The Winter of Discontent >> Hi, I'm Raoul Pal, CEO and co-founder of Real Vision. Also the founder and CEO of Global Macro Investor my research business. I'm talking to you on behalf Global Macro Investor today because that's where I express my personal opinions. As you know, Real Vision doesn't have an opinion. I think it's a Sunday evening and yet again, I'm forced to make a video by what's going on in the world. I think it's really important for people to understand. Currently, everybody's losing their minds in social media about the states of the US election and lockdowns in Europe. But what's really important in times like this, is to really understand what are going to affect us. Because we can complain all day that we like or don't like a current measure by the government, but it doesn't help us in our investing. If you remember going back to the early rise of COVID back in February, March, I warned people then because the narrative at the time was, "Well, China is to blame," as opposed to "Oh, what's the impact?" Sooner or later the market caught up with it. What is really evident now and something I've been flagging for a long time in Global Macro Investor and also in Real Vision Pro, is that the rise in COVID in Europe is meaningful and significant. It is was caused by opening the borders after the harsh lockdowns, opening the borders and then letting people go on holiday. I understand why they did it, but at the time I thought this is probably going to create a problem and it has. COVID has exploded. Most countries in Europe, as you can see from this chart, and now massively are all-time highs. Now, obviously, I understand, so we don't need to put it in the comments section that this is to do with the increased number of tests. I also understand that the death rate is currently lower and the hospitalization rate is currently lower. That's taken for granted. It's not the most relevant thing here and I'll come on to explain why. But they are rising all measures and the rise of the virus looks like it's going to be hugely significant. Because measures are only just coming into place as the R naught is well above one. It's going to take time for this to be fixed and it's going to roll from country to country across Europe. Now, what I'm interested in and something I've talked a lot about is the reaction function of governments in central banks. That's all that matters. Your opinion doesn't matter whatsoever. What actually matters is what do people do? What is obvious is when you get a large rise in the virus, the governments having had lockdowns before, have to really follow some lockdown strategy. Therefore, we're seeing it now in the UK, we're seeing it in France, and we're seeing it across all of Europe. I think we'll see almost every country go into some partial or full lockdown. They had no choice because of what they've done before. Whether you like it or not, again, is irrelevance. But, let's assume they didn't lockdown. What happens then? Well, that's the Swedish example. Well, what happened was the same thing, which is the economy cratered. Why? It's because the older population, the Baby boomers and even the Gen Xers, don't want to get ill. Of course not. It's human behavior. Self-preservation is the core of what humans do. Therefore, they stop going out and they stop spending. Again, I always use my mother who's living in Spain. She lives in Spain. She stopped going out again. She doesn't see anybody. She stays at home, minds her own business, doesn't basically spend money. Whether the government impose a lockdown in Spain which she hasn't got yet or doesn't, the impact is still the same. The economy slows massively. We can see it in a real-time economic data across Europe is all the economies are slowing. Now, lockdowns, they will guarantee that the economy slows and again people will take evasive action. They are less likely to spend as much as they did from home the first time around. The novelty of the situation, the stuff that they did in the houses, the stuff they bought on Amazon, is less likely to be repeated. Because people start thinking, "Hey maybe this virus is not going away. Maybe it's here for an extended period." Then people change their behavior paths, very typical in a recession. As you know, I've been talking about the liquidation phase, the hope phase, and insolvency phase. This rising COVID is without question the highest risk factor that can cause the insolvency phase. You see everybody in Europe now is straddled by reduced cashflows and high debt burdens or high costs. You can be a small restaurant and you can't pay the rent because you're not getting enough revenue. That happens everywhere across the system. There is nowhere worse than the European banking sector. The European banks, if I use the chart with including UK and Swiss banks as well, the Essex seven P. You can see that we are at all time lows. If we break here, I think we go into the next phase that I've been talking about for a long time which is, I think in the end, the European banking