The Reset II (w/Raoul Pal & Grant Williams)

hmm uh welcome everybody uh this is a special
interview that i'm gonna do we've been speaking a lot about uh some of the stuff that's going
on and we started a little over a year ago with me talking to rael about a pc wrote called
the end game and we we ended up doing two pieces on this the end game and the reset
and i thought it was a great chance for us to come back and revisit those because things
are moving very very fast now and the genesis of this was a piece raoul wrote a few weeks
ago in mid-january an update to his subscribers which he called the black swan in which he
pointed out the speed with which the banking system particularly in europe was unravelling
as we've seen in the in the days and weeks since then it's become a major problem so
i figured that rail and i could sit here and talk a little bit about that and a little
bit about the whole point behind real vision which was at times like these to try and educate
people help them understand what's going on and why things that seem so out of control
are actually happening you know none of this is is is stuff that wasn't seen by people
so raoul's here with me and uh we're going to sit down and maybe talk about a few things
against real so you and i get the chance to sit around the office and kick this stuff
around every day which is great but when you put the piece out about the black swan it
picked up a lot of it i mean we had a bunch of people calling in the office you were on
the phone all the time just talk a little bit about what the black swan said and then
we can kind of kick around some of the possibilities yeah i mean i had been writing a lot about
various parts of what's going on in the economy and i've been quite public about it you know
it's on twitter and i've appeared on cnbc and obviously on real vision talking about
the law of unintended consequences and that was the talk about the dollar what's happening
to the bond market and the possibility that the rates are going to fall dramatically um
what was happening in emerging markets what was happening in oil what was happening in
commodities what was happening kind of in the global economy and i had been keeping
my eye on some of the european banks because i always start with the charts and the charts
of stuff like deutsche bank and credit suisse didn't look right to me and i've been writing
about this for about a year just saying listen i don't really know i know deutsche bank has
70 trillion of derivatives on their books more than what one percent sorry 100 of global
gdp so i thought you know i need to keep an eye on this and then suddenly in early january
i started flicking through the charts again and i had that holy [ __ ] moment when i suddenly
saw all of the banks were going and they're in free fall i don't know how much deutsche
bank's fallen in the last couple of months but it's 50 or something crazy at that point
i started realizing this is much bigger than i thought this was the black swan that nobody
was looking at because everyone's looking at china everyone's looking at the dollar
everyone's looking at em the oil markets and suddenly the europe european banks are collapsing
how does this sneak up on everywhere because it kind of caught everybody by surprise this
is probably the purest global macro environment i've ever seen in my working career and probably
since the 1930s so there's only a few of us who really do global macro and live and breathe
in it's what i do but what i know in this kind of environment it's really complex there's
lots of moving parts they all happen at once and they're all interconnected and it's a
skill set that's just different in how we do things so it's this enormous puzzle so
most people aren't used to doing that they're used to following news flow as opposed to
anticipating news flow and in these kind of global macro situations it's about anticipating
use flow and that's where charts come so useful because you can suddenly flick around the
world and say okay what is going on here but we're talking about the banking sector right
which which has been the epicenter of the previous crisis should have everybody focused
on it how does deutsche bank go down 30 how does credit swiss break multi multi-year support
without there being headlines until that waterfall accelerates it's because of the hubris of
central banking because of the same what we're showing you here on our youtube channel is
just the tip of the iceberg no matter where you are in your financial
journey whether you're a beginner just looking to break into the market or financial professional
looking to up your game real vision has something for everyone every day our team of expert
journalists provides in-depth analysis written reports access to live streams and access
to our community the exchange where you can interact with people just like you from all
over the world for just one dollar you can unlock all of this and more at
try our essential tier if you like what you see it's only 20 bucks a month thereafter
so click on the link in the description go to and see what you think we
look forward to seeing you there multi multi-year support without there being
headlines until that waterfall accelerates it's because of the hubris of central banking
because — JASON ZIEMIANSKI: What we're showing you here
on our YouTube channel is just the tip of the iceberg.

No matter where you are in your
financial journey, whether you're a beginner just looking to break into the market or a
financial professional looking to up your game, Real Vision has something for everyone.
Every day, our team of expert journalists provides in-depth analysis, written reports,
access to live streams, and access to our community, The Exchange, where you can interact
with people just like you from all over the world. For just $1, you can unlock all of
this and more at Try our Essential tier. If you like what you see, it's only
$20 a month thereafter. So click on the link in the description, go to,
and see what you think. We look forward to seeing you there.

