We Study Billionaires - The Investor’s Podcast Network - TIP132: Raoul Pal - Macro Investing & New Opportunities (Business Podcast)

Starting point is 00:00:00 We study billionaires, and this is episode 131 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 Stig Broderson. Hey, hey, hey, how's everybody doing out there?

Starting point is 00:00:31 This is Preston Pish, and I'm your host for The Investors Podcast. And as usual, I'm accompanied by my co-host, Stig Broderson, out in Seoul, South Korea. And today we bring you one of our favorite guests. We've got Raul Powell with us today. And for anybody who doesn't know Raul, he is the founder and CEO of Real Vision TV. For any of our regular listeners, you guys know who Real Vision is. They do all these amazing firsthand account videos, long-length videos of interviews of some of the best and smartest investors in the finance sector.

Starting point is 00:01:04 So Raul's the guy that goes around and talks to the smartest people in the world, literally face to face. And so what's fun about bringing him onto the show, this is the second time on the show, and then we had Grant who came on the show as well. It's great to talk to these guys because they're talking to the smartest people. They know exactly what the heck's going on, and they're going to be able to provide some of those amazing insights with us today. So Raoul, thanks so much for taking time out of your busy day to talk with us.

Starting point is 00:01:27 Not at all. It's good to be here. So let's start off by talking about just your general opinions on where the market's gone. As far as I'm concerned, this just gets crazier by the day. I mean, come on, you know the deal. I don't know how long I've been saying this narrative. The market's overvalued. It's a 25 on the Schiller P.E.

Starting point is 00:01:47 Now it's close to a 30 on the Schiller P.E. We got Donald Trump. When it looked like Donald Trump was going to get elected, the market was tanking. Then he gets elected. And then it does tank for about 12 or eight hours. and then it does a total reversal and it goes screaming higher. Talk us through how you're seeing things today.

Starting point is 00:02:06 Do you think that this thing has more to run on the equity side, on the stock market side? Do you think it has more to run? You see how I look at these things is, I ask myself the question, do you want to be involved? If I see the upside is, let's say, it goes up another 10%.

Starting point is 00:02:21 This is now the third longest expansion in all economic history. So the odds of having a recession or a bare market is getting higher and higher by the day, definitionally. We also know certain things, for example, that after a two-term government, every single change of government has led to recession going back since 1910. That recession comes within 12 to 15 months. So the probabilities are extremely high.

Starting point is 00:02:49 I know people probably get bored of me saying this because economies move in very slow time horizons, but that's the outcome. So normally in the bare market, the stock market falls 40%, let's say. So therefore, you've got a 10% upside and a 40% downside. So do I want to bet against this market right now? No, not until the economic data starts turning lower. But do I want to participate when the downside starts to come? Yes, because the risk reward is better.

Starting point is 00:03:17 So that's how I look at it. I look at everything in risk reward and probability terms. Now, for me, I do a lot of work using the business cycle, and I use the ISM survey as a guide to the business cycle. And if you look at the year-on-year returns of the S&P, put them against the ISM, they're basically the same chart. So the S&P is the business cycle. Now, really, what it means is that unless the ISM goes below 50, stock market doesn't fall.

Starting point is 00:03:45 So even if it does fall, it'll be temporary. Now, sometimes it's a lead by the ISM and then the market falls, which is quite nice because it helps you out, gives you an advance notice. if not they start to fall together. So I have a feeling until we start to see more economic growth, we won't see the market come off. However, in terms of economic growth, that is starting to play out. If you look at retail, you look at car sales, you look at a whole number of indicators, they're bad. Industrial production, all the hard data is bad.

Starting point is 00:04:15 It's the survey data is good. So there's this kind of animal spirit that's not following through to economic growth. So it becomes intuitively more interesting to me when there's a disconnect between the narrative and the reality. So just for me to summarize for the audience, when you say the ISM index, you're referring to the manufacturing index. Correct. So could you please elaborate and explain what it means when it hits the 50 mark? Yeah, so actually, it's kind of scaled. It's a probability event.

Starting point is 00:04:45 So 50, you start to say, okay, there is the risk that the market is going to fall, the credit contract, is going to come and all the other things that come along with a recession. By 47, your probability explodes to about 80%. By 46, it's 100% chance of recession. So it's kind of as it falls through from 50 and lower, the odds of a recession explode. And also, therefore, the odds of a bear market. Okay, so just so people have a reference point, where's the ISM index today as far as a numerical value? Yeah, it's 57.7, which is one of the more elevated levels that it's been. at since the recovery started back in 2010. So it is quite elevated. It would have to fall a long way, and that usually takes several months before it would cross 50, even if it turned down from here.

