WBD140 Audio Transcription

Raoul Pal on Bitcoin as a Global Recession Hedge

Interview date: Monday 29th August 2019

Note: the following is a transcription of my interview with Raoul Pal from Real Vision. I have reviewed the transcription but if you find any mistakes, please feel free to email me. You can listen to the original recording here.

In this interview, I speak with Raoul Pal, economist and investment strategist. We take an in-depth look at the state of the global economy, whether we are on the brink of recession and the role Bitcoin may play as a hedge against legacy markets.

“The system has basically got you trapped in. The stock market is at all-time highs it’s massively overvalued, what do you do with money? It’s really difficult… and this is why, what I’m so interested in is, there’s a group of people creating a parallel universe in which none of this applies, and that parallel universe is the Bitcoin universe.”

— Raoul Pal

Interview Transcription

Peter McCormack: I would say good afternoon Raoul, but I actually don't know where you are in the world.

Raoul Pal: I am very lucky because I'm in the Cayman islands. So if you don't know where that is, that's kind of west of Jamaica, east of Honduras in the middle of the Caribbean sea.

Peter McCormack: Well, normally I do about 80% of my interviews in person, I fly all around the world and I really should have done this one in person!

Raoul Pal: Yeah, you're stupid! Although it's probably hotter in England than it is in the Cayman Islands right now.

Peter McCormack: Not today. It's been raining heavily, but I don't care, I would love to come out to the Cayman islands. Maybe we'll do a follow up one day.

Raoul Pal: Exactly, you're more than welcome.

Peter McCormack: Well, thank you. Anyway, it's good to have a fellow Brit. The majority of my guests are Americans, so this is going to be a very British episode. Okay, so firstly, I've only recently discovered you, as I mentioned before we started, Marty Bent, who has an amazing podcast, shared out your Tweetstorm, looking at the problems of Europe and I thought, "this is great!" It's certainly something I need to know more about and certainly something you're an expert about, but before we start, I think it would good for people to understand your background and talk about the work you're now doing with Real Vision.

Raoul Pal: Great! My background is that I'm a finance guy, so I'm 30 years in the finance industry. The majority of my career was at Goldman Sachs where I ran a large business at Goldman Sachs. I then went and started and managed a hedge fund for the largest hedge fund firm in Europe, doing what's called global macro investing, which is top down, big picture, looking at all asset classes around the world and looking for the opportunities, generally driven by economics or big secular things. So that's what I did.

Then I opted out of the rat race and semi retired when I was 36 years old and moved to the Mediterranean coast of Spain, a town called Javier and there I started writing the Global Macro Investor. That is a kind of macro-economic and strategic research service for the world's biggest hedge funds, family offices, sovereign wealth funds, pension funds, governments, stuff like that. Whilst doing that, I started realizing... Well 2008 came along. When 2008 came along, I realized that I knew everything that was happening, because I was at the epicenter of the financial industry.

But when I spoke to my parent’s friends or friends of friends, they were like, "well, why don't we know?" I thought that this was wrong. It's wrong that a whole group of people knew and a whole group people didn't know. So I understood why the banks couldn't tell people and yes, Occupy Wall Street and all of that was going on at the time as well. I understand that the banks couldn't tell people because they've got shareholders and they're all going to go bust, but the media did a terrible job. That's when I started realizing that maybe there was an opportunity to do it better.

So two things happen simultaneously that is relevant for you out of this is, I started realizing that video was probably the answer to the future, because a friend of mine was running ITV at the time and I said, "how is business?" This is 2007/2008. He said, "business is great, but YouTube." I'm like, "what do you mean YouTube? It's cat videos" which is all it was at the time and keep fit videos. He's like, "no. Nobody needs a broadcasting license and we pay a hundred million pounds for it." I'm like "really?!" He said that "video on demand technology is so disruptive, we don't know how to deal with it."

I said, "what are you going to do about this?" And he said, "nothing. We're going to wait," because everyone saw what happened to the music industry because of Spotify and Napster and everyone saw what happened to the book industry because of Amazon, nobody's going to move quickly, they need to figure this out. So I thought, okay, here's a great opportunity. So eventually wind forwards, I realized that the opportunity was to start a video on demand channel, like the Netflix of finance, which became Real Vision.

The idea behind Real Vision was to democratize financial information, to make sure that everybody had access to the same quality. So how do we start that? We just got the most famous hedge fund managers and the most famous investors and the best analysts and strategists in the world, that the average guy would never get access to and because they were friends of mine, we just interviewed them for an hour.

We got total access to their minds, what they think, what the opportunities are, what the lessons are, the failures, the successes, everything and it kind of blew people away, because we dropped the barrier between the elite and the average investor. We said, "look, that shouldn't exist" and nobody wants it to exist. So we then started creating more and more programming.

We've made a documentary series about gold, we've done a number of things, but at the beginning of all of this, was an understanding that 2008 was a really watershed event, that there was a massive loss of faith in the financial system, Wall Street and the media. The opportunity is to change that, which is what we did with Real Vision and the other part of that equation was Bitcoin, that I felt strongly about, was part of the same narrative, which is "we have now broken everything. Now it's up to us to find the solutions."

And that's how I discovered Bitcoin as part of this journey and why Bitcoin has been part of Real Vision's core fanatics from the very first video we ever did, because we talked about the problems in the world and why Bitcoin, cryptocurrency and all of the world that's developing out of it, is maybe a solution to many of the issues.

Peter McCormack: What a beautiful and elegant solution that Bitcoin has proven to be in that, the problems are being solved away from the banks and the central banks and the governments that have caused all the problems. This is essentially a people revolution, but a decentralized one.

Raoul Pal: It is, and it also isn't, because banks are pretty smart people. So when you actually go and speak to a lot of these people, all the Goldman Sachs of this world, the JP Morgans, they're massively involved in this whole space. So now Bitcoin is separate, because Bitcoin is decentralized in its very nature, but all of the ancillary Blockchain, tokenization, digitization, all of that stuff, they're all working on too, as is VISA, MasterCard, everybody else.

But what is happening in it and Facebook's Libra coin, at the center of all of this is massive revolution and it was driven by the average guy and the adoption of Bitcoin, which was a genius invention and we still don't get our heads around how genius it was, but as things develop, it was an enormous breakthrough for the world.

