The Crypto Market Seems Different This Time From Raoul Pal
This is the biggest monetary tightening in all recorded history in the shortest period of time. Weve got rising commodity costs, rising interest rates and a strong dollar. Those three things together are extraordinary. So here is the a combination of those three against the ism and its already pricing in a recession. Ism below 47 is a recession, its saying the nine month forward. Ism is going to be 37 and its still going, so it kind of feels that were going to go into a very sharp urgent recession. All youre trying to do in the investment game is put probability in your favor thats. All we do and its trying to figure out okay, how do i get to a trade idea, most people just kind of bring them out of nowhere and think? Well, i just want to do this trade, maybe its based on technical analysis, maybe its based on some fundamental piece of news, but i do it in a very different way. I take a very structured approach, which is: what is the long term secular trend? I almost never trade against my secular trends, ill either go with my secular trend or not at all. Then once ive got a secular trend. The single most important driver of all asset prices is the business cycle. I use the ism survey as the guide to the business cycle, which is basically just mirrors gdp, but on a monthly basis. So i use the business cycle to analyze where markets are going so the year on year.
Rate of change of almost all markets is actually the same as the ism server its kind of a really weird thing, but thats how it works. So i, the business cycle, is the most important driver of asset prices. The secular trend then gives you what you want to do so secular trends are often in my world debt, demographics technology. Things like that. You need to have an eye on those trends. Then you have an eye on the business cycle and then you get down to okay. What do i want to do and what trades are there and then i tend to use technical analysis sentiment analysis, um flows, that kind of stuff to then get the odds further. In my favor, so i try and build the whole thesis out. I also look at history. I look at a lot of history and say: when has things been similar and i dont expect a complete repeat, but you know humans are humans will react in the same way to roughly the same set of circumstances, and so i i tend to look for those Kind of setups, so if i can explain all of it, i tend to have a very high probability of being right, but those kind of big setups come infrequently im, not a frequent trader im more of a big picture, macro long term position, taker yeah, so the Market is currently obsessed by inflation, its obsessed by the central banks, its obsessed by interest rates going super high.
We saw bill act coming out today. Yesterday, saying you know, interest rates need to go up to the moon. I step back from the narrative and start looking at okay. What is the reality of that and i think the reality is and ill show it in the presentation that what weve actually done is utterly destroyed. Demand already weve had the largest rate of change of interest rates in history. The largest rate of change of commodities in history weve had the largest rate of change of mortgage rates, all sorts of stuff, a very perky dollar as well a strong dollar that makes a big difference to this. Those things tend to be financial conditions. Tightening we can see it in the equity market, we can see it in the housing market. You can see it in the crypto market. Is conditions have tightened dramatically? The markets still looking at the previous cpi, prints and cpi is a lagging indicator. The forward looking stuff of the business cycle is collapsing and thats interesting to me, because that fits with my secular framework, which is disinflationary slower growth over time with this aging population. Demographics, all of this stuff, all coming together, so thats. Why im really paying attention right? Now i think the markets probably wrong, and i think that its going to set up for a whole bunch of opportunities as the fed pivot fast and the economy goes into recession. Much quicker than anybody expect so were in a slow growth world driven by demographics and debt.
The central banks need to keep propping it all up and that keeps going into the future and thats baked in the cake, so thats, the secular structural view, but now lets talk about demand and where we are in the business cycle. The business cycle is looking like it is about to roll over really really hard, and i talked about the massive monetary tightening weve had. This is the biggest monetary tightening in all recorded history in the shortest period of time. Weve got rising commodity costs, rising interest rates and a strong dollar. Those three things together are extraordinary. So here is the a combination of those three against the ism and its already pricing in a recession. Ism below 47 is a recession, its saying the nine month forward. Ism is going to be 37 and its still going, so it kind of feels that were going to go into a very sharp urgent recession and thats. What the mark! The markets are picking up thats what cryptos picking up thats what equities have been picking up equities are currently pricing the ism on the year on year basis at around 49., so theyve got further to go to price in some of this, but the com comparisons get Easier because the market went up a lot this time last year, going forwards so im looking closer towards the low and ill come into that in a bit, so lets look at the rising commodity cost of the equation.
Why this is so bad? Food prices, the largest increase in food prices since 1919. It goes back to the 1970s, so this means, if your food bill goes up and your wages havent been going up. Therefore, you have well if wages have been going up in inflation, adjusted terms about five percent and food has gone up at nine percent. You can afford less other goods because you keep consuming food. So food is one of these inelastic goods that destroys demand in the economy and, as i said, your wages have gone down in inflation, adjusted terms because wages have been rising at about five and a half percent, but everything else is rising faster and that led people To take out more credit again, so credits been increasing and credits been increasing about six percent a year, um right now and thats off site, setting the difference between commodity prices, cost of living prices and incomes. The other thing people did was save a load of money. Over the pandemic, because they didnt spend it as much and they were given direct transfer payments theyve now pretty much eroded it and gone back to trend. Now you really want to see the personal savings rate increasing, which has been doing because of the retirees but were back to where they were so all net gains have gone. Theyve spent all their money, theyve started, borrowing money that tells you demand, is about to be destroyed and that any of the retail sales numbers that have been perkier are going to start dying off pretty fast.
My view is that for once, the u.s consumer wont be saving the day and its kind of a something thats believed to be a truism in markets. Is the consumer always saves everything in america? I think weve probably broken the consumer, so input costs are also rising. So that was the consumer level, but now lets look at all other commodities. Now we saw the largest rise of commodities again for decades. The rate of change of commodities now is falling sharply, which is why i think inflation falls sharply the year on year. Rate of change matters the most, not the absolute level of oil. For example, its the year on year rate thats turned down. We will see cpi turn down with a vengeance soon, but were still paying for that spike that we had, and that spike was dramatic, that spike translated through to ppi inflation, so producer inflation input costs went up dramatically now, if you invert those well guess what higher Prices lead to economic slowdowns so because youve got this indebted old economy. The moment you raise, prices demand gets destroyed, and this is again pricing the ism down at 30, which would be the worst ism print since 1974, which was an equally short sharp recession, where the ism fell from 56, roughly, where it is today to 30.