale that are so significant that they actually become changes in kind. And I think what you're describing with video and remote work is one of those. It's like, sure, it was happening. And this was a massive accelerant on that, but it was such an accelerant that it does feel like a change in kind, a fundamental shift in how we'll consider work. Because we all had the light bulb moment at the same time globally, everything we've been doing

was wrong and that we can do it differently and we can maybe find a quality of life back. You know, one of the big sacrifices everybody has made over time is a lowering of a quality of life because the more we get inundated by email and Slack messages and WhatsApp messages and more messages and more media and more stuff, the less of our time we had. You know, so much so that media then gets consumed in podcast form because you can do it on the subway on the way to work. What you're doing is cramming more and more into your day. But what this is done is allowed us to knock out the commute. And that for most people is an hour either way. That's two hours of your day you've got back. And to be able to work from home and you're about

to have a kid, that's a game changer. You're not the father who's in New York City and comes home, miserable and tired and barely sees the baby until the end of the week. I mean, this is a real quality of life shift if we capture it. Yep, I couldn't agree more. Okay, let's shift over to crypto for a second, because I know there's a lot, lots going on there. What do you think when all of a sudden, done, biggest crypto stories of the year were? I think that stock to flow worked or is yet to be disproven was brilliant, right? Because it was a hypothesis. We all kind of grabbed hold of it and thought, maybe, maybe this is the one. And it's worked perfectly, whether that's, well, it's actually implicitly the behavior of crowds. But that was one, a hell of a story that I don't think.

that I think it was one of the features of this year. You know, if there was one thing we all pinned our hopes on was that hypothesis playing out. So I think that was probably the biggest story in crypto, along with the rise of Defi, you know, in the kind of spotty, sporadic way that it came about. But I think Defi was really interesting. It opened our minds to, okay, we can disrupt a whole other part of the financial system. We knew it was kind of coming, but when it came, it was interesting. And that was the development of the time value of money within the crypto world.

And that's a very important role. So I thought that was a really big and important story in crypto. And obviously the rise of the institution, as I call it, the wall of money. I mean, that's a huge story that people didn't really believe it was going to happen. And now everyone's trying to get used to the fact that the rules have changed. And they're not really happy about it. Well, it's, I mean, we're setting up for the next set of battles, right, around what Bitcoin is supposed to be and how it's supposed to function. Actually, later today, I'm literally recording with Ben Hunt and Alex Gladstein to discuss that exact question of can Bitcoin turn into something other than just another Wall Street casino game, which is kind of a quote from Ben about that. It's the next question. And I think it's going to be really fascinating to see. I did have a question that I thought that you would be particularly well, to answer around almost the combination of defy and that institutional shift, right? You've obviously

spent a lot of time looking at that institutional shift. You know, so much airtime on this podcast and other places has been spent on that. It's obviously a defining feature of this year as it relates to Bitcoin. But I think, you know, especially as we hover around this 20,000 mark, it reminds us of 2017. We ask what's the same, what's different. And part of what, you know, the characteristic of a 2017 rally was Bitcoin was surging. But at the same time, the other thing, the other thing, thing in the crypto space were these ICOs, right, that were kind of just shedding off Bucco bucks. They were kind of hot air in most cases, even if they had well intentions. How much did it matter that the other things happening in crypto this year were real, at least. There were things

that were actually built and happening. Even if there was some mania around it, it was, it didn't exist. It existed in more than just a white paper. Actually, I think it's pretty similar. I think the ICO thing, yes, people feel a little bit sick and burnt because everyone got wrapped up into that. The actual thing is that is tokens aren't going away. And it's just a matter now of working through what are the real use cases for them. And I think that lay the ground for it. I think defy is going to have similar kinds of problems. There's tons of these projects and I've seen a ton of them that just aren't really defy. And there's a bunch of people really working hard on getting it right. And a lot of people won't get it right at first time.

But the foundation is being laid. So I think defile will be a feature of this rally and there'll be a lot of projects that fail. But that's okay again because and people call them scams and blah, blah, blah. It's a feature of the nascent part of this space that this is the whole new thing just developing. And people are trying to throw stuff against the wall and see what sticks. Now, people need to be careful in how they invest in that space. But to watch it, it's truly extraordinary. How big a deal do you think the emergence of central bank digital currencies as a major point of

conversation, research, discussion, experimentation among central banks is going forward? I am surprised how few people understand how big this is. I think the space is going, la la la, la, I can't hear you because they don't want to pretend that governments can be involved in the digital space. And then it's like it's not Bitcoin and the central banks aren't saying it is either. What they're telling us is that they are going to change the rules of economics. And the shift is going to be towards behavioral economics and away from traditional economics, schools of thought.