Peter McCormack: So one of the things I've struggled with Raoul is making my friends care. So if I was to go onto Facebook and I post a picture of me and my kids on holiday, I'm going to get 150 likes. If I try and started a bait around Brexit, I'll get maybe five or six people enter a conversation. If I then try and get them to understand Bitcoin and I'll put something up to explain something as best as I can explain, but point out that we've got negative interest rates heading our way and try and point out some of the problems in the money system and that Bitcoin is a hedge against this...

Actually I took a quote from your interview with Stephan today and tweeted it out, you said "even with a small probability, the risk reward is so enormous that this is the best opportunity in the world." Yet I can't make anyone care and I know what's going to happen is, at some point in the next six months, Bitcoin is eventually going to break through the $20,000, it's going to set a new record and suddenly all my friends are going to care and it's almost going to be too late.

Have you found any way of trying to get the normal person on the street, who doesn't understand how the financial system works, doesn't understand the meaning of inflation, doesn't understand what happened with the banks, how they can care and how they can prepare for this?

Raoul Pal: The question is whose job is all of this at the moment and where we are in this whole Bitcoin journey? Because Bitcoin is not money yet, it's too volatile. It goes up and down too much to be money, but we all think that it may be money in the future. It has lots of elements of money-ness. So the only thing you can appeal to them on right now, is greed, because if you don't understand the financial system, you can't be fearful of it, which is part of the issue.

So what you end up doing is having to then educate them about the financial system and fiat money and all of the complications and central banks and now you're down a big rabbit hole where you've lost most people. But if you say, "listen, the stock market is at all time highs and it's been going up for 30 years. If there's no interest rate, so when you want to retire, you can't live off your money, what are you guys going to do? Your house price hasn't gone up a lot recently. How are you going to do this?

But if you put just 10%, 5% of your investment in this thing, and I'm right and it goes up a hundred fold, well you're going to make enough money to retire on." That simple value statement, which is what I'm talking about with the best risk reward, is if they lost it... Let's say they've got £10,000 of savings and they put £1,000 into Bitcoin and it goes up a hundred fold. That moves their entire net worth 10x. So if you put it that way, they'll go, "oh bloody hell yeah" and that is the way you bring them into the system.

Once they get into the system, they'll understand it better, because guess what, once you start to make some money and you take some losses, you start to understand what it's all about. You start thinking, "I need to understand that, okay, this is a long-term investment. It's going to be very volatile for now" and they'll start to understand. So you need to get the key thing.

You're an advertising man, you have to understand it. What are you going to anchor their behavior on? You need to find which is the emotional motivator and it probably is greed. At some points, it can be fair. If the stock market melts down or as Brexit gets closer, you can use things like fear to get people to understand it, but greed is the easiest.

Peter McCormack: Well listen, I don't post every one of my episodes to my personal Facebook feed and this one will go up, so we'll have a chance. But I do have a receptive audience of Bitcoiners or people interested in Bitcoin who will want to know a bit more about what's going on in the global economy and I know your Tweetstorm was specifically about Europe, but I have a feeling this is all interconnected. So can we start to talk about this?

Can you start explaining what's happening at a macro level globally? Because I'm seeing certain things and I certainly don't understand economics that well. I don't really understand how markets work, but when I see something such as a negative interest and negative yields, I have a feeling they're not a good sign!

Raoul Pal: Yeah, so let's get at the very top level. What is the main feature of the economies? The main feature for economies, I think everybody intuitively knows is, they go up and down. We have booms and busts or recessions and boom times. Now, what's amazing is that that's relatively predictable. That cycle, the amplitude can change, i.e. the length between the boom and the bust can shift around a bit. But booms and busts don't go away. England avoided it for a period of time.

So England avoided it from 1990 through to 2008, it was a very long expansion. The US is in its longest expansion in history right now. Australia is in the middle still of its longest expansion in history and sometimes they're short. Europe's had a number of small recessions. They had one in 2008, a big one. They had one in 2012 when the EU almost fell apart and they're in the middle of one now. So what you're looking for is that.

So I'm looking to see that England, Australia, the US are overdue the downside of the business cycle. The interest rates have risen in America, which usually is the harbinger of the end of the business cycle, because the Fed has been trying to slow the economy down by raising borrowing costs for people, so they can spend less money. Okay, so that's happening and we see this slow down evolving. That's all well and good and that's normal, the business cycle is normal.

But the problem is that we spent too long trying to stop the business cycle happening by managing interest rates. So this happened, if you remember, you'll have read about back in 1987 and the stock market crash, the Federal Reserve cut interest rates to try and stimulate the stock market and confidence. It worked. So the things recovered, there was no recession. So the central banks started using this trick endlessly, cut interest rates and interest rates have been falling and falling and falling over time.

As interest rates fall, people borrow more money. So you've got this enormous explosion in debt and interest rates keep falling. So now you've got a problem where you've got the largest debt pile the world has ever seen. You've got interest rates at zero and falling, we'll come back to this negative rate business and we have a global economy looking like it's going into recession.

The problem is, is the outcomes of this are actually potentially serious, because we have the largest group of people in history going into retirement at this age, which is the Baby Boomers, those born just after 1945. Those people are all going to retirement and if we're not careful, we have a recession and the stock market falls by 50%, which is normal and you're going to wipe out their entire savings in one go.

So you've got that event, you've got governments that have borrowed way too much money, people like Japan are extraordinarily in debt, and they've been buying their own bonds, so they'd been buying their own debt to issue more currency to stimulate their economy! These things are not normal, right? It's basically getting a credit card to pay your mortgage. So they're doing this and they're getting close to the end game, another recession, and they're going to own all of their own bond market.

So basically it's like putting their entire mortgage on their credit card at this point and then so what do they do? They're going to write it off, because they owe it to themselves and you could create chaos in the currency markets then, because it's very difficult to understand what a currency has been worth, when government just writes off all of its debt and says, "well we're not going to pay anybody back, even though we owe it to ourselves."

