Raoul Pal (02:40):
I then decided I’d learn something and I wanted to make some more mistakes. So I then went and joined one of my clients, which was the largest hedge fund firm in Europe called GLG Partners. First, I started writing a book and then having made plenty of mistakes, I then figured out what I needed to be doing and then launched and ran the global macro hedge fund for them for several years. Then decided that the hedge fund business was not the business that I wanted to be in any longer because it was now becoming an asset-gathering business as opposed to a performance business.

Raoul Pal (03:07):
I decided to opt-out of the rat race, moved to the Mediterranean Coast of Spain, and lived in the middle of a national park, five minutes from the beach. I did that for 10 years, writing Global Macro Investor, which is my flagship research product. I started it just to keep my hand in the game, piece and bills, keep a hand in the game for the world’s best-known hedge fund managers because they’re all people I grew up with. And I had probably more experience in the hedge fund space than any other person writing at the time, any research.

Raoul Pal (03:35):
Most people either came out of investment banks as research people, or they just came out of the newsletter world. So I was one of the rare people who had been running money, knew that whole business from start to finish. I still write Global Macro Investor to this day, so that’s 16 years later. It’s still one of the preeminent macro research services in the world and still read by the world’s most famous hedge fund managers, sovereign wealth funds, family offices, stuff like that.

Raoul Pal (03:59):
And then somewhere on that crazy journey in Spain, having watched the world almost collapsed twice, 2008, and then 2012 in Europe, when we almost lost all the European banks and Europe itself, I was at the epicenter of all of that and knew exactly what was going on. But friends of my parents and friends of friends didn’t. They would come up to me and said, “Why don’t we know?” And I’m like, “This sits really uncomfortably with me. Why do some people have all information and others have none?”

Raoul Pal (04:23):
So that got me on the journey of thinking and wanting to do something about it. And somewhere down the line, three of the co-founders lived in the same village in Spain, same town in Spain, over a few drinks, started coming up with the idea. The fourth co-founder, Graham Williams, happened to be in Spain. I didn’t know him at all. He had made a couple of videos and we thought, “You know what? Video is going to be the answer.” This is very early still, in [the] video world. So that’s what we started.

Raoul Pal (04:45):
I don’t think you guys would exist without Real Vision. I don’t think any of the podcasts would exist without Real Vision. Half the things, Real Vision was the start of it all, of democratizing the very best financial information. Still, to this day, we have the most incredible roster of guests and people that nobody else can get, that just helps people understand what the hell is going on. Helps them understand the complex world of finance, business, and the global economy and how it all interacts.

Raoul Pal (05:10):
We’ve moved also into crypto because that’s been part of this journey too. And crypto and macro are now the same thing. Just means we’ve all got a lot to learn. So all the crypto people have got to learn a lot about macro. All the macro people have got to learn a lot about crypto. So it’s a fun time as well. That’s basically the story. I live in the Cayman Islands. I moved to the Cayman Islands back in 2014. We started Real Vision here. I live between two islands, a small island of 140 people called Little Cayman, and the big island, Grand Cayman, of about 60,000 people where I am today in my office.

Robert Leonard (05:41):
I want to preface this whole conversation by saying that I don’t know a ton about everything that we’re going to talk about. I’m familiar with it all. I’ve studied it a bit. I spent a lot of time on Real Vision, but we’re going to talk about macro, crypto, NFTs, a couple [of] other just general topics. I’m not an expert on these by any means. We’re all learning, right?

Raoul Pal (06:02):
We’re all learning. The point is none of us are experts, and anybody who claims they are lying. It’s [that] things are moving so fast. In NFT, what happens today, we have no idea what that’s going to look like in five years, let alone three years. So everyone should have the confidence in knowing that nobody knows anything.

Robert Leonard (06:21):
Yeah, absolutely. How do you view the macro landscape currently? I’ve heard in some other interviews that you’ve mentioned there are three phases of a crisis, liquidation, hope, and insolvency. Explain what occurs with each phase.

Raoul Pal (06:35):
Usually what happens is there’s a realization that economic growth is about to disappear or has disappeared. That’s when everyone goes, “Oh my God, sell everything. I don’t know what’s the…” That’s the liquidation phase. We saw that last March. This time, last year, we were middle of the liquidation phase. Just panic sell, get out. I need to assess what’s going on.

Raoul Pal (06:54):
Then you normally have something called the hope phase. The hope phase is, you know what? It’s going to be all right. Now, normally that hope phase usually goes on for three, six months, and then fades because the reality sets in. This is part credit crisis because businesses couldn’t generate money, people couldn’t pay their debts. Normally speaking, the insolvencies, the bankruptcies rise. And then you get the next wave as all the unemployment comes, etc.

Raoul Pal (07:19):
But this one actually played out differently because the central banks and governments were so aggressive. We’ve never seen anything like this in all history, that it stopped the insolvencies because they just gave people money, said, “Don’t go busting me. Please don’t go bust. Here’s some money.” It was for businesses, you can borrow money, you don’t have to pay us back. Individuals, I don’t care what happens. Here’s 1,500 bucks or whatever the number is.

Raoul Pal (07:41):
So that has either stopped the insolvency phase, but you’ve transferred those debts to the government and the central bank, or it’s delayed it and we’ve got more to come, as people realize that retail jobs, for example, are probably never coming back. So it has changed compared to a normal crisis. That the important thing, when we get to that mix between macro and crypto. We’ve learned now that interest rates, which were the usual mechanism to stimulate the economy.

Raoul Pal (08:07):
I cut interest rates, you might borrow some more money or mortgage payments go down. So you’ve got some more money to spend in a restaurant. That’s the basic mechanism. Or you can spend more on your credit card. But interest rates were zero anyway, basically. So then the only answer was this monetary printing that we see, quantitative easing. If you didn’t get it, it’s not like somebody says, “Oh, look, we just put $10,000 in their bank account. Where do I get it from?” It’s a weird world, but there is a mechanism by which that finds its way into asset prices.

Raoul Pal (08:34):
I’ll explain a little bit about that in a sec, and things to go up in price, things get more expensive. The idea is it also allows people who need money by big corporations to get the money that they need. So that also, the flip side of what sounds like an amazing piece of magic, has another negative side, is that piece of magic is actually the creation of more money. Let’s say you were really thirsty and I gave you a bottle of water. You pay me pretty much anything for it.

