WBD207 Audio Transcription

The Social & Economic Impact of Coronavirus with Raoul Pal

Interview date: Monday 23rd March 2020

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 talk to Raoul Pal co-founder & CEO of Real Vision and macroeconomist. We discuss the political and economic impact of coronavirus, the role of the state and the societal change that will occur.

“What you need to be, I think, is pragmatic and understand there are no great answers and every answer has a bad outcome for all of us.”

— Raoul Pal

Interview Transcription

Peter McCormack: Raoul, how are you?

Raoul Pal: I'm good my friend! Slightly overwhelmed with what's been going on, but I'm self-isolated in Little Cayman, so it's okay. My wife's got I think COVID and she's in Grand Cayman. She can't fly over, she's been ill for over two weeks now.

Peter McCormack: Oh gosh.

Raoul Pal: So, this is the world we live in!

Peter McCormack: She's okay, over the worst of it?

Raoul Pal: Yeah, well over the worst, but it just drags on and on and on. She's just lethargic and not feeling well. I think her cough has now gone and I think the temperature's gone, but she's just wiped. You know that post-viral feeling of feeling wiped out and she's still in that stage.

Peter McCormack: Yeah, so when I got back from Turkey I was sick and I was really, really sick for three days. Then I kind of got better, but just had this tiredness that I've not had post-flu before. Where I was just so lethargic and I still don't know if I had it because they wouldn't test me. But a very strange world right now! How do you take it all in?

Raoul Pal: Well I was luckily ahead of a lot of this. So I saw what was happening in China and by probably late Jan I'd figured out what was going to happen. So that was great! But now the kind of news flows caught up with where I got to. So now it becomes a bit overwhelming because it's now turned into a political thing about how you should react and how you shouldn't, so it becomes a really complicated world and now forecasting going forwards becomes more difficult because there is a number of potential outcomes.

So it is overwhelming and I'm trying now to narrow myself, so I don't get as much input anymore, because at first you want to see the inputs and know all the different variables and now I think there's too many variables and you need to now make some decisions on, "Okay, what does this all mean?"

Peter McCormack: Right, okay. Well look, there were two main reasons I wanted to talk to you. Firstly, I wanted to talk about the economic side of this because I'm not an economist, I don't analyze the markets the way you do and I try and build a show for people who are similar, who just go to work and they want a bite size explanation of what's going on in the world. I thought that would be very useful, but also I kind of got stuck in the middle of this, you say the political side, it feels like there's two sides to this.

There's a group of people who think this is a massive overreaction and we shouldn't be killing the economy and then there's a group of people who think this deserves an overreaction and it appears to be almost like battle lines have been drawn. I saw one of your tweets where you were having a discussion back and forth, and actually you put out something that was quite human, that I empathize with, where you said people are scared, there's people dying and hospitals are overrun. I think you asked them, what's your point here? So I kind of felt like you're in that zone there where you're not sure how to deal with this.

Raoul Pal: Listen, it is a world of suboptimal choices and you can make the choice of sacrificing the economy for the sake of society or you can sacrifice some of society for the sake of the economy and within that is a whole range of outcomes. We're all acting with imperfect information because almost everything is built on a model of which we don't know and it's much more complicated than most people understand. So I am in the Cayman Islands, we've gone to full 24/7 curfew and we are testing and we're isolating and we are trying to get to grips with it. I'm very comfortable with that approach here, because I live in a country that has two societal differences to others.

One is we're used to this because we have hurricanes, so when you have a hurricane, Hurricane Ivan basically flooded the entire island. The entire island went underwater and disappeared from satellites. It took out 60% of all the buildings and knocked out life for six months on the island. So it was a total obliteration of the island. But people, as a society, of the Cayman Islands have always lived with hurricanes, so they understand that part of life is the sacrifice that sometimes mother nature gives you that you have to rebuild a society and that's okay. It's part of the cycle of life and the cycle of nature and how things work. So there's a certain acceptance here in that's okay.