system has to get nationalized. I think that's part of what the central bank did to currency movies about to free the banking system because it's not able to transfer or encourage money transfer mechanism. That's one of the reasons velocity of money is so low. Also in Europe, before we move on to the US, what do we know? What we know the UK already is talking about transfer payments and furloughs. How do they pay for this? Well, hearing comes the big problem. The issue is here, is that they don't have the money, so it has to get transferred to the central bank balance sheet. The Bank of England is likely to go to negative rates. The market is already pricing that. Again, whether you like it or not, whether you think it's right, doesn't matter. The markets will price it and the central bank will follow. As the central bank follows, well we're also going to see the government starting to fiscally stimulate and the central bank doing more quantitative easing. In the EU, we've also got the problem that inflation is negative. It's one thing that drives these CB, it's inflation. They don't have the growth and inflation mandates that the Fed has. Theirs is just inflation. That means they are now highly incentivized to print an extraordinary amounts of money to try and protect the banking system which it wont work, to try and bolster the government balance sheets so they could undertake fiscal stimulus. That we'll see more rate pressure. Burden deals fell significantly and had been flagging this problem for a while. Bonnie Neil's are heading back towards those March, April lows. Also the other thing that I note is that speculators had bought the European narrative and haven't changed their view yet. They're extremely long the Euro, and it's starting to break down. Probably by the time the markets open tonight, the GMI crash pattern in the euro would have broken. We should expect the Euro to stop falling back down towards 110 and maybe lower. As you know, I've been long dollars all the way through this, even it's painful move up. Because I believe the longest secular backdrop is a stronger dollar. Slowing world growth means that it's harder to pay your dollar debts and that drives the dollar higher. I can't express that more times. Also it's a relative world. I said before the Fed had done more and the Europeans were to come and now the Europeans are to come. We will see this rolling stimulus. That rolling stimulus, so the Europeans, the Fed, the BOJ, the PBOC. That's the thing that pushes Bitcoin and gold higher. I'll come on to those in a bit. That's the overall devaluation affair currency. The European story is very interesting to me because this is a textbook lead indicator for what's happening in the US. Everybody is so distracted by the virus, no lockdowns, lockdowns. All of this stuff without realizing that the virus is exploding in the US. Again, we have the same thing, testing is increasing, it's not as deadly, the hospitalization rate is still rising but it's lower, the death rate is still rising, but it's lower. Again, that doesn't matter. What matters is what happens to the economy, and two things are going on. We're seeing it already in states with high COVID, their sum has slowed down. As we can see that in the high frequency data, that's not good for the economy. It builds on my case, for the insolvency. The longer revenues remain suppressed and below zero, the worse it is for the indebted economy. The US has this other issue which is the election. Let me talk you through that because it's really important to me. Again, we need to join the dots, the narrative, I think is 100 percent wrong. The narrative is blue wave reflation. That has led to the largest short position in 30-year bonds in history. It's four standard deviations away from its mean. It is the largest short position in the dollar, and it is the largest long position in commodities. Everybody is on one side of the boat. Like the blue wave stimulus, we're going to see inflation and we're going to see growth. Let's question that narrative for a second. Let's assume that Biden sweeps everything full blue wave, so what happens? Zero. Nothing happens until he would get in in January or February, and then they have to try and rush through a stimulus package. Remember, the stimulus package of 2-3 trillion is the package that was due in September. This is not a new package, that's papering over the cracks of the past. That doesn't move things forward and doesn't help from this situation. I think that alone leaves this extended period of no stimulus, the Central Bank not doing enough, and the rise of the virus. Now, the incumbent party is not motivated to control the virus, so you can't do anything about it. Therefore, we have to wait and see how bad the virus gets. In a blue wave Biden administration, we're going to have record virus cases by the time they come in. There will be a slowdown in the economy, and awaiting for the fiscal stimulus, which is still backward looking. I think there's a real problem here, a real problem for cash