So these things are somewhat complicated, but they're very wonky. In Europe, we've got a banking system that never recovered from 2008 through to 2012, it's a real mess. They just basically swept it under the carpets and hoped it went away. In the US we've got a corporate sector that has basically been issuing debt in record amounts, debt at the corporate levels of companies, has gone up 100% since the crisis.

What they've done, is use that debt to buy back their own shares, which if you think of what happens is the managers or the top level in the company all have lots of share options. They issue new debt, buy back the shares, which drives up the shares, they all get rich and guess what? The 1% get rich and the 99% gets screwed.

Peter McCormack: My friend Travis Kling, I did an interview with him and he called it "universal beta income for rich people."

Raoul Pal: Yeah, it's a cash machine for them and it's extraordinary. So what you're creating is this big potential number of banana skins. China was another great savior of the world. They went and did the same thing. They basically brought forward their economic growth by borrowing money and spending it. So they built roads and bridges and railways and you name it, they built it and now they're one of the most indebted economies in the world.

So they've got a banking sector that doesn't work either. The Japanese banking sector doesn't really work either. So we're a little bit precarious to be going into recession. Now this is where it gets important, is normally the central banks would do their trick and cut interest rates. Low and behold, interest rates are zero. So what are the interest rates doing then, they're starting to go negative, which means that you have to pay the government to lend them money, because it's the safest thing you can do, because the system has basically got you trapped.

The stock market is at all time highs, it's massively overvalued, what do you do with money? It's really difficult and you've got banks that are not necessarily as stable as they could be, so you're prepared to lose money to own bonds because they're a bit safer. That's a really complicated world and this is why, what I'm so interested in, is there's a group of people creating a parallel universe, where none of this applies and that parallel universe is the Bitcoin universe, where you can step out of a lot of that universe.

You can't step out fully yet, you can't do seamless payments and you can't manage your mortgage doing it and you can't do all of the things that we do in everyday financial world using Bitcoin. But God, there's a lot of people working on developing it, to make that eventual outcome. Will it totally replace the financial system? No. But will a future financial system involve cryptography and cryptocurrencies? For sure!

So this is why it's very, very interesting what's going on globally right now. The risk of a nasty set of outcomes is very high, which makes owning Bitcoin and here's the fear part of the equation, makes owning Bitcoin as a option to opt out of that financial system, makes it extremely valuable.

Peter McCormack: Okay, so I've got a couple of questions. My first one is, it feels like you've said here about, essentially they've been delaying the business cycle. They've been delaying the bust. So I guess the longer you delay it, the bigger the bust is going to be? Then secondly, is this delaying a result of globalization in that almost all the major financial powers in the world are playing a game of chicken?

Raoul Pal: The globalization story is a very interesting one. Again, it's an outcome from the over financialization of the world and then the bust. So what happens is, people are looking for reasons why they got screwed. The reason everyone got screwed is everyone borrowed too much money, that was the actual answer. But what they want is they want somebody's scalp and the scalp they're going to take is globalization.

Globalization was done the wrong way. For anybody interested in the mistakes we made with globalization, there's a fantastic interview on YouTube with a famous English billionaire called James Goldsmith, who was like the famous corporate raider of the 1980s and 90s on a show called Charlie Rose, who was one of the most famous interviewers in the US.

It's a phenomenal interview and in 1996 when the World Trade Organization was being set up and the general agreement on tariffs and trades was being set up, James Goldsmith, who was this pure capitalist, was saying, "this is the wrong thing to do! What you're going to do, is you are going to your hand your entire manufacturing to China and Vietnam and these other countries. You're going to hole out your middle class and your working class.

They're going to get rich, but in those countries, not every man's going to get rich. The kind of oligarchs are going to take all the money", which is what's happened in China too. Yes, the whole nation's got wealthier, but some rich people got really rich. Same in Russia. So he said, "you're going to create civil unrest and it'll end up in populism and you'll destroy everything that you're supposed to be doing."

He said the answer is not to allow everybody to trade freely, because the problem is you set up labor arbitrage, which means you're a car company, you'll go to the cheapest labor, because that's the most costly inputs. You will change all of that if you do this. If however, you say there is no barrier to entry, if you want to sell goods in China, manufacture them in China or manufacture them from abroad, but you'll have to pay a tariff to do so, if you're going to do it from abroad. So you equalize the labor costs.

That way you don't screw your own population, but everybody can compete in each other's countries. So Chinese company can come and set up a computer manufacturer in the US and compete on the same terms as Dell and Apple; fantastic. But that's what they didn't do. So there was an inherent flaw in everybody thinking that the capitalist ideal of globalization and free trade, was the answer for everything.

It did bring good growth for a period of time, but as you rightly said, the flip side of that was these imbalances got built up and we just didn't control the system, so the bust is going to be bigger than we should have done.

Peter McCormack: So is this essentially what we've seen with the steel industry, especially in the UK?

Raoul Pal: Exactly and the car industry in the UK and all of these things. So if you think of the UK car industry, go back before the WTO, remember Toyota and all those guys, Honda set up car plants in England. That's the right way. The wrong way is to import Chinese cars into the UK because you're using labor costs that are $5,000 a year, as opposed to the UK car worker, probably about $40,000 a year.

Peter McCormack: Okay, so in the Bitcoin world, we have a number of libertarians who are big proponents of the Austrian economics, which is something that is new to me and I'm trying to understand it and it certainly seems to have some interesting principles. They often talk about free markets and free markets being efficient and the benefits of free markets. So is what you're saying that free market are good protected by state borders, but a global free market is too risky?

Raoul Pal: I think because there is no status quo where everybody's on the same playing field, to shift into a free market, when somebody has got $1,000 a year labor costs and somebody else got $50,000 a year labor cost, is impossible. You create massive breakages. If the world was in economics terms, ceteris paribus; all things remaining equal, if everything was the same, i.e. perfect competition, then it's perfect. There's no problem. But perfect competition does not exist and that's the key tenant of economics, that there is a level playing field for everybody.

That does not exist, so we can't pretend that is the case. What is interesting about Austrian economics, is Austrian economics believe in the non intervention of the business cycle and basically allowing the business cycle to have booms and busts more frequently, because that stops these big imbalances. It stops people borrowing too much money. It stops companies borrowing too much money. It stops people making stupid investment decisions. It regulates itself and that is a much more stable economy.