The other societal difference here is there's a reverence for old people. It's quite a religious society and so a reverence for old people and an understanding that sometimes society has to take hardship and we're all in this together means that they are not averse to doing this. I've found that Europe, because of its understanding of its war history, has a understanding that this may be necessary and they understand that, maybe it's an overreaction, we will never know.

But we do know, and it's like the Pascal's dilemma, is it's a choice you have to take because the other side could be catastrophic and sure, somebody with a model may tell you that it's not, and maybe they're right, but it's not something we want to do. So Europe is much more comfortable with those kind of choices. Particularly again, the Mediterranean countries that have an old population and that revere their old population, again, they tend to be more religious countries or not religious per se, but have religious foundations and the societal structure is based around church and family and that kind of stuff.

So those countries will accept that sacrifice. The US is probably in the extreme where it's a mix between the two. Some people are like, "Sacrifice everything for the economy, it's okay, it's not a big event and statistically, not that many people die." Of course, they're right too. Does it overwhelm the hospitals? We don't know, but the risk is reasonably high and New York's showing that. Will it not do it in other places? Of course, this is not a consistent variable that we can apply everywhere, so we don't know and anybody who says they do know is lying. So I'm prepared to have sacrifices and other people aren't.

I get it! It is devastating for economies that everybody needs to be tipped out of work for an unknown period of time. Is it six weeks? Is it three months? Is it six months? I don't know. It's the same when a hurricane hits, I just don't know. We just do our best to rebuild afterwards and we will rebuild things that are better after this happens. But we all will have to take some collective pain. Now let's assume that we go the route of doing nothing and let's assume that it's not terrible, but it's bad. So all the alarmists about millions of people dying are wrong, but it creates a societal scar, because not only...

Like my wife is unable to work for three weeks probably, because she's had the virus, as have 18 of her staff. There's a bunch of people like that. There's a bunch of people who see their parents die or grandparents die and it creates a societal fear and they're still going to have to shut down parts of the economy to deal with these clusters. So what you do is you dampen the economic growth anyway and you drag it out over a longer period of time. Now that means that you could have 9 months or 12 months of impact until we can roll out the vaccines and roll out the things that make your survival rates or the rates which you improve from the virus better.

So that takes time. It's not going to happen in three months, you can't roll it out to 7.7 billion. It's a global epidemic here, a pandemic. It's including Brazil and India and every country you're naming, the Cayman islands and Dominican Republic, it's everywhere. So the chance of eradicating it in one go is zero. So you've got a huge economic overhang anyway. So do you try and take more of that economic overhang early and hope that the tail of it, i.e. the next six months, is slightly better because of it and people are less fearful.

That's probably my choice. Is that the right one? I have no idea. Is the right idea to not do that and deal with the virus as it flares up and have a society that basically can't open the doors? So Cayman's going to go down this. There was a great article called "The Hammer And The Dance", which is go hard on it first, reduce the number, and then deal with clusters as they come. So that's what Cayman's strategy is right now.

Peter McCormack: Actually, I think I saw that, it was put into a chart.

Raoul Pal: Correct, great article on Medium about it. So what that really means is, and Cayman's doing that, it's like, shut down, stop everything, find out where we are, treat as many cases, find out where the clusters are. Then once you have control of the virus, Singapore did this roughly, as did South Korea, is you can then reopen parts of the economy, because you know basically what's going on and then you will close down parts, because that area, "Oh my God, they've got a problem there, we close that."

But it's kind of containable and that's okay, but it creates a slow economic output going forwards. But the other thing is, is Cayman is not going to open its borders with the US if the US doesn't deal with this in a more cohesive strategy. So if the US does open up by April, well, Cayman can't open its borders because we're going to risk our population and people aren't thinking about the overhangs of different countries having different outcomes. It's all well and good saying, "Well, it's great what Singapore and South Korea did, but if you don't follow suit, well, you create a different set of outcomes" and people aren't modelling the different set of outcomes either.