flows, a real problem for the economy. So that is the base case. I think the reflation trade is dead wrong. Europe is telling you global growth is not going to go up, it's going to go down. That generally means the dollar goes higher. If the dollar goes higher then the reflation base of commodities and bonds is wrong. Now also the bond market bet about this fiscal stimulus, I think is wrong. I think it's wrong on a number of levels, but essentially it's wrong because I don't believe that new supply of bonds affects the price of bonds because of the Central Bank intervention, and also because the pension system is dramatically underweight and various people dramatically underweight bonds at a structural level, particularly with the baby boomers. They're all retiring and essentially they need to own bonds. I'm still bullish on bonds and we'll come a little bit to the end on the trades and ideas that can come out of this. Let's look at Biden winning the house and not getting the Senate. Well then it's going to be a **** fight. Stimulus is going to be a nightmare, we're not going to get anywhere, and it's going to be slow. Everyone's going to drag their heels, and that just plays into the growth issue. It's exactly the same outcome as the one I've just come across, but the stimulus going forward is less. That's really bad. Bond yields in that should collapse from here, the dollar should scream higher. The other one is, what happens if Trump wins? Another poll just said that, "Maybe trust the polls." Fine, that's your view. We'll find out in a week's time. Let's assume that Trump wins. Well, he's not going to do anything about the virus because he campaigned on it. Well, Biden, if we go back, campaigned on the virus and some restrictive measures. I think he'll do it anyway or the states will, but that's another slow down for Biden. But Trump won't do anything, but then the states will have to because the virus will increase in incredible rate. Again, I'm not interested in what your view on whether they should do or not. These are the most likely outcomes, the probabilities. The probability is he does nothing, the probability is the baby boomers stop going out, and the probability is the economy slows down and the states will be forced to do something themselves. So I only see a bunch of negatives considering that the market has priced in record reflationary bias. That's really interesting to me when the position's all the other way, what does it mean for the equity market? Well, that one I don't really know, because the equity market has offset some of the monetary stimulus. Could it continue in this weird bifurcated way where indebted companies fall and others rise? I don't know. But my guess is, if this gets any worse, the millennials who have been investing their 401k's in passive flows will stop investing, and that will leave no buyers in the market. We already know that the value, an active management side of the equation is offered only being sold every day by retiring baby boomers. It has been offset by the millennials that drove up the indices, something Mike Greene has talked a lot about. There is evidence that that flow is starting to change, in which case the speculative activity also diminishes. I've seen it before numerous times, if Central Bank activity uses the stock market until it doesn't, I think the risks are very much tilted to the downside. It's not a bet I'm prepared to take. I am sure the ibex in Spain, I am short some of the most indebted companies in the United States General Electric AT& T, and also short for banks. Because banks are the epicenter of debt, and if cash flows are impaired for an extended period, then they are going to get worse. I think we've got a really troublesome situation here that's all stacking up for this winter of discontent that I've talked about. I don't really see a positive out there. But it could be, again, I have no authority on the future. I'm just trying to give you an understanding that we're at extremely risky point. There is no vaccine coming. Not yet, not till the spring, not till the summer. We're going to be living with this virus for an extended period of time. We don't know how big this next wave is going to be. We've also just seen the results out of the UK about the loss of antibodies. Twenty five percent of people lose all of their antibodies in three months. So we don't really know a lot of things, and we have to be honest with ourselves about it. We have to be honest with ourselves that the fear of this, the human behavioral aspect, the psychology and the psychology of governments massively tilts the probability of an economic slowdown in our favor. So how do we look at these trains? How do we look at protecting ourselves here? Now, I've talked at length about Bitcoin. Bitcoin currently had the second highest monthly close in all history, just below 14,000. I've shown many of the charts where we've only got 14,000 and the all time high of 20,000 as the final resistance points. Now it doesn't mean the Bitcoin won't correct. If