2 April 2017

In this episode, Preston and Stig interview one of the biggest names in macro finance, Raoul Pal.  Raoul is the founder and CEO of Real Vision TV and he is well known for interviewing some of the wealthiest investors in the world.  In this interview, Preston and Stig talk to Raoul about some of the biggest ideas and investment opportunities at the beginning of 2017.

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  • Why Tesla might be one of the worst stock picks right now.
  • Why the real investors are bears on oil, while speculators are bulls.
  • Why the dollar will strengthen, and why a recession might even accelerate it.
  • Why the Iranian economy might be one of the best places to put your money.
  • Why India’s ban on cash is a smart move for a developing economy.


Disclaimer: The transcript that follows has been generated using artificial intelligence. We strive to be as accurate as possible, but minor errors and slightly off timestamps may be present due to platform differences.

Preston Pysh  0:00  

We study billionaires and this is episode 131 of The Investor’s Podcast.

Intro  0:06  

Broadcasting from Bel Air, Maryland, this is The Investor’s 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 hosts, Preston Pysh and Stig Brodersen!

Preston Pysh  0:29  

Hey, how’s everybody doing out there? My name is Preston Pysh. I’m your host for The Investor’s Podcast. And as usual, I’m accompanied by my co-host Stig Brodersen out in Seoul, South Korea. 

Today, we bring you one of our favorite guests. We’ve got Raoul Pal with us today. For anybody who doesn’t know who Raoul is, he is the founder and CEO of Real Vision TV. For any of our regular listeners, you guys know what 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. 

So Raoul is 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 his second time on the show. 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.

Raoul Pal  1:27  

Not at all. It was good to be here.

Preston Pysh  1:29  

So let’s start off by talking about just your general opinions on where the market has gone. As far as I’m concerned, it 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 of the market is overvalued. It’s a 25 on the Shiller PE now, it’s close to a 30 on the Shiller PE. 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 8 hours and then it does total reversal and it goes screaming higher. Like, talk us through how you’re seeing things today. 

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? 

Raoul Pal  2:12  

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%. This is now the third longest expansion in all economic history. So the odds of having a recession or a bear 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 a recession, since 1910. That recession comes within 12 to 15 months. So the probabilities are extremely high. You will probably get bored of me saying this, because your economy is moving very slow time horizons, but that’s the outcome. 

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So normally in the bear 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 economic data starts turning lower. But do I want to participate when the downside starts to come? Yes, because the risk reward is better. 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. I use the ISM survey as a guide to the business cycle. 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. So even if it does fall, it’d be temporary. 

Now, sometimes the lead by the ISM and then the market falls, which is quite nice because it helps you out. It gives you an advance notice, if not they start to fall together. So I have a feeling until we start seeing more economic growth, we won’t see the market come off. However, in terms of economic growth, that is starting to play out. You know, if you look at retail, you look at car sales, you look at a whole number of indicators, they are bad. Industrial production, all the hard data is bad. It’s the survey data is good. So there’s this kind of animal spirits that’s not following through to economic growth. 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?


Stig Brodersen  4:36  

So could you please elaborate and explain what it means when it hits the 50 mark?

Raoul Pal  4:42  

Yeah, so actually, it’s kind of scale. There’s that probability event. So 50, you start to say, “Okay, there is the risk that the market is going to fall. The credit contraction 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.

Preston Pysh  5:10  

Okay, so just so people have a reference point, where’s the ISM index today as far as the numerical value?

Raoul Pal  5:16  

Yes, 57.7, which is one of the more elevated levels that it’s been at, since the recovery started back in 2010. So it’s quite elevated, it would have to fall a long way. And that usually takes several months before it crossed 50, even if it turned down from here. 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.

Preston Pysh  5:40  

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 US 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?

Raoul Pal  6:08  

Okay, so the two longest other business cycles that we had one was in the 60s, the kind of gogo years of the 60s, that was about nine years. And then we had one over the 90s, which is 10 years. So 1991 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.

Preston Pysh  6:41  

Now, one of the things I know you guys do a lot of global macro kind of stuff. 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 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 in that narrative and more specifically, how that’s starting to change today, with the amount of credit that’s being induced over in China?

Raoul Pal  7:15  

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 this empty buildings all over China, based on borrowings. There’s the household sector, there’s the corporate sector, there’s the state owned business sector, and the government sector, all borrowing money at record amounts of trying to 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 the system up after a while. It kind of collapses under its own weight. So they keep trying to turn the spigot on, turn them off, turn it on, turn it off, to try create something. 