So if you're seeing what's happening to Bitcoin, let's bring it back to Bitcoin, is these 90% down move or 80% down move, 500% up move kind of thing that Bitcoin has been doing, is a free market in something that is now regulating how much capital people will put at risk, because you understand there is a volatility that means it's terrifying if you put too much money in, because you're going to look like you lost all your money at one point.

So having some volatility is good. Having no volatility is terrible, because people then extrapolate that everything will be okay and that's what happen with houses, because houses don't go up and down like the stock market. So we go back to 2007/2008, everyone had too much risk in housing, because interest rates were low, you could borrow money easily and your house price didn't go up and down a lot. Guess what?

House prices then suddenly fell 25% and everybody's totally screwed because they didn't realize. If house price had been moving up and down a lot, people won't take as much leverage. So that is what Austrian economics kind of believe, is the free markets in that respect.

Peter McCormack: I actually bought the house I'm in right now, I think it was June 2008. If you look at the graph, I bought it the month before the crash happened!

Raoul Pal: This is why you need to learn more about finance!

Peter McCormack: So when people argue against me and they talk about Bitcoin being too volatile, actually there's a good defense in that, it's a good reflection of a free market and the natural boom and bust cycles, which actually are quite regular as well within Bitcoin?

Raoul Pal: Yes and because Bitcoin doesn't have the depth of end uses yet, of course it's volatile because it's still quite speculative because we're all using it as an option on the future. Because the future is uncertain, there is a lot of volatility, that's exactly right. But when it becomes not an option on the future, but a commonly accepted method of payment or store of wealth or whatever ends up being, the volatility will go significantly because more people will be buying and selling on a daily basis and that's right.

Therefore, it becomes less risky over time, meaning it's been adopted. So the adoption will lower volatility. It's trading right now to say, the way it's skewed with such huge upside spikes and these big downswings and then huge upsides, it's telling you that it is trading like an option that even though people lose faith for periods of time, the key driver is the upside option on the future of financial system or future wealth.

So you have to think of it that way, which is why go back to the conversation of how do you get your friends into it, it's like take a small position. Understand that your £1,000 may go down to £200, but keeping it, because with the next phase up, it will eventually get you to be worth £100,000.

Peter McCormack: Also with Bitcoin, there is no central bank with a monetary policy who's trying to change the boom and bust cycle, like you've said, so with the global economy.

Raoul Pal: Correct. So you actually have a free market, which is why it attracts some of the libertarian elements to this and the libertarians come at it from different angles as well; they don't want any regulation and I think that's probably wrong. I think regulation helps if you want to attract investment capital into it, which will lower the volatility, then I think you need some regulation because there are just too many bad actors who can manipulate prices and take advantage of everybody. I think that's still there, so it's a fine line and it's not easy.

Peter McCormack: Okay, what about inflation? I will speak to some people, they say inflation's good and that an economy needs a certain amount of inflation. I'll speak to some Bitcoiners and they'll tell me inflation's terrible!

Raoul Pal: Inflation is only good really when you have debt, because inflation means the value of that debt goes down by the amount of inflation every year, in terms of real terms. If you have an economy without much debt, then you really don't want inflation. In fact deflation is sometimes quite nice, because the cost of goods fall. The Japanese have learned this, as have the Swiss, is they have these old populations that basically retired. They don't want inflation really.

They have a lot of debt, so they quite like to inflate away the debt, but the actual population actually likes deflation, because the households don't have debt, they have savings. So they get richer every year in terms of what they can afford with deflation, because the price of goods falls. The government wants inflation because it's got loads of bloody debts it needs to get rid of and it can't. 

So there is an inherent battle. Switzerland doesn't have the government debt, so they're very happy with a bit of mild deflation, because it makes everyone feel a little bit richer. There is an argument from others that a bit of inflation gives the perception of growth, because things move forward, prices go up, your pie gets bigger. I think that's nonsense really. I think a world without inflation would be just fine. But inflation comes and goes, like supply and demand. So there's nothing you can do about it, it's actually the function of the business cycle.

Peter McCormack: But isn't deflation used as a measure for entering a recession?

Raoul Pal: No, it's what it's become.

Peter McCormack: Okay interesting.

Raoul Pal: But we feared it because we've got no interest rates left to stimulate and we've got massive debts. So massive debts in a deflation, go up. So if prices are falling, the value of your debt actually goes up. So it's the opposite and that's why central banks fear it so much, because they've created the monster, which is the debt monster.

Peter McCormack: You've also talked about the potential of a death spiral. You've talked a lot about European banks and I think the best way to describe how you've looked at the banks across Europe is that most of them look pretty fucked! I can't think of a better way to explain it, especially what's happening in Spain, what's happening with Deutsche Bank, with the layoffs. You've even pointed to Barclays in the UK. This death spiral, how might it play out? How would someone like myself observe this? What should I be aware of and also, what are the kinds of things I could be doing to help protect my finances for the future?

Raoul Pal: Yeah, I mean, look, I know a lot of your listeners are not probably stock market people, but it is important because the share price will show you what is going on. So there is an index called the Euro Stocks Banks Index, follow that or follow the bank that you bank in, as a stock. Look at the share price, what's it been doing over the last 10 years, 20 years, 5 years, 2 years, 1 year?

Just be familiar because that's going to give you a warning if there's something going on. I think one of the key lessons from 2008 was that we kind of probably know how to deal with how to stop banks going under or we have to avoid it. So there will be measures taken. I don't think we're going to see the kind of Northern Rock mess or the Lehman Brothers mess.

We could do, but I kind of think that everybody involved at the centre of the financial system knows exactly how important this is right now. So what do they do? They probably let the share prices go to zero and the state has to buy, like they did with RBS, the government has to buy.

Peter McCormack: And Lloyd's.

Raoul Pal: Yeah and Lloyd's, they had to bail out some of the banks. Now that's going to screw the taxpayer, so they'll have to think of someway around that too and maybe the central banks lend them money to do that, so the taxpayers don't. There'll be some way that they have to do this, because we may scream and shout and say they're taking our money from the taxpayer, but the reality is they'll take all your savings if they don't do it.