Starting point is 00:05:33 And again, it's not necessarily my call that it will do, but I'll come on in a sec to why I think it probably will turn lower. So you also talked about the length of the credit cycle. So right now, you said that we're the third longest on history of the U.S. stock market. How much further do we have to go. How many more months or days do we start getting into the second? And then it's the longest credit cycle in history, just to kind of give some people some context where if we are going to set a new record for the length of this cycle, how much further do we have to go to get there? Okay. So the two longest other business cycles that we had, one was in the 60s, the kind of go-go years of the 60s. That was about nine years. And then we had one over the 90s, which is 10,

Starting point is 00:06:21 years. So 91 to 2001, that was about 10 years. So we're currently what? Since 2009, we're in year eight. So it's basically another year or two would be absolute maximum. But this is so long in the tooth now that once any of the indicators turn over, you need to be aware. Now, one of the things I know you guys do a lot of global macro kind of stuff. And when we look at this credit expansion that's happened over the last 10 years. So much of this has been attributed to what's happening over in China. I think for a lot of people, they might not necessarily understand the magnitude of the amount of credit that China has created during this last credit cycle, much more so than anywhere else in the world. Can you talk to us a little bit about that idea and that narrative and more specifically how that's starting to change today with the amount of credit that's being induced over in China?

Starting point is 00:07:15 Well, look, they've been trying to slow the credit growth. Credit growth has been off the charts. I mean, as people will have heard about, there's empty buildings all over China based on borrowings. There's the household sector. There's the corporate sector. That's the state-owned business sector and the government sector are all borrowing money at record amounts.

Starting point is 00:07:34 So try and keep GDP elevated. Now, what's happening is the rate of return of each dollar borrowed or each yuan borrowed is collapsing. Now, the government has been trying to slow credit, but they have to keep opening the taps because what they're trying to do is stop the whole system collapsing. Because once you've got too much debt, it's very difficult to hold a system up after a while. It kind of collapses under its own weight.

Starting point is 00:07:56 So they keep trying to turn the spigots on, turn them off, turn it on, turn it off to try and create something. Meanwhile, we're seeing capital flight people leaving China with as much money as they can because they fear a collapse. And they also fear a collapse of the currency. It's also driving some of the speculation in the commodity markets because Chinese companies who can buy copper, for example, will store it. because copper is a dollar nominated asset. So if the one then falls, they kind of protected themselves. So it's distorting some of the commodity markets as well. Well, and I think you're also seeing it in the high-end real estate market globally,

Starting point is 00:08:31 not just in the US, but globally because so much of that money was coming out of China at a rapid speed. And they're like, where do we put this stuff? And they're paling it into like really high and expensive real estate around the globe. And now you're starting to see that market fall apart. Absolutely right. And this capital flight is everywhere from China. And, you know, people pick up the wrong narrative often. So they say the Chinese are selling treasuries. You know, this is terrible for the bond market. What it actually is is the Chinese spending their reserves, which are held in treasuries,

Starting point is 00:09:02 to defend their currency so it doesn't collapse because so much money is leaving. So when they say they've sold a trillion dollars of treasuries, what they mean is a trillion dollars of Chinese capital has left China, which is a big number. Yeah, that's a fantastic point for people to understand what's actually happening over there. All right. In continuation of us discussing the overvalued market, I'm curious, Raoul, with all the different heads fund managers you're speaking to, what's the best investment idea of you have gotten in the past three months? Okay, if we talk about investment ideas, what we need to understand first is time horizon. So the single best investment idea in the world right now, if you've got a 10-year time

Starting point is 00:09:43 horizon where you want to stick some money in and you want to make multiple hundred percent is Iran. The Iranian stock market is the cheapest in the world. It is a phenomenally good economy that's not just about get oil and gas. It's actually a hugely balanced economy because it was a closed economy. It's opening up to Europeans. It will open up to Americans soon. Europeans can now go and invest in Iran again. And the two funds that are available to foreigners are trading off peas of five and a half. I mean, five and a half P. dividend yield of 14%. You have a massively educated

Starting point is 00:10:17 population. So that's the kind of off the wall one. And let's talk about that real fast, because so many people that are listening to this are from the US, about 40% of our audience is international. But the people in the US, they might hear that and have a lot of concern. Like, I'm not going to go put my money in Iran

Starting point is 00:10:33 because the narrative here in the US is that Iran is bad, this, or whatever you want to spin it to. So it would be your argument for that person that would be concerned with taking their money here that's domestically, So many people only invest in the country that they live. That's right. So firstly, you need to look at, again, go back to risk reward.

Starting point is 00:10:52 If it's a P of five and a half, it's basically priced for civil war. You know, it's so incredibly cheap. And you get a 14% dividend yield. So the chances of a bad event having a huge impact on the stock market is relatively low over a period of time. Because these companies generate a lot of cash. It's a profitable country. So that's one thing. The other thing is I've been there.

Starting point is 00:11:13 go there, go and find out these things. Or, you know, we've done some interviews on Real Vision. And it's really interesting to hear what it's like on the ground. I mean, it's basically the world economy stopped in 1980, which is when the Shah left. But they've still built great, high-quality businesses that make everything from fruit juice to soap powder to all the things that we understand in society, but they're all Iranian. And these Iranians export to Dubai and the Middle East and to India. They trade with a load of other nations just because we're not involved with them.

Starting point is 00:11:43 And, you know, go there, see how safe it is. It's an incredibly safe, really friendly place. Now, a geopolitical narrative is not necessary the true narrative. And I think people are learning more and more about how this is. And, you know, having been there, seen it, the risk reward to me looks good. Now, maybe I'm wrong. How much money we're going to lose? Okay, let's say I lose 50%.