Meanwhile, we’re seeing capital flight, people leaving China with as much money as they can, because they fear a collapse. 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 $1 nominated asset. So if the yuan then falls, they kind of protected themselves. It’s distorting some other commodity markets as well.

Preston Pysh  8:27  

Well, I think you’re also seeing it in the high end real estate market globally, 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? They pile it in into like, really high and expensive real estate around the globe, and now you’re starting to see that market fall apart.

Raoul Pal  8:46  

Absolutely right. And it’s capital flight is everywhere from China. 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 to defend that 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.

Preston Pysh  9:16  

Yeah, that’s a fantastic point for people to understand what’s actually happening over there.

Raoul Pal  9:21  

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 you have gotten in the past three months? 

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 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 PEs of five and a half. I mean, five and a half PE dividend yield of 14%. You have a massively educated population. So that’s the kind of off the wall one. 

Preston Pysh  10:20  

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 gonna go put my money in Iran,” because the narrative here in the US is that, you know, Iran is bad or whatever you want to spin it to. So what would be your argument for that person that would be concerned with taking their money here, domestically, because so many people only invest in the country that they live.

Raoul Pal  10:47  

That’s right. So firstly, you need to look at again, go back to risk reward. If it’s a PE of five and a half, it’s basically price 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. Go there, go and find out these things, or 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 where the *inaudible, 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 are 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. Go there, see how safe it is. It’s an incredibly safe, really friendly place. 

Now, a geopolitical narrative is not necessarily the true narrative. I think people are learning more and more about how this isn’t, you know, having been there and seen it, the risk reward to me looks good. Maybe I’m wrong. How much money am I gonna lose? Okay, let’s say I lose 50%. But what’s the upside? I’d say it’s probably about 1,000%. If you look at long structural bull markets, so 50% with 10 times upside, I mean, that’s a huge risk reward.

Preston Pysh  12:17  

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?

Raoul Pal  12:29  

Interest rates have fallen from about 22% to single digits. Inflation is leaving around rapidly. And as more infrastructure comes into run, 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 leaves the Trump administration to kind of just finally ratify it, but they want to rattle some sabers 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 in the equity market, we’re definitely getting paid 14% just in the dividend. So the currency can move 14% your flat, and you still get the five and a half PE for that.

Preston Pysh  13:26  

Now, it seemed like you had another investing idea that you want to talk about.

Raoul Pal  13:30  

So I’m starting with the most esoteric, which is Iran, and then gonna move south of Iran and go to India. India, which is much more accessible to many of us, you know, there are ETFs in India, etc. India did something that most people didn’t understand, which is a band cash. And the narrative again, I love narratives because they usually roll. 

The narrative was they’re expropriating assets. This is bad, they’re screwing the poor. This is a really bad thing, right? That’s the lazy Western analysis. I’m half Indian, I spent a long time in India. What it 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. The petty corruption is in front of everything. You try and get somebody to buy you a railway ticket, you have to give them a tip, or some sort of bribe, anything involves a bribe. It was such a friction for 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 of build infrastructure was getting no taxation income. And it was a problematic society overall, and it was never going to change. 

So overnight, getting rid of the large banknotes and forcing people into the banking system. overnight recapitalized the banks. Genius. Didn’t cost the government a penny. Suddenly, the government can tax more efficiently and therefore they can start building 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 to some other guy 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. People quite like Modi. the Prime Minister of India. Somewhat populous, but he’s doing stuff and he’s very pro-business. 

But then I started looking into the story. And I came across something called India Stack. And what was fascinating, it’s the biggest macro story I’ve ever come across in terms of technology and nobody knows about it. I was on Twitter recently. 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. Part of a whole system that allows him to it’s called *arda, a biometric system of recording your personal information. So it’s basically like your identity card, but it’s based on biometrics. It’s either retina scans or it’s fingerprints. 

Okay, some countries have done that before, not that interested. 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 India Stack.” 

So the cash payment system means that now I can transfer money to you, I don’t need to go through a middleman because I confirm it by my fingerprint, and it gets frictionless to you. There’s no middleman, nobody’s gonna 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 *arda number. You don’t even need a phone. So that is extraordinary right? This is leaked from 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 scan. 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, and all the other things. Farmers find it incredibly difficult to borrow money because they have no birth certificate to back 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 fingerprints, you can go into a bank. If 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 to do to open a bank account, to open a mutual fund account, to get life insurance, to borrow money, all of the things that make a functioning society that India didn’t have have all arrived in one go. And it’s an open API that allows anybody to develop software around it as well. So you get 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 basically got rid of cash from society.