Because when you can give different people, different incentive schemes, you basically reinvented Facebook. But Facebook with money is a huge thing. So this is what the central banks are talking about. So not only does it, is it great for Bitcoin because we have digital on ramps and off ramps and everything comes easier, but literally, literally, Literally everything is going to change. How the dollar plays in the global system,

they want to, the IMF want to make this part of the narrative too. So we're talking secular, forth-turning, massive shifts that are potential on the horizon. It won't play out overnight. It's not, well, it could do. Bretton Woods did and stuff like that. It could play out overnight. I don't think so.

I think it's just something that will change. And before you know, you look back and go, oh, my God, the world's entirely different than it used to be. Part of the dimension of this that I think that other people, aren't necessarily talking about is how much it enables the blending of fiscal and monetary policy. Exactly. This is the crucial thing I keep trying to pound the table about is you don't have monetary policy any longer. It's basically lip service. It doesn't work in Europe. It doesn't work in Japan. It basically just frees up some assets on bank balance sheets. Belostity of money's collapsed.

They don't really lend out particularly. They lend to the best creditors and that's it. And so monetary policy with rates at zero has run its course. The Fed have told you that. The ECB have told you about they've all said it needs to go to fiscal. And they're bored of telling governments this. Now, governments don't like it. And people don't like it because of deficits. And the MMT is the crowd in the middle of saying it doesn't matter.

But either way, there is no choice. You either somehow have to pay back all of this debt and go to austerity, which they tried and it failed. Or you have to try the logical conclusion of MMT, which is to give the power of fiscal to central banks and merge of the two. It's slightly terrifying. But it's also, I think, is going to be incredibly, incredibly exciting in terms of how you can change. I said economics, how you can manage the economy. It's a really interesting phase because I do think you can do some real good here. You know, we go back to the barbers and the restaurants and the people like that.

Right now, it's so blunt trying to be able to do that. But once you do these central bank digital currencies and you have some sort of programmable money attached to it, you can basically do anything. You can say, right, anybody who runs a restaurant that's registered as a restaurant, you're going to get a check for $25,000 and you have to spend it within three months where it evaporates. That's programmable money. That's astonishingly powerful as a stimulus. Because you can get people to behave in the way you want them to behave that does the best good for society as a whole. obviously central banks being central banks and governments being governments will always screw it up. But at theory, it's a really powerful idea.

It's groundbreaking, I think. Yeah, I think it's going to be, there's so much to unpack there. There's so much to explore. I definitely hope for our industry that we take an active hand in the conversations about that rather than kind of just let it pass us by and let other sort of advocates engage because the way that that takes shapes could be radically different. I guess one last question just to wrap us up. Really fun one.

Kind of a difficult question sometimes. But what's one prediction that only you have? That Iran is going to have the best performing stock market in the next 12 months. All right. That's a good one. What's the TLDR on why? It's got the average age of 28 years old. It's the cheapest P on Earth.

It's about P of 6. The Biden administration is likely to warm up relations with Iran. Europeans are allowed to invest as are others, but it was a bit restrictive because of the US and the banking system made it a little bit awkward. I think that whole thing is going to get freed up. You've got the cheapest market on earth, and it's a very broad balanced market, carmakers, food makers, all of this is not just about oil with a really smart diaspora of people and a really smart internal population.

You don't get many of these often. It's like Russia in 1990. These are once in a lifetime opportunities in investing at kind of emerging market country level. And it's just like the world has been, it's been like put on hold and put under dust sheets. And you just take it off and you can start the Ferrari. So it's been one of the best performing stock markets over the last five years. But I think it's probably going to be the best. Love it. Way, way different answer than I would have expected. Raoul, thank you so much for hanging out today. I guess just for people who are listening who want to see more. What's next for Real Vision?

What do you guys have coming up that people can look forward to in the new year? We've got, you know, on Real Vision Crypto, we've got astonishing amounts of content, and it's free. People just need to go Real VisionCripto.com. We've got basically every big name of the industry and all the undiscovered names and all of the debate about all of the parts of this, the excitement, the failures, the wins, the philosophies, that's all coming. So people should do that. There's a lot more coming in that space.

We're going to add research into crypto as well. So you'll hear more from us on that. and on the Real Vision side, we're bringing in education into the membership tiers. So there's a lot going on at Real Vision right now. So really exciting times. Awesome. All right. Well, we'll make sure everyone gets over there, signs up.

Thank you again for hanging out today. And happy holidays. And to you too. Thanks a lot.