You're listening to Teip. Hey, everyone, welcome to the Investors podcast. On today's show, we got a guest that needs no introduction, Mr. Rawle Powell. Raul has decades of experience in financial markets and is the founder of the popular media company Real Vision. During the show, we talk about all the hot macro topics going on. At the end of twenty twenty. We talk about inflation, deflation, the idea of a new Bretton Woods central bank, digital currencies, Bitcoin MMT and much, much more so without further delay.
Here's our interview with the one and only Raul Powell.
You are listening to the investor's podcast where we study the financial markets and read the books that influenced self-made billionaires the most. We keep you informed and prepared for the unexpected. Hey, everyone, welcome to the Investors podcast, I'm your host, press patient is always I'm accompanied by my co-host, Dick Brotherson, and today we've got the one and only Rawle pal. Welcome back to the Investors podcast. Such a pleasure to.
Always good to be here, my friend. I really enjoy these chats. I want to open it up with, in my opinion, the big enchilada of what in the world is going on, and it's this binary situation of deflation versus inflation and kind of what policy is going to pop out of what we're seeing right now. So I'm kind of curious, just your overall thoughts when somebody says deflation versus inflation. I'm deflation always have been firstly the trends in my favor, and secondly, I just think that with an aging population, a dynamic like we've got a relatively strong dollar and technology, it's almost impossible to generate meaningful ongoing inflation.
And we'll come into some of the big changes that could come from fiscal and supply. And we'll talk through that a bit. But I think generally, overall, that's the super trend. You've got to fight now. What do you call inflation? What do you call deflation? That's the other thing is definitional issues here. So I think that their currencies are deflating versus hard assets. That's not necessarily price inflation. I'm about to write a piece for global macro investor about wage deflation vs.
actual inflation. Maybe it's wages, because when you look at most goods versus the price of gold and stuff like that, they haven't really changed price. So it could be that wages are deflating, which is something I want to dig into because real wages haven't gone up since nineteen seventy four. So there's a number of issues here, but I'm very much biased toward deflation for now. Michael Saylor, on the other hand, said that inflation is happening in pretty much everything you need, medical would be an example, real estate would be another.
What are your thoughts on that? One thing is the millennials themselves are driving it because they're trying to get into property at the same time, they can only afford the same kind of price range. Well, guess what? They will push themselves out of it. Rich people have obviously had too much money because they've had access to credit, unlike average people. So that's pushed up the value of those things. We've seen fine art and wines go crazy, prices, cars because of the same thing of the money of the rich people.
Then there's the stuff around which corporates have power in Washington, and that is pharmaceuticals, health care and some levels of food and stuff like that. So, look, it's a really complicated world. Inflation is not a straightforward CPI thing, but you do find your fixed cost of living has gone up while cost of consumer goods has collapsed. We were interviewing Lynne Aldan, who, in my personal opinion is just unbelievably smart, and she was making the case for because at the end of the day, it really this is all revolving around CPI and the premium in the fixed income market above CPI.
And she was making the argument. I asked her, well, how do you measure, quote unquote, inflation of the monetary supply of the currency supply? Just. Well, I'm just looking at the printing that's getting listed onto the balance sheets of the central banks. Maybe we can use that a CPI. What do you think of that idea? As I said, there's different measures of inflation for different things. The other thing I know is my inflation is different than your inflation.
So I just think the whole thing is arcane. So what are we trying to solve for here? You know, what do we care about here? You know, we don't have bond yields that are going to offset anything that gains gone. And we can get into the discussion about bitcoin and gold and that kind of stuff to offset the devaluation of currency. I think the real issue is incomes don't go up enough. And that's the real issue here.
In the 1970s, we had inflation because wages went up and pushed up the cost of goods. We don't have that. We have wages that just do not go up. And that's the biggest problem here. So I'm not sure we're always searching for the wrong enemy. I think globalization was one of the enemies. You know, I'm a globalist in many respects, but globalization destroyed wages because a global wage arbitrage. Then you throw in technology on top.
What chance does anybody have? I mean, they're literally going to be no bus drivers in 10 years time. There'll be no truck drivers in 15 years time, there will be no cab drivers. All of these jobs just get all destroyed. You know, Marc Andreessen software is eating the world was probably one of the most profound statements I've ever seen.
And so there is this really weird dichotomy, this massive deflation. As you said, there's a cost of living inflation, stuff like health care and housing. And then there's the massive deflation in the value of fiat currencies. I mean, this is a complicated dynamic. You know, I got my roots with this really strong Warren Buffett value investing, calculate the intrinsic value of the company background whenever I first was learning about finance. And all of that is based on fixed income, risk free rates of a 10 year treasury and kind of using that as a ruler and a yardstick.
But now with everything getting polarized down to zero percent, negative yields, how is a person to do valuations any more?
How are you looking at that? Well, the point being is it seems to all be trumped by flows now you a passive investing again, it's the millennials starting to invest and they're all passive investment vehicles versus the baby boomers who are all divesting of active strategies. So value is underperforming both massively because of generational flows. That's very difficult to change. That's been my Greens point for a long time. So I think that makes it difficult. I think zero interest rates make assets more speculative.
But also, if you look at Japan and Europe, they made them tremendously cyclical.
Japan just went up and down business cycle and that's the UK stock market did that for 250 years before the mid 50s, when finally the UK stock market actually broke out of a range. But it just went up and down with the business cycle. And that kind of makes sense. PE expansion when people are optimistic, contraction when they're not. But it flows from baby boomers. Millennials have changed all of that. So it's created a crazy world, a world that nobody understands.
And models don't work any longer. And I'm not sure it'll ever revert come elsewhere, I think. But they won't come back to these markets. You previously mentioned this point about wages not going off since nineteen seventy four.
