We Study Billionaires - The Investor’s Podcast Network - TIP 094 : Raoul Pal - Macro Economics and Global Risks (Investment Podcast)

Starting point is 00:00:00 We study billionaires, and this is episode 94 of The Investors Podcast. Broadcasting from Bel Air, Maryland. This is the Investors Podcast. They'll read the books and summarize the lessons. They'll test the waters and tell you when it's cold. They'll give you actionable investing strategies. Your host, Preston Pish, and Sting Broderson. Hey, how's everybody doing out there?

Starting point is 00:00:29 This is Preston Pish, and I'm your host for The Investors Podcast. And as always, I am a company by my co-host, Stig Broderson, out in Denmark. And today we've got a guest for you that you guys are going to love. And I know this for a fact that you're going to love them because on our forum, one of the nice things about having a forum is you get to see all the discussions that are taking place within your community. And a name and a company, if you will, that comes up quite a bit is Real Vision TV. And today we have the founder and CEO of Real Vision TV. TV, Mr. Raul Powell. So we are thrilled to have Raul here, and he comes with just a wealth of

Starting point is 00:01:05 information. His channel, his Real Vision TV, what they do is they go around and they interview the most famous and influential investors on the entire planet. For example, Raoul's interviewed Kyle Bass, who we talk about on the show all the time, Jim Rogers, who we talk about all the time. I mean, I could go on and on the people that he is interviewed. So Raul has this background in investing. He's a global macro guy. He worked for GLG partners and also Goldman Sachs. So, Raul, Stig and I are so thrilled to finally get you on our show to talk to you. And I know our audience knows who you are. So this is really exciting to finally be able to get this going. I'm so pleased to be here, guys. All right. So I've got kind of the first question here.

Starting point is 00:01:47 Stigin, do you have any other comments or anything? You would want to just jump right into the questions? I think it's funny that you said that Raoul is basically doing on video, what we're doing in audio format and I can only think is because he's better looking than us. That is a guarantee. All right. It's my Cayman Island sometime that does that. Yes, yes. All right, Raoul.

Starting point is 00:02:09 So the thing that we've kind of noticed with guys that are really successful in the market is it's almost like they've had this experience, if you will, or this event that really kind of propelled them into a certain direction. So, for example, Ray Dalio comes to mind of a guy who he started. it off working as a caddy. He made a bunch of money on some really bad picks. He was selecting his first stock because it was the cheapest price, like literally it was like under $5 so he thought he could buy more shares. So he started doing well and had no idea what he was doing and then just got crushed in the market and had this really bad experience. And we've kind of seen that

Starting point is 00:02:45 theme with investors that these guys that really do well or that really become a big name, they have like this event that happened to them. And then they just get so immersed into it and can't look back. Have you ever had an experience like that, or is that a common theme that you see among investors when you're interviewing them as well? Yeah, very much so. And I mean, I've been really lucky. My career was, it was super lucky because I started kind of in that hedge fund game very early on. So what really influenced me, I was, I was in equity derivative sales for a UK bank. And I was starting to start reading at the time the Barron's round table with Jim Rogers and various other people in it. And this global macro thing started appealing to me.

Starting point is 00:03:25 Tiger Management, who are one of our clients, Julian Robertson, started a huge trade, which was based on South Africa opening up. So the South Africa market had just opened up. And then I saw how somebody like him would think through that situation, how to implement strategy in South Africa. And it's like, wow, I get this. This is really fascinating because you're putting together what you read in the newspaper, global view on the world, and then seeing them implement a trade. So my career then on, I then realized hedge funds is what I wanted to do. So I then started speaking to, luckily again, some of the world's most famous hedge fund managers. So I'd speak to Full Tudor Jones every day and all of these guys. And I saw how they implemented trades

Starting point is 00:04:05 and how they thought through things and used multiple asset classes to express views. And then it all, I guess it all culminated in 1998, the Asian crisis. I was, you know, then about eight years into my career. And that's when I really saw what Global Macro is all about, how investing is done, trade implementation, all of these things. And that was it. So, most of these guys, bare markets have been a feature of them because that's where the fastest, highest returns can be made. Bull markets tend to be slower returns, bare markets if you get them right, tend to be very rapid returns and big returns. So it's interesting because I had a question that I was going to ask and then I removed it

Starting point is 00:04:42 out of Stigginized list here. But it has to do with what you're getting at is these guys that perform really well during bear markets. And so a few names that kind of come to mind is billionaire George Soros, Jim Rogers, Dahlio. I mean, once you start looking into these guys, another one is Stanley Drunken Miller. And so when I think about who are the people I want to follow, who are the people I really want to track? It's really kind of those guys when you get into an overvalued market condition to see what are the moves that those guys are making. Because when I look at Warren Buffett, he's much better at the bull market, if you will, instead of the bear market. These other guys, though, they're the experts at the bear. So are those the guys that