Multi multi-year support without there being
headlines until that waterfall accelerates it's because of the hubris of central banking
because if the central bankers tell you it's okay the market's got a pavlovian response
to believe it's okay now i think why i wanted to do this as part of the reset is because
part of the idea behind the reset at some point central bankers are proven not to be
omnipotent and i think that's the process we're going through you know as we're speaking
the boj are having tremendous problems trying to actually get the currency to do what they
want to do or the stock markets do what they wanted to do and this is the kind of thing
that is going to materialize so everybody believed that the euro european situation
was fine because they told you it was fine and everybody does the wrong thing which is
look at growth now and not forward-looking growth so if you look at the business cycle
which i use it tells you it's rolling over but people take a snapshot said the european
economy is fine the banks will be fine uh-uh and not when you've got emerging markets going
under so that puts pressure on places like santander who have huge emerging market exposure
then they've obviously got oil exposure because they're exposed to brazil and these other
countries and that whole thing triggers all sorts of events and then there was the stunning
situation it is another law of unintended consequences where some bright spark came
up with the idea of coco bonds right well okay great great thing to bring up because
we've hear a lot about these cocoa bonds in the last couple of weeks people have kind
of figured out that these might have something to do what's going on so for the people that
don't understand what they are just just explain a little bit of how they work because they
are very interesting instruments yeah and they're really complicated i cannot um profess
to know a great deal of the detail because they're all different but it came to me um
it was a conversation you and i had had in a bar here in grand cayman and i woke up in
the middle of the night when holy [ __ ] is the cocoa bonds and i think i was the first
person i went on twitter that day and said i don't know anything about these but i have
a feeling that this is really wrong and then i got a lot of feedback fantastically back
about the coco bonds and then i realized yeah i was right that gut feeling that i had was
that these looked like something we saw in the late 90s was called reverse convertibles
and essentially what it is is in reverse convertibles there were yield enhancements so you get a
bond and they basically sold puts in the downside of the stock market and it looks great because
you get this extra yield which is the sale of the obviously if the market goes down you'll
short the market and there's a ton of hedging that gets done and cocoas are similar but
much more complex because they're based on the tier one capital ratios so the idea it
was in theory by whoever the bright spark was was that if the t1 capital starts drawing
down and getting near its limit these cocoas would issue either new equity so you get put
into accuracy so it's a convertible so they're called contingent convertible bonds or some
of the cocoa extinguishes itself so the debt amounts reduce it balances the whole thing
but what it means is everyone said well this is not a share price thing it's based on t1
capital what two capitals based on the share price the whole thing is all wrapped up in
the same thing so basically what it means is if you were one of the smart guys who bought
the coco bonds and you'll have made some return for a period of time great but what you do
because it was very smart people who bought them because you can't understand them otherwise
is that you have to be able to hedge them so how do you hedge a cocoa bond well initially
when you're a long way away from the tier one capital kind of put what you do is you
might trade some cds around it so that's what people did they they traded a couple of cds's
particularly the itrax financial cds and it was fine but then when it starts moving towards
the strike it then turns into an equity and this is the bit that nobody realized so what
happens is anybody's got these things has to start selling stock and you're basically
the market is in a negative gamma situation you know and that kind of negative convexity
means that people were not prepared for that and what it does is as opposed to saving the
bank it pushes the share price lower and pushes it toward bankruptcy so this is just accelerating
the process i mean the banks were bad anyway but then you've got this ridiculous instrument
now the question is what happens i mean do the ecb come in and try another qe where they
buy the coco bonds take them as collateral i mean where's deutsche bank they i mean this
is the point right there they will have to do something they can't ju this isn't lehman
right they can't let deutsche bank go so they'll have to do something and you know i i get
misinterpreted when i say they're all going to zero what i mean is they're going to be
taken over they're going to be bailed out basically yeah but you know essentially equity
holders are going to lose their money and who knows how many of the bondholders will
too you know you you brought up there uh the central bankers and i think this has been
the moment i've been waiting for this was to me the tipping point was always going to
be when that faith in central bankers evaporated and i think it's quite evaporated yet because
they haven't made their move to counter this they're going to have to do that fairly soon
but one of the most instructive things i've seen was the the market's immediate reaction
to kuroda taking rates negative in japan you know the nikkei fell 900 points in the space
of a matter of minutes straight after that and then the spin came out and you know the
stories are on bloomberg about saying how it was a great thing and it wouldn't you know
this was going to really help carbonomics and the market bounced and it kind of got
up but you saw that it's those moments where you see knee-jerk reaction unfettered unspun
what does it want to do and the market wants to look down and again that was an unintended
consequence because people didn't think through what it means to the banking sector right
so what they're thinking is well if we go to negative rates it's going to get cash back
into the system because people are going to to spend money and the same old stupid things