Preston Pysh  18:09  

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?

Raoul Pal  18:21  

Yeah, I mean, I just want… One more bit of biometrics that comes to that. The other thing is your medical records are there. So you can get run over by car or remote part of India, be taken to a medical clinic, take your fingerprints, all your medical records are there. And that’s astonishing, right? America has tried to do something like that last 20 years and got nowhere. 

But going back on to the Bitcoin story. That’s the first thing I thought I thought, “Wow, this actually removes a lot of the need for Bitcoin.” 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 one of the great things Bitcoin was going to have. 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. Yeah, 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 the currency to, 

Preston Pysh  19:20  

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. 

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.

Raoul Pal  20:29  

Yeah, that’s right. But 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. 

You know, 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. With that would be incredibly powerful. I don’t know whether India is having that conversation. But I know many, many central banks are.

Preston Pysh  20:55  

I completely agree with you. I know the People’s Bank of China, they’re talking about doing some type of blockchain technology in order to lock in, and this is the important part for people that maybe don’t understand too much about Bitcoin. Tthe 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.

Raoul Pal  21:19  

That’s right. As we talked about earlier about China and the debt, you can’t allow the government to expand debt. 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 that mobile phone sector in India becomes exponentially growing. It’s already pretty well saturated by mobile phones. What was genius about this whole *arda system and India Stack, it works on 2G phone lines, astonishing. Somebody really thought through what India is about, the 2G, that’s what we need to do. So it works in 2G. But all of the API’s, all the applications are going to come out to this will work on smartphones. So the smartphones are currently 28% of the Indian market, it’s going to go to 100%, the Indian market. The manufacturers are really building *arda rated 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 system, clearly everyone’s now being pushed into the banking system, when they’re 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 incredibly positive India. So that’s my next story for you. There are ETFs you could try in India. It’s a buy and hold and you can hold this I think for the next five or 10 years. Yes, when the world gets a recession, India is going to get hit but the story of India’s demographics, plus it’s  amazing technological revolution, make it a really good opportunity.

Preston Pysh  22:50  

So just in our show notes, so people know will have the lowest cost ETF for I believe it’s pro shares by BlackRock that has the lowest cost 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.

Raoul Pal  23:10  

I’ve got one more for you.

Preston Pysh  23:11  

Okay, well, let’s talk it. Let’s hear.

Raoul Pal  23:13  

So I’ve given you the more esoteric one, the slightly less exotic one. 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 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. 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 bad because the fall in oil, but that all stopped in April, May, June. All of this reverses, because remember, the markets bounced, and everything changed. So all of that year on year effect is going to evaporate. 

So mathematically speaking, CPI should go for wherever it 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 gonna turn around and people aren’t ready for this, because they forgot 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 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 in the history of the bond market is right now. So the probability of bond yields falling as opposed to rising is increasing dramatically. And it may not be today right here, right now, there’s one of these things you scale in over the next month, let’s say. But you scale into that, I think you could hold the trade for 18 months and yields will halve.

Preston Pysh  25:17  

So that’s an interesting comment, because we were talking to Bill Miller. Everyone knows who Bill Miller is, the former CIO at Legg Mason. I read an article where Ray Dalio basically came out and said, “I think we hit the bottom in the bond market,” and you’re saying the opposite here. 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 gonna let you explain it because you’re gonna do a much better job than I could explain your reasoning why. Go ahead and explain this.

Raoul Pal  25:47  

You go back and look at that chart bond yields, 10 year bond yields, and you look at…. It gets these periodic spasms where everyone goes, “inflation, inflation, growth, growth, growth.” What happens is every time it does that, bond yields then fold because it’s been slightly disinflationary. And then we get spasm. It never breaks the level of the previous spasm. 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. 

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. So bond yields tend to create ageing populations tend to create lower bond yields, which is why Japan has had such low bond yields. 

Now, also with the debt situation that tends to be deflationary in the end of that whole demographic wave, when all of these guys are out of the system. Can bond yields explode? Of course they can. Yeah, I do expect that, but not yet. Everyone’s way too early. 

Preston Pysh  27:06  

I agree with you. 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.