Starting point is 00:05:23 you're tracking right now? Do you, do you see those guys as being kind of your guiding light as far as ideas and how to look at things? Yeah, I do, because I think bull markets, anybody can look smart. So, yes, some people are smarter than others and people like Warren Buffett, they understand how to buy companies, and they have a trade construction that's very interesting. But in the overall market, you need to look like people like Stan Drucker-Mill. I mean, Stan Drucker Miller's never had a down year in Duquesne-Ducane funds in 1982. I mean, people talk about Warren Buffett being a great investment. Stan Druckermiller is one of the greatest we've ever known. And there's a whole load of those guys out there. And they understand full markets, bare markets, and multi-asset classes,

Starting point is 00:06:00 because, you know, investors tend to talk too much about equities. You know, we're there to make money. We're there to make investments in things that make us money or protect ourselves. And that is much wider remit than equity markets. So, you know, looking at bull markets and equities is probably really not the way forward. It's looking at all asset classes. So it's really funny that you're saying that because this has been a theme that Stig and I have been about on our show for quite a while is we think if you're going to do well and have good returns in the coming year or two years, you've really got to step out of the equity space and look more into commodities, currencies, and things like that. Would you agree with that approach? Is that

Starting point is 00:06:36 where people really need to start focusing their attention to learn more? Yes, and also the interconnected into play between those asset classes. Yes, it gets more complicated because there's longs and shorts and the average guy can't do some of that. But just understanding the relative attractiveness of certain asset classes at certain points in the cycle is the key to making and holding the money that you've made. Could you provide some examples when you talk about how the asset classes, the relationship between a commodity and a currency, for instance, could you come up with some examples? Because I think most people probably have a good understanding of how stocks and bonds interact

Starting point is 00:07:13 with each other, but I'm curious to hear some of the more rare examples that you might come up with. Yeah, and I think this is something people really don't understand. Right now we're in a situation where we have underway, what I think is a large dollar bull market, up about 37% from its low. Usually, dollarable markets go. The last one was up of 50% back in the late 90s. The previous one in the early 80s was up 100%. I think we've got a long way to go.

Starting point is 00:07:38 People don't understand what that means. Dollar bull market is inversely correlated to commodity prices in general, not always, but most of the time. It also tends to drive global economies, global trade. So the interconnectedness of trading the US dollar right now is very interesting. It also means that develop markets outperform emerging markets in equities. So there's a whole string of trades that come off from one understanding. And that's one of things I spend a lot of time talking about writing about is the knock on effects of things. That's where the real value is to be made in investing.

Starting point is 00:08:09 So, Raoul, what you're really saying is that you're a bear on oil. Is that right? Yeah, you're dead right. because, you know, interestingly enough, you can talk all day about supply and demand of oil. Just overlay the chart of oil against the DXY inverted. They're the same chart because dollar is the denominator of all commodity prices. So if the dollar goes up, oil goes down. So just so you know, Raoul, Stig and I have this ongoing play of the show.

Starting point is 00:08:34 I've been a bear on oil for quite some time. And he's, you know, he always tries to argue the bull case, but I think he's slowly coming around to the idea that it's not going to rebound here quickly. I think that oil amounts still go higher, even though some people might say that you all have seen the rebound. We're still talking almost a double of the recent oil price. So definitely it has been really bull lately. But I think since I know all the good arguments for why it should be a bull market, I'm just really interested in hearing why I'm wrong.

Starting point is 00:09:07 That's just how we're... I want to know why is it that I'm wrong. And I'm really hoping that Braul and all the other guests will hopefully tell me about I'm wrong. I really like pulling the thread on this idea because I think a lot of the people in our audience are really wanting to know more of this idea. So I know that Ray Dalio has this white paper on economic principles. For me, it was really kind of a game changer of how I understood how commodities and currencies are really kind of tied to each other because fiat currencies can be completely manipulated by the money supply and the credit that goes into the system. So once that starts contracting, that contraction of credit is actually adjusting the supply. of money and it's making the value of the commodities, which are somewhat fixed. Oil is not maybe the best example, but gold and other ones that are really hard to adjust the supply are fixed. And so it's really easy.

Starting point is 00:09:58 It was easy for me to wrap my head around the idea of why that would contract and why that would go down. So do you have any other points or any other way that you would describe that to help people kind of understand it from a fundamental level of how those two are planning? I mean, you know, I can't break it down to simple things, but some things you can understand. you see that world trade has fallen. So world trade is now year on year, the second lowest level since 1958. And people will argue, oh, that's just because the dollar has shifted.