Is that why we've seen this increased interest in universal basic income from both voters and politicians? So let's strip that down, right? So if the problem is wages, let's say I'm right that somewhere in this and I'm still doing the work and I'm trying to get my head around it, but let's say wages are the problem with a newbie solves a lot of that. It basically is giving a premium back to people who got destroyed by globalization. So, OK, that's interesting.
Now, you know, I know a lot of people don't like it, but I have a feeling it might work because what you're giving people is the ability to pay rent, pay their electricity and have health care.
Now, don't forget, in other countries there is more of a welfare state. Now, I know Americans find this really difficult to believe and think everyone is a communist the moment they have a free health care system. But most countries in the world have free health care and a welfare state that supports people. Should they fall below a certain poverty line? The U.S. doesn't really have it. So UBI does some of that. But I think Europe will have some UBI as well, because so many people have been left behind by globalization.
And I think that's what the populist revolt was about globally was the fact that people realize that they've got poorer and they don't know who to blame. So they're blaming everybody. Well, I think we probably try to fix the wrong problem, and that was the issue. I mean, demographics shows all of this. It shows where seepages going and it's been forecasting it for years. So it's all driven by demographics. Now, why do we get a debt bubble?
Right. People that ask these questions and you say, oh, yeah, well, the central banks crazy. Well, they didn't. It actually came from the 80s. So where did that debt bubble come from? Well, if you start to think of the world in the way that wages didn't go up enough, what do we do? We borrow money. I guess my big narrative for how we got there in the eighties was that we kept adjusting the money multiplier so we had a gold standard.
But if you go in and you adjust the money multiplier of this really cool chart, I need to send you this chart. It shows how the money multiplier was adjusted from Bretton Woods up into when we came off the gold standard in 71. And they just kept adjusting it more and more and more. And when you're doing that, you're just expanding the money supply until you get to a point where you can't make good on the gold that's sitting in the in the vaults.
So why did we see all that wage growth through that period of time? Well, I would adjust because the central banks were manipulating the markets even back then. Look, governments and central banks have always manipulated the markets, but I think, you know, there's a confluence of events here, some big events that all happened and who knows?
One was the biggest generation of people in all recorded history, all coming into the workforce at the same time. Right. Then there's the fact that the wages can go up because of so many of them. Then you had globalization by 1996 and the World Trade Organization. Then you've had the massive rise of technology. Then you've had the massive rise of debt, whether it's been driven by the central banks, driven by people trying to cover their wage gap or a combination of everything, probably.
So you've got this massive confluence of events that have created this huge mess. The other thing was that the rise of the pension system from the 80s to and then there was the rise of passive funds index funds that started in the late 90s. And you can see the trajectory in the S&P just completely took off from 1996 onwards. It it's like a weird break in the chart that was the launch of all of these index funds. So all of these things have come together and they've all compounded themselves.
To pick them apart is almost impossible now, but to predict where they go is more reasonable. And all the decisions that have been made is reflective of the decision made before fiscal and monetary policies, by nature controlling something that by default would move in another direction if allowed.
Yeah, and don't forget, throw on top of that the fact that all the central banks use economic models which don't work. Right. They use linear extractions of GDP when even a child knows it goes up and down. It's cyclical, right? Not one of them has cyclicality in their models. So this error on top of error and they're also trying to solve the wrong problem. And so it's all become the law of unintended consequences.
I mean, nobody thought that index funds cheapening the ability for people to invest was going to create this ridiculous bubble where the entire stock market is trading on PE of 30 or 40 or 50 or choose the number.
Nobody thought that was going to happen. I know this. People say, well, just raise rates and go to the normal level. I think rates are at their normal level because of the debt bubble, because of the demographics, because of all of the other things. I don't know what you can do about it, but then start again. Now, it's a fascinating point, so when you start to hear MMT and talking about taking rates negative, you know, at the end of the day, I guess I might be just a really hardcore free market type person where, like, if your business sucks and it's not making some money, you shouldn't be bailed out.
You should fail, because if we don't let that naturally happen, then we're just going to compound that problem.
That was the law of unintended consequences, probably from nineteen ninety seven, maybe even eighty seven, the stock market crash when they cut rates. So when Greenspan cut rates, then they need to support markets and that created unintended consequences all the way through. So it's now, as you suggest. Yes. The free market, things should go bust, but now it's such a big debt bubble that you destroy everything. So the only answer is to create a parallel system and try and jump because you can't do it by letting the whole thing go.
Nobody's going to let it go because the devastation is too big. And I honestly believe the interest rates are trading at free market levels, because even if you go to get private sector loan, you know, rates may be 10 percent, but it's not wildly different. We've seen this in Japan for a long time as well. So I don't know. But yes, I guess if the central banks hadn't made so much capital available, rates would have been higher.
But the whole thing now is like looking back, it's almost pointless because it's such a big mess. You know, a year ago when you and I were talking, I'm just looking at the bond market and it's in these very low yields and I'm saying, hey, this is a mess. I'm not going anywhere near this. And you were like, no, no, no, no, my friend, this is going to be a big buy in the coming year.
And you were dead. Right?
So I guess my question for you, and I wasn't going to be surprised if you were right, is just for me, it was a personal choice of risk of like, well, I just don't know when this is eventually going to blow up or when the market's going to lose trust. And all this other things, as we were looking at it now, it wouldn't surprise me in the least bit if we go into the summer and interest rates on all these bond instruments are getting pushed even lower.
Are all going negative. I mean, look, let's face it, the UK went negative first time in 400 years of the history of the UK credit markets that happened last month. The Bank of England will follow suit. All of Europe's negative eye in the EU, Denmark's negative, Sweden's negative. New Zealand's been negative. I mean, basically, it's everywhere, right? It's systemic in every single place. And if the US thinks they're going to avoid this, they're smoking crack.
I mean, it is coming and the chart has said it and I've called it the chart of truth. It is going negative because there is nothing they can do to stop it and the market will walk them there first. And nobody believes it. Nobody believes that the US rates can go negative. But they will and they'll need to. If you've been following what's been happening in the German bond market, I mean, yields been collapsing because Europe is about to go back into deep recession because of the virus and what's going on there.