they keep trying but what happens with negative rate becomes virtually impossible for banks
to return particularly particularly when you've taken away their ability to trade which dodd
frank's essentially done that's right so you've crippled these institutions i mean if you
look at if you look at the european banking system negative rates look at the banks look
at japan look at the banks negative rates now people are saying well the fed are going
to be the next ones we've seen the reichsbank go out to four and a half percent this morning
uh if the if the u.s go to negative rates which seems a long way away but these things
will happen very quickly the u.s banking system is going to come under the same kind of pressure
yeah and the share price of citibank are already falling some of the u.s banks look terrible
as well some of the uk banks look terrible the markets are starting to understand that
there is almost no way out of this which is what we talked about originally when we talked
about the big the reset i mean the only thing that we don't know is the time we kind of
and we don't know the machinations in the middle but we kind of know where it's all
going and it's following the path we know the next thing to come is negative rates elsewhere
we know there's going to be a ban on cash which is a terrifying thing but it's coming
then we also know and these are things we talked about a year ago and or so ago a year
and a half ago we also know that there are wealth taxes to come to try and desperately
claw back income we know that's to come too there are so many of these issues i think
there's going to be a qe for the people which will be not for the one percent but for the
99 what will that be they'll be building roads and bridges financed by quantitative easing
also using the fed's balance sheet i mean i don't know how this ends but it cannot end
well in this situation there was a really interesting uh interview on cnbc carl bass
appeared uh last week while we were at the conference here and he was talking to david
faber and you know they're obviously friends and so it was a good conversation it was it
was a bit of give-and-take in it and at one point david faber said to carl you know you
had this big bet on japan and you spoke about this you spoke about the bonds and you spoke
about the currency and it didn't happen and right now i'm thinking you know didn't is
not the same as hasn't and this is this is what i struggle to come to terms with people
assume that because something hasn't happened it won't happen and it didn't happen that's
a really important point because one of the reasons you and i set up real vision was because
we thought people really needed to get a true understanding what's going on because these
are extraordinary times and the risks are extraordinary and the opportunities will be
too but it was people needed to know and the problem is for you and i we go out on a limb
to do this because it's very awkward situation for me because you know i've always kept myself
private but i've had to become more public in what i'm doing because i think it's important
for us we have a moral duty i know that sounds a big term and moral duty to get across a
message to people that you know things are bad so it's tough when i go on television
or on real vision or write to my subscribers and say i think a lot of these banks are going
to zero now i'm not doing that for sensationalism in any way i just think people need to be
aware that there is a reasonable probability and i don't deal uncertainties i only deal
in probabilities and i'm not going to say this unless i think there's a reasonable probability
and so it's really important to get this stuff across to people and it i know it sounds sensationless
but you know this is why we've got real vision you and i sat through oh we watched all this
stuff happen and yeah as you said that's a large reason of how we ended up doing this
this thing in the first place because there was this this sense that uh how could we have
seen it coming yeah and they're they're making we're sitting on the big shortest playing
about the four or five guys who made out like bandits during the financial crisis because
they were the only ones smart enough to see it coming it's not you know it's not the case
and it's certainly not the case today you know now it seems to me there are even more
smart people paying attention but they're getting drowned out by this need of central
bankers trickling down to mainstream media to sell this positive story that everything's
been fixed and it's all fine and it's all you know everything's going to grow and it's
it's going to it's gonna fix itself it's not gonna fix it it can't fix itself because of
the debt yeah and i think you need to put well we need to put ourselves in the shoes
of the central bankers given the same set of circumstances how would you deal with it
it's difficult to say you would have done much different yeah we'd all like to say i'd
press the reset button but it's not an easy thing to do when you're in charge you know
you're looking after the financial resources of a country of 350 million people you know
i wouldn't want to do that and so they're going to fight to the death and that fighting
to the death is all they're doing is is trying to suppress volatility and as we've talked
about many times suppressed volatility leaks leads to hypervolatility and that is what
we've got going on now we've got the volatility genie popping out of every bottle right now
whether it's china and the chinese have their own volatility genie to deal with the japanese
look like they've just been given theirs on a plate as well we know that's happened in
the energy markets and the commodity markets it's happening in the european banking system
and it's happening in the global economy and then it's happening in emerging markets now
obviously there's one big country missing in that equation which is the u.s and the
volatility genie is going to come yeah look it's as sure as nightfalls never when you
when you talk about what would you do in that situation the thing the disconnect i find
is these guys you look at bernanke for example who was a great student of financial history
and a lot of what he did in in 08 was driven by his deep understanding of the depression
and the work he done on that but there's a point where i mean you can take this all the
way back to greenspan to find in my views the original mistakes you know greenspan monetary
policy was way too easy for way too long it didn't need to be and that kind of set this