Starting point is 00:10:26 So, you know, the amount of dollars, the amount of exports in dollars has fallen. Okay, that's the face of it, is correct. But when you dig beneath the surface and look on the knock on effects, we realize that something like $5 trillion alone got taken out of the global economy just from miners, oil miners, commodity miners and the agricultural guys. That's without all the value chain and all the knock on effects of everybody else. So what you've done is you sucked out a huge amount of dollars from the system because the dollar has gone up and commodities is the price of dollars. These countries, for example, Saudi Arabia doesn't have enough dollar revenue anymore.

Starting point is 00:11:00 So it creates problems. So there's a shortage of dollars. So as the dollar goes up, it creates a short squeeze. And the BIS explained this the best way because they talked about the $10 trillion dollar global carry trade, which is that everybody borrowed dollars to invest in commodities and other things. And that's all around world, whether it's South Korea, whether it's China, where the biggest position is, whether it's Japan, whether it's Europe, it's there. And it's the biggest position the world has ever known. So for me, I only deal in probabilities.

Starting point is 00:11:29 And you just say, if there is the largest short position the world has ever seen in the biggest asset class, the world knows, then that is a big deal. And it's going to destroy global revenues. He says people need dollars and there's not enough for them around. And I think it's really important with what you just described and what you just laid out of understanding what is the direction that the Fed is basically saying they're going to go because that's what kind of keeps that trend persisting in that direction. And so right now, it's May 23rd, 2016, and the Fed is now signaling that they want to do another

Starting point is 00:12:04 potential rate hike in June. Okay. And I think that it's all, I don't know if they're actually going to do it. do it, but just them talking about it continues to push that trend in that direction where the dollar is going to get stronger just because they're talking about it. They could delay it like they did last time for another six months, but if they keep saying, yeah, we're interested in raising rates, we're interested in. That keeps that pressure on that the dollar is going to at least stay where it's at a minimum, if not, maybe get a little bit stronger. And I think that that is such an

Starting point is 00:12:32 important thing. And I know Stan Drunken Miller, I mean, this is his big thing. Watch the Fed. Watch the Fed. What are they doing? If they're saying they're going to just tighten more, that's going to keep the dollar strong, that's going to keep all these pressures at play. Once that reverses, and once they start signaling something different, like, hey, we're going to do a bunch of QE and negative interest rates or whatever, then all of a sudden you might want to look at your strategy and maybe reconsider. Would you agree with what I'm saying there? Well, I think the consensus group thing is that if the Fed are weakening, the dollar weakens. Historically, that's generally not the case. Sometimes it works.

Starting point is 00:13:06 sometimes it doesn't. And it's all about how far you are in the cycle of people needing dollars. Secondly, it's the relative performance is what drives asset classes. So if the US is cutting interest rates, but Japan is doing more and China is doing more, Europe's doing more, then the relative rate differential still applies. So that still drives the currencies and then you have the positioning problem. So it's not very clear cut. But one thing that is obvious to me, it seems to be to stand Drucker as well. Maybe we're both wrong, but it is When we get to that situation where the Fed are cutting interest rates, you get a situation where potentially the dollar can go up and gold can go up because gold acts, you know, gold is essentially

Starting point is 00:13:47 a positive carry trade in a negative interest rate world. And I think that's an interesting dynamic because people don't believe dollar and gold can go up at the same time. I think they will. Let's take a quick break and hear from today's sponsors. All right. I want you guys to imagine spending three days in Oslo at the height of the summer. You've got long days of daylight, incredible food, floating saunas on the Oslo Fjord, and every conversation you have is with people who are actually shaping the future. That's what the Oslo Freedom Forum is. From June 1st through the 3rd, 2026, the Oslo Freedom Forum is entering its 18th year, bringing together activists, technologists, journalists, investors, and builders from all over the world, many of them operating on the front lines of history. This is where you hear firsthand stories from people using.

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Starting point is 00:18:19 So what is the second best asset for them to own will be dollars. Right now, dollars are the best assets to own, potentially. But that gold situation, we saw the first quarter in gold, there's a lot of pent up demand. I've just had a round table here for global macro investor in the Cayman Islands. And a big theme for people was, you know, how do we own gold for extended periods? Well, I think the thing that a lot of people don't realize is that real interest rates in the U.S. are negative right now. I don't think people realize that. I think that they're still looking at the 10-year treasury and saying, oh, it's at 1.7% or wherever it's at.