So you can take a choice now. The problem is that we're all in debt too. Everybody's to blame for this. So I'm not sure depositors are going to lose all their money, so I don't want to say, "look, it's a panic and it's a crisis", but just be a little bit smart. Just look at what banks you're in, think is this the safest thing? Is this okay? Have some ability to own some Bitcoin and I don't want to sound all kind of doom-mongerish, but gold always has a place in this kind of world too.

Just be a little bit smart, don't take too much risk and just consider what's going on, because if the banks start breaking down properly from here, i.e. their share prices start falling significantly, which I was looking at today and I just tweeted again about it today. It's very close to happening. It's very close to getting into a very ugly situation. It feels a lot like before Bear Sterns went over in 2007, where the markets are waiting for something to happen.

Peter McCormack: Yeah, I think in the UK our deposits are protected up to £75,000...

Raoul Pal: Same in Europe as well.

Peter McCormack: Which we're told and I don't know how those guarantees actually play out, but at the same time, this is one of those things that actually ends up becoming a very good argument for Bitcoin, in that no-one can take your Bitcoin as long as you're managing your private keys pretty well.

Raoul Pal: But the problem is, is it can go down 90%, which is the same as losing all your money. That's why Bitcoin is not a perfect solution yet.

Peter McCormack: But this is where you said you probably want a bit of gold, bit of Bitcoin, I think you even said, what, some dollars as well might be a good hedge?

Raoul Pal: Yes, I like dollars because of a slightly quirky reason, is that the world has borrowed $13 trillion. So that's not the debt in the US, that's foreigners borrowing dollars because it was cheap. Usually in a economic recession, they'll end up having to pay back that debt or they'll go bust.

So it drives the dollar higher. So I think the dollar is a safe currency for the time being, not forever, but for the time being, for the next 18 months, the dollar is a safe currency and so owning some dollars is not a bad idea.

Peter McCormack: Also I think it's Warren Buffet who says, "you should buy when people are fearful." So when the banks are crashing, would that actually be a good time to buy bank stock or is that not how it plays out here?

Raoul Pal: Well, that's a great question, because the question is, do you think that the current structure of banking and its fragility is going to be the future banking system we're going to get? So is Lloyds, Barclays...

Peter McCormack: Nope!

Raoul Pal: Probably not, right? You already believe that there is a change coming and that it probably lies within the crypto world, so then it doesn't sound like they will be the great investments to come. Other shares, sure. Other things will fall and they shouldn't do over time, they'll be fine. The banks, it's not clear we're not going to get a new financial system or a different financial system at the end of this.

Peter McCormack: Okay, so looking a bit more close to home for myself and kind of yourself being a Brit, Brexit is a hot topic. We also have a new prime minister now in Boris Johnson, who has gone pretty hard line about, we might have a no deal, which by the way I thought should have been the starting point for any negotiation, was to act like we didn't care, we're off. But by the by, we have Brexit coming, we're not part of the single currency, does that actually give the UK any advantages do you see in this situation?

Raoul Pal: No. The UK has enormous debts. It has consumption is too big and people spend too much money on shit in the UK. They'd rather spend the day in a shopping mall, I mean it's terrible. So no, the UK is not set up to be structurally better or more effective than Europe. Europe has its own problems, but the UK banks still have the issues that they've got, such as the inability for the UK to be competitive, because its labor force is too expensive, because it won't accept immigration, it's an issue. So I don't see how the UK is yet structurally set up to compete.

Peter McCormack: So the argument of immigration being a problem and a reason for Brexit is actually counter intuitive?

Raoul Pal: Well look, I don't want to get into the whole shitfest that is Brexit, but yes. You've got an aging population, you've got high wealth and high average salary, which the UK has. Your only answer is either you have to shrink your economy and shrink your population or you have to accept immigrants. There is no other way around it, because if not, the outcome is a massive deflation in terms of wages and that is very painful to deal with.

So one other way is a massive collapse of the currency to make exports cheaper, but obviously the UK inputs so much stuff, that that will be a massive increase in inflation on the average person and their ability to buy goods goes down. So this is a structural issue that the UK will have to deal with and I think they've gone about it in the wrong way, but only time will tell. Again, it's too contentious an issue, people have very polarized opinions on it.

In the end, it'll all be fine for everybody. The UK as a separate country outside of Europe, well the UK had the best ever deal anyway. It had its own currency, its own central bank, its own rules with a bit of EU overlay, that's all it had. It's now rejected all of that to negotiate a deal. As you rightly point out, trade negotiators are the hardest negotiators on earth, because the stakes are so high. So the first thing you know is the UK has no trade deals and they're desperate for them.

So as a trade negotiator, the first thing you do is don't do a trade deal. As you said, if you said, "I don't care about trade deal", then at least it sort of levels the playing field. But we said, "no, we want to get trade deals done", well nobody is going to do a trade deal with the UK until they can screw them on the worst possible terms. I mean the whole thing was so badly thought about, but in the end I'm indifferent to whether it happens or not.

I happen to be a fan of Europe, having lived in Spain for a long time and loved how I could cross borders, move money around, I could live in a different country that I wanted to, I could pay my taxes in the UK and draw them out in Spain in social security or the hospital or whatever it was, what an amazing opportunity. Is it fundamentally screwed because of the currency? Yeah! There's a whole bunch of problems within Europe too. So there are no right answers and the UK on its own will eventually be fine, but there's going to be some issues to pay for first.

Peter McCormack: So another thing I worry about quite a bit actually, so I've got two children now, 15 and 9 and I look at the amount of debt that they potentially could end up with by the time they're say 22, just in education loans. If they choose to go into higher education, they could be leaving for £50,000/£60,000 of debt to go into a very competitive labor market. I remember myself as an advertiser in London when I used to put out a job for a graduate, we'd have 80 applications. So it's a very competitive market.

On top of that they have a lot of consumer pressure, which probably has grown through generations. They want to have a car, they want to have nice clothes, they want to go out, they want to have a holiday and we can say, "you shouldn't", but that is a pressure they have as well. The housing market, I mean I have no idea how my children are going to get on the housing ladder! My hedge for them is, I have put a little bit of Bitcoin for both of them, with the hope that in 10/15 years that will have grown to a point to help them.