Raoul Pal  27:17  

So I know these guys, right? 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 and I can be wrong. Maybe we’re not as smart as those guys. But what I do know is I’ve seen every one of these guys, from Stan Druckenmiller to Paul Tudor Jones. I’ve seen them all screw up in *JGBs because they thought Japanese bond yields can’t go lower.

Preston Pysh  27:44  

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 Gundlach, I mean, you guys have interviewed him and he’s saying things like, 3% or 5% within a year or something.

Raoul Pal  28:00  

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 this trendline, it could be a massive spasm in yield.” 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 Gundlach, it’s clever. But he’s, you know, he’s a good manager. He knows what he’s doing.

Preston Pysh  28:24  

Well, he understands the marketing and the finance side. 

Raoul Pal  28:26  


All right. So Raoul, I 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, 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 have been reported, because the inflation number is simply calculated with this called logical math. Would you mention this that the search in oil, so we’ve seen it go from $30 to $50 a barrel, that has drastically increased what we might call the real inflation. So what the Fed might be doing is that they’re trying to lie in the higher rate now so they will have more ammunition if the economy should tank again. Is that correct?

Absolutely. Right. So that leads me perfectly into because I’m feeling incredibly generous this morning. I’m gonna give you the fourth trade idea.

Preston Pysh  29:28  

Bring it. Let’s hear it.

Raoul Pal  29:30  

Speculative, long positioning in the oil 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 of looking at it, you know, 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. It 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 $13. Jeff Gundlach style I said it’s going to $13 and it did, which is quite lucky. It doesn’t usually happen that way. So I look at the situation now, positions are much longer, their speculative positions. I then started speaking to the oil traders, the actual physical oil traders for the oil companies, they will record short. They’re like no, there’s so much all around in storage everywhere. 

The Chinese have got more resource than anybody knows. And we think the breakeven 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 62 years ago. So what it means is they think that the price of oil should fall. 

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 geyser 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, it has to do with Saudi Arabia in Saudi Aramco. Aramco is the Saudi state oil company. They want to privatize 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’ve been more sold.

Look Saudi is changing as an economy. You know, John Burbank, the great hedge fund manager went through a depth in Real Vision about how Saudi Arabia is changing. But let’s say a country like Saudi, it changes slower than we would like to expect in financial markets. We always want everything tomorrow. So Saudi Aramco, I think it’s about raising money. The government of Saudi Arabia issued a bond which is very rare for them because they were the 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 expenditures too high, so they raise some money. They then say we’re gonna sell a stake of the largest company Evernote, $2 trillion, $1 trillion. 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 a tapped on the shoulder and said, “We’d rather you didn’t show up with currency, we’ve got something else for you.” And I thought, oh, 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, what’s his deal speaks to a lot of hedge funds as well. So there’s the OPEC cuts. But then Saudi is gonna 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 1$0 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, you get a much higher price for the bond or cheaper borrowing for the bond. I have a feeling that it’s to do with that but either way, forget all that. You know, I don’t know the full narrative. None of us ever will. 

What I know is the oil price have been trading sideways for a long time. All of the guys who actually produce oil or record short, speculators along, they’re the weak hands because that’s a margin. The other guys add a cash flow in 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 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 bullish, you know, but the point being is that all prices 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.

Preston Pysh  33:52  

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, 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 gonna kind of stay where it’s at, it’s gonna 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?

Raoul Pal  34:33  

So I don’t agree that the dollar weakens on the back of the Fed in action. I think there’s a gap where the Feds 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. Interest rate differentials 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 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 recession, it’s difficult. So what happens is the dollar becomes the safe haven currency and that we saw that back in 2007-2008, the dollar strengthened. So I am not of the opinion that the dollar weakens over time. However, I am of the opinion that 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.

Stig Brodersen  35:47  

Interesting, very interesting investment opportunity. Okay, so, so much for the four best investment opportunities that you’ve heard of recently. What’s the worst investment idea heard about in the last quarter

Raoul Pal  35:59  


Preston Pysh  36:03  

Hey, I’m a big Elon Musk fan, but I have to agree with you. The prices over there are crazy. 

Raoul Pal  36:07  

It’s not so much that 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, so what’s what happens, right? 

“So, three weeks ago, we’re going to fly two guys next year around the moon. Oh, and we’re gonna launch another car. But I haven’t got the other ones in production yet really. They can’t get enough production. So now the men are going round the moon. Oh, by the way, I need to borrow another billion dollars.”