Starting point is 00:18:50 And they're thinking it's still positive. But it's not because after you account for the inflation that's existing, and especially if you consider the energy prices into that inflation number of the last few months, I mean, you're into negative territory with really. real interest rates in the U.S. So if we have negative interest rates, we had Jim Rickards on our show and he really kind of did a good job describing how gold is a zero yield asset, zero yield. But if interest rates are negative, that's worse than your zero yield you're getting on gold. So gold makes more sense at that point. And I think that's where you're at right now in the first quarter into the second quarter of 2016. And that's why you're seeing it go the way it's going. Exactly right. Exactly right. It's early days yet. We've had a decent size correction in gold.

Starting point is 00:19:31 let's see how it develops over time. But it feels like if you really want to own gold, if you really want a strong case to own gold, then this is probably the most likely outcome. Raoul, like you, Preston and I don't like to speak about certainties, but we do like to speak about probabilities. And we think that the US stock market might face problems ahead. When I look at the stock market, one could argue that the current situation might be a lot worse. So the New York Stock Exchange's Martin debt is contracting for an all-time high level.

Starting point is 00:19:59 The central banks doesn't have the same flexibility as it had back then. And when I look at the U.S. and the world economy to support all of this, I have trouble identifying where the growth should come from, say within the next three to five years. So where do you see the differences and similarities in the stock market today, perhaps both compared to 2000 and 2008? Yeah, okay, good questions. So when I talk about, and I wrote about this in my last publication, when I talk about the similarities between 2000, it's only in contextual pattern terms.

Starting point is 00:20:29 how the stock market's going up and down in 10 and 15% increments and going nowhere. People don't really realize that. It's been a huge struggle and everyone's lost money, bulls and bets. So that's how I see the similarity right now. It's a similar situation. We know how that one was resolved. There are situations where it's been resolved positively to the upside. But as you point out, the probability of that is low considering the valuation, the debt, the global slowdown, the dollar strength, and all of the other things in the background. So then we talk about magnitude. Now, I've gotten the, stake before trying to ascertain magnitude of events, particularly downside events. And I think

Starting point is 00:21:05 it's difficult to do because you don't know the external factors that come to play over the course of a bear market. What you know is there's a lot of banana skins to slip on. There's Japan, there's China, there's Europe, there's geopolitics, you know, Russia, Turkey, situations within the US, including elections. So there's so many things that we can slip on and it's all encapsulated by the global debt bubble. But, you know, the probability is that if something, if we start hitting towards global recessions, that there is an acceleration point that could be larger than people expect. So I totally agree with you. I totally agree with why the probability is the market doesn't go much higher. I think it's difficult to. And the downside is potentially bigger than we expect,

Starting point is 00:21:44 but we just don't know. I mean, what does, what does quantitative easing spending on infrastructure do for the economy? Can that stop a recession? Well, it has done in Japan periodically, so we just don't know. Interesting response role. And now I mentioned margin debt and we also talk about central banks. And I guess that we're all looking for this. One key ratio that could tell us everything, which is not there. But I know that you place a lot of emphasis on ISM. Could you please explain that indicator on whether that tells us right now? Yeah. So I am a student. I kind of throw out all schools of economics because most of them are theoretical and they've failed. I, however, are much more sanguine and say, you know what, all we need to understand is the economy goes up and down, it's been going forever. You know, if we even look at Egyptians talking about stuff, they had the seven, you know, lean year, seven fat years, the business cycle is always there.

Starting point is 00:22:37 What's also great about it, I use the ISM to predict the business cycle, or as my indicator of the business cycle, because it maps GDP very closely. And what we know is it goes from peak to trough and trough to peak. We also know, because we've got data going back to 1947 in the ISM and 1870 using the Treasury survey beforehand, we can look at the number of months between a peak and a trough. So it'll give us a probability of when we should be seeing a peak or a trough. We also know what happens at various points in the cycle. How many months after it crosses 50 does it lead to recession? We also know how many times it leads to recession when it does certain things or leads to a boom.

Starting point is 00:23:14 So we can calculate probabilities. And that means that you end up being a better forecaster than most economists are with a very simple thing, which is the chart of ISM. So that's how I find it useful. Also, ISM correlates very closely to asset prices. So the year and year rate of change of the S&P 500 is the ISM, almost identical. Generally speaking, the year and year rate of change with bond yield is the ISM. It's got more skewed now with quantitative easing. Commodity prices are the same.