we get a liquidation event of which we might get some, but I think a solvency ban is a longer term downtrend, but you might get pockets of liquidation. Bitcoin could get hit, but that's the time to buy. Nobody has got enough Bitcoin, even me and I have kept buying it. Bitcoin is one. You may not like Bitcoin, maybe you don't understand the technology, maybe you don't agree with it. That's all fine. You've got gold. Gold has been selling off over this whole period, and gold may get hit a bit but a lot of the speculative positioning, the shorter term guys, are out of gold. Sure, we might see some liquidation in gold, but we're getting very much in the buy zone for gold. So you should be starting the grand accumulating gold for the next run higher. Because all of the outcomes in Europe and all of the outcomes in the US, a more fiscal stimulus, lots more and a lot more monetary stimulus. This is a perfect, perfect storm for gold and Bitcoin. Again, I prefer Bitcoin overall, I still have some gold. I prefer it because Bitcoin hasn't got to the full price discovery phase as a currency, so it's still a call option on the technology of the future. I think that plus its reserve asset value makes it an extraordinarily unique and attractive asset. But I'm also getting very interested in dollars and bonds again. Now for both GMI and Macron Service have started buying bonds. I think now is the time to start thinking. Now, I'm usually a little bit early, so just remember that. But I'd be buying calls on the TLT and also on eurodollar futures December 2021, because I think rates are going negative in the US. The US is the only major country that doesn't have negative rates and it will get there. Well, Australia doesn't, New Zealand does, but they're all going this way. There is no way to deal with this, and the only reaction function is lower and lower rates. So we're just trading the rate function. Again, whether you agree with or not, is not my concern. What I'm trying to do is make money here and protect myself. I think your dollars will have to price in something like negative 50 basis points. I think that is a very attractive bet in the call options and stuff that you can trade. Again, I'm not going to give the full details here, the rotation Pro subscribers have been given full ideas about that. But I don't want to get people into trades that they don't really understand and don't know how to manage. But Eurodollar futures, I'll be looking at those call options on Eurodollar futures. TLT is pretty easy way you can own TLT, everybody hates it, everybody sold it. I think we're very close to the turning point and I think that TLT goes through 170 and probably ends up at 200. Now if you're more sophisticated, then obviously 30 year bonds, I think are really attractive here, 10 year bonds too, in fact anywhere on the bond curve. I think nothing is priced into that and everything is the other way round. So you get all the optionality using call options makes it even better because let's say I'm an idiot and I'm dead wrong, that's okay. You're already going to lose a little bit. But if I'm right, you can make several times your money and I love those asymmetric bets. Gold and Bitcoin are both asymmetric bets, with Bitcoin having the highest asymmetry of all. The dollar. God, the amount of conversations about why everybody hates the dollar. A lot of people come at that with their behavioral bias. Their long gold or their long commodities, or their long Bitcoin, and they think therefore the dollar must collapse. I don't agree with that. I never have. As you know, or many of you won't realize but I've been long dollars and gold for a significant period of time and Bitcoin. I've said they will all go up together because it's the debt issue that's driving it all, so that's the reality that the dollar goes up in debt issues. That dollar has a dollar smile, which means when things are bad, it goes up, when things are really good in the US, it goes up and anywhere in the middle it does badly. We're still in the really bad scenario and we're about to see the Euro stocks sharply going lower and some other currencies too. We're starting to see the Brazilian real started falling sharply against the dollar. The Turkish lira hit all-time highs. Things are creaking in the currency markets and nobody's listening because they also desperately want their dollars, and their gold and Bitcoin positions to be validated by the dollar, forget the validation. It will still work. Yes, there will be some volatility. Yes, the correlations between equities and Bitcoin and gold and all of these are there but they are passing and fading fast. Because the super narrative here is the massive stimulus that's going to come and the debasement of the occurrences. So they will decouple from everything. But to get to that debasement of the occurrences, everybody ends up buying the most attractive one, which is the dollar, and I know people don't understand this and it looks like the dollar has been rallying for extended period. But look at the