Raoul Pal (09:05):
Let’s say you’re not ordinarily thirsty. Maybe two small bottles of water, you’ll replete. Now, if I give you a thousand bottles of water, you don’t really want them anymore. So you won’t pay for any of that water because it’s too much water. It’s the same with all assets. If there’s too much of it, it becomes free in value to you. We’ve seen that, for example, in music. Music has become essentially free.

Raoul Pal (09:28):
The same is true of money. What happens is if you create more of it, it’s not like we all get richer. If we all get richer at the same time, we’re all going to pay more for that restaurant meal, because we will have more money. So what happens is the value of money falls. That is where the macro of this huge recession based around the most indebted economy the world has ever seen, which is the US, in this global indebted world, with an aging population, and a bunch of millennials who have gone into the labor force with massive debts, which is very difficult for them.

Raoul Pal (10:05):
Then we’ve got the central banks devaluing the value of money. That’s what led people to think, “This doesn’t feel right. People seem to be getting poor and not richer and all this money’s around. Why?” When I looked at this and I went back in history and looked at wages adjusted for inflation over the last 40 years, the story of millennials and baby boomers is all written this, basically wages have kept place with [an] average price of stuff, because technology has been deflationary. Food goes up and down. Gas goes up and down.

Raoul Pal (10:39):
But what’s really happened is the value of assets has gone up because of this printing of money. If you’re a 32-year-old baby boomer in about 1980, you start saving and investing. Same as millennials are doing right now. So they’ve suddenly become financialized as you guys have become financialized. So they become financialized. The equity market is trading at a price-earnings of seven, the cheapest in history. The bond market is giving you yields of 18%, the most ever. And real estate prices have been ravaged by inflation and they cost nothing.

Raoul Pal (11:13):
So a baby boomer starting his journey in his financial life or her financial life could do nothing but make money because you were given very attractive things. Cut to a year and a half ago, there’s a bunch of millennials thinking, “I need to start saving for my 401k. I’ve got debts to pay off. I’m almost there. I’m still not there yet. I can’t afford a property because they’re at all-time highs. I can’t afford real estate and I can’t afford the equity market because it’s all expensive.”

Raoul Pal (11:43):
That was the issue that came from printing of money, is these assets have gone up so much that your share for your income was less than the previous generation and the generation before that. So you’re kind of screwed. And so, suddenly crypto comes along, and here’s something that goes from being a small market, but its opportunity is maybe another 200X from here. So you’ve now suddenly been given something that gives you the opportunity to generate some meaningful wealth.

Raoul Pal (12:12):
But the wage issue has been a massive problem over time, and wages aren’t going up because there’s a bunch of baby boomers, 76 million of them in the workforce in the US, and you’ve just thrown 85 million millennials all in the same workplace. Do you remember the maths about money? If you have too much of something, it’s worth nothing? Guess what? You’re all worth nothing, which is why everyone’s finding it so hard to earn a living and make enough money because there are too many people in the workforce. That will change over time as the baby boomers come out of the workforce. But it’s not great because technology is eating the rest of your jobs.

Robert Leonard (12:49):
Do you think this is why we’re seeing so many different assets come about? I mean, first, it was crypto, then we have NFTs. And then, recently, I’ve been even seeing individual investors be able to finance receivables for companies. I don’t necessarily think that’s a bad thing, but there are just all these alternative assets that are out there and I’m just like, “It’s great that it’s being democratized.” But is that why we’re seeing this? There are so many, like, crazy things that you never would have thought.

Raoul Pal (13:12):
They actually came from creating solutions to the problems of the existing system. We’ve got this money that keeps devaluing. So let’s create money that can’t be devalued. Okay. Genius. So then all that’s happening is we’ve created this new world. At first, it was small. Just think of it like discovering the Americas and Europe is the old financial system and the Americas has been discovered.

Raoul Pal (13:34):
The first people go over there, go, “Yeah, it’s fine. Yeah. We’ve got a [inaudible 00:13:38]. but a bunch of the natives who are here, it’s pretty hard. We need to figure out a way around [it]. We could probably grow stuff. It looks all right. And then, load off the boatload come and it starts expanding. It’s the same with crypto. People have this crazy idea that you could make something from this. Over time, people are migrating across because they’re starting to understand is, how the hell do I offset this? I’m never going to make money.

Raoul Pal (13:57):
So then, once you’ve created this world, well guess what? Somebody builds New York City and that’s Bitcoin. And then somebody builds Ethereum, and you can suddenly now program these small contracts and people start populating that world. Then they start populating other cities, and it’s Philly, and then it’s LA. They’re just other crypto projects. NFTS, they’re just all ways of fixing. So why NFTs? NFTs do a number of different things, but really it’s to cut the middleman out. So you can sell things directly to an audience that you know.

Raoul Pal (14:24):
Now, there are some middlemen because you sell artwork on exchanges still. I was speaking to a friend of mine, RAC. He’s a Grammy award-winning musician. He’s measuring NFTs in music. What is your fascination? He’s like, “The music industry takes 80% of our economics,” and that’s the middlemen do. But that’s even Google and Facebook. Let’s say he’s got a big community of people who love his music, then to sell them something, he basically has to use Google and Facebook to drive that.

Raoul Pal (14:51):
There’s advertising, sell them albums and stuff, and everybody’s taking a cut. Now he’s able to sell directly to his community and sell them scarce assets, to creating scarcity in a digital world because it’s like having an autograph. His autograph would have been on a CD or an album before, and now it’s his digital autograph on an NFT. So there can be 50,000 of those. They can’t be with every album. But the album that’s signed by the artist, it’s always worth more.

Raoul Pal (15:17):
People overcomplicate all of this, but it’s just authenticity, scarcity. Scarcity in our world has value because there’s too much of other things.

Robert Leonard (15:26):
Before we get into a full conversation about NFTs and crypto, I want to go back to… You mentioned quantitative easing and money printing. I think a lot of millennials hear these two terms all the time. It’s always in the financial news, but they never know exactly what it is. Literally, is there a printer printing cash? Is it on a screen? For those who don’t know, explain what financial experts generally mean when they broadly say that the government is printing money.