thing in motion because once you once you get markets used to a certain reaction you
mentioned pavlov earlier on it's exactly right markets expect lower rates more stimulus whenever
they whenever they start to buckle you know tarp qe1 what do you want to call it fine
i don't think anyone really has a problem with that you could argue the mechanics of
it and how you could have got the money into better hands or whatever but when you get
into qe2 and you get into operation twist and you get into qe3 which all looked optically
whether they were or not it's hard to rewrite history they all happened after what were
in essence small falls in the stock market perfectly healthy corrections in the stock
market and they leapt in to do this now either they saw this coming they saw something really
bad and felt that was the way to stave this thing off in which case now what do they do
or they were just playing the music that the market wanted to hear which is certainly what
it looked like optically what do they do because these markets want to go down that's clear
they want to find a clearing price i don't see how you can stop that when you've got
rates at xero without getting cash bans and all the kind of things that are almost orwellian
in nature yeah and banning of short selling and all of that stuff we don't know is the
answer we just don't know how they can deal with this once the market takes the decision
that the central banks have to do a lot more they haven't tried the fiscal stimulus route
since tarp really so if they do say right we're going to build bridges and do all the
u.s airports and all that stuff that needs to get down the roads you know is that going
to be the kantians are going to be jumping up and down saying this is it this is what
we need right because this is the thing that has not been proven yet so we need to go and
blow up that you know we need to have the bonfire of that vanity as well right only
then will we realize that in the end you know we are just part of the business cycle and
if you get create a debt supercycle you get a debt supercycle bust people can understand
intuitively in commodities right you get a commodity supercycle supercycle bus because
it's been going on forever but the credit cycle is so big and people don't understand
they're confused with all of the elements that it creates around them that they don't
really know and history has told us that it's almost impossible to manage japan was bloody
lucky in how it managed its debt supercycle bus because the rest of the world was still
growing so you had a cushion right now there's nobody growing see that's that's such an important
point that whole idea that because people say well you know japan was the second biggest
economy in the world and they've been through 20 years of deflation it didn't hurt yeah
because you had genuine growth elsewhere now where's the growth coming from it's not coming
from europe it's not coming from the u.s really that's right and if you look at like a lot
of people say well this could be just 1998 again i a non-event for the usa the us market
fell 20 germany fell 30 35 so it was a reasonable event some of the banks like credit suisse
got into deep trouble again that time around but the u.s is growing at four and a half
percent in 1998.

Um this time around it's barely growing at all and so you know the
chances of something bad happening and i've been talking about the business cycle for
some time and i still owe real vision viewers the business cycle presentation but i'm so
swamped with everything going on i will do it we'll get it we'll get there um but now
if you look at all of the business cycles everywhere in the world they're all pointing
negative so you know and i've always written that in a recession bad things happen the
big ugly comes out and within this process of heading towards the reset or the end game
we know what the big uglies are we just don't know how ugly they are and in what order they
come which is why the european banks you know was always one of them and the whole banking
sector still is the u.s banks are still not great either everyone there's a narrative
you'll listen to the narrative the drums get beaten no the u.s banks have been recapitalized
they're fine that's [ __ ] there's still a lot of problem in the u.s banking system it
is not cleared up so the thing that really concerns me is the fact that the liquidity
from the system that all the illiquid assets from the system have gone to only very few
liquidity providers and that's blackrock carlisle fortress apollo etc those guys now own all
the illiquid assets they've taken what the banks were doing before and taken it and concentrated
it even more so and that terrifies me because the liquidity situation is has changed dramatically
this is probably the worst liquidity situation i have ever seen the global marketplace is
now like the emerging markets where in 1998 it's huge air pockets because there are no
natural buyers of assets right now we've got the sovereign wealth funds who are natural
sellers of assets they were the big provider of liquidity the pension system is going to
get into true trouble it's going to have to sell assets to realize anything otherwise
you've got the funding black holes so they're a net seller of assets demographically speaking
they are too the banks who are liquidity providers that was their job in the system are now not
there so the only guys who provided liquidity are basically funds that are subject to the
same liquidity that's coming out of the sovereign wealth funds so who are the biggest investors
in these so if the pension system sovereign wealth system start trying to liquidate blackrock
there is no bar of those assets or uh blackstone there's no buyer of those assets in the world
so this terrifies the hell out of me if you think about what qe has been about it's been
about liquidity liquidity about about injecting liquidity into the system we keep hearing
that expression so how you know when you talk about the law of unintended consequences liquidity
begets illiquidity and obviously what do you do now if you've pumped in four and a half
trillion just from the fed plus the bank of england plus the boj plus the ecb plus the
chinese which i mean that number who knows what it is but we know it's many magnitudes
higher than it's supposed to be what do you do like what's the solution to that firstly
liquidity is a misunderstood concept and what's happened is you've seen around the world um