Starting point is 00:12:05 But what's the upside? I'd say it's probably about 1,000% if you look at long structural ball markets. So 50% with 10 times upside. I mean, that's a huge risk reward. So whenever I hear such large numbers, my immediate concern becomes the currency risk of inflation. So how does their currency look as far as stability and for being able to protect those returns? Interest rates have fallen from about 22% to single digits. Inflation is leaving Iran rapidly.

Starting point is 00:12:38 And as more infrastructure comes into Iran, it's probably likely. to be somewhat deflationary. The currency, I think, will strengthen from foreign direct investment because a lot of people want to invest in Iran. Iran is already lining up the largest aircraft order the world has ever seen. Now, obviously, it needs the Trump administration to kind of just finally ratify it, but they want to rattle some sabres first and put Iran in their place just because it geopolitically looks good. But, you know, there's a huge amount of FDI that's going to come in that's going to strengthen the currency and strengthen the reserves of Iran. So, yes, it may, like India, for example, see a slow devaluation over time, but the amount of upside available

Starting point is 00:13:17 in the equity market, but don't forget you're getting paid 14% just in the dividend. So the currency can move 14% in your flat, and you still get the five and a half P for that. Now, it seemed like you had another investing idea that you wanted to talk about. So I'm starting with the most esoteric which is Iran. I'm then going to move south of Iran and go to India. India, which is much more accessible to many of us. There are ETS in India, etc. India did something that most people didn't understand, which was it banned cash. And the narrative, again, I love narratives because they're usually wrong. The narrative was they're expropriating assets. This is bad. They're screwing the poor. This is a really bad thing. That's the lazy Western analysis. I'm half Indian.

Starting point is 00:14:01 I've spent a long time in India. What it was was actually a genius stroke of doing a number of things. When I first started looking at the story, I realized that it was about getting the corruption out of the system, the petty corruption. You're never going to get big corruption, but petty corruption was in front of everything. You try and get somebody to buy you a railway ticket and you have to give them a tip or some sort of bribe. Anything involved a bribe. It was such a frictionful society that money just doesn't circulate easily. 90% of the economy was cash. The government, which needs to move the country to the next level and build infrastructure, was getting no taxation income. And it was a problematic society overall. And it was never going

Starting point is 00:14:42 to change. So overnight, getting rid of the large banknotes and forcing people into the banking system, overnight recapitalize the banks. Genius. Didn't cost the government a penny. Suddenly, the government can tax more efficiently and therefore they can start building the infrastructure, the roads and the ports and stuff that India desperately needs. But it went beyond that. It meant that a lot of people were not having money taken away from them. You know, it was like a tax, was bribery. You'd rather pay the tax to the government than pay it to some other guy

Starting point is 00:15:14 who's not adding to the good of society and building infrastructure for you. But that was the first part of the story. So that was like, okay, that's quite bullish. You know, people quite like Modi is the Prime Minister of India. You know, he's somewhat populous, but he's doing stuff and he's very pro-business. But then I started looking into the story

Starting point is 00:15:29 and I came across something called India Stack. And what was fascinating is the biggest macro story, I've ever come across in terms of technology and nobody knows about it. I was on Twitter recently and I asked people, who knows about India Stack? 93% of all the people and I've got like 25,000 Twitter followers didn't know anything about India Stack. 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.

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Starting point is 00:19:53 That's Shopify. slash WSB. All right, back to the show. Part of a whole system that allows India, it's called Ardar. Ardar is a biometric system of recording

Starting point is 00:20:09 your personal information. So it's basically like your identity card, but it's based on biometrics. It's either retina scans or its fingerprints. Okay, so that's, some countries have done that before, not that interested.

Starting point is 00:20:20 But what they did is they got 1.1 billion people onto this biometric database. Then they said, okay, what we're going to do is we're going to plug a cash payment system around it. And we're going to create something called IndiaStat. So the cash payment system means that now I can transfer money to you. I don't need to go through a middle band because I confirm it via my fingerprint and it goes frictionless to you. There's no middleman.

Starting point is 00:20:45 Nobody's going to take money off you. So it makes a society that doesn't need cash. But what was genius is you can now pay for a carton of milk with a fingerprint and your odd on. number. You don't even need a phone. So that is extraordinary, right? This is leapfrog the entire world by 20 years and nobody knew it was coming. Then they have India Stack. India Stack is the ability to store all your state documents in a secure box, which is accessible by your fingerprint or your retina's cap. So what that means is Indians, so many Indians, didn't even have a birth certificate. So they weren't in the system. So they couldn't get any of the government handouts, subsidies,

Starting point is 00:21:23 and all the other things, farmers are finding incredibly difficult to borrow money because I had no birth certificate about who they were. So they were kind of the unbanked, the great unbanked, and there was hundreds of millions of these guys. Suddenly, everybody is now registered. And with your fingerprint, you can go into a bank, give your fingerprint all of your documentation, such as your utility bills, your passport, or anything you need to open a bank account for your client is electronic and instantaneous. So the bank can open a bank account immediately. None of this messing around that we all have do to open a bank account, to open a mutual fund account, to get life assurance, to borrow money. All of the things that make a functioning society that India didn't have have all arrived