Raoul Pal (15:52):
Here’s the rub. The central bank will tell you they’re not printing money. And there’s a bunch of banks that’ll tell you they’re not printing money, that they’re doing something different. But what they actually do is they don’t turn up one morning and just go, “Oh, let’s add another billion dollars today.” What they say is we’re going to buy these bonds, these government bonds that you have, and we’re going to give you the cash for those, and then say, “Okay, where’s that cash coming from? We’re just going to put that on the computer.” That’s the billion dollars.

Raoul Pal (16:22):
So you’re taking government debt out of the system, which is those bonds, and giving people money instead. So in effect, the federal reserve is calling randomly all these asset management firms or the banks and saying, “Hey, listen, we want to buy a billion dollars of bonds today. What have you got to sell?” So then people buy them. It pushes the price of bonds up or yields down. People sell them to the Fed and the Fed holds them on their balance sheet. And they give them money instead that they’ve just created.

Raoul Pal (16:49):
So then you are the fund manager and you’ve just been given your billion dollars. What do you do? Do you go and buy some more stocks? Do you go and buy something else? What do you buy with it? Leave it. They’re there to invest. So that’s the basic mechanism by which this all happens. Banks may sell the bonds that they’ve got in their books, and then they will use that money to maybe lend to hedge funds, to take more risks, or to corporations or whatever it may be.

Raoul Pal (17:13):
That’s what monetary printing is. But in the end, it’s a creation of money and a way of distributing it, which is buying these bonds.

Robert Leonard (17:20):
How does that trickle down to an individual investor or an individual person?

Raoul Pal (17:25):
Doesn’t. Why do you think there’s a rich-poor divide? It doesn’t trickle down to you and I. Doesn’t make all credit cards cheap. But yes, our mortgages have come down in price because bond yields have come lower because they’d bought bonds. But really doesn’t make it easier for us to borrow. It makes it really easy to be a huge corporation. You can borrow money at zero all day in infinite size. But for people, it doesn’t.

Raoul Pal (17:47):
But if you go back to the firm manager that sold his bonds, he’s now pushing up the price of equities or real estate or whatever. And us as individuals, I mean, we can buy less of them because the price has gone up. It’s like when Bitcoin was at 5,000 bucks, you might be able to buy one. When it’s at 50,000 bucks, you can only buy a 10th of one.

Robert Leonard (18:07):
On Twitter, you recently talked about the death of the macro environment. Can you explain to us what you meant by that?

Raoul Pal (18:13):
Yes. Macro investing is really all about the macroeconomic state of the world and how it affects asset prices. When the economy is growing, certain assets will do well. When certain economies are growing, maybe ones that consume a lot of commodities, other parts will do well. When the environment rolls over and recession comes, then assets react accordingly. So macro is all about the interrelationship between economies and asset prices. It’s great because it’s super broad.

Raoul Pal (18:43):
It’s everything from credits or emerging markets, to bonds, to equities, to currencies, to all of this. It’s a phenomenal world. The most macro instrument in the world is bonds and foreign exchange. Then comes foreign exchange, credit, commodities. And equities are lost. The stock market is a lot about human hope and optimism and emotion, “I think this company is going to do well.”

Raoul Pal (19:12):
When you go to the opposite end of the spectrum, bonds are basically GDP growth plus inflation, and credit is GDP growth, the growth of the company, plus inflation, plus [the] risk of not paying you back. So bonds are so pure. It’s just, is the economy going up or down in the next six months or so to one year, and is inflation going up or down? That’s all that decision you have to make. Super macro.

Raoul Pal (19:36):
Now we just happened to be in the biggest ever trend in all history, which was the falling of interest rates from that 18%, when those boomers were 30 years old, to now where it went to zero everywhere in the world. That trend was a macro trend based on demographics and also debts and a bunch of things. But really it was a demographic trend of those boomers moving through life. That generated almost all the returns for everybody.

Raoul Pal (20:02):
It also pushed the stock market higher. It created the debt economy, everything, because of this megatrend. But now we’ve pretty much hit zero. Yes, it could go to negative 50 basis points. I know that’s a weird world, but that’s the world that is in Europe, and Switzerland, and the UK, and Australia, and New Zealand. We’ve had negative rates. That’s okay. But that’s not much further than here. 10-year bonds, if I look right now, are 1.7%. They got down to about 50 basis points this time last year.

Raoul Pal (20:30):
Okay. They can’t go much lower. So that big trend lower in rates is not much of a trend anymore. Can they go higher? Maybe inflation’s coming back, which I don’t think it can. But let’s say it does. Well, the fed have made it clear, as [did] the Bank of Japan, and the Australian Central Bank. And the European Central Bank, the rates can’t be allowed to go up because it breaks the whole system. So they stop rates going up and rates can’t fall much further.

Raoul Pal (20:55):
So there we go. The biggest money-generating engine in the history of investment has just stopped. There’s no money to be made. And then, the next part is, okay, well, what about the FX market, the foreign exchange market, the big daddy of all, the biggest market? Trades four trillion a day. Well, the problem is that the dollar is 85% of every single transaction on earth. So we actually live in a dollar world. Everything’s a sideshow. The dollar is more dominant than Bitcoin is and the crypto world.

Raoul Pal (21:27):
Bitcoin is like 64% dominance. The dollar is 88. I mean, it’s the king. Everything matters. Now, the problem is if the dollar goes up too much, it destroys emerging markets and global growth. But everybody needs dollars, everyone’s borrowed dollars. So it keeps going up, which is difficult. But if it goes down, it also wrecks economies. The central banks have made it clear that they actually don’t want the dollar to move anywhere.

Raoul Pal (21:54):
In fact, if we could just keep all foreign exchange roughly equal to the euro, the pound, the yen, the RMB, the dollar, maybe the Aussie, the big world currencies, Swiss franc, Don’t let them move too much. Well, that’s basically what they’re saying in rates. You make an extraordinary amount of money if the dollar goes up or down, because if the dollar’s going down, emerging markets go up. You can borrow money in dollars. You can invest in an emerging market.

Raoul Pal (22:20):
But if it’s going nowhere, which I think is what the central banks want. And the people at the BIS, the Bank of International Settlements, the central bank’s central bank, and the International Monetary Fund have all said they don’t want to move in. If that’s the case, then we’ve taken up the two biggest macro drivers on earth, and we’re left with all the non-macro stuff, which is equities, credits, commodities, which is less macro.