velocity of money collapsing it's utterly collapsed in the u.s and it's happened everywhere
so what's happening is money has no particular value within the general population they don't
want to use it does not circulate so it's being hoarded so that's telling you something
is structurally a mess and also you know all of this excess liquidity it did provide too
much liquidity to places like these illiquid liquidity providers um and that has been a
concern this is the one percent in you know in the general public terms abusing the fact
that there's cheap money around to buy as much cheap assets as they could and to the
detriment of almost everybody else because nobody else could get money so well let's
talk about potential outcomes you know there's a there's a good scenario there's a base case
there's an extreme scenario let's talk let's talk about potentially a smooth unwinding
of this what does that look like the smooth unwind is not going to be smooth
it'll have much like we've seen from 2012 we saw 2012 you get to the precipice they
managed to do something that's enough to stick over the hole and you hope that they can do
that without the whole system collapsing came very close in 2012 so they can keep doing
this a number of times the system is saved from failure but each time is incrementally
better you know that's kind of a bit like japan but with more volatility it's that's
possible and i think that's the inherent belief in central banks and maybe they are right
what do you and i know right there's a lot of smart people who will also say you know
the central banks can sort this out there is a still a belief in economics as some you
know voodoo magic um so that's possible so that's for me the smoothest route so but base
case i mean if you had to you deal in probabilities what what's the most probable outcome for
that you see for this sadly and again i'm not wanting to sound sensationalist but i
think the most likely outcome as i've said since the last time we spoke in this format
over a year and a half ago is in the next recession one of the big uglies comes out
it's gonna be and i don't know which one it is it's a race between china and a 50 percent
d vale versus a total collapse internally of their economy because of their credit bubble
whether it's japan which we've all been looking waiting for and it hasn't happened but maybe
it happens or maybe it's the european banking sector forcing the hand of everybody else
and suddenly all the collateral in the system's worthless again because the european um government's
bonds are worthless again we all thought that went away it didn't go away at all whether
it's just the loss of central bank control of the monetary system whether it's i mean
one of the beliefs that i still have even though the dollar is correcting somewhat now
is i still think the dollar wildly overshoots in this environment and the problems that
that forces and a plaza record and then maybe some debt jubilee and debt forgiveness that
needs to happen there's a whole host of things it's almost impossible to know which one it
is but what we need to care about is not trying to spot the one it's about is there gonna
be a domino effect right which which it when you run through all those as possibilities
the linkage between them is really clear i mean you don't have to stretch to figure out
how one knocks the other one and when the world is not awash with capital when it is
very badly liquidity constrained when there are no liquidity providers and there are massive
air pockets in all sorts of assets if one of those goes i mean it is going to be extraordinary
well okay well let's let's i mean it seems to me that the the base case and the extreme
case are pretty close i mean it doesn't get much worse than that right we're going to
see an awful lot of bad things happen yeah i mean bear in mind however there's still
the business cycle and the business cycle will bottom out over the next 18 months or
so and therefore maybe we can get away this time before the business cycle rolls back
up again i think each time the business cycle is going to get more and more subdued um so
maybe we get away with it it's possible i i just don't know but all i know is my spidey
sense is up my radars are all bleeping and looking around at every single thing possible
because i'm terrified that one of these is going to go off well and and the danger in
making we might be okay your base case is not a sensible risk to take right yeah the
the fear in that for me and one of the reasons i wanted to do this is the fear in that for
me is it creates a sense of i don't need to do anything inactivity precisely amongst people
and i think this is not the time to be inactive this is the time to just think through how
you do things and what you do both in your investing life and in your personal life to
say okay what happens if they do bang cash you know what do i need to think about what
do i need to think about if they if you've made some money in your career and you're
sitting on savings and you live in the u.s or europe and or the uk and wealth taxes are
coming and that and somebody can suddenly tax you 20 in a one-off hit how do you deal
with that well let's let's think some of these things through because they're great points
and they're the the sort of things that everyone's going to be facing those decisions i mean
let's start with this idea of banning cash because that is something that that the younger
generation think is a great idea i speak to my kids about this no cash be great fantastic
they don't understand the implications of that what should people do to get ahead of
a possible ban in case there is only one reason to ban cash right and it's all about negative
rates of course and we've seen it in switzerland because the swiss went to negative rates and
one of the swiss cantonail pension funds rightly said we're going to take our cash out so they
went to the bank and said we want to draw x million dollars in cash and the bank said
no this is what do you mean it's our cash and it's like well it's not you don't seem
to have a physical right to the cash so which is the first stages of the ban of cash so
that means they couldn't get around negative rates okay so negative rates half percent
one percent you know it's not the end of the world it's a put option price you're paying
for a put option of of owning cash in this environment i'd pay one percent own cash however
it gives them the right to come in the morning and say oh deposit rates are now negative