long-term charts. It just doesn't feel that way. Maybe I'm wrong, maybe you don't like the dollar. That's okay, too. Just look at the other parts of the trade. I like the dollar trade. I think the dollar is the big daddy in all of this. If the dollar starts to move higher, that's going to supercharge all the other trades I'm looking at, because that's a deflationary wave and the only answer in deflation is printing more money and that forces gold and Bitcoin to rise, again as a kind of confused narrative around this, but doesn't deflation mean that gold goes lower? No, because of the knock-on effects and the reaction function. Again, a lot of people look at financial markets as a snapshot of today. But the only way to win in this game, particularly the game of global macro, is to look one or two steps ahead and assign some probabilities, and you have to be relatively honest with yourselves about this probabilities, not due to your own biases. Because of the assets you own or like, or the particular philosophy you have. Maybe you're an Austrian economist or maybe you think that central banks are the worst thing ever, don't bring your biases to the party. Bringing your analysis. Try and get the probabilities right. Understand that we don't get from here to dollar collapse in one step. That's not how it works, and a lot of people jump too fast. You generally have to go through a number of points first and my guess is that the dollar is going to follow what it did in the 2000 peak. So I show you these two charts, they're a little bit confusing. You can find them on Twitter as well. It's like a 12-13 point chart pattern that is playing out almost exactly the same as the last dollar bull market. At this point here, just when everybody is really short, the dollar, the dollar started taking off. That was the end of the hope phase in 2001 when the economy started rolling over again, and that's exactly where we are now. So I think that this chart is very likely for me to play out. I also have a chart of the same period using bonds, and I've shown this before. This has been a chart that I've used for about a year and a half now and it's kept me exactly right in the bond trade. So here's 10-year yields, now versus 2001. They mirror perfectly. Then we've got this weird de-linkage that there's no de-linkage. The time is exactly right and the difference is because of the movement, because bond yields are basically stuck at zero. Where the larger correction in percentage points, it's the scaling that's issue here. If I show you the scaled version, which is the next chart, you can see that they mirror pretty well. That chart, which got me the whole of the bond bull run last year, tells us that bonds are going to rally from here, whether it's today, next week, I don't know. We'll probably see a false move on the election. But this is the opportunity to start getting into bonds as we start pricing in a weaker economy for longer. So that 2001-2002 Hope phase moving into despair that is writ large in bonds and the dollars. If you look at the chart of Bitcoin versus it's previous having, It's also writ large, the Bitcoin is likely to go up. So against all of this, we've got this remarkable set of opportunities in a very scary world. There is also an even worse world where the election result is contested. That's a reasonable probability, too. So what happens in that scenario, the worst case scenario? Bond yields collapse, the dollar screams higher and at that screams higher because fear, Bitcoin and gold go up. So I think almost everything is tilted this way. Again, I could be wrong. But I think there's ways of playing this that means I won't be wrong. Or if I am, it won't be painful. Anyway, I thought this was really important. I think people are getting overwhelmed by the amount of information and argument and discussion, debate and opinions going on and it's not opinions we need, it's analysis we need. It's not about our own philosophies on how things should be. It is what is, and what will be. That's what we have to do here. So look, good luck. It's a really, I think, dangerous setup in markets. I think it's a dangerous setup in the economy. It's so dangerous in terms of civil unrest as well. Just because you can see it in Europe, you see it in the US. People are scared, unhappy, angry, and disenfranchised. So we just have to move forwards, but realize that this is a very precarious point in time. So be careful out there. Good luck, and just be careful, wear a mask and socially distance, even if you don't believe in it all, it just helps, thanks. [MUSIC] >> Hey, there. Since you got to the end, I'm guessing you liked the video and that's probably because we don't just turn on a camera and film. We work really hard on getting the narrative flow just right, and that's why many finance companies are actually now hiring Real Vision to make videos for them. One of our recent client videos just hit 100,000 organic views on YouTube and there were no kittens in sight. 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