Raoul Pal (22:44):
Can be driven by supply and demand in the case of commodities, and in equities it’s driven by fear and greed. So the death of macro is that it’s suddenly the macro opportunities to apply macroeconomic analysis [which] are going down the toilet.

Robert Leonard (22:59):
What does this mean for millennial investors or just any investor that’s getting started today? Is it something that they should even worry themselves with, or should they just focus on getting the basics of investing down?

Raoul Pal (23:11):
The question is, what do you want to invest in? I think the world is set up for the past and not the future. Why are you investing? You’re investing to create a future opportunity for yourself. So you’re investing your current time to create quality time in the future really. So there are two things I always say. Firstly, invest in your quality time now. Quality of life is the best investment you can make, then make the investment in yourself.

Raoul Pal (23:37):
I would say, okay, where are the most likely opportunities lie? Well, we’ve talked about crypto. It has a very high chance of being a very big market for a very long period of time. So you’re unlikely to make more money in that than you will have all-time record high valuation in the equity market. But there’s another thing happening. I’ve only just started writing about this, so this is quite new for people, is we’re also about to enter a technology age of which we’ve never… The world and humanity have never gone through before.

Raoul Pal (24:07):
We’re about to combine crypto, a whole new financial system, a whole new exchange of value system, with artificial intelligence, robotics. We’re adding in genome sciences. We’ve seen this with how fast the vaccine came. Money’s going to flood into that. We’re seeing it with everything from autonomous driving, to distributed edge computing, where everybody can have enormous computing power, where the cloud is going.

Raoul Pal (24:34):
We’ve got a bunch of technologies, so disruptive, all hitting at the same time, that we’re likely to see an extraordinary period of continued growth. We think about technology stocks as being these darlings of the 2010s like Google and Facebook and stuff. But the reality is that Elon Musk, and I know people hate Tesla… I really don’t care because there are three things that are really interesting.

Raoul Pal (25:01):
One is, forget the cars. If he solves autonomous driving and has the programming to do it, he’s solved one of the largest problems the world has. We could [inaudible 00:25:10] all of that labor, all of that cost of taxi drivers, truck drivers, delivery drivers, everything out. What’s Tesla worth in that fortune? Ignore how much they sell cars for, all of these things. These are much bigger things. Could it all go wrong? Of course, it could.

Raoul Pal (25:26):
But he’s also solved another thing. Everyone’s like, “Why the hell does he want to go into space? Yeah, he wants to colonize Mars.” No, what he’s just done is strung up a bunch of satellites everywhere and is now creating WiFi with faster broadband speeds than most people get outside of cities. He’s going to do that globally, and that’s extraordinary, that Starlink. It’s an amazing thing. So you’re about to connect people that have never been connected before, across the world. He’s doing that.

Raoul Pal (25:51):
And the other issue is, okay, we’ve got too many people and too much traffic. The other thing is he’s digging tunnels. Everyone thinks he’s crazy, but actually, he’s going to do fine from it. But there’s a bunch of these kinds of things that are going on. 5G is huge. We’re going to connect everybody with gigantic amounts of data and enable things like the internet of things and distributed computing. And then everybody’s moving to an entirely new financial system, an exchange of value system, based on cryptocurrencies.

Raoul Pal (26:21):
Then we’re building things like the metaverse where we can actually earn money in games or digital life. It’s not even necessarily a game, digital worlds. This is all happening right now. It’s not like if we had had this conversation when we launched Real Vision, it’s like these things have been researched and there’s a bit of VC money. No, no, these are all happening. Starlink is rolling out its stuff. We are seeing the autonomous driving getting closer, and Google’s very close with Waymo now. All of this stuff is happening right now.

Raoul Pal (26:50):
I mean, crypto is happening right now. So it is actually a very exciting opportunity. Finally, you might be able to offset the destruction of the value of money by the growth of technology, in which I would include crypto, which has sound money at its core as well. So it’s actually a positive message, and to keep away from this value versus growth investing, because I actually think now, if I divide the S and P by the Fed balance sheet to try and look at how to value equities, they basically haven’t gone anywhere since the Fed started quantitative easing.

Raoul Pal (27:22):
If I look at things like General Electric and old companies like that, they’re just basically zombie companies. Once you adjust for the amount of free money to complicate things, it’s actually a fall in the value of the denominator, which is fiat money. But when you look at the NASDAQ, it’s actually outperformed. There’s a real secular trend in technology going on that’s above and beyond that, of which they’re devaluing money.

Raoul Pal (27:46):
If you look at crypto versus the fed balance sheet, basically in a straight lineup, because it’s actually creating wealth. So only technology and crypto are creating wealth. Everything else is offsetting the fall in the value of currency, including real estate. It’s an amazing, fascinating world. This is all new, and I’ve only started talking about it. So people will be scratching their heads about these concepts for a while. But follow my Twitter feed. I’ll start trying to get people across the line in what I’m talking about.

Robert Leonard (28:14):
Why is this time different? Because I feel like people were saying similar things like when the internet came around, in the 2000.

Raoul Pal (28:22):
And it did. It changed everything.

Robert Leonard (28:25):
But then everything crashed, right?

Raoul Pal (28:27):
Did it, or did it go through like the crypto winter? Did the bad investment. In the end, if you’d have held Amazon, you’d be really outrageously, disgustingly, wealthy. That’s noise. It was an S curve. We’re actually in an exponential adoption trend. All of these things I’m talking about are all going to be newly adopted by seven and a half billion people. People can’t get their heads around this. It’s not like selling any fancy phone. The mobile phone itself was an adoption curve.

Raoul Pal (28:57):
But in those adoption curves, you have something called an S curve, which is, there are points in the life cycle of a business where it’s not clear it’s going to survive or it needs to pivot to grow fast again. And Amazon saw that. In fact, it fell 90% in 2000. And then it had several drops of 40 or 50%, maybe even 60% as we went through the S curves of Amazon, themselves, all the market, trying to establish, was this going to make it or not? That’s normal.

Raoul Pal (29:25):
Bitcoin has gone through the same. Ethereum’s gone through the same. The whole space will go through the same. And some won’t survive. But I thought about this because the narrative is a dot.com bubble. The actual reality is that was the largest game changer I’ve ever seen probably since the 1950s that I’ve heard of. We created a consumer society. The internet was probably bigger than that. It was massive. So I think we should look back upon that point in history differently and just say, “Yeah, it was an early S curve, but what came out of it changed the world.”