10 and there's your wealth tax and those kind of situations are bad so how do you get around
that situation is not easy obviously why do you think people are getting very excited
about bitcoin it's a way of making cash payments and doing stuff without having to need physical
cash um that's helpful because you can at least transfer cash around because they can
stop you moving it if they don't have cash if it's physical cash i can give it to you
here if i need to wire you something the bank can stop me wiring it to you but bitcoin gets
around some of that obviously you know we'll talk a bit later about gold but obviously
gold is one of the ways around it because gold doesn't have a negative rate really or
it's a it's relatively small um the cost of carrying gold versus the negative rates of
cash so obviously gold is going to get very attractive it's not easy for people so what
do you do i mean one of the ways that i address this is i want an operating business right
i wanted operating business that generates cash but you don't want to sit on huge piles
of cash so you need to think that through what you do if you if you're lucky enough
to have some savings but operating businesses at least you've got cash flow turning over
you're doing things you're growing things and you're building value for a situation
where you can release the cash at some point in the future should you need to well let's
talk about portfolio construction then because you know the 60 40 traditional if they're
both going to go down that's 100 of bad news what do people look to because treasury is
obviously you said quite rightly uh that the layup trade for the year is to get long treasures
to get long aaa collateral and that's playing out in space and it feels like that's going
to accelerate but of course if we see a massive move into that space which seems like a sensible
play it creates havoc over here so so from a portfolio perspective what should people
be looking at doing it's not easy no it's not easy look you know
bonnie eels are going to go to half a percent in the us they're the wrong price person when
you said that on cnbc you know i was what you were on the phone from the cayman i was
talking and i was watching the anchor and her face she she couldn't compute the the
idea of the 10-year u.s treasury at half a percent but you look around and you see the
buns negative and you see switzerland negative you know these these are safe strong economies
and countries why is it such a stretch to see that perhaps notionally the safest asset
in the world would trade at those rates it seems and in a volatile market it's a no-brainer
it's one of the best layout trades i've ever seen and you get positive carry you get paid
to do the trade i mean it's perfect but from an equity perspective because that's that's
where a lot of people well i'm more interested in the machinations as opposed to as opposed
to you know what's the right way of doing this in terms of equity just think of what
a falling bond yield does to pension funds and the insurance companies is a massive problem
so they end up they've taken too much risk and equity they don't own enough bonds the
bond yields falling they can't lock in the annuity rates that they need to do they're
going to have to realize assets they have to sell assets and this is going to be a big
big problem and i don't think people have quite figured out how bad the pension issue
is so it does mean that the equity markets are likely to come under increasing pressure
we know that there's huge pockets of illiquidity because the market is basically now the liquidity
providers are the high frequency trading firms and they just you know i'm not going to get
into the argument about good or bad but they're just not built like the banks were to take
huge chunks of stock of people and take risk so we just don't have that and so that makes
it very lopsided risk reward in the equity market but if we if if we think about this
and you think about the fact that whether we like it or not whether they like it or
not this is all going to come down to central banks and what central banks do they're either
going to save this somehow or they're going to make a misstep like kuroda did and screw
this thing up but it it's going to come from them to the central banks optically when you're
trying to manage fear and you're trying to manage reactions you're trying to hurt a load
of people into not doing something crazy which brings down the system whatever that means
the equity markets are what you have to target because that's what people understand if you
do something with the bond market if you correct something that's going wrong in the bond market
it doesn't actually feel good okay so we've seen some of this happen already and people
just don't see the signs is one of the things that central banks will do is by chunks of
the equity market yeah absolutely and if the pension system is a point of collapse then
they will have to find ways of guaranteeing a yield to it or guaranteeing a return and
that's buying equities now that doesn't mean as we see in japan doesn't mean equities go
up no and we've seen it you know taiwanese buy equity the koreans buy equity the chinese
have bought equity you know it's not unusual um but there will they'll be a larger owner
of the equity market which you know we're getting in a world that i don't understand
anymore we're the biggest owner well maybe i do understand maybe it's what you and i
grew up in the 70s where the state owns half the companies well at the end of this the
obvious thing is the state will own half the companies again right but but this time the
difference being they'll do it with printed money yeah and what does that mean and this
is the argument nobody knows all i know is that you know i speak to a lot of people and
some people are sanguine about it say look it's gonna be fine it'll work out and maybe
they're right they're the best case scenario for me you know nobody's going this is going
to be boon times but maybe maybe they'll get through this but i just think the propensity
for a slip up on the banana skin right is huge yeah it's it's such a hard landing stick
i mean you talk about what some people say something okay you know i know that you and
i have chat in the last couple of weeks and some of the messages you've been getting from
people really savvy smart clear-headed cold-eyed investors who normally in this kind of environment
are sitting there going great the opportunities that are going to come my way are phenomenal