The US is following suit. So, yeah, it's going more negative. I'm long bonds right now and I, I think it's a good trade. Then, Raul, I can't help but ask what would need to happen for you to change your position in ENFANTS. Well, we will at some point finish this recession, I think it goes on longer than people imagine, but at the end, you then get cyclical inflation. Are you going to create structural inflation?
Are you going to create structural dislocation in the bond market? Zero chance, zero point zero, because the central bank will own it. Will it tapped into the currency market, not the bond market. So I've had this opinion that the more that they start exercising the UBI lever, the more that we have the potential for the CPI gauge to start demonstrating some form of inflation. Do you buy that? No, because it's a one off annual rate of change, what drives inflation is when wages keep going up.
That is what demand inflation is. That's the real toxic, nasty inflation. Once you give people twenty thousand dollars a year, you get one year. And we've seen this in Japan when they've tried various measures like this. What you get is a massive rising inflation. The next year it comes out and the inflation's gone because there's no increasing wage without increasing wage. You don't get structural inflation. You simply can't do it. When you're majoring in nominal Fiat dollars.
Yes, and again, when you're not measuring it in other things where there's massive demand from millennials, which will drive it up or, you know, all of those things when you're looking at it in dollars, yes, UBI will lower the price of the Fed system. So, again, it's complicated. Let's talk about the big topic here, the first thing that I want to cover is just if Bitcoin wasn't out there, this is a story about gold, really.
This is a major story about gold. But now you have this technology that offering a counter to even that. That brings a whole lot of other qualities that gold is deficient in as far as dependability, the visibility, all of those things. So it's going to go back, it's actually about three things gold would have been and the other one, maybe even more importantly than you're seeing it, is cash flow. So the SAS business model is all powerful because you're generating something of real value now that it's overvalued right now.
But it throws off cash, right? When you've got businesses that are throwing off 70, 80 percent margins, whoever wants to own a bond. Why do you even want to own gold?
You're just compounding capital. It's such an incredible rate. So that's the other thing. So gold cash flows. That's that's a great point. Just look, looking here in twenty twenty, look at Nasdaq, the margins of the Fang stocks, the stocks that really drive the index, they just have the fattest margins. We've never seen margins like this before.
General Electric and Ford never had margins like this. We've never seen this before. So I understand it's difficult for the market to figure out how to price this stuff because we just don't know. I mean, we've never seen businesses that generate hundreds of billions of dollars in revenues and have 70 percent margins. I mean, really, I mean, that's astonishing. So it's difficult to value. We get it. Before we start going down this path, I want to talk to you about something that is kind of on a similar light.
So right now you're seeing a political movement to kind of break up some of these companies. And so many of these companies are being driven by artificial intelligence, deep learning. And you look at the competitors over in China, where the centralization of their competitors over in that geographical region or encouraged for consolidation and encouraged to be integrated with the government so that all that data can be harvested and manipulated and used to benefit the regime. Is the West in a vulnerable position because of the cries for monopolies and for governments to step in and start breaking some of these apart?
And I mean, how are we going to remain competitive against the E when they're embracing it?
And we're going to we're going to wall ourselves off or them off whatever way you want to look at it. It's the only way. The only way is to break into two incidents, essentially because you can't compete with state taxes because it's too dangerous and too powerful. Meanwhile, you know, I also don't agree with the fact that Google has more data, more people than any other entity in the world, far more than the Chinese government has. I mean, those guys have everything.
I've never even seen anybody else. The question, how secure is that data? Nobody even talks about the security of Google data. But this is a sovereign risk of the highest order. Probably the most important data base in the world. And Google on their own manage it. And how so?
We have to be very careful with granting these people the powers, including the private sector, because the ability of either abuse or of nefarious, they act to stealing it. I think too important to ignore.
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All right, back to the show. So let's talk the bitcoin versus gold versus cash flow. What are your overarching opinions on this? My opinions are in life of cash flow and then own Bitcoin as your asset, as your heart asset, because you are if you're operating cash flow, you're generating cash, which devalues over time.
I don't believe necessarily that Michael Sailors' point is applicable to everybody because nobody's thinking about 100 year time horizons of the capital. But overall, look, we're in a risky world out there. We're trying to make growth in our capital for the future. First thing is invest in yourself. So whether you create a business or you know, and you've done that right, you create a business. It's a high margin business. It generates an income. It affords you the opportunities to make investments and have a lifestyle.
That's all that matters for me. Everything is all about the lifestyle token. That's what you live for, is your life. I don't live for my Bitcoin. The Bitcoin is my life, for example. So that's how I think of it. First is first cash flow. Cash flow security gives the ability to then accumulate assets that have future value.
As you're talking about your retained earnings, you say that some of that isn't Bitcoin. Do you also own big technology stocks? I have none. And the reason being is I fear about regulatory risk and I also think expensive and I don't know how to value them any longer, but I kind of think I know how to value Bitcoin, which is it's a reserve asset with a call attached. On the future financial system, we talked about opting into a parallel system.
Well, once being built. So what value is that worth? Well, that's worth a lot. So I think I can get a macro valuation. I can't for Apple. I can't get a trillion dollar company and figure out is it worth three trillion. I just can't do that. And that's just probably because I'm stupid, but I just don't know how to do it. So I'm just stay away from it. And I put out a tweet thread today that I've now kind of use my Twitter is kind of overwhelmed with this thread showing Bitcoin vs.
every other major asset, including Amazon and Apple. Right. That all breaking down is Bitcoin. Look, I've been in this game a long time. I've also studied history. I have never, ever seen an entire asset consume every single other asset in the world. I mean, it's extraordinary. And I think this is just the start, right. Talk about the charts that you're describing, because I've seen them on Twitter, tell the audience, maybe considered the charts I started with is OK, what does gold look like versus Bitcoin?