Starting point is 00:22:03 in one go. And it's an open API that allows anybody to develop software around it as well. So you're going to create everything around the ability to use a fingerprint, where you can buy goods with a fingerprint, you can borrow money with a fingerprint, etc. So you've basically got rid of cash from society. Now, are they incorporating something almost like Bitcoin where they're locking in the monetary baseline of the currency that's being used? Are they going to incorporate that as well, or is it just more on the biometric side? Yeah, I mean, I just want to say one more bit of the biometric side. I'll come to that. The other thing is your medical records are there. So you can get run over by a car in a remote part of India, be taken to a medical clinic,

Starting point is 00:22:42 take your fingerprint, all your medical records are there. I mean, that's astonishing, right? America's tried to do something like that for the last 20 years and got nowhere. But going back onto the Bitcoin story, that's the first thing I thought. I thought, wow, this actually removes a lot of the need for Bitcoin. And I know all the crypto guys go, yeah, but it's not the same because it's decentralized versus centralized. But in effect, for the average man, it's done the same thing. You've got a cashless payment system that can process more payments faster than Bitcoin ever could in its current format. It has all of your security documents, which is what Bitcoin was one of the great things Bitcoin was going to have.

Starting point is 00:23:15 Yes, it's run by the government, but in the end, for the average man, the functionality is great. They have not added a currency to this. The rupee still stands as the rupee in the way. But if I look at the speed of development, clearly it looks obvious that they're going to do something with a currency too. Well, I think one of the concerns whenever I talk to people about Bitcoin, the thing that they almost always, even for myself, when I'm trying to explain how blockchain technology works and the mining part of it, it confuses the living heck out of people. The common person I'm talking to about it that doesn't understand what the purpose of the whole Bitcoin thing is, which I think it's more around central banks than anything else. But for people to wrap their head around the mining and the encryption of how exchanges are taking place, I think it's a far stretch to get your typical citizen to buy into using some type of currency that there's nothing tangible to. This seems like it would gather trust, which is all what currency is all about.

Starting point is 00:24:16 I think this would gather trust a whole lot faster because people in India, specifically I'm talking about, when they go up and they put their fingerprint on something and it conducts the transaction, they understand that the government's behind making sure that this all happens. I think the level of trust is so much higher than some type of Bitcoin or cryptocurrency thing when somebody says, well, who runs this? And my answer is, well, no one knows. Yeah, that's right.

Starting point is 00:24:41 There are governments who are looking at integrating cryptocurrency within their own currency. I would imagine India would do something similar, just at the speed of development of what they're doing. So imagine this whole system, but then with some digital-based currency as well, that has some sort of inability for the central banks to mess with it. I mean, that would be incredibly powerful. I don't know whether India is having that conversation, but I know many, many central banks are. Yeah, no, and I completely agree with you. I know the People's Bank of China, they're talking about doing some type of

Starting point is 00:25:11 blockchain technology in order to lock in. And this is the important part for people that maybe don't understand too much about Bitcoin. The important part is locking the monetary baseline so that the country does not manipulate the monetary baseline and increase it and basically create fake growth is basically what we're talking about. That's right. As we talked about earlier about China and the debts, you can't allow the government to expand debt and it makes it much more difficult for the banking system to over leverage and easier to control. So yes. But I think that whole development, is astonishing. So I'm very bullish India. I think the mobile phone sector in India

Starting point is 00:25:47 becomes exponentially growing. It's already pretty well saturated by mobile phones. What was genius about this whole Ardar system and India stack, it works on 2G phone lines. I'm astonishing. Somebody really thought through what India is about, thought 2G, that's what we need to do. So it works in 2G. But all of the APIs, all the applications are going to come out of this will work on smartphones. So the smartphones, currently 28% of the Indian market, it's going to go to 100% of the Indian market. The manufacturers are already building Ardar-related smartphones with your fingerprint scan on it, because then you can operate anything online. You can go to Amazon, buy anything with your fingerprints all done. So the opportunities in telecom and data are massive. The banking

Starting point is 00:26:31 system, clearly, everyone's now been pushed into the banking system when they were out of the banking system. The velocity of money, not in the inflationary sense, but in the terms of the ease of doing business is going to increase. All of these are incredibly positive India. So that's my next story for you. There are ETFs you can trade on India. It's a buy and hold, you know, and you can hold this, I think, for the next five or ten years. Yes, when the world gets a recession, India's going to get hit. But the story of India's demographics plus this amazing technological revolution, make it a really good opportunity. So just in our show notes so people know, we'll have the lowest cost ETF for, I believe it's pro shares by BlackRock that has the lowest cost

Starting point is 00:27:08 ETF in India. But I'll research that. I'll have a ticker in the show notes for people that are interested in potentially buying an ETF over in India. Fantastic. So we're talking about the opportunities. I've got one more for you. Okay, well, let's talk it. Let's hear it. So I've given you the more esoteric one, the slightly less esoteric one, and now the easy one. So we're talking about growth. Most of the growth indicators around the world are affected by what happened last year, because all of these data are year-on-year rates of change. If you remember January and February last year and most of the end of last year, the commodity markets were collapsing, the oil market was collapsing, growth was collapsing,

Starting point is 00:27:50 there was a number of things, and the dollar was going higher. So what happened was all of the data now looks terrible. CPI looks like it's 3%. It's not really. It's because it dipped so badly because of the fallen oil. But that all stopped in April. April, May, June, all of this reverses. Because remember, the market's bounced and everything changed. So all of that year-on-year effect is going to evaporate. So mathematically speaking, CPI should go from where it ever is, 2.5, 2.7. It should go down to one and a half in the next six months. And economic growth, even with the ISM, many of these surveys, they're all going to turn around. People aren't ready for this. Because they've forgotten.