but the message this time is really different right yeah and i've been really careful i've
not i've not gone out and said the world's going to [ __ ] i've been you know structured
and this is what's happening you know this is what i think is happening next you know
and i've been trying to go through it methodically and using my framework without going you know
what deep down i think it's all [ __ ] um and what's interesting is some really really
old macro hands some smart smart people and very famous guys i'm getting emails from them
saying you know what sell everything no everything right and i'm like wow i mean people are just
you know in the background saying we are getting very very concerned now look again we can
all be wrong but again what they're saying if you listen to what they're saying it's
not like yes it's definitely happening but what they're saying is the probability of
that bad outcome is exploding and therefore you have to be really careful and don't forget
there are worse outcomes in all of this yeah um you know the worst outcome is war correct
and where that and many people you know many sensible people we've had in real vision and
said you know what the outcome that could be the end of this is war i don't know and
i don't want to predict that i just don't want to think about it that's quite happy
living in the cayman islands hidden away from a lot of the worst problems that are there
it's one of the reasons why they came in such a great place but yeah it's troubling but
yeah but again and that you bring up which is this is another interesting point and it's
about the speed with which this this wave of call it realization call it broadening
acceptance whatever it may be you know i gave a presentation almost a year ago to the day
last year talking about cycles and talking about war as as an inevitable part of the
cycle and when i first gave that speech people afters were like well you're saying there's
going to be a war and i said look no what i'm saying is there's not not going to be
a war which is kind of a little bit nuanced but i wasn't trying to be a smart ass that
that's what i was saying in the years since the number of smart people who are very now
are now very happy to talk about the possibility that we could have a major conflict is ratcheting
up really really fast which i find very concerning and i don't even know what that conflict is
i don't know what it looks like in the modern era i know there's cyber conflict which is
another huge issue that we'll we'll have to get some more people on real vision to talk
about because it's a bigger deal than we really realized um yeah i mean neil how's fourth
turning which is something i really really enjoyed it it speaks to me too intuitively
about generational cycles etc i mean that's one of the outcomes that he says is reasonably
likely now whether that war is an internal conflict you know could china get a civil
war well i know there's groups in the pentagon who are gaming that already because there
is an outcome of that and if the chinese economy collapses then what do they do do just does
china go outward which is the case that germany did so they become an aggressor or do they
just get caught in a civil war what does that mean for the world i don't know does that
happen well i don't think so but it's possible i don't know the only thing i do know is in
environments like this it's quick it's amazing how fast things accelerate the banks weren't
a problem at all until january the 20th when i wrote the article and something the banks
were the biggest problem in the world it's like wow this changes fast i mean in a month
some of these have fallen 30 percent so okay look you know we cannot deal with the speed
of the movements going on right now and as i've always said is once the the volatility
genie starts coming out the sign waves get bigger and bigger and bigger and bigger and
i think we're in that phase i mean who knows maybe we're very very lucky but i do not see
a way out of one of the big uglies happening well one of the ways out i guess uh for one
of a better phrase but it's a much better segue is gold we said we talk about gold so
we should probably talk about that because it it's something that suddenly you know it's
up 40 bucks today it's like three percent today and people are suddenly starting to
pay attention to something that along with all these other things you know as i've kept
saying nothing matters to anybody until it matters to everybody and that's i think the
genesis of the speed of these movements are we now going to see that in gold well you
see you have to be very careful with gold and people who who love the gold story are
very quick to not strip out the currency move in gold to understand what's the real move
because gold is a currency and it's a number of other things as well and you have to understand
what's currency move now my guess is if you put gold inverted against dollar yen it's
pretty similar so it's telling you it's more of a currency move okay that's fine but technically
it's doing something interesting and the dollar's not doing that so there's something broader
going on in gold i think the gold chart is a giant wedge pattern and it's been trading
in a channel and i think that channel is breaking which is the first move i was looking for
so great i think the next thing we will see is as the dollar rallies again which i think
it will i think gold will fail to make a new low that's the signal you're looking for if
gold is dollars rallying and gold fails to make a new low then something has changed
and that something changing is the nuance we need and if it is i i use something in
in global microscope the gmi crash pattern which is basically a failed rally so the mark
comes from a high falls rallies and then takes out that low and that's the signal that failed
pattern works in reverse as well so if gold does that so it fails to take out the recent
low on the next big dollar move and i think this is how it plays out in my mind my framework
is and i could be wrong but i see it relatively clearly is the dollar keeps going up i know
everybody doesn't believe it virtually nobody believes the dollar is going to go up in a
negative rate environment i don't think you even believe it so i'm one of the few people
who believe in that i could be dead wrong but i believe that the dollar continues to
go up in a negative rate environment they continued to cut interest rates in the early
80s and the dollar went up 100 they continued to cut interest rates in the 90s and in the