Starting point is 00:23:42 So all asset prices obviously are related to. to the business cycle. So ignore everything else that people look at in terms of trying to judge GDP, use the business cycle. It's a much easier way of doing it, as long as you understand that nothing is a science, everything is an art and a probability. Yeah, and just to put a little context to this, so if we have a higher ISM index, that means that we can expect higher corporate profits,

Starting point is 00:24:05 and that would usually also have a positive spillover in the stock market. So I just wanted to add that to the response. Absolutely right. And in that environment, you generally see CPI rising a little bit. as well because inflation comes up because there's a bit more money around. You know, it's not rocket science. It's a very obvious linkage. So it's interesting when you talk about the business cycle, which you're really talking about is credit growth and contraction that's occurring during that period. And so that makes total sense when you think about GDP because GDP is simply your

Starting point is 00:24:34 top line revenue, at least how I think of it in my head is the top line revenue for the United States. And so if you're seeing that top line expand and get bigger and then you start to see slowly start to contract, that's a representation of your actual money that's in the system, the monetary baseline, plus your credit, which represents the overall currency that's being circulated in the economy. Would you agree with that idea, Raoul, as far as the way that you're looking at it? I try not to overthink it, because we can all try and be smart to try and understand what drives the business cycle. The fact is nobody really knows. We know it's a function of credit. We know it's a function of the manufacturing cycle. We know it's a function of inventory cycle.

Starting point is 00:25:12 all of these things we know, but let's not concern ourselves with what does it, just that it is. That makes it much clearer. I mean, you know, we're talking about GDP. One of the interesting things about GDP is, GDP is kind of exports minus imports. Okay, that's a weird old world because right now exports and imports in almost every country is falling. Now, if that's your own personal economy, if you're selling less stuff and buying less stuff, your economy is shrinking. Yeah. But in GDP accounting, it's not shrinking, which is why people are kind of misunderstanding what's going on in the world right.

Starting point is 00:25:42 now when we see these kind of things. So I try to keep it, I try to uncomplicate things. I like that. One of the other points that you had made in that previous response, you said that the market hasn't moved anywhere since 2014. And when you look at that and you look at the time that you're talking, and I would imagine if you go back to, call it like November of 2014, and this is, you know, I don't know for sure, but that's what I would guess. Right now the S&P, or I'm sorry, the Dow Jones is at 17,500 at the end of May of 2016. And I think if it's, you know, I think you'd go back to November of 2014, you'd probably see a similar spot on the Dow. What I find interesting is when you go back to November 2014, that's whenever the Fed had stopped quantitative

Starting point is 00:26:25 easing. They haven't done it since. In fact, they had one small 25 point basis point move where they tightened, but really haven't done anything ever since that point in time. Is there a correlation? Do you believe that there's a correlation there? No. No. No. We claimed the same thing with commodity prices, but then it didn't work. I think there's a Pavlovian response that creates this bias right now within the marketplace. I don't believe there's an actual mechanism because if we look at the positioning, if we look at the flow into equities, it does not correlate with the amounts of quantitative easing. What we've seen is volumes declining in equities, but all of the trillions of QE. So I think, yes, you know, at the margin,

Starting point is 00:27:12 Prime brokerage units within banks will lend more money to hedge funds, but hedge fund positioning is not going up at the same rate. I don't think it's a flow-through. I think it's a Pavlovian response that doesn't really have a correct linkage because I don't see it elsewhere in the world. So the footsy, when the UK bought an astonishing amounts of guilds, we just didn't see the same linkage. We didn't see it in Europe and we don't see it in Japan.

Starting point is 00:27:34 So is the US different from some mechanism? I don't think so. I just think it's slightly more speculative. Huh. Very interesting. So, Raoul, when I listen to George Soros talk about the issues in China, it seems like their country might be repeating some of the mistakes that we made here in the U.S. back in 2008. The only difference is that they are even more leverage than we were back then. Do you agree with Soros and Kyle Bass and all these other guys that are saying that China is the number one risk that we're facing with the global economy?

Starting point is 00:28:05 And if not, what would you say is that number one risk, whether it's Japan or European banks or whatever? What do you think is, do you agree with them and then what do you think is the major risk? The China thing is something I was probably one of the first people in the world on. I mean, back in 2008, I went around a shot video of empty buildings in China. I think I was before Hugh Hendry did it and before everybody else did it. So I've been very concerned about China and the debt story. I think I wrote an article back in 2004 when I was still running a hedge fund for GLG. And I think Stanley Drucker Miller got 11 copies of it from various people as it got circulated around the world.

Starting point is 00:28:40 because people weren't skeptical about China. They just wanted to believe. And that China story, I've been following it from then on and seeing the whole issue grow and grow and grow. And the Chinese situation is more has been spent on infrastructure and capital expenditure than in any other nation at any time in history. And the amounts of money are vast.