But I'm looking at the opportunities for younger people these days and I'm not sure what advice I would give. I mean Bitcoin is obviously an opportunity, but what advice would you give to somebody who's like 15,16,17 years old?

Raoul Pal: You've got another bigger problem, the rise of the robots.

Peter McCormack: Yes! Well we can get into that.

Raoul Pal: AI, right? So this whole thing means you have to be extremely careful if you're a 15 year old, what job you go into before it gets decimated. So you have to think, how is society going to value certain human elements and the human element that I think can't be replicated, is creativity. So I think there's an element of creativity that will have value. So you can see it for example, in the content space in TV right now. There's huge wealth being made in TV and it's actually a relatively rare skill set, so that's something.

Understanding how the machines work is probably pretty powerful. So at some way coding, everybody should learn at some point, but also data analytics is pretty powerful. Although the machines themselves will be able to analyze data pretty well. But there is some elements of human involvement in that. Human interaction, so just anything that requires some form of human interaction is still good. But this is not easy. This is really not easy!

Peter McCormack: I've had this conversation with my son. So fortunately he is on the creative side, he loves his drama, loves his art, loves design, very creative, cannot stand biology, cannot stand physics, chemistry, and I said to him, "do you know what? Don't worry about that. I don't mind if you fail at those subjects, as long as you are putting a disproportionate amount of time into your creative subjects."

I've got a friend called Rich Roll, who's a successful podcaster and he said, "we're still teaching children to memorize facts, when they're carrying a supercomputer in their pocket." So I'm very comfortable with my son, but I understand what your point was. Actually also, I listened to a recent interview Andrew Yang did with Joe Rogan and his solution to this was the Universal Basic Income, which I don't feel is a solution.

Raoul Pal: I don't think it is the solution, just human nature, any Universal Basic Income will basically be offset by prices rising. So I'm not sure that you'll be able to ever maintain a purchasing power. Secondly, human instinct means that if you get paid to do nothing, it's not the element of people don't do anything, it's the element of behavioral reward systems.

So behavioral economics is a very powerful thing and understanding human incentives and rewards systems is very powerful. If you take away one of the fundamental things that drives humans, which is that bizarre desire to achieve something in their career, if you take that away, it's basically like putting a tiger in a cage, you create depression, you create all sorts of problems. I don't think that that is the answer. The one answer is, and you're seeing it happening already around the world, population has to collapse.

So your kids will not have kids or if they do, they'll have one kid and that is the right answer. So the rates of childbirth will collapse, because you need less humans for the same output. So then humans can be wealthier in terms of what they are, because there's less of them and they have the leverage of automation to drive that. So that's a good thing. Then those humans, if they can be in the more creative pursuits, where humans need humans, then they have a value too and that's rewarding.

So you don't need the Universal Basic Income because creativity is extremely rewarding and not everybody is a creative. That's great too because there'll be enough opportunities for people who are more scientific in nature, because big datasets create big opportunities and there's a lot of people and that's the world we live in now. We live in big data sets and there's a lot science can do with huge data sets that is incredibly empowering for people.

So the breakthroughs in medicine that are going to come from big datasets is enormous. Breakthroughs and understanding of all sorts of stuff, parts of our world is extraordinary. I mean just microbiology, just understanding gut bacteria and how it may be the single most powerful thing that happens within us. All of these things mean medicine changes, all sorts of changes. There's plenty of opportunity to come, but just not in the standard way that we thought.

Peter McCormack: Okay, so we have the rise of the robots and AI. We have a collapsing global economy, potentially collapse in the stock market, we've got global warming, the next 20 years could be fascinating, scary, strange!

Raoul Pal: So I'm going to give you and your listeners a great thing to read. There is a book by Neil Howe called "The Fourth Turning" and The Fourth Turning is a look at generational cycles, based on four generational large cycles and how, what gets rejected at the fourth turning, which is a large change in basically the structure of society. His hypothesis is that we're entering the fourth turning. So the whole populism part is the final rejections of the old system and out of the phoenix rises the ashes of the new system.

So we're seeing it with the rejection of what's known as the rules based global order system, that's the World Trade Organization, the United Nations, the IMF, the World Bank, all of these things are looking like they're starting to fragment and people like Donald Trump and the Chinese and others, are trying to force these things apart, as are the Russians.

So we're coming to a period of big change, which is why Bitcoin plays so well into this narrative, because it is the potential glimpse of something on the other side of this all. So yes, I'm not trying to sound catastrophic, I'm just saying right now the risks are pretty high with the global economy and there's some potential nasty outcomes there. So just be aware of it, but I think change is good and that the change that comes out of this, is the change that's much needed. We need a new set of systems for the modern world that we live in.

As you said, you cannot run an education system teaching kids times tables, when they have computers in their pockets. All of this, everything has to change and we're still clinging onto a system that was basically developed, the rules based global order system came out of World War II and the infrastructure of which we understand the world speaks today, that doesn't apply to this world. 

Yes, there's many things that we will bring through, but there's many things that need changing and that's good. Once we get this, we'll stop this ridiculous swinging from left to right in politics. There's massive tribalism online where people are splitting each other apart, killing each other verbally over any disagreement and driving everybody further apart. That has to change.

Peter McCormack: It's funny again, I tweeted about that today, because I find this strong left or right wing politics, I find it very confusing because as I follow politics, there's things I like from the left and things I like from the right. The analogy I gave, and it probably sounds really dumb, but I walk with a left and a right foot. If I only have one foot, I hop and I just feel like this drive to the edges of politics is... I don't know, it's just creating a very ugly society.

Raoul Pal: You're an advertising guy, so it's all about messaging, right? What's happening now, is the messaging has got so extreme, one side is like, "we're all fucked because of this", the other side is "we're all fuck because of that" and each side is saying that either side is evil. If you try and sound like the person of reason in the middle, your voice doesn't resonate, because you're not headlines.

If you say, "let's come together and we'll figure out a way through this", that doesn't make a headline, as "they're all going to die, it's all screwed", is a much easier narrative to get attention. So this is the behavioral economics side of things again. So much like we've seen in the media industry, the race to the bottom in terms of the kind of Buzzfeed style and clickbait, politics has become click bait. So nothing in the middle resonates and that has to change.