Well, gold is breaking down versus Bitcoin. Then what does the Nasdaq look like? Surely the Nasdaq must be outperforming, though. It's breaking down. What about the banks? Well, the banks, you know, we've always talked about bitcoins destroying the banks. Well, the banks for all time lows in Bitcoin price using Bitcoin, the denominator. What about commodities? Well, if you use Bitcoin as the denominator, commodities are all time lows. OK, what about Apple, Amazon, the G4 central bank balance sheets?
That's been the most powerful asset in the world. No bitcoins eating them all. So Bitcoin is becoming the world's strongest narrative and it's only just started the chart patterns alone all look like they're breaking. So this is very interesting. I've never seen this before in my life. And just to put a little context on what he's talking about, so from the start of twenty twenty, you have the let's see what this is. Gold is up twenty four percent since the start of the year.
The Nasdaq is up 30 percent. Apple is up fifty five percent and Bitcoin is up ninety seven percent. It's crazy. It is crazy, and then the banks are down, what, 40, 30? Yeah, they're negative. Bitcoin is up ninety seven and the banks are down 30, right, that's one hundred and twenty percent outperformance.
This is incredible. It's mind blowing. So talk to us about the banking, your opinion is that Bitcoin is going to continue to run probably more aggressively than what, the hundred percent we've seen year to date? What does this do to the banking sector moving for the banking sector is reflecting something else, and it's that theory everyone's got bored of me talking about is the insolvencies is we have this bifurcated world where Nasdaq stocks were going up. But really everything from oil markets to banking stocks were all doing the opposite.
And the old economy names the triple B credit companies. They're the most indebted large companies in the world. They all look the same. They basically bounced a bit from the low and then flatlined and then started rolling over, which is actually exactly the same as the real time economic data. So the European economic data is rolling over and tipping down. Guess what? The European banks are tipping down. So they're reflecting the economy. The bond market looks the same to so as we said, yet that cash flow, racy business model of business is kind of decoupled.
Everything else is the same. The banks, if insolvency really is the problem and how insolvency is the problem is if I'm right and GDP growth stays negative for the next 12 months, there's not enough cash flow to pay for the debt. Simple as that, whether it's at household level, foreign corporation level or US corporate level, small or medium sized enterprise level. So that creates more insolvencies as companies go insolvent. And what the banks are telling you is there's a problem here and that's what the bond market is telling you.
And that's what General Electric's telling you. That's what AT&T is telling you. They're all saying there's a debt problem here. So let's see that you're right.
Roll that. Bitcoin is going to take off in twenty one. And I'm not saying that I agree or disagree with that statement, but let's say that is true. What does that do for the opportunity cost perspective, our fixed income investors? And what if it's not true? There's a reflexive loop that's going to happen. It's so obvious is the US has approved custody of Bitcoin for certain banks, which is a code word for prime broking for hedge funds, which means the hedge funds will see this.
Most of them haven't got custody yet, but soon they will. And that means that they will come into this space because they can trade multi asset class. So that sucks them in. And I've talked about this. The next is the ETF will get launched at some point, somebody will get it off the ground and then all the areas buy it for their customers because it's outperforming everything and they love to be cheap and chase the trade. So this is going to be the strongest trade now.
So you've got the hedge funds and the areas we know the family office space is already interested and they get sucked in. The more the price goes up and the narrative goes up and more people talk about it, family offices tend to do that endowment level and X because they can hold because the long term asset, so endowments can justify earlier and pension funds can pension funds can't do this yet. It's quite difficult for them. So we've got this wall of money that I keep talking about that's coming.
And if you throw in the public and the Nasdaq traders and the speculators and the Robin Hood and everybody else, you've got a perfect storm and you got the corporate treasurers. And I think that last one's huge role, I mean, Michael Saylor, no offense to Michael and his company, but now him dropping four hundred and twenty five million into this, that's a small company in the grand scheme of things globally. Right. Like that's it's not a big company.
Yeah, unfortunately, I've talked about this a few times recently, the crypto space is not very good at speaking the language of others. We tend to impose our own language. So the corporate treasures will not by Michael Sailors' language, because it's not the language that they speak. They don't think in those terms. The treasurer may stay at Microsoft for 10 years and then leave. You know, he doesn't think in the it wasn't his company didn't build it.
So we need to talk about how it works in a diversified asset, how it works in a corporate treasury portfolio of fixed income, commercial paper, currency baskets, all of the things that they do. We need to talk that language and show them. Once you do that, Microsoft and Apple and all these other massive cash businesses will own it. Of course they will, because it's a great asset for diversification and they don't need to buy too much of it.
The pension system, okay, that's another beast. Again, everyone's like they should do this well until you can show it to them. In Barrow models, Barria is the model by which most of the pension industry builds their portfolio and risk management tools. But we're not talking that language. So it's like you shouting at me in French and me just shouting back in English louder saying, I can't understand you. That's what's going on because they can't do anything with this.
They've got a barer asset. They don't know how to custody that. We're not telling them how it works from a portfolio diversification or risk metrics standpoint. So we'll get there. And I've already been starting to beg people who understand the Barrow world to say, listen, I know who owns that. Pension funds allocation world is consultants like Mercer. We need to get them across the line. You need to teach them about it first. Then they go to the pension fund trustees and then the pension fund trustees approve it for the asset allocators as a big process.
And I think the key distinction between what you're talking about across all these different mechanisms of how they could come into the market versus Michael Saylor is it's a story about voting rights. It's a story about control inside the company. He has complete control to just go out and do a bold call, have taken his entire Treasury and dropping it into Bitcoin like he did. The go first, I mean, good on him, right, because he was in a position that he could and he got it and there's a few other people around that got it.