Robert Leonard (29:58):
I know there are a lot of investors that have been clinging to value investing principles over the last decade, as they’ve continued to underperform. Do you think traditional value investing, the way Warren Buffet historically has done it, is dead?

Raoul Pal (30:10):
I think it’s not dead. But will outperform? I don’t know because the world is moving and people are going to hate me for saying this because it’s such the antithesis of the cynical, “This time is not different,” but it’s been proven actually for the last 21 years, or longer, maybe 25 years, that Metcalfe’s law and adoption curves, network effects are not valued in the same way. And value investors cannot value these things. They say, “Yeah, you’re all idiots. You’ll see in the end.” Well, we’re 25 years in. I’m sorry that somebody has to realize that that’s a false storm.

Raoul Pal (30:48):
Now, does value investing mean you lower your risk and build a nice portfolio and it does well over time? Absolutely. Will it outperform network adoption stocked? Zero chance ever, except in a down cycle. When I talk about network effects, even though the price rise goes exponential over time, when you break it down, they can have some really big ups and downs.

Raoul Pal (31:06):
So I’m not talking about a smooth curve, “It’s all going to be easy. We’ll make money forever.” No. It’s like crypto. It comes with a downside. So value investing is not going away. It will never outperform those companies. It will create robust high-quality portfolios that perform over time. And that’s okay. If you’ve got lower risk, do that.

Robert Leonard (31:29):
I think that volatility piece that you mentioned is the part that a lot of people miss, because they look at Amazon and they’ll zoom out on the chart, and they’ll just see an exponential curve up. But if you actually drill in a little bit, you see those huge drawdowns that you just talked about. And yeah, if you held that whole period, sure, you’ll get amazing, amazing results. But you have to stomach that.

Raoul Pal (31:46):
Yeah. And probably the only people who held that are probably… Well, not even index funds, because it wasn’t big enough to be in the early index funds.

Robert Leonard (31:54):
They didn’t have access to it, right, to sell?

Raoul Pal (31:57):
That’s right. So the only person is Jeff Bezos and his ex-wife. They’re probably the only people who ran the entire bull market.

Robert Leonard (32:05):
Yeah. It’s incredible. I think about myself. I have been telling myself for a long time, “I’m still young.” But when I first got into investing, I was a value investor, and this whole run-up, I keep telling myself, “This time’s no different. This time’s no different. This time’s no different. Don’t cave.” But I keep talking to more people and I’m starting to think I might need to evolve a little bit as an investor and start to think about these ideas.

Raoul Pal (32:25):
I was the same as you, a miserable macro cynic who thought the world was according to how I thought about it. This recession really made me realize that I was wrong. The understanding of crypto, and adoption effects, and network effects, and technology made me realize that I was wrong. Again, nothing wrong with value investing. It’ll do absolutely fine. It’s not the way to take risk. And again, that’s not for everybody.

Robert Leonard (32:51):
Is that why your portfolio has gone from a small percentage of crypto to a pretty large position?

Raoul Pal (32:57):
Entirely. I was an equity cynic. I didn’t like the equity markets. Too high valuation. I would do some trading stuff, macro opportunities. But I’ve never been that buy-and-hold guy. I just couldn’t get comfortable with this whole world. And then crypto started and I’ve been in this space since 2013. But I still haven’t figured it out. But I’ve really figured it out over the last 18 months and what it meant and how big the opportunity was.

Raoul Pal (33:23):
I realized that to create true wealth, you have to understand the theme really well and have very high conviction and concentrate all of your risk, which is the opposite of what we’re told. But if you go back and look at Jeff Bezos, why is he so rich? Because he concentrated all his wealth in one bet. Now, you have to do that intelligently. There’s a bunch of caveats, a lot of caveats. But that’s what I’m trying to tell people. It depends on what it is you want to achieve.

Raoul Pal (33:51):
For some people who are not really investors, to give some money to Growth Guns, give some money to a value guy, that’s all fine. But people who really want to get into it themselves, there are different opportunities. Some people can get rich owning value. Some people can get rich being short sellers in a bull market. There’s no shortage of ways of getting rich, but the easiest way is to try and follow it. And if you’ve got exponential trends behind your back, everybody can be the dumb money and we’ll make money. And that’s great.

Robert Leonard (34:20):
I mean, even Buffet says diversification is only for people who don’t know what they’re doing. When you talk to your fellow macro experts, what do they all think about crypto and Bitcoin specifically?

Raoul Pal (34:31):
They all moved across to macro. So I was probably the second, probably, the second in the space to move across. Dan Morehead was first from Pantera. Then I started writing about it in 2013 and investing in it. Not many of the macro guys did. But then after that, one by one, they all went. I mean, they just left macro. I keep bumping into old, famous macro people that I grew up with all entirely in crypto, crypto, and technology.

Raoul Pal (35:00):
They said, “Forget it. Everything else is a waste of time. Don’t generate the types of returns, risk-adjusted or otherwise.” So they’re all there and they’re all coming. I don’t know a single macro guy who’s not involved.

Robert Leonard (35:13):
Do you think there’s a pool of investors, not necessarily your sophisticated investors, but just general investors, that are trying to chase the next Bitcoin? I think that’s my biggest concern really, is people saw how much Bitcoin went up and how some people got so rich off it that they’re diving into all these other ideas. I’m not saying NFTs won’t work or all these other things that are coming up. But do you think are just almost blindly going into those just because they’re hoping it’s the next Bitcoin?

Raoul Pal (35:39):
Yes, but that’s normal. I argue with the Bitcoin world over this all the time. “Bitcoin world is Bitcoin only,” and I’m like, “No, all investment has a risk curve. Where you are on your risk curve is up to you. It’s how much risk he wants to take.” Now, it’s the same in emerging markets or equity markets. You might start with the S and P, but you want to eventually end up owning Indian equities or whatever it may be, because they’re riskier. They might go up more, but they might go down more.

Raoul Pal (36:05):
So risk at certain [inaudible 00:36:07] returns, you’re hoping will be better. That’s what I do. That’s normal. And that’s why many of these alternative tokens do very well because capital flows into them in the risk cycle. That’s really normal. Same happens in junk bonds and credit and everything else. Because a bunch of people lost money in 2017, they’re trying to tell people not to take risks in these things because they lost money.