Starting point is 00:29:01 And the amount of credit is astonishing. And it's so opaque we don't know what to do. Data, we don't know how they can manipulate the data. Yes, they need to devalue. currency, but it's going to take time, and maybe they'll draw it out. They won't let anybody win in this game, and that we're kind of fighting them blind and no way a specular is going to win the game. The other side marks much more kind of, okay, these are the numbers. They cannot last any longer. This will have to blow at some point. So I kind of err on Mark's side,

Starting point is 00:29:28 but I understand Dan side too. So it's funny because last summer, we saw that their equity market was really just having tremendous problems. It was having huge pullbacks. It had a crash, not a 60% downturn, but it had a tremendous downturn last summer. I think a lot of people are looking at it now saying, hey, it's been mitigated, it's been stopped. But do you think that it has more to fall from here? Do you think that they have a lot more de leveraging to occur? So I tend to be a student of history. So I try not take snapshots of where we are now and say that's where we are. We have to live in the future in the global macro world and we have to look in the future and extrapolate backwards. Also, we need to live in the past and understand how the past worked.

Starting point is 00:30:09 So if I look back at any similar situation, there is a very low probability chance that China gets out of this without a really big issue. You know, however much of shifting around of taking it from state-owned interest prices, putting it on the government balance sheet, hiding it amongst the banks, that's a whole game. Nobody's ever really gotten away with it in the past. Will China? Well, my view is probably not. My view is generally there tends to be some fundamental economic laws, which are,

Starting point is 00:30:36 once you get too overstretched, there's nothing you can do about it. it eventually implodes. Let's take a quick break and hear from today's sponsors. No, it's not your imagination. Risk and regulation are ramping up, and customers now expect proof of security just to do business. That's why VANTA is a game changer. Vanta automates your compliance process and brings compliance, risk, and customer trust together on one AI-powered platform.

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Starting point is 00:34:28 because this path of keep pouring in money into the society with financial stimuli, that's not a sustainable solution. Well, the problem is with the fiscal stimuli, much like monetary stimulus, is there is a law of diminishing returns. So you can build more empty cities, more roads, but the stimulus effect is very limited. It's just the construction spend goes in, construction spend goes out, and that's the effect.

Starting point is 00:34:55 So the US could get a better stimulus because it needs, infrastructure spending, for example. But China really doesn't at this point. So, you know, I don't really know how this plays out, but I think the only way countries really play this out is they have to end up becoming economically attractive for external investment and for selling their own goods. And I know the world doesn't like the idea of a cheaper Chinese currency,

Starting point is 00:35:17 but we need China to be one of the legs of the global economy that is working. Currently, we have no legs. The US is the strongest leg and it's pretty weak. So let's expand on this idea. So let's just say that we go into the third quarter of this year and we really start to see deflationary forces starting to take over. And this is all hypothetical. And things get a lot worse.

Starting point is 00:35:38 And now the Fed is in a position where they can drop interest rates a quarter of a percent. And that's what they've got. That's what they have in the hopper. You know, you got Ray Dalio, you got other people all saying helicopter money, helicopter money. But the issue that I see potentially with this is that is reliance. on the fiscal arm of policy versus monetary policy, which was what the Fed actually controls, in order to stimulate and to put more dollars into the system. I see fiscal, the fiscal side of it,

Starting point is 00:36:09 dealing with the House and the Senate and everybody else passing this kind of stuff as being a very slow process. Would that potentially cause more problems because they don't, the Fed doesn't have their tools available? So now we're relying on the fiscal side. You see what I'm getting at it. Okay, so there is, I've talked about this in the past. We have a policy, gap between the Fed being on a tightening bias to an actual implementation of something useful. Now, quantitative easing in its previous format is almost politically impossible to do right now because it pushed too much money in the hands of too few. And with the political cycle where it is, it's almost impossible to do.

Starting point is 00:36:45 So then we have to go to money for the people. I'm thinking about in the past, the Fed, as much as we like to beat up the Fed, they do understand and that something has to be done. And then they had the power to do something very quickly. But all their tools are gone. They don't have any tools left. And so now you're really kind of looking at the fiscal side to solve the problem. And the fiscal side is not going to get this quickly, if at all.

Starting point is 00:37:11 No, I mean, we know the fiscal side has worked in recessions in the past. Will it work this time around? Well, probably a bit. You know, can it save us at the bottom of the next recession? It probably can. Is it an ongoing thing? because we have no monetary policy, well, the next time around,

Starting point is 00:37:27 we won't have much fiscal policy either, because what you're doing is you're essentially monetizing fiscal policy. It becomes problematic, and all of these things leads us to believe at the end of it, something has to be done about the global debt pile,

Starting point is 00:37:40 which is causing this problem, and potentially something to do with fiat currency. And my view is at some point, whether it's the bottom of this cycle or the bottom of the next cycle, is going to have to be a debt jubilee of some sort. That's the way the world has always dealt with these things.