But that will spread slowly. But it will come because I know everybody is going to hate this, but the investment banks will get into this space and they know how to translate. They know how to speak to these other people. And that's a net beneficiary to the space, even though all of us want to protect it from the investment banks. But they can't screw with it really, because it's distributed it's not owned by them. Nothing they can do with it.
They can help create a derivative market around it. That's coming anyway. There's nothing we can do to stop it because humans want leverage for some reason. Bang! Twenty, seventeen, where this thing was really running, the big issue discussed was whether the government would shut it down. You almost do not hear that argument anymore. What are your thoughts on that subject?
Yeah, I mean, I've read the IMF papers, the papers, the ECB, the Bank of England and the Fed and the Department of Justice, all the papers, not one of them is saying we need to stop this. They're all saying, let's make sure it's regulated, make sure the entities are regulated. And by the way, let's build digital currency systems because that's where we have to get to. And they kind of acknowledge Bitcoin. It's like, yes, look, this was the great invention.
And we understand they've got no reason to stop it because, I mean, the bloody foreign exchange markets trade for trillion dollars a day. They don't care about Bitcoin. But what it was was really interesting to them and taught them, OK, we need to move into a digital future and good on them. They're doing it now. How they use it in the end, who knows? But I don't think Bitcoin is a problem. Talk to me when it's ten trillion dollars and maybe they try.
But in a globalized world with something that moves around on the Internet, it's almost impossible to stop because somebody will allow it. But rather, when it's a 10 trillion dollars, you have so much entrenchment on corporate balance sheets all over the globe, like how in the world are they possibly going to shut it down, Attender? That's not going to go well with voters, so they're not it's the fear they once tried it with gold. Well, last time I checked, gold's been around for about 10000 years and still works as a system of value and money, regardless that the Fed once banned it.
Yeah, Turks banned it recently. Did it stop Turkey? It's not a narrative that's provable in the outside world. So one of the unique things that pops out of this, if we start going down this path, if you want to take out a loan right now and you want a hundred thousand dollar loan, you have to pretty much cough up two hundred thousand dollars worth of Bitcoin and put it into somebody else's escrow account. That's not how loans work today.
Right. It's very different than that type of system.
So when you think about this world we live in today that is so credit based and if everything starts moving in this direction where everything's equity based, what does this do to the landscape of everything? You know, I don't know the answer to that, because I think this is going to be a phased affair and it looks like this now, but in the end, Bitcoin won't live like this. Its volatility will come down to five percent. But at what price is that?
What market cap? 10 trillion. Trillion? I don't know. But then it's like money and then it stabilizes massively. So I don't really know how this is all going to work, but it will take time for that to play out. All right.
Well, let's shift gears here. You recently had a post about the IMF and the new Bretton Woods system. Could you please talk to us about that? Yeah, I've been flagging this for a while, the central banks, I don't think the PIIGS were first there. Mark Carney, the Bank of England, shocked everybody at Jackson Hole last year by talking about central bank digital currencies. Everyone's like, well, the main media missed it, but I'm like, what's this?
Is the Bank of England, the second oldest central bank in the world, talking about central bank digital currency and how disrupted Facebook LIBOR was as an idea. And they're not sure that they should let Facebook do this, but they should do it. I was like, wow, OK, he gets it. Well, then the ECB, Ben Koray, the Beiste, the IMF and the Fed all started talking about it. And then last week, before there's the IMF on video for everybody to watch talking about the new Bretton Woods.
And they all know that the dollar standard is a problem because the US is twenty five percent of the global economy and seventy nine and a half percent of all payments. So there's a massive mismatch. And the Fed have basically fill the gap. But now the mechanisms between onshore and offshore dollars don't flow either. Now the whole thing's a mess. And people like China who are larger don't to be held to ransom by the swift payment system. And a bunch of these things are known to the Europeans, really, because they want to trade with Iran and want the US to tell them the contract with Iran.
So anyway, it's in everybody's interest to walk off the dollar standard and create something new in the central bank, digital currencies of that. So they're talking about it in terms of a Bretton Woods, of having a new agreement on a currency. Now, I don't think there's going to be a single world currencies, but I think you can construct baskets. There's no reason South Africa should get penalised because it has a weak currency. And as a deal, everything in the US dollars, it's destructive.
Now, imagine if all commodities were traded on a commodity currency. The better reflect the fundamentals of these countries. It would be so much better than having to reflect it in the dollar, which is not fair on those countries because they're cyclical. I think we're going to see regional baskets, different types of trade baskets, anything we can create from this. And we've only just started. And then we have the ability of central banks to use this to completely change what monetary and fiscal policy even is and what economics is.
I mean, we are walk away from the standard Keynesian model and everything else, the whole lot. We're going to go into a world of behavioral economics and big data and incentive based systems where you get a different interest rate to me and, you know, they can make direct payments. And then before you know it, you're incentive systems were they can change your behaviour. By the way, your car monitor was caught, you speeding, and therefore you're going to pay a higher tax rate this month.
And I don't know if it's worse or better. Look, everybody says, oh, my God, it's a police state and everything else. Well, guess what? Surveillance state has been there forever. And if you don't think Google and Facebook and everybody else owns you, even here we are on Skype. Who's got this data? Microsoft. Right. So forget about the fact that we can get out of anonymity. Yeah, I'm on an island of 140 people.
I don't use the Internet. I'm pretty anonymous here, but most of us don't get that. So I think it's a really exciting time because they're going to screw this up. They're going to make some amazing changes, some great things, some terrible things. And as investors, that's the opportunity to me. So when you look at the news and you see Paul Tudor Jones coming out and talking about I bought Bitcoin a few months ago, I even like it more now.
I mean, he's really kind of coming on strong. How does the rest of the people at Goldman Sachs and everybody on Wall Street, how are they viewing that clip, that CNBC clip? Are people rolling their eyes? Are they taking it very seriously? They never take people like Paul seriously. They take his wealth seriously. He's a traitor and they don't get it and he'll change his mind a lot. But big hedge fund managers who can afford to take the risk, I mean, many of them just left the business and went to crypto famous people like John Burbank, just left Dan Moorhead, Dan Shapiro.