Starting point is 00:28:32 got why this data was going up. So the next recommendation is by TLT. It's simple. Inflation is not what's there. I know people desperately want to believe there's inflation. There isn't. It's just the mathematical translation effects. There is inflation in some areas. Generally, the economy is deflationary. The price of oil is going to collapse for a number of reasons, which is another story I'll give you. Well, the probability of it of collapsing is high. So all I think is the risk reward of owning TLT when people are record short bonds right now. The biggest ever short position of the history of the bond market is right now. So the probability of bond yields falling as opposed to rising is increasing dramatically.

Starting point is 00:29:16 And it may not be today right here right now. So it's one of these things you scale in over the next month, let's say. But you scale into that. And I think you can hold the trade for 18 months and yields will halve. So that's an interesting comment because we were talking to Bill Miller. Everyone knows who Bill Miller is the former CIO at Lake Mason. I read an article where Ray Dalio basically came out and said, I think we hit the bottom in the bond market.

Starting point is 00:29:41 And you're saying the opposite here, Raoul. And you're saying that to you, it's a very obvious trade. And I think I know where you're coming from because I kind of see this the same way as you. But I'm going to let you explain it because you're going to do a much better job than I could ever do explaining your reasoning why on this. Go ahead and explain this. you go back and look at that chart of bond yields, 10-year bond yields, and you look at it gets these periodic spasms, right, where everyone goes, oh, inflation, inflation, growth, growth, growth.

Starting point is 00:30:07 What happens is every time it does that, bond yields then fall, okay, because it's been slightly disinflationary, and then we get a spasm, it never breaks the level of the previous spasm, i. there's a downtrend, but it's wildly consistent. And we're kind of in that area now between kind of up to 3%, you don't really know. It would not have broken the previous one, which was like 18 months ago. So that trend is so strong.

Starting point is 00:30:32 Why is it strong? It's strong because everybody's bloody retiring. You've got the largest group of people in all of American history or global history all retiring at the same time. What do you do when you retire? Eventually, you have to buy fixed income and you need to draw down your capital and consumer over time. That's what retirement is about.

Starting point is 00:30:53 So bond yields tend to create, aging populations tend to create lower bond yields, which is why Japan has had such low bond yields. Now, also with the debt situation, debt tends to be deflationary. In the end of the whole demographic wave, when all of these guys are out of the system, can bond yields explode? Of course they can. You know, I do expect that, but not yet. Everyone's way too early. I agree with you. And I think that that's a bold claim for you to say that and probably maybe not the smartest thing for me to agree with you because There's some heavy hitters that are saying the exact opposite. So I know these guys, right?

Starting point is 00:31:30 I know many of these guys personally. Every one of them has been wrong more than five times on JGBs over the last 20 years. Everyone. And so, you know, smart guys can be wrong too. You know, you and I can be wrong. Maybe we're not smart as those guys. But what I do know is I've seen every one of these guys from Stan Drucker Miller to Paul Tudor Jones. I've seen them all screw up in JGBs because they thought Japanese bond yields can't go

Starting point is 00:31:54 lower. Well, yeah, and I think that's a fantastic point. If people don't think that the bond yields can go lower, just look at Japan for 10 seconds and you'll see the answer. So Jeff Gunblock, I mean, you guys have interviewed him. He's saying things like three or five percent within a year or something. The reality is, if you look at what Jeff says, he reverses his views often. He's a trader. That's not necessarily his long-term view. He's kind of saying, hey, listen, if it breaks his trend line, there could be a massive spasm in yields. So what do you go out publicly and say there's a risk that yields are going to 5%. He's right. There is a risk. But he gets the headline and everyone says, Jeff Gunlack, Jeff Gunlack. It's clever. He's a good manager. He knows what

Starting point is 00:32:34 he's doing. We understand the marketing and the finance side. Exactly. All right. So, Raul, I would like to talk about the Fed and perhaps also relate back to what you said about inflation, because the Fed has recently raised rates and they've done that twice in close to a quarter. but in the past eight to nine years, they only raised it thrice. So you might very well be right that the Fed now realizes that real inflation is higher than the prices that are being reported because the inflation number is simply calculated with that's called logical math. And what you mention is that the search in oral, so we have seen it go from $30 to $50 a barrel,