Raoul Pal (36:32):
No, what we should be doing is educating people on what risks they’re taking, why they’re taking them. They should not be putting all of their money into a token because they think it goes up, hoping that it goes up more than Bitcoin. They need to be educated, the type of risk that they’re taking. And that it’s okay to take that risk. But maybe have some Bitcoin and maybe some Ethereum, and then you can add some of that risk at the edges.

Raoul Pal (36:54):
Dinner with a mate of mine last night, from Little Cayman, the island of 140 people, and he’s like, “You know, I’ve been watching all of this stuff and I’ve been watching Real Vision crypto and blah, blah, blah. I love this space.” I said, “What do you own?” He said, “I own Cardano and XRP. I said, “Why? What do you know about them?” Well, I feel like, start with a core allocation to Bitcoin, move into Ethereum, spread some other money into other projects that could be interesting.

Raoul Pal (37:20):
They’re very early, some will go to zero, some will go nowhere, some will go up a lot. None of us know at this point we don’t know what the adoption curve looks like. But that’s what the space needs to be saying and not shutting people down and saying, “Well, I lost money in 2017. I’m trying to protect you.” That’s nonsense. That’s just tribalism to make Bitcoin go up more than others. Doesn’t make sense. It’s a big world out there.

Robert Leonard (37:44):
I can’t count how many times I’ve been told by people, not to pressure them, but I’ll push back on them and ask them, or I’ll challenge them and say, “Why are you investing in that?” And they’ll just say, “Oh, I feel like,” or, “I feel like this.” And I’m like, “Ah, that’s not a thesis.”

Raoul Pal (37:57):
No. How I addressed it was with some intellectual honesty. I pretty much understand Bitcoin as well as anybody, not the technology aspects, but the macro opportunity, what it’s doing, where it’s going, the players involved, all of that. Ethereum, I’m pretty comfortable with as well. But I also think that the entire digital assets space is going to be absolutely gigantic. And so, I wanted exposure. So if my thesis is that network effects are the largest drivers of these things, so I’m going to go into Twitter and ask people, “Okay, show me the best coin and why?”

Raoul Pal (38:29):
I got six and a half thousand replies, but what I did was just skim through, okay, what are most people involved in? What do they care about? Where is the reasonable analysis coming from? I got a basket of 10, equally weighted. Only 10% of my portfolio. It’s gone up 100% in a month and a half. But it’s 10% on my portfolio. And I just took an equal-weighted basket and said, “I don’t know. I’m not smart enough.” But I figured that the space will go up because the risk curve goes up when the bull market goes.

Raoul Pal (38:56):
Within that, I’m going to learn a lot about this space, about which one is which, what’s working, what projects are really getting network effects. And that’s okay to do, because let’s say Raoul’s a total idiot. 10 out of 10 go to zero, lose 10%. Last time I checked, Ethereum was up 10% today. I don’t care. That’s how you take risk.

Robert Leonard (39:16):
Why do so many people think only Bitcoin is the answer? Is it because it was the first?

Raoul Pal (39:21):
Ask Preston. Because they conflate it… This is my opinion. Again, I’m not trying to upset people. They’re conflating money with value. Bitcoin is a monetary system, essentially. It’s not at the money stage yet, but it’s a store of value. It is a collateral asset. It’s all of these things that I talked about. And there’s a potential that it could become a form of money once the volatility goes down and adoption is massive. That’s the Bitcoin maximalist argument. I have no problem with that.

Raoul Pal (39:50):
But money is not the only transfer of value. Other things have value. If things didn’t have value, then nobody would buy art, or classic cars, or equities, or anything. They would just hold the dollar because that’s money. It’s not. Other things have value and they will outperform the value of Bitcoin, and they will underperform the value of Bitcoin, and that’s just how the world works. We talked about investments, underperforming, outperforming all through this interview. That is what will happen.

Raoul Pal (40:16):
This is the internet of value that’s being built. It’s the exchange of ownership, storage, creation, earning of value. That’s miles bigger than people are really thinking. They’re saying, “Can all be built on Bitcoin?” Sure. Will it be? No chance? Will Bitcoin be money? Possibly. Will it be an important part of our financial future? Almost definitely. So there’s probabilities embedded in this.

Raoul Pal (40:48):
For people to say, “You’ve got zero chance. You’re an idiot because you’re buying Ethereum,” or whatever it is, is more wrong than the person buying it because they’re ascribing zero chance, a zero probability. When you push them, they say, “Well, those things, they all trend towards zero.” I’ve gone through, written a whole rebuttal about the John Pfeffer article. And the fact that utility tokens don’t have value and only Bitcoin has value, it’s not true. Provable, the network effects is how you value these things.

Raoul Pal (41:17):
Bitcoin is only valued on network effects. It’s not valued by any other mechanism. Same with Ethereum. It’s identical in how it’s valued, and so are all of these. That’s a shock to people because they didn’t want to believe it. Bitcoin believers are becoming like gold believers. “There can only be one, gold is the real money.” Now it’s Bitcoin. Last time I checked, gold’s been around for 10,000 years. There have been loads of other forms of money that have tried to compete with it or have competed with it. And there’s been loads of stores of value, millions of them. If not, there’ll be no real estate. It’s absurd.

Robert Leonard (41:48):
One of the most common concerns I see from investors about crypto is the worry of government regulation. I read recently a headline that Ray Dalio even said that he wouldn’t be surprised if the government outlawed it. What role do you see the government playing in the world of crypto? And in your opinion, is it possible for the government to really outlaw it?

Raoul Pal (42:07):
I don’t think they’re going to. I think it’s in everybody’s interest to have an independent financial asset, like gold has been. I think it’s in everybody’s interest. Everybody knows we’ve pretty much got a broken financial system. Bitcoin plays a very important role within that, and I think it’ll play an even more important role. It keeps governments honest, it keeps people honest. It gives people an ability to save money outside of just the interest rates or whatever that the government offers you. It’s no riskier or less risky than owning equities.

Raoul Pal (42:38):
I don’t think it’s a problem. I think they will regulate our involvement with it, meaning they don’t want you to not pay tax. Regardless of what you think you should be doing with tax, you actually live in a country where you democratically vote. And part of that system is a tax-based system. In fact, every society in the history of mankind is a tax-based society. If you don’t pay your taxes, then what they say is you should no longer be a member of society or you go to jail, because that’s the point of organized societies.