I mean, you name it, they're all Lovo. It's the supermassive black hole sucking them in to saying, well, all the opportunity sets in, all the other asset prices are less than this one. So hedge fund managers that I speak to, some of them are famous in the world, have called crypto investing units for their own personal wealth. So they get it. And the Wall Street guys, they get it, too. Most of these guys, you know, don't forget there's been a massive deflation in Wall Street salaries over the last decade.
People used to, as a salesman, used to earn two million bucks a year, now earns five hundred thousand. He's a seventy five percent haircut. So these guys now realize that banking is not the rich job that you then get out of and you can retire doesn't happen. So these guys are having to get the new religion as well. So there's a lot of people involved in this now. It will permeate into the actual investment banks themselves as they set up trading desks and all of that.
I mean, it's all coming because the customers are demanding it. Raul, you speak to the smartest guys in finance and still with your experience and you always strive to make yourself smarter every single day. What is something you heard here recently that has really changed your mind about a financial topic? The last interesting conversation I had that made me really stop and think was Geoff Booth that made me start thinking about wage deflation and I'm only just asking that thought process.
So you're the first person to really hear it, and I'm going to be writing something about it that's made me think something differently. And I don't know where that work is going to lead to, what it's going to tell me. But I just know it's interesting because it's the opposite of what everybody else is saying. And so when you look at everything in the world, what I'm going to do is look at all asset prices in the denominator of wages and then let's see what things look like.
Yeah. And also the other guy that really put my mind to stuff that a discovery I made on Twitter, Santiago Velez, who now does interviewing for a real vision. But he had this incredible understanding of the kind of Internet of value and the whole broader landscape. So that was super interesting to me as well, because he's really in the weeds of interoperability. How we connect all of these systems together, that is not a winner takes all. And he also said a really interesting thing, because you see the tribalism, the Bitcoin maximalism, us is blah, blah, blah.
And he's like, good. He said at first I thought it was a bug and now I realize it's the feature, he said, because everybody's fighting for their own piece of turf and what it's doing. And Michael Saylor talked about this.
Really what he's doing is creating these super vibrant, rich, deep communities that ensure the survival of their asset and only the strongest will survive because it has to be invested in by the community. It doesn't survive in its own way. It has to create network effect.
So it's really clever when he realized that this is network effect, this is Metcalfe's law happening in front of our eyes.
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So how do you think about the whole DFI movement where you have these decentralized exchanges? I know that you swap was the big one that everyone's talking about. On top of the theory, I'm curious how your view and some of the stuff. These are the baby steps into solving what needs to happen, which is a yield curve once Bitcoin and the crypto markets solve yield curve and has its own yield curve, then we we're free of the old system. It's as simple as that time value of money has to exist.
It doesn't yet. So define whether you hate it or not. Like the tokens. It's irrelevant. It is the market struggling to price capital in the crypto world. I love that. And it will get solved. And it will, because if Bitcoin is to be this pristine asset of pristine collateral that I talked about, it has to have time value because I'm not going to lock it up with that time value. If I'm going to give it to you as collateral, I want to get something in exchange, which is interest.
And in whatever format that is, it doesn't have to be money. It can be an extra bitcoin or whatever it is or other tokens or anything in this world.
But I just think this is really interesting. People don't really get it yet because they're still fighting over coins, I think coins and our currency. And that's the future versus it's not Bitcoin. I was missing what is going on, which is the largest single financial revolution that we've seen. It is the Internet of value. I mean, this whole tokenization thing hasn't even started and it won't be this wave. But the next wave behind this is you and I are going to be talking about tokens in all sorts of things.
And when we talk about value investing, we'll be talking about what tokens people don't understand because people don't know how to price the smart contracts embedded in this canvas. Is this one people like AKA who have come a long, short token funds drop one hundred and thirty odd percent this year. Last time I checked because there's Alpha in that space. So there's going to be alpha in money markets. In the crypto markets is alpha and tokens. There's this is truly exciting because we're so bored of financial markets that we can't even price any longer.
So you think value investing comes back once we get the yield curve back? Yes, because you've got assets that are not now driven by the demographic issues of the baby boomers selling all the active funds and the millennials buying the passive. Now we're going to create millions of new securities, literally millions. So what a beast of an opportunity. This is like going back into the hedge fund business in the 70s when Storrar started. There's no competition and there's not enough capital in the space.
And that would literally millions of tokens. And what a great thing to figure out how to create pricing models around smart contracts.
I can't get my head around it yet, but we're going to have to. Last question for you. Who's the patsy at the table in all of this? What is really nice is that the person who's not the patsy is the little guy, for once, the little guy is the winner. They are going to take their share. And that is amazing because for so long they are the patsy this time, probably Wall Street, because I think that business model is going to change dramatically because of fintech fintech a central bank.
Digital currencies plus crypto currencies is a big problem for the banks and that will change. So they have been abusive of their monopolistic powers for a long time. Sure, they don't make as much money as they used to, but they're going to make a lot less. But the oil companies make less and less now, and they will do in the future because they now have competition. So I think the balance of power shifts because don't forget, at one point the financials were 70 percent of the entire US stock market over financialization of the world has been the key feature of our lifetimes.
So our lifetimes, we've seen this enormous debt bubble. And if you are the dealer at the table of a debt bubble, which is a bank, you make all the money. Well, this is the opposite. It's the inverse. And that's really, really unique. Well, what a pleasure to always have you on. I'm a huge fan of real vision, and I'm pretty sure most of the people listening to this are also huge fans of real vision.
But give people a hand off, maybe highlight something that you want people to.