Starting point is 00:33:17 that has drastically increased what you might call the real inflation. So what the Fed might be doing is that they're trying to lie in a higher rate now so they will have more ammunition if the economy should tank again. Is that correct? Absolutely right. So that leads to be perfectly into, because I'm feeling incredibly generous this morning, I'm going to give you the fourth trade idea. Bring it. Let's hear it. Speculative long positioning in the oil's futures market is the largest of any commodity market in the history of all futures contracts. Now, yes, there's a number of other ways

Starting point is 00:33:50 of looking at it, you know, you take it the dollar terms, whatever. But if you look at the sheer size of what's going on in the futures markets in oil, it is off the charts. The last time this happened was very similar, actually, was 2014. And I was very lucky in calling a top in the oil market at about $100 a barrel. I said it was going to $30 and Jeff Gunn-like style. I said, it's going to 30, and it did, which was quite lucky. It doesn't usually happen that way. So I look at the situation now, positions are much longer. They're speculative positions. I then spoke, started speaking to the oil traders, the actual physical oil traders for the oil companies.

Starting point is 00:34:26 They're all record short. They're like, no, no, there's so much oil around in storage everywhere. The Chinese have got more in storage than anybody knows. And we think the break-even price of oil production is coming down, so we just want to hedge as much as we can. So, you know, all the shale oil is coming down to 30 or 40 bucks when it was up at 60, two years ago. So what it means is they think that the price of oil should fall.

Starting point is 00:34:48 The speculators are record long. Why? This is interesting because when you ask, who's really record long oil? You don't know. I can see the retail guys are long oil stocks because they still have this love for oil because it's an American thing, right? But when you go back and figure it out... 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. So whether you're prepping for a SOC 2 or running an enterprise GRC program,

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Starting point is 00:38:35 Part of the liberation of Saudi Arabia, if you believe that narrative, or whether it's because they need the cash, which is the narrative, I believe, more so. Look, Saudi is changing as an economy. you know, John Burbank, the great hedge fund manager, went through a depth on real vision about how Saudi Arabia is changing. But let's say a country like Saudi changes slower than we would like to expect in financial markets. We always want everything tomorrow. So Saudi Aramco, I think, is about raising money. The government of Saudi Arabia issued a bond, which is very rare for them because they were a cash cow, but the oil price is too low for them, and their economy is just not structured for a low oil price. So this is a problem. The amount of expenditure is too high.

Starting point is 00:39:10 So they raised some money. They then say we're going to sell a stake of the largest company ever known. Two trillion dollars, one trillion dollar. Nobody knows how big this company is because actually nobody knows what the reserves are in Saudi Arabia. It's a very hidden secret. But so people started coming to me saying, hey, listen, Saudi Arabia has been speaking to some of the large hedge funds. And they kind of had to tap them on the shoulder and said, we'd rather you didn't short the currency. We've got something else for you.

Starting point is 00:39:35 And I thought, wow, that's interesting. And again, these are rumors you don't really know, but, you know, I know a lot of people were involved with Saudi Arabia, that's pretty open. OPEC went to still speak to a load of hedge funds as well. So there's the OPEC cuts, but then Saudi's gone to speak to hedge funds and basically suggested that they should be long. Why? They can't wait for the Aramco deal, because that could be next year or the year after. You can't just manipulate markets for that long. I think it's because they want to issue an Aramco bond for $10 or $20 billion to get some cash. And I think, you know, a bond is just a future cash flows. So if you can show that the price of oil is high,

Starting point is 00:40:10 you get a much higher price for the bond or cheaper borrowing for the bond. And I have a feeling that it's to do with that. But either way, forget all the, you know, I don't know the full narrative. None of us ever will. What I know is the oil price has been training sideways for a long time. All of the guys who actually produce oil are record short. The speculators are long. They're the weak hands because that's on margin. The other guys are at a cash loan real business. So the probability is that the speculators get cleared out. Now, if this position is as big as we think. And the oil price and the dollar go hand in hand because the dollar is the denominator of the price of oil. And the dollar has been rallying. The price of oil currently

Starting point is 00:40:52 should be at about 40 bucks or 35 bucks, but it's not. They're diverging. My guess is that gap closes. Now, can the dollar weaken from here for a bit? Yeah, sure, even though I'm a dollar bull, as you know. But the point being is the oil price cannot stay long at these levels. So my guess is at some point the oil price falls quickly. So I think there's an opportunity to maybe buy puts in oil and as a more speculative trade, but the chances of getting paid out massively if the speculators get washed out. So you talk about how you're still a dollar bull. And I think as long as the Fed continues with their narrative that they're going to continue to raise rates,

Starting point is 00:41:33 maybe not as fast as some others might think, you know, call it two more times for the rest of 2017. But I think as long as the Fed has that narrative that they're going to raise rates, I agree with you. I think the dollar is either going to hold or maybe even get slightly stronger. So if that's true, people that are gold investors switching gears into gold, I think gold's going to kind of stay where it's at. It's going to bump around maybe a little higher, a little lower. But for the most part, I don't see any major movements in gold until the Fed kind of changes their narrative. And we start to see them loosen or the dollar starts to become weaker. Would you agree with that?