This happens repeatedly. 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 don’t confuse that with a well run business.

Preston Pysh  37:11  

Well, the nice thing for him is he can do it through equity deals, you know, he can raise money through equity, which is a great way to do because if he’s having to deal with through the debt markets. Tthat’s when it starts becoming…

Raoul Pal  37:21  

Well, how can you? It’s got no cash flow. You have to pay back debts. 

Preston Pysh  37:26  

Great point. Fantastic point. Though, 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 fan.

Raoul Pal  37:37  

Me too. I love the cars. I love what he’s doing. You know, I’m 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, All I’m saying is just be careful in that stock.

Preston Pysh  37:56  

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 in the middle of March, March 17, when we’re recording this, what would that be?

Raoul Pal  38:10  

I’m about to write this in global macro investments, the biggest subject of all. And it’s a thing that people have left to one side, and if ignored. We talked about the retirement of baby boomers, the largest number of people in history, hitting 70. They all have to start to retire. They’ve already extended their retirement. 

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 they’ve spent their life savings. They’ll probably own some fixed income, we kind of understand that. 

What nobody quite understands, is that, as we’ve talked about earlier in this program, with your 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 a recession. We talked about recessions, and they have a tendency to have the price of the stock market. You have a risk of having the wealth of the entire baby boom generation at retirement 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 for years without recession, you’re going to catch it even more of these boomers at their retirement date because we’re just going up that curve now. So for the next 10 years, every recession has a enormous impact on the retirement savings of the largest group of people in the world.

Preston Pysh  39:44  

I think the other point, to kind of piggyback off that idea is when the recession 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 in 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 in the 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.

Raoul Pal  40:12  

I totally agree. Now, fixed income will just protect your capital from destruction 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 effects. I’m never really interested in the superficial effect. It is 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 have 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 understood to this day. I think that you know, that is a situation that slows growth significantly for extended periods. 

Also, they’re highly unlikely to rebuy 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 check my money in the stock market to retire.” So I think it’s a big shift and I think it’s really important.

Stig Brodersen  41:22  

Fantastic comment. Alright, so this is my last question. Who do you follow in the financial markets? 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?”

Raoul Pal  41:36  

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 have been in Real Vision. Mike green, stunningly smart guy, John Burbank, amazingly smart. Kyle Bass makes me smart. Mark Hart. Mark, you know, he’s 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 Bessent. Incredible people to sit down with. S

o many of those kind of guys I’ve always interested in. I like people who has a very broad range of stuff, 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, or I won’t mention his name. he is worth multiple billions and I met him on a bus in Iran. And I mean, he owns like 40% of the second largest insurance company in Iran, because he could buy it for a PE of two, with a dividend yield of 18%. And he was using the cash flow to buy 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 is so crazy smart and how he views the world how he structures trades. 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 the dividend level. So he was getting paid to been around.

Preston Pysh  43:15  

Yeah, the PE of 2, it’s hard to lose.

Raoul Pal  43:18  

Yeah, exactly. Right.

Preston Pysh  43:21  

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 in 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. So you guys have a new experiment, which 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.

Raoul Pal  43:52  

Thank you. We love what you do. There’s very few really great podcasts out there. You guys do a stunningly good job, but we thought we wanted to do something different with podcasts. And we’re going to tell stories. I think you could probably tell I’m a natural storyteller. But Real Vision is all about stories, you know, 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. 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 of 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 got one guy to say this is the end of the world because people are expropriating the assets from the poor. Rhen 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. It’s Adventures in Finance, Real Vision podcast. Enjoy some great storytelling.

Preston Pysh  45:09  

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, in these various vantage points of all around the world, you have such a clear picture of how things operate, and how they’re interconnected. And that’s what his podcast is really doing with some of these interviews.  I can attest Grant Williams, brilliant. At interviews, he asks such intelligent questions, there’s a lot of value to be captured. So we’re really excited to hear about this row.

Raoul Pal  45:48  

Great. And also, you know, people can find me. I’m very active on Twitter. So it’s at @raoulgmi. And find me on Twitter, say hello and get involved in the conversation.

Stig Brodersen  45:59  

Thank you, Raoul. Thank you so much for your time.

Raoul Pal  46:01  

Great. Thanks a lot.

Stig Brodersen  46:03  

All right, guys. That was all that Preston and I had for this week’s episode of The Investor’s Podcast. We will see each other again next week.


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