The only way you're going to change is creating a new middle, or not even a middle, but a new playing field altogether. So it kind of makes you think that the two party system is going to change within this as well. It has to, because it's now not serving anybody. Everyone's just getting more angry and more fed up. So nobody's thinking this is working for them, nobody is!

Peter McCormack: Living in our most prosperous times, we've never been richer, we've never had more prosperity, yet we're all angry and we're all fighting. I remember the last US election, during the runoffs, Trump was quite behind and he just kept saying stupid shit, after stupid shit, but it was a very clear, basic message. Again, I guess that resonated with people, similar with Brexit. Very clear stupid messages, which were kind of obvious, but they resonated with enough people.

Raoul Pal: Also, what was really clever about the Trump campaign, and there's a fantastic BBC documentary called the "Secrets of Silicon Valley" and there's that less good one on Netflix now called "The Great Hack", just come out.

Peter McCormack: I think I know the one you mean. I just watched "The Great Hack" the other day. I'm interviewing Brittany Kaiser in October.

Raoul Pal: Wow! "Secrets of Silicon Valley" is a two part documentary series, absolutely phenomenal that the BBC did. What was amazing about what Donald Trump managed to do, was realize that in this world of being able to approach different people online, you can tailor different messages and that doesn't need to be a truth. So you don't need one message, because that group of people there, they will take the Crooked Hillary message.

That people over there, they will take Hillary's ill message. That group over there, they'll take that Hillary's going to take away your guns message and all of those three people may have conflicting opinions and beliefs, but because you can micro-target them, it doesn't matter, so you can tell them anything.

Peter McCormack: So I watched "The Great Hack" on my flight home from the US the other day and as much as I was like, "look, this is terrible, this is awful!" I also came to the conclusion, "this is kind of a natural evolution of technology." There's no difference between what happened in the election, is what's happened with all of advertising. Just targeting people, targeted data and it's not like previous to Cambridge Analytica and Facebook, that political parties wouldn't lie. It wasn't like they were all honest previously, they just had less mediums and less data to advertise with.

Raoul Pal: That's right. So advertising came out of propaganda. Propaganda is a very age old thing. These things, whether you read David Ogilvy's book or any of the books on advertising, all of this is behavioral economics. But that as a science, has now grown out of Daniel Kahneman, Richard Tyler and these guys. So it's now become at the forefront because the key change is data. You can capture data in enormous quantities. So it changed advertising immediately, right? 

Because before it had to be intuitive and you could still test it, but it was a bit clunky. Now you can test any message on anybody and do anything. So that's changed everything. So obviously politics and advertising, they're basically the other sides of the same coin, so obviously the same thing. What it is actually all about, is behavioral economics. So there was a fantastic part in that "Secrets of Silicon Valley" that was like a light bulb going off my head and I did not know this.

So Daniel Kahneman, one of the founding fathers of behavioral economics, had a gathering up in, I think it was some valley, with Zuckerberg, I think it was Sergei Brin, I think both of them from Google. I think maybe Eric Schmidt was there as well, I think that possibly Reid Hoffman, when he was doing LinkedIn, I think Jack Dorsey was probably there from Twitter, all of them. So why would these guys all get together?

Because what Kahneman was essentially explaining is that the "like" buttons and the emojis and the emoticons and all of the different behavioral patterns that you can put onto these platforms, was so powerful that you could affect anybody's behavior, which is why Facebook went from just the kind of "like" approach, to all these different emotions, because then you can hyper target emotions and they can then understand what content creates what emotion and then what they're likely to sell or buy.

So Bezos was there as well at this thing. So what it was, was basically teaching these guys, you now have the power to influence people like nobody's ever had before and that is the outcome of what is happening right now. This is why politics has been changed forever. It's why advertising has been changed forever. It's why data is the new oil. It is why everything, is they realize that behavioral economics has taken over the world and nobody has figured this out yet. So governments will figure this out very soon.

You see the Chinese are now taking huge amounts of data on their people and then trying to devise a negative based incentive system, as opposed to a positive incentive system, which is the normal behavioral economics route. This is extraordinary change. This is one of the biggest changes in the world happening and it's happening in front of our eyes and people don't really understand it yet.

Peter McCormack: So just interestingly, back on the Ogilvy book. "Ogilvy on Advertising" is my favorite book from the industry. Everybody who joined my company, I'd buy them three books. I can't remember the other two, but "Ogilvy on Advertising" was one of them, because the one thing I loved about that was the craft side to copywriting. It's what I really missed about the industry. I'm a big fan of long form copy.

I like going on the Underground, reading a long form copy ad. I think Jack Daniel's do one of the best. I like being engrossed in it and you can't really... It's not like in my world, where we were doing banner ads or testing ads or testing headlines. We lost the craft and we lost the beauty to it and I really miss that. I've got to say, I really miss it. I actually wrote... You might even enjoy it. So when I quit the industry, I essentially wrote my advertising suicide note.

I wrote a manifesto called "online advertising doesn't work" and sent it to all my clients. It was kind of like a Jerry Maguire moment and then left the industry, because we've lost the craft, haven't we, in copywriting and in talking to people! I'm getting all sentimental now.

Raoul Pal: Yeah, because things have changed and moved on!

Peter McCormack: Well listen, I'm conscious of time. I do want to finish talking a bit more about Bitcoin, because that is what my show is about. I love that you're a fan, but you have a lot of conviction for it, where other people don't. You have a lot of conviction, where other people think it's just magic internet money or trying to convince friends.

The couple of things I always get said, "well it isn't backed by anything", which is like the standard message and "oh yeah, but you can fork it and create these other coins" or "should I buy Bitcoin Cash? It's cheaper." You've got past those arguments, right?

Raoul Pal: So I first bought Bitcoin somewhere around $200 and then when all the forking happened and that massive run-up happened, I sold out at, I don't know, $2,000 or $3,000 or so. So I've done really well and then I didn't get back. I saw that huge spike up and I missed all of that. I saw the collapse and then I recently got back in again. The forks are one thing that worried me, as you're creating lookalikes. So I thought, "well does that devalue the original?"