Starting point is 00:42:06 So I don't agree that the dollar weakens on the back of the Fed inaction. I think there's a gap where the Fed stop hiking and the dollar weakens because this is a narrative that people want to believe. Generally, interest rate rises or cuts and movements in the dollar are not highly correlated. Interestrate deferentials are. So the differential between Germany or the UK or whichever. And the US has been rising and the others haven't. But there's a number of reasons why the currency will continue to.

Starting point is 00:42:36 strengthen. Because if the Federal Reserve, let's say they go to cutting rates again, what is happening in the world? That's a recession. If there's a recession, the US currently is most likely to do better because Europe's got so many structural problems right now. They can't really outperform in a recession. China in a recession probably blows up. Japan in a recession, it's difficult. So what happens is the dollar becomes the safe haven currency. And that we saw that back in 2007, in 2008, the dollar strengthened. So I am not of the opinion that the dollar weakens over time.

Starting point is 00:43:09 However, I am of the opinion, the gold goes up as well. So that's my other trade that I've been talking about for some time is I think the dollar and gold rally. Hmm. Interesting. Very interesting investment opportunity. Okay, so so much for the fourth

Starting point is 00:43:26 best investment opportunities that you heard of recently. What's the worst investment idea you heard about in the last quarter? Tesla. Hey, I'm a big Elon Musk fan, but I have to agree with you. Some of the prices over there, crazy. It's not so much that.

Starting point is 00:43:42 It's the step back and map out what's going on. This company burns cash. Okay, there's several tech companies that burn cash. But it burns at an extraordinary rate. It never meets a deadline. But Elon keeps coming out and saying more outrageous claims every time he needs to raise money. Yeah.

Starting point is 00:44:03 So watch what happens, right? So three weeks ago, we're going to fly two guys next year around the moon. Oh, and we're going to launch another car. They haven't got the other ones in production yet, really. They can't get enough production. So now the men are going around the moon. Oh, by the way, I need to borrow another billion dollars. And this happens repeatedly.

Starting point is 00:44:24 I don't like that pattern because it's not about what the company's selling. it's about making outrageous claims and then borrowing more money. So Tesla, I think, is a risky stock. I think too many people think that Elon Musk stands for good things, which he does. But you don't confuse that with a well-run business. Well, the nice thing for him is he can do it through equity deals. He can raise money through equity, which is a great way to do it. Because if he's having to do it through the debt markets, that's when it starts becoming...

Starting point is 00:44:55 Well, how can you? He's got no cash flow. Yeah, no, I... How'd you pay back? debt, right? Great point. Fantastic point. No, I like that you're bringing this up because I know there's probably a lot of people in our audience that are Tesla fans. I know I'm a fan of Tesla. I'm a fan. Me too. I love their cars. I love what he's doing. You know, I'm an environmentally conscious person. Separate the narrative from the economic reality of the situation. It's riskier than people think, you know, I'm not saying any bold claims about Tesla's going to go bust or anything like that.

Starting point is 00:45:26 All I'm saying is just be careful in that stock. So let's talk about this. If we could stop time and capture the most important narrative that every investor in the market should understand today, and we're talking the middle of March, March 17th when we're recording this, what would that be? I'm about to write this in global macro investor. It's the biggest subject of all. And it's a thing that people have left to one side and have ignored. We talked about the retirement of baby boomers.

Starting point is 00:45:57 The largest number of people in history are hitting 70. They all have to start to retire. They've already extended their retirement. Okay, we understand that. We understand economically it makes growth slow. There is a risk that they need to sell equities because they eventually need to spend the capital that they've spent their life savings.

Starting point is 00:46:17 They'll probably own some fixed income. We kind of understand that. What nobody quite understands is, is that, as we've talked about earlier in this program, we're due a recession. So you've got a group of 65 to 70-year-olds, the largest ever, with the largest accumulation of wealth the world has ever seen at their maximum allocation before recession. We talked about recessions, and they have a tendency to halve the price of the stock market. You have a risk of halving the wealth of the entire baby boom generation at retirement

Starting point is 00:46:49 day. I think that's the biggest story nobody's even thinking about. And the probability of recession, again, I don't care whether it's this year, next year, or the year after. The longer it goes, the worse it is. If we go four years without recession, you're going to capture even more of these boomers at their retirement dates. Because we're just going up that curve now. So for the next 10 years, every recession has an enormous impact on the retirement savings of the largest group of people in the world. And I think the other point to kind of piggyback off that idea is when the recession

Starting point is 00:47:22 occurs, whenever that is, if it's a year, two years, three years, whatever. When that happens, and you have some of these people that have their money and equities, and that then gets hit by a very significant margin like you're talking about. The typical reaction of the common person is, I've got to move my money into fixed income. And I hate to tell you, my opinion is fixed income. If you think fixed income is low right now, it's only going to get lower. I totally agree. Now, fixed income will just protect your capital from destruction.