Raoul Pal (43:08):
If you want to not pay taxes, you can move to the Cayman Islands. We do pay tax. We pay import duty and we pay a bunch of other stuff. Everyone pays their share to a government or if not, society doesn’t function. So they will make sure that you pay your fair share. If they try to excessively penalize it, 100% capital gains tax on crypto, well, then you’re forced to offshore and forced to underground and it will create more problems.

Raoul Pal (43:29):
I think they know it. All the noise I get is they just want to try and regulate it so it fits in with their own system. They want the on-ramps and off-ramps. The ECB, I can see are trying to slow adoption by driving this ESP narrative, Bitcoin’s expensive. The whole world is moving to cleaner energy. Bitcoin is one of the things. But the ECB has used it. Why? Because the institutions have a legal mandate for ESG. So it’s going to slow them down in adopting it. That’s all that’s going on, this slow down. I think that’s fine. I understand why.

Robert Leonard (44:06):
A bit of a fun question. I know there’s no definitive answer to this, but what are your thoughts on Satoshi Nakamoto? Is it one person, group of people? Will we ever even know?

Raoul Pal (44:17):
Now we’re just in a conspiracy world. My conspiracy theory, which I’ve held since day one, is when you look at the language, it’s transatlantic. I’ve always thought that came out of GCHQ in the UK and the NSA and the US. I’ve always thought it came out of government… I’ve had conversations over my years with several members of the state security infrastructure in the United States. They know everything about all of this.

Raoul Pal (44:47):
They understand its place. They understand that the financial system is also the Achilles heel of the global world. The other risk they understand is China. They don’t understand the risk of China. They understand this stuff and they have huge teams of people working on outcome analysis. I spoke at length in the past about the financial systems’ problems. When you’ve got the smartest cryptographers in the world working for both the UK and the US, then it’s not absurd to think a small group gets given an opportunity to say, “Hey, listen. If you could design a different system, what would it be? Because we are going to migrate across to that system and it will have worked. So that’s my view. Could be 100% wrong, but my view is it was built as plan B purposely.

Robert Leonard (45:35):
Does Bitcoin change or the world of crypto change at all if we ever find out who it is, and it is in fact a government?

Raoul Pal (45:41):
No, because they don’t control it. The only problem is the outstanding coins. That’s just the money supply issue, so they could push down the price for a while.

Robert Leonard (45:49):
Okay, fine.

Raoul Pal (45:50):
I don’t know how much they’re worth now. 40 billion? I mean, [inaudible 00:45:52] isn’t all that big. You could probably sell that to the government of Singapore and the investment fund in one transaction. It’s not the end of the world. But it would upset people if that were the case. So I think people would much prefer the narrative of a mysterious person [who] gifted it to the world. Could have been Hal Finney. He’s dead now. We’ll never know.

Robert Leonard (46:12):
We briefly talked about NFTs at the beginning of the conversation. I want to go back to them. Can you define exactly what they are for us and how you see them as a potential investment asset class?

Raoul Pal (46:22):
All NFTs are individual tokens that you attach to physical or digital assets. That means the asset is now recorded on a blockchain. It can be for a bottle of wine, or it could be for digital art. It could be for music. It could be for IP rights. It’s just a token that attaches to something. So then I can then transfer ownership to you. And you’ve got now proven ownership. This picture behind me is actually an NFT, and I’ve printed it off. Somebody created it for me, of me, and sent it to my Ethereum wallet, “It’s yours.” I now own it, so I can print it off and put it on the wall.

Raoul Pal (47:01):
I could sell it to you too. So that works. That’s what all they are. Why are they going up, not so much? Well, you’re just opening a bunch of assets that couldn’t be sold before to be now rare, because digital things weren’t rare. We talked about music. It’s lost its rarity so people don’t make any money selling records. But if you’re the Kings of Leon, you can now create an album on an NFT and sell it to one person, your super fan.

Raoul Pal (47:31):
He might pay you 10 million bucks for it, or you could sell it to a thousand fans and charge them a thousand dollars each, or you could sell it to everybody and sell them at $1 each, whatever. It just depends on how much [inaudible 00:47:43] do you want? What was the piece of art that sold 69 million? The Beeple piece? Well, he had already become one of the leading digital artists in the world.

Raoul Pal (47:53):
That piece of art was actually 5,000 pieces of art. His entire artistry from learning to the present day, altogether created a larger piece of art. Yeah, a meta-narrative art. That actually makes them all valued at about 15,000 each in reality. Because now the ownership is on a blockchain, you’ve got an authenticated thing. Now people are in an uproar about these pictures. Say, “It’s digital art. It could be replicated. It’s worthless.” Blah, blah, blah, blah, blah. It’s the same value. It must go up, growth investing’s stupid. All of this stuff, just narratives.

Raoul Pal (48:27):
The reality is I could bring you a picture from Michael Angelo, and basically, it’s a bit of cotton and some paint, and it could be worth $500 million. That’s as absurd as digital art. Photographic art, as long as it’s signed by the photographer, it’s worth money. If you have the negative, it’s worth even more. Red Books. If you get a first edition signed by William Shakespeare, not that they exist, it’s worth almost infinite money. But yet you and I can go into any bookstore and buy a Shakespeare, or we could buy a secondhand one for 50 cents.

Raoul Pal (49:06):
That’s what it’s doing. It’s creating authenticated scarcity. Same as having an album signed by the singer. It can be used for all sorts of things. What we’re seeing now is people buying art. Some of this is expected frenzy. Some of that art’s worth nothing. Some of it is great art, be worth a lot. Again, I’ve seen the artwork world go through this. Damien Hirst, back in 2000, created a tank of a shark in formaldehyde and sold it to Stevie Cohen, the hedge fund manager for about 20 million bucks or whatever, and was like, “Outrageous. This is not art,” angry man shouts at internet.

Raoul Pal (49:41):
The reality was yes it was art, and Damien Hirst has been one of the most prolific and famous artists of the 21st century. Same with Banksy, “Street art, that’s not art. That’s just a mess.” Guess what? Banksy sells for a lot of money now. It just depends on what people adopt as a store of value in what they do. NFTs are just a way of that, and they will develop and morph into ways that you and I have no understanding of. And that’s what excites me.