Starting point is 00:37:55 Well, going back to what we were talking about earlier as far as China, do you see China as that number one threat or do you see Japan or European banks? What would you say is the number one risk facing the global economy at this point? I think, again, this is a mistake people make, is they try and assign probabilities to these things, and we really don't know. It's usually the thing you weren't looking at. All we do know is all of these things are part of the domino effect. So once the first domino goes, then there's things that we can do.

Starting point is 00:38:21 We can trade along that domino effect, look for the knock on effects, and look to protect ourselves or make money out of a situation like that. The hard thing, and I think the wrong thing, and we've seen people repeatedly do this, is try and pick this is the one. It's Europe. It's Japan. It's China. I don't know what's the one. I'm half indifferent. Once it starts, we know what to do.

Starting point is 00:38:40 I love that. I'm serious. I love that response because I fall victim to that all the time. That is a great response. I'm going to start using that. I'll let people know where I got it from. So let me just shift gears here a bit. Braud, you retired as a headst fund manager back in 2004.

Starting point is 00:38:58 And that was after an impressive career at Goldman Sachs and GLG partners, as president mentioned before. I'm personally very impressed by the performance and investment approach of some managers. And Bradalio from Bridgewater Associate might be the best example. 12 years passed since retired and the industry has changed rapidly. And today there are more than 10,000 funds managing assets exceeding $3 trillion. So I know that there are some investors out there, they're under the impression that there would be a better position for a potential recession in the hedge fund than other investment vehicles. What would your advice be for these investors?

Starting point is 00:39:36 What should they look for aside, say, historical performance and fees, which is the typical things to look at? Okay, there's a big question in that. First, I think the death of the hedge fund industry is coming. I think it's underway. I think it's impossible to have 10,000 of the special. smartest people in the room. Because the risk reward in running a hedge fund is very good. You get paid a management fee and upside, no downside, unless you've got some of your own money invested. It

Starting point is 00:40:02 attracts a lot of people into that business. You can get rich if you get it right. But the fact is, most people don't make money. Over time, you know, people believe money and they give up in the business. There's a reasonable turnover of funds. I think as a way of protecting yourself, yeah, you know, hedge funds overall with a broad enough portfolio is okay. But as the pension fund industry started investing in a hedge fund business, they got rid of the high volatile, high return, long view. And what they did is they forced people down to monthly returns. So then if you're a hedge fund manager and you have to perform monthly and if you fail to make money in one month, you have to go to investors and say why you didn't. That means your trade horizon has gone to two

Starting point is 00:40:43 weeks. And this is the problem. Paul Chilli Jones once told me that he said, well, the most common mistake people have is that their trade horizon doesn't match their idea horizon. So if you're trading an 18 month view about what you think is going on that we might get to give a stimulus within the US economy, then don't trade up on a two-week view because you're trading two different things. I remember the first time I heard about hedge funds. I think it was my first year and a Monday grad. We have people out from heads fund talking about how they could always make money. They could do that bull markets, they can do that in bare markets. And I guess that's how people usually see heads funds because they can't be market neutral.

Starting point is 00:41:27 And then financial crisis happened and almost all hedge funds just got crushed. And for me, that was very confusing because I read through some of these investment strategies and almost all of them said, we also make money if the market goes down. So what's the due diligence approach for an investor to make sure that they actually do make money if the market down. You know, it's very difficult because people can get their view wrong. So, you know, not everybody's amazing. So the due diligence process is first portfolio construction. They do have a balance of hedge funds to give yourself the chance of smoothing out those returns. Because one or two guys will get it right, one or two guys will get it wrong. We need to

Starting point is 00:42:05 make sure that the ones that get it wrong, don't get it spectacularly wrong. So they lose 10% the other guys make 30%, you're all fine. I think that's part of it. The other part is finding out when people started their career, Preston started this earlier in the conversation when we first started, it's about when you started your career has a big influence on how you think about things. Anybody who started their career,

Starting point is 00:42:28 trading full markets, and that's what they understand, tend not to be able to handle downsides. People who've been in ups and down cycles tend to be able to handle both because you become very humble after a while because you're going to screw it up somewhere down the line and you'll learn that you're not great. Once you learn that, that's the key lesson

Starting point is 00:42:45 And that allows you to be a little more flexible in how you think about it. So, Raul, you've had access to all these amazing people that you've interviewed. And the thing that I really want to hear from you is who's one of the smarter people or one of the people that I guess maybe smarter isn't the best word. But who's really impressed you when you sat down with them and you've heard them respond to some of your answers and you can just see their response was just extremely profound, very intelligent. What name would kind of stick out in your head? You can give more than one if you have multiple people. Well, look, somewhat obvious. You know, you sit down with Kyle, Kyle, Carl Bass.