If you haven't seen it already, I did a piece about the new Bretton Woods because I think it's really important. And that's why you said, hey, listen, we got to talk about this. It's on YouTube. Just go to Real Vision on YouTube free and go and have a look or listen to the Real Vision podcast. So they're all free enough to pay for anything and just go and check out some of that content. This three or four piece of me, one where I lay out my unfolding thesis that's on there from a couple of weeks ago.
There's this one and then there's some of these really smart people that you you'll find interesting, because if you like this podcast, you'll like real vision, because we've always known each other, because we always realize we're in the same space. It's very accretive to all of us to create these kind of conversations, broaden everybody's mind. So we're all in the same game. The other thing is really exciting news. We're about to do something massive in crypto.
As you can tell, I'm probably marginally positive on the cryptocurrency space. Look, we wanted to create what we did in real vision of macro for the whole crypto space. We're launching World Vision Crypto been launched internally for the Real Vision subscribers, but it's going to be free to the world with some really big sponsors. And so everybody's going to be able to have access to the quality of information that real vision does in the rest of the investing space.
But in crypto, and that's covering every part, digital assets from the bitcoin maximalists to the weird, funky tokens that none of us understand, it's all coming. So just look out for me on Twitter as well and you'll see notifications of it and you can sign up to that for free, real pal.
Thank you so much for coming on the Investors podcast. It's always a pleasure. Thank you, my friend. All right.
So at this point in time, as we are letting go, we have a question from the audience. And this question comes from Josephine.
Hello, Pristina's. First, I want to thank you and say that I greatly appreciate listening to your weekly podcast. You're both an inspiration to me. My request today is in relation to the modern monetary theory and MMT, which seems to be a top issue at the moment. As far as I understand, the simplest form of NMT proposes that governments borrowing in their own currency should not worry about deficits as they can always print more money to finance the debt.
However, countries under the Eurozone are dependent on the European Central Bank to manage the monetary policy for the member countries. My question to you is how empty would relate to the eurozone countries that are not able to independently manage their monetary policies? Also, I would love to hear your general thought MNC. So Josephine absolutely loved this question and it's a very insightful question you're asking. Unfortunately, I don't know you personally, but I can see that you're writing from an email account belonging to a business school.
And I wanted to highlight that because macroeconomist is being taught in a weird way in business schools today, and that includes modern monetary theory, or MMT. It's often referred to.
So I just wanted to shout out to you and other students, listen to this podcast, how much I admire that you're thinking so critical about what is being taught to you right now, because we should all be able to think independently. Of course, both students going to school and those of us who are student of life as well. And let me address your question first about MMT in general and then specifically talk about the eurozone afterwards. The idea behind Amte, as you mentioned, in its most simple form, is that a country can print its own money and can thereby run the continuous budget deficit since the can't be insolvent.
Well, it sounds good, right?
But if something is too good to be true, it typically is. And the same goes for MMT. So let's first talk about the scenario of a non global currency country, and that includes most countries. Often they can issue some debt in their local currency, but they are at the end of the day, depending on the major currencies, whenever the issue debt, most notably the US dollar and run continues deficits quickly erodes the faith in that country and the step obligations leading to a debasement of the currency.
One of the most famous example of that would be the Weimar Republic in nineteen twenties who experienced this hyperinflation because they had to repay its debt mainly in US dollar and the sterling. A more recent example is that we've seen how line the world still is on the US dollar, and we've seen that just this year when we saw a dollar shortage during the pandemic and the dollar soared. And that happened because none of currencies had to source the debt in US dollars.
OK, so that was done.
Reserve currency. So let's talk about amte in a global reserve currency. And as mentioned, the most important fiat currency we have, that is the US dollar. And so, not surprisingly, you could say MMT was also originated in the US and it was first proposed by a man named Warren Mosler. But it was also must validated by former Fed Chairman Alan Greenspan, who said that there is nothing to prevent the federal government from creating as much money as it wants and paying it to somebody.
He actually said that.
And the US is in a slightly different situation because they are the main global reserve currency. But the conclusion is really the same. Whenever the music stops, you are in a world of pain. Now, the US in that privileged position that the Rhen can play the music for longer due to its size and the currency dominance. But the music still stops, and the longer the music plays, the more it's going to hurt.
So you might be asking how is it going to hurt and why? Well, the most obvious way this is going to hurt the US is through inflation. The US can continue to issue bonds to finance its debt, but only as long as the world keeps trusting the value of the US dollar as a store value. Whenever that stops, you will see rapid inflation in the worst case, hyperinflation that could destroy the economy and lead to social unrest. Now, proponents of MMT acknowledge the risk of inflation, but bring the argument that it can be countered by increasing taxes.
To me, that is just an argument that makes little sense because inflation is a tax on everyone and it hurts the have nots the most. And whenever you try to make tax reforms in the country, rapid inflation, the idea of just raising taxes is really just going to be a disaster. And so you might be thinking, why is MMT so popular even among politicians when it's obviously wrong? Well, think about it. If your petition and wanted to get elected, do you get more votes?
If you spend more or less money? Obviously, it's easier if you pledge to give money to more voter groups rather than few because it's a pain to stay within your budget. So if you can argue that you can print as much money as you want and you don't have to care about the budget deficit at all. Well, a lot of politicians like that idea and voters are used to seeing actual cash on cash. But you see well, you see, it's been printed by the central bank.
So the idea of just printing more money resonates with a lot of people.
But that doesn't make it true. Then, specifically to your question about in Europe and sorry for the long way around going to that question, it's a basic assumption. And you know how economists like assumptions that in a sovereign country you need to be able to control your own money supply. And as you say, that's not the case in Europe. So Amity is not applicable to Europe. Also, given that you don't have the same crossover between fiscal and monetary policies as you do in the United States.
It's sort of being tested here in twenty twenty. I want to give you that with the Corona bonds and raising money for fiscal spending. And so far I'm not impressed.
And in any case, it won't change the fundamental flaw of the theory. We had multiple monetary regimes throughout the last few centuries, and it's always tempting to conclude that as long as you don't see a complete failure in a few currencies like hyperinflation, it validates a monetary policy.