Robert Leonard (50:06):
One of those things is Jack Dorsey selling his tweet. I can understand, I can wrap my head around everything that you mentioned. I just can’t understand, why would somebody want to even buy Jack Dorsey’s first tweet?

Raoul Pal (50:16):
Who knows? It’s mainly because we’re already ascribing dollar values to this stuff. And actually, what it is is Ethereum. All of this is been sold for Ethereum, not dollars. And if you’ve held onto Ethereum forever, and you’ve got 300 million bucks of Ethereum, to prove the point about NFTs, because you’re interested, because you own an NFT platform. I mean, look at the guys who bought the Beeple piece. I mean, they’re all over this space.

Raoul Pal (50:39):
So part of it is to drive this space forward. So yes, that may be worth nothing, that tweet. Probably worth nothing. Doesn’t matter. What it is is proving a concept to a much broader opportunity. Again, miserable old cynic shouting at the internet will say, “It’s all worth nothing.” The reality is like we talked about before in ’97, ’98, ’99, 2000, where everyone said, “Oh, that was all a big bust.” I think you and I have discovered that actually, it wasn’t.

Raoul Pal (51:08):
If that hadn’t happened, you and I would not be doing what we’re doing today, which is what video and audio perfectly streaming over the internet in different continents, different countries. So really was 2000 the terrible thing, or was it just the reallocation of capital into the right places in the right opportunities? This will be the same.

Robert Leonard (51:31):
Yeah, in a similar vein, but different, I also invest in real estate. It’s my second podcast about real estate. People always ask me, “Is now a good time to buy real estate?” I always say that as long as the numbers make sense, then it’s always the right time to buy a deal. And everybody’s response is, “Well, what about 2007, 2008?” And I say, well, the same thing that you just said about the internet as well. If you go back and you look and you bought a deal that made sense with the right numbers, if you held it to today, you’re fine. So it’s the same thing. If you buy now, as long as the numbers make sense, it makes sense.

Raoul Pal (51:59):
That’s right. If you’re overpaying in a racy market that could collapse, then that’s fine. I mean, Miami’s a classic example of that. I guess, for the boom-bust cycle, people [inaudible 00:52:09] and property is more volatile. It’s always the land of dreams, hopes, and dreams. Everyone rushes in, pays too much for real estate, builds so much real estate. Real estate market collapses. Too much leverage, and off we go. But over time, has Miami real estate gone up? Yeah. Have people made billions of dollars from it? Yeah. And it’s still been very cyclical. It’s okay.

Robert Leonard (52:28):
Which habits or principles have you incorporated into your life that you think have helped lead to your success, that not enough people do but should?

Raoul Pal (52:37):
Travel, without question. Without question, the single best thing you can ever do is travel to places that make you uncomfortable. I’m not talking about going to a [inaudible 00:52:47] in the summer, or, “Oh, I went to London and mates took the train to Paris.” Bullshit. Go to uncomfortable places. Meet people you wouldn’t ordinarily meet because when you understand how the world, rich texture of the world, different people’s opinions, how they live their lives…

Raoul Pal (53:03):
They may not be the same as yours, but they’re equally right. And how it works for them. There’s no my way or the highway. It is a very complex, beautiful place out there. You understand the role of nature and why we should care about our environment. Understand how economies develop, how people develop, different schools of thought, different religions. I mean, that alone makes you open-minded. Being open-minded allows you to be a better investor.

Raoul Pal (53:28):
Being open-minded gives you a sense of opportunity that you will let opportunities come to you. Being closed minded, not leaving, traveling only to places that you think are safe, where you take no risk, all the quality of the magic of life lives outside of that circle. And until you figure that out, you won’t realize what you’re missing. It’s everything otherwise outside the comfort zone.

Robert Leonard (53:51):
I’ve even found that to be true even just across the United States. For a long time, I didn’t travel much when I was younger. My parents never traveled much. And then, when I got a little bit older, I started to travel. And even just across the country in the US, like California is so much different. I’m on the East Coast in New Hampshire. We’re so much different. It was huge to learn just like it’s such a big world out there.

Raoul Pal (54:10):
But anything. Even if you’re not in the ability to travel, do things outside of your comfort zone. You don’t like hiking and stuff. Well, then force yourself to go for a week with some friends camping or tracking. Do stuff you wouldn’t do. You’re a little bit introverted, but force yourself to go to a bar on your own in a place you’ve never been to before and meet people. And magic happens. It’s hard. It’s really hard, but magic happens, and stories happen. Life never happens at home. Life happens outside.

Robert Leonard (54:38):
Yeah, I agree. I was an introverted accountant and now here I am. I’m talking to you, Kevin O’Leary, all these amazing guests. So I completely agree. Raoul, thanks so much for joining me today. I told you this before we started recording, but I followed Real Vision since it just started. It was awesome to be able to sit down and chat with you. For those listening that want to learn more about you and Real Vision, where is the best place for them to go?

Raoul Pal (55:02):
You can find me on Twitter, @raoul, R-A-O-U-L, GMI, which is short for Global Macro Investor. So @raoulGMI at Twitter. You can follow me there. Always go and check out Real Vision. I think there are very few people listening to this podcast who won’t be aware of Real Vision. Real Vision, there’s a free YouTube channel. There’s a podcast of our free content. There’s the subscription side, which has got all of the amazing stuff, plus all the learning tools.

Raoul Pal (55:26):
We’re embedding education through all of our tiers, and we have a free crypto channel. For anybody who’s interested in any part of the financial macro or economic arena, it’s all Lafayette. We built it for you.

Robert Leonard (55:40):
I can’t recommend Real Vision and following Raoul on Twitter enough. So, guys, go check that out. Raoul, thank you so much.

Raoul Pal (55:47):
Thank you. Really enjoyed it. I just hope that I haven’t pissed off Preston too much.

Robert Leonard (55:52):
All right, guys. That’s all I had for this week’s episode of Millennial Investing. I’ll see you again next week.

Outro (55:58):
Thank you for listening to TIP. Make sure to subscribe to We Study Billionaires by The Investor’s Podcast Network. Every Wednesday, we teach you about Bitcoin, and every Saturday we study billionaires and the financial markets. To access our show notes, transcripts, or courses, go to theinvestorspodcast.com. This show is for entertainment purposes only. Before making any decision, consult a professional. This show is copyrighted by The Investor’s Podcast Network. Written permission must be granted before syndication or rebroadcasting.