Starting point is 00:43:24 He's a smart guy. People are less obvious. The person I really, really like to talk to, and I really appreciate how he forms his view is John Burbank. Right now, I think John is really one of the better thinkers out there. It doesn't have to be famous people. There's hidden gems everywhere of incredibly smart people. It's about keeping your mind open.

Starting point is 00:43:44 And I think that that's what's really important. that we wanted to kind of highlight with that question, Raul, was because we always talk about a lot of the same billionaires and things like that. But you know there's these other people out there that are high net worth people that have really kind of earned their stripes, if you will, in the industry. But we don't talk about them or they might have like a treasure trove of information that they've written about. I want to find those people and I want to highlight them. Also, the media has a tendency to follow certain people. You know, so everyone's following Ray Dalio. He's not the guy I'd like to follow. The guy I'd like to follow is people like Lewis

Starting point is 00:44:14 Bacon, more capital management. Lewis, I mean, when I used to be trading with them when I was at Goldman, the trade construction of how these people do things is beyond my comprehension. They're so smart. I'm curious to hear how you think about all the amazing conversations you have with these intelligent people, because how do you make sure that you are 100% objective and avoid your own confirmation bias? Look, confirmation bias is fine, as long as you're always doing your homework.

Starting point is 00:44:42 What I find that people don't know, and I notice this from the, comments within Real Vision. People don't know how to what somebody tells them, apply it to their own framework. There was no replacement from doing your own homework. Listen to somebody else do their trade. You hear Stan Drucker-Miller likes gold. A, you don't know what other trades he does, how he implements the trade, when he's in the trade, when he's out the trade. So it's ridiculous to assume we can piggyback people. What we should do is learn from people. When you learn from people, that's when you get all of the value. I like that too. Learn the essence of how they're making decisions, not the actual decision itself.

Starting point is 00:45:14 Absolutely. And I just want to highlight, if you're thinking after this interview that Royal Paul is a baron oil, so I should start shawning oil. That's not what he's saying. He's not talking about what Saudi Arabia will do or all rigs in America. That's not what he's saying neither. What he's saying is that he thinks that the dollar will go up and therefore all we go down. It's two very, very different things. Correct.

Starting point is 00:45:39 But that is absolutely correct, right? So you could say, I agree with your view about the dollar, but I think the link is between dollar and oil is different because here's my research, right? That's a very valid view. What's not valid is just saying, well, I heard an argument from so and so, and they said the dollar's going, oil's going up. That's not valid. What's valid is what you've just done is said, okay, I can understand that.

Starting point is 00:46:00 It doesn't fit in my framework, but I understand that maybe the risk to my equation. Raoul, this is my final question. As a micro guy, what would be one of the best books a person could read to be? better understand currencies and commodities and how they interact. I think that any of the Soros books originally, from the crisis of global capitalism, which is about the emerging market crisis, to Soros and Soros. Obviously, as ever, it's the market wizard books. Once you read St. Drucker-Miller's writing about the German unification,

Starting point is 00:46:30 you understand how currencies work and how complex a world that is. In terms of understanding macro, I think one of the things you have to do is understand history. You cannot approach macro by not knowing that. So I would use manias panics and crashes by Kindleburger because it gives you a full history of how things evolve. And they're basically the cycles of markets. Those kind of things, I think we'll put you on a good stead to understand that, A, you can't extrapolate a trend forever.

Starting point is 00:46:54 And B, you can understand the interplay of asset classes. Great recommendation. Thank you. That's awesome. I'm going to pick up that last one you just said. Yeah, that's brilliant. So Raoul, thank you so much for coming on our show and spending this last hour with you. I know our audience is going to get a ton out of it.

Starting point is 00:47:09 but we really appreciate everything that you're doing. So thank you very much. I loved it. Thanks, guys. Really enjoyed it. All right, guys. That was all that we have for this episode. We'll see each other next week. Thanks for listening to The Investors Podcast. To listen to more shows or access to the tools discussed on the show, be sure to visit www. www.com. Submit your questions or request a guest appearance to The Investors Podcast by going to www.com. If your question is answered during the show, show, you will receive a free autographed copy of the Warren Buffett Accounting Book. This podcast is for entertainment purposes only.

Starting point is 00:47:46 This material is copyrighted by the TIP Network and must have written approval before a commercial application.

We Study Billionaires - The Investor’s Podcast Network - TIP 094 : Raoul Pal - Macro Economics and Global Risks (Investment Podcast)

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