But in the end it didn't, it did the opposite. They all went to zero and everybody realized, there was only going to be one. So yes, there are different forms of money, so Ether may have different use cases, Bitcoin Cash may have some different use cases, Litecoin may have some different ones, but generally speaking, Bitcoin has been crowned the King and it has been tested now five or six times with massive collapses in prices.

But the Bitcoin mining algorithm is so beautiful that there's a guy on Twitter called @100trillionUSD, Plan B and he's developed a stock flow model, which is basically, for people who don't really understand that, it's like what the demand is versus what the supply is and by model, you know what it is. So he then used some very complicated mathematics and basically gives you the price trajectory and it shows that it works perfectly. It predicts that when he you get the Bitcoin halving, it takes off again ahead of that and it works beautifully.

So it does work for all of that, it is understandable and it has some rarity. If people don't understand that it has a value, go and look at your kids. Your son probably plays Fortnite. So in Fortnite, he is now hanging out with his friends online, which is different to us, we used to get on our bikes. They may still get on their bikes and do stuff, but they will spend a considerable period of time in the evenings and on the weekends on Fortnite hanging out.

Now your friends can have a friend he met on holiday in Spain, who lives in Lancashire, there could be some kid in America he met and it could be just local kids around the block, they all get together. So they're now living together, socializing online together and talking. In that world, digital things have a value. 

So for us, having a fancy shirt from whatever tribe you belong to, let's say it's the Paul Smith tribe, you think that says something about you and your socioeconomic standing and all this stupid shit that humans do attached to clothing, right? But the kids do that online, so you can buy skins, you can buy things online that have value. Look, there's no reason your Paul Smith shirt has value over its cost of manufacturing, but it does.

There is no reason online that things should have a value, but they do, because humans assign them values. So digital things do have value and they will always have value and they will change in certain things. So there is no reason to believe that Bitcoin can't have value. The only reason gold has value, is because we say it has value. If we suddenly decide that that shiny object, doesn't have value, then it doesn't have value. It's just a human thing. So the "backed by anything" is just not an argument.

Peter McCormack: Well just before we came on, my daughter wanted me to buy her something on Roblox and it's like a mermaid house or something that all her friends can come out and hang out in. She wants that and she wants to spend her money on that. Also when I was out in LA, I met up with the guy from Wax. He was telling me about this game where a guy paid $33,000 for a limited edition skin for a gun. I was like, "what?!"

He said, "well look, if you're rich and that's what you like! You might like to play tennis and if you'd like to play tennis, you're going to join a good tennis club, you're going to get the most expensive racket and that's what you want to do. This guy likes to play online, he likes to shoot people, he wants that skin." I was like, "yeah, okay, you're right!"

I didn't get it at first, but it's like I didn't get MP3s at first. I was buying CDs for 3 more years that I should have, now they're all stocked up. In some ways I see Bitcoin the same, Bitcoin is just the digitization of money in a different way.

Raoul Pal: Exactly right and digital things, kids now live in the virtual world and the real world and they don't see a difference. Older people would say "that's ridiculous!" Well wait till you see somebody you've watched on television, walk past you in the street, you don't know whether they're the character or the actor.

Because we also live with this blended version of the virtual world, our virtual world happened to be television. There's no difference! We all live in a blend of the virtual and the real. That whole world changed a long time ago and human storytelling, which is as old as humans, was part of that blending between the real world and some sort of virtual worlds. So it is not uncommon and yes, of course it has value.

Peter McCormack: It's Ready Player One!

Raoul Pal: Of course it is!

Peter McCormack: I didn't love that film when I first saw it and then I watched it again, considering it more in terms of thinking about my children and thinking about, is this the future and I suddenly realized what a brilliant film it is.

Raoul Pal: A lot of people are coming back to that saying, "well that was prophetic." There's a lot of people who love The Matrix for similar reasons, but Ready Player One, people are like "okay, that was actually really clever!"

Peter McCormack: All right, well listen this is been as amazing as I thought it would be. I'm glad we fit it in, because I'm off on holiday on Thursday. Just to finish, final question, before we close out, we've talked about a lot of quite scary things. What gives you optimism? What are the good things we can look at and also any kind of like closing advice to people who may be listening to this.

Raoul Pal: The optimism is the world around us and it is a beautiful, fantastic, magical place. Go out, travel it, see it, experience it, experience nature, experience all of the incredibleness around us, because all the rest is just stupid shit humans do. The rest of it is the reality of our planet and its amazing place. So that is the positive part of the story. I'm lucky here because diving is the big thing.

Every time get my mask on and go underwater, there's this beautiful world and none of this stuff matters. That's free and it's there for everybody! For anybody who wants to know more about this stuff, I think Real Vision is a really good resource. We do a lot of this stuff. We have a free version, so just go to realvision.com/free and knock your socks off with all the content there. The subscription service is about the same cost as Netflix, about $180 a year, which is realvision.com.

But just go to realvision.com/free and you can just go and check out and see some of the great names of the industry, some of the most famous investors, including some of the most famous hedge fund managers involved in crypto or any other aspects of finance are all there for you. So you can't say nobody told me, because it's all there for you to digest and absorb.

Peter McCormack: All right, fantastic! Look, how do people follow you? How do they stay in touch? Who do you want to hear from?

Raoul Pal: I'm very open and open to discourse and exchange on Twitter. So at @raoulgmi, you'll find me there and I'm always happy. I'm always chatting about stuff, putting ideas out, testing hypotheses, doing stuff. I reply to a lot of stuff if I can, I'm getting a bit overly swamped by followers, but I try my best.

Peter McCormack: Well listen, look I really appreciate you coming on. I do wish I'd come to Cayman and do this. If we do a follow up, I think I will! But I really appreciate your time.

Raoul Pal: It's a direct flight from London!

Peter McCormack: That feels like a good halfway point if I was going out to the US!

Raoul Pal: Well it's kind of going south of Florida.

Peter McCormack: Don't worry about that, that's fine.

Raoul Pal: Well then it's a very good halfway point to the US!

Peter McCormack: Yeah, it's a good excuse for my expenses! So Raoul, appreciate you coming on, I appreciate you listening to my questions. I wish you all the best for the future, stay in touch and I'll be checking out Real Vision.

Raoul Pal: Great, thanks so much! I really enjoyed it, a lot of fun.

Peter McCormack: Thank you.