Starting point is 00:47:51 at this point. Okay, fine. So you don't get any return. But what I'm really interested in is what is the knock on effect? I'm never really interested in the superficial effect. It's the knock on effect that counts. So if this happens, what happens to the consumption patterns of these boomers? They're going to halve. So these are the biggest consumers of all. They spend more money than anybody else. You're going to halve their consumption patterns because their retirement. Because one thing they cannot do is predict the longevity of their lives. So you always have to keep money back. to make sure that you can continue to live into retirement. So what it's going to do is create a psychological effect of a reverse of the consumerism that we've

Starting point is 00:48:32 understood to this day. And I think that, you know, that is a situation that slows growth significantly for extended periods of time. Also, they're highly unlikely to re-buy the stock market because they're done. They're retired. You cannot risk again to say, let's do this again because I need to chuck my money in the stock market to retire. So I think it's a big shift and I think it's really important. Fantastic comment. All right. So this is my last question. Who do you follow in the financial markets?

Starting point is 00:49:02 Like if you had to do a Google search and say, what is that person's thoughts on the financial markets right now? And what should I be doing? Interestingly enough, I read virtually no research because I like to develop my own ideas. But who do I like to sit in a room and chat with? who really, you know, do I walk away and go, you know, that guy's super smart. I've learned so much. Quite a few of them being on Real Vision. Mike Green, stunningly smart guy. John Burbank, amazingly smart.

Starting point is 00:49:30 Kyle Bass, amazingly smart. Mark Hart. Mark, you know, is not that well known. He's one of the smartest people I've ever known. The guy's bandwidth to understand all sorts of things in the world is extraordinary. Macro greats, people like Scott Besson, incredible people to sit down with. So many of those kind of guys I'm always interested in. I like people who have a very broad range of stuff

Starting point is 00:49:53 because that's where you learn. You're not going to find about Iran by looking at your Bloomberg screen or reading a newsletter. You're going to find about Iran by meeting somebody interesting. One of the great guys I know is an Italian head of a family office. I won't ever mention his name. He's worth multiple billions. And I met him on a bus in Iran.

Starting point is 00:50:12 And I mean, he owns like 40% of the second largest insurance company. in Iran because he could buy it for a P of two with a dividend deal of 18%. And he was using the cash flows by sugar companies and copper companies in Iran. I mean, the guy was genius. He was one of the first foreign investors in Iran. He was one of the first foreign investors in Russia back in the early 90s. Those kind of guys, they're the trailblazers. The guy's so crazy smart and how he views the world, how he structures trades.

Starting point is 00:50:39 He almost never pays for a trade. You know, you buy the insurance company. All it does is generate cash, both in company level and in dividend. level. So he was getting paid to be in Iran. Yeah, the P.E. of two, it's hard to lose. Yeah, exactly right. Oh my. Raoul, what a pleasure chatting with you. We are just so honored to have you here on the show. I know anybody that's listening to this can have an immediate opinion of how smart and brilliant and how you're able to capture all this information from these people that you're talking to. It's just fabulous. This is what I'm really excited to tell our audience about, though.

Starting point is 00:51:13 So you guys have a new experiment. It might not be the best word, but you guys are getting into the podcast space. And I want to give you an opportunity to tell our audience about your new podcast. Thank you. I mean, look, we love what you do. There's very few really great podcasts out there. You guys do a stunningly good job.

Starting point is 00:51:32 But we thought we wanted to do something different with podcasting. We want to tell stories. And I think you could probably tell them a natural storyteller. But Real Vision is all about stories, whether it's visual, written, or now in audio form. There's stories within financial markets that engage people and get them to learn along the route. So it's called Adventures in Finance. I think it's already the number three finance podcast on iTunes in America.

Starting point is 00:51:56 It's been a phenomenal success. We've got about seven episodes downloaded. Grant, the co-founder of Real Vision, is one of the hosts. And he's a very funny, engaging and smart guy with Aaron Chan as well. So they're doing that. And we cover great topics from the Indian demonetization story. And we presented it in the two ways. We've got one guy to say, this is the end of the world, because people are expropriating

Starting point is 00:52:18 the assets from the poor, and then the other side of the story, too. We've got some great stories about satellite imagery and what's going on with big data. We've got stories about German real estate. And today, I think the latest podcast is about Brexit and the triggering of Article 50 and how that works. So find us on iTunes or anywhere else. Adventures in Finance, the Real Vision podcast, and just sit down and enjoy some great storytelling. Fantastic. I know lots and lots of people from our audience are going to be checking this out because if you want to learn, and I really liked when Raoul was in the interview when he talked about how when you have these various perspectives and these various vantage points of all around the world, you have such a clear picture of how things operate and how they're interconnected.

Starting point is 00:53:05 and that's what his podcast is really doing with some of these interviews. I can attest Grant Williams. Brilliant. At interviews, he asked such intelligent questions. There's a lot of value to be captured. So we're really excited to hear about this, Raoul. Great. And also, you know, people can find me.

Starting point is 00:53:23 I'm very active on Twitter. So it's at Raoul, R-A-O-U-L-G-M-I. So find me on Twitter, say hello and get involved in the conversation. Thank you, Raoul. Thank you so much for your time. Great. Thanks a lot. All right, guys. That was all that Preston and I had for this week's episode of The Investors podcast. We'll see each other again next week.

We Study Billionaires - The Investor’s Podcast Network - TIP132: Raoul Pal - Macro Investing & New Opportunities (Business Podcast)

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