I don't agree with that.
And I also just want to clarify, I don't see hyperinflation all in the US or Europe in the near future. That's not what I'm saying and that's not the point. But I am certain that if we continue to run these crazy deficits and just print and print and print, it doesn't matter MMT or whatever kind of theory you're going to relate to, it won't save us. So to your question about Imjin, Europe, not only in reality is MMT not applicable in the Eurozone, even in theory, it's hard to make the argument, even though I'm sure you'll find some economists that will give it a fair try.
All right. So, Josephine, fantastic question. I think a lot of what we talked about with Rawle really kind of gets at the heart of what's going on and why MMT is going to be. In my personal opinion, a disaster. Why are they doing this, why haven't they ever proposed something like this in the past? Well, why they're proposing this is because when you look at the velocity of money, how often money is being exchanged amongst all the participants in the economy, it's slowing down year after year.
It has. It has been for decades. And now it's it's at a snail's pace between participants inside the economy. And what's blowing the minds of so many economists are saying, well, we're printing faster and harder than we ever have historically. How come that's not driving the velocity of money up? Well, you have to look at how it's been inserted to date and how it's going to be inserted into the future. And if they continue to just inserted into the bond market and straight into the hands of people who are holding all these assets, and then those people take that that cash flow that's just been recently printed, what are they going to do with it?
Well, they're going to go and buy other assets because they're already fairly wealthy or they're extremely wealthy in most cases. And they don't need to go out and buy more things. They just need to go out and buy more equity or they need to go out and buy more fixed income investments with that money that has just been stuffed into their hands. So the way that they're supplying that liquidity into the system, it's just nesting itself straight into assets as opposed to into the hands of people to conduct transactions, which is where they really want it to go.
The problem with this long term, in my humble opinion, is you're creating an incentive structure that is broke if you want to understand the incentive structure that printing and and the inflation of monetary units as they're adding more and more units. And then the credit is just being stacked on top of that, which also spends like money. Credit spends exactly like money. When you look at that, what that incentive structure is doing is it's forcing the speed of technology in the speed of investment into new technology to accelerate.
Geoff Booth has one of the best books on how this how this investment and this incentive structure compounds on itself, similar to like what we're seeing with Moore's Law. That's why you see technology just eating the world right now. So as they continue to double down, triple down, quadruple down on on this idea of MMT starting to take interest rates negative, it's only going to compound this technology software, eating the world type event that we are currently experiencing.
And it's in it starting to feel like it's getting out of control, like beyond society's ability to actually handle it. Just look at how media is being spread and social media and all those aspects that are just devouring our social norms. I would I would suggest that a lot of these are due to these policies and they're due to this incentive structure that is a result of these policies. So I'm very concerned about it. One of the reasons and I know we just talked about Bitcoin on this show for a lot of time.
One of the reasons I like Bitcoin is because it it could potentially slow some of this down. In my personal opinion. Some people will argue different sides of this. But in my opinion, if you if an inflationary monetary policy and I'm talking about them adding more units whenever I say inflationary monetary policy, if if you're adding more units and it creates this incentive structure, if you have something that's pegged, it might slow it down. That's not a reason why Bitcoin will be successful.
But it the reason I'm bringing it up is because it might be a counter to all this software eating the world that that we're seeing. It could slow some of that incentive structure for capital investment into more and more technology. It might slow it down a little bit. Another thing that I think is huge about this is when you're talking about modern monetary policy, what is really doing is it's keeping these zombie companies alive. So many of these companies do not have free cash flows.
And whenever they just hand out loans to companies that in otherwise would would fail, you're just keeping them alive and you're in you're not allowing creative destruction in a free and open market to occur. And I think that that's my biggest issue with MMT, is you're not really allowing free and open markets to really exist. And I just think that that's crazy. So those are some of my thoughts. Those are some of my concerns. I get very frustrated whenever I see academia not kind of lay some of these these counterarguments out like Stig and I have just done.
It seems like, you know. Academia is just going along for it, they're they're recommending it, they're suggesting that this is the best route to go. And I would I would suggest the exact opposite. Now, if we let's just say that I know a lot of people don't buy into the into the Bitcoin argument, and that's fine. I would just say that if that starts to become a reality and it would start to take hold and I I suspect that's what is going to happen.
You're going to need some type of policy like MMT in order to grease the skids for that transition to actually occur. If central bankers just step back and didn't print anything that transition period over to something, that would be a hard equity based monetary policy that's being delivered completely decentralized would be an extremely painful event for the world. So although I like to bash MMT in a weird way, if we are going to this Bitcoin world, we really do need some type of MMT policy where a lot of liquidity is being provided into the system in order to make that transition a whole lot smoother and not as abrupt.
So I know that's kind of counterintuitive to some of the stuff I was saying before, but in a weird way, that MMT policy is somewhat needed for a more graceful transition if this Bitcoin world that Rallen, Stig and I were talking about actually transpires. So, Josephine, fantastic question, this is this stuff is not easy. We definitely don't have all the answers. We're just we're looking at this from so many different angles. We're trying to talk to as many people as we can.
But what a great question and for asking such a great question. And we're going to give you access to our tip finance tool. This allows you to go in there, filter all the stocks on the stock market for value so you can find really good companies that are kicking off good free cash flows and that are undervalued relative to every other stock in the in the market right now. It also has a momentum tool, which has been extremely useful here in twenty twenty with the volatility that we've seen in our momentum tool has been extremely accurate at keeping people in the market at the right time for anybody else out there.
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All right, guys. Preston, I really hope you enjoyed this episode of the Investors podcast. We will see each other again next week. Thank you for listening to IP to access our show notes, courses or forums, go to the investor's podcast Dotcom. This show is for entertainment purposes only before making any decisions, consult a professional. The show is copyrighted by the Investors Podcast Network written permission must be granted before syndication or before casting.