late 90s and the dollar went up 50 percent so i think the probability is if the fed are
going to negative rates the rest of the world is in total chaos in which case i see the
dollar as the primary currency asset however in negative rates the primary currency asset
will be gold yeah it will just outperform the dollar the dollar will be the next best
currency because there's going to be a dawning particularly it's going to come out the family
office space first because they're they're in wealth preservation mode and the first
thing they're going to think is okay negative rates what do i do you know if you do have
a certain amount of wealth and you've got negative rates they will not stand for that
but you cannot invest in markets in it because the markets are too volatile so you have to
buy gold well look it answers for a family office it answers almost every problem they
face yeah but it also you know as we we've got to be intellectually honest about it it
was a pain in the ass to own in the last five years oh yeah um but many of the family officers
who believe in gold have had it for a long time since the 300s so they don't really care
about it it's the it's the other level of wealth that needs to figure this out they
won't come until later because they won't figure it out but there will be some people
that will start to move the price that that start to understand if we we're here we're
going to get to here the whole key to the investment games we talked about when we first
started uh this interview is it's the anticipation of the events is where you make the money
you can't wait for the event and then look around you the rising probability means that
the price of gold has to go higher i mean maybe the easy way right now is forget all
the about buying a physical gold you've got plenty of time to do that before all of that
doesn't work what you can do is just buy some call options and then not worry about it for
the time being you know that's how i structured it for global macro investor i sold one year
downside put saying i'm happy to buy if it falls down to a thousand and i'll buy with
that money i'll buy three times as many way out of the money calls so if it really starts
to go i'm in it and then i can figure all the stuff out later about okay i want to get
physical gold where would i do it all of that and i know we've got some interviews coming
up about that physical gold thing because we've got a gold storage here in the cayman
not we got a gold sort of there is a gold storage in the cayman um islands that is relatively
interesting um yeah i think it's coming i don't think i want to jump the gun yet but
what's you said something that's interesting because we've been talking about the speed
with which all this stuff happened when it starts to happen it really starts to happen
we've seen in the banks we've seen it in equity markets cascading lower and yet you said buy
the calls play it through options because you've got plenty of time to buy this before
it happens which is which is interesting because what we're talking about in markets is an
let's face it a limitless supply of script what we're talking about with gold is a physically
very limited supply yeah but you're thinking you're approaching this with the person with
the knowledge the person without the knowledge is much later to the game right so the price
gaps the really big price gaps where it moves 10 a day 15 in a day and not here yet no no
they're aware and that's the point is you're you know where it is because you understand
the gold market but other people have to come into this and it has to dawn on them they
have to realize they have to go further down those steps to realize oh yeah maybe i need
to get gold and that's really going to be a price much harder in here probably when
it breaks the big wedge pattern so there's this there's the small channel then there's
the big wedge which is much higher up 1600 or whatever it is and at that point then everyone's
going to go oh yeah now and then you get the big price gaps okay so let's let's wrap this
up um we've taken up enough of his time with all this gloom and doing but what what should
people be looking at like right now what's the things that you've got on your bloomberg
screen that you think people should be paying most attention to yeah so there's a number
of things firstly obviously it's the dollar and you need to look at a broad range don't
use the dxy because it's useless i use it just because it's easy to show people i have
a broad range of currencies understand what's happening with the dollar understand what's
happening in the oil market it's less necessary now because it's made its massive move um
i think keep an eye on the share price of those illiquidity providers blackrock et cetera
keep your price on the european banks use sx7p i think it's the european bank sector
you can use that or you can look at one of the individual banks whether it's santander
banco popular credit suisse deutsche bank i mean you take your pick standard chartered
there's a whole load of them that look like they're going to zero so keep around those
obviously just the 10-year bond in the u.s is pretty useful place to start glance at
how negative other bond markets are becoming in terms of yields um and then i think there's
still stress more stress to come from emerging markets so eem and i think just keep those
things on your screen monitor them i think of all it's the banks right now that we need
to follow and i don't think people forget the penny's not dropped about these liquidity
providers that'll be the one where everyone's gonna oh my god these are too big to fail
but they're private companies and only the rich are going to get hosed because that's
who owns it and they might let some of these things go i mean blackrock is the largest
owner of property in america of housing you know i don't know how this ends but it's not
good thank you for watching this interview this
is just a taste of what we do at real vision to learn more about the complex world of finance
business and the global economy click on the membership link in the description give us
seven days to change your life this will be the best dollar you ever invest NICK CORREA: Thank you for watching this interview.
This is just a taste of what we do at Real Vision.

To learn more about the complex world
of finance, business, and the global economy, click on the membership link in the description.
Give us 7 days to change your life. This will be the best dollar you'd ever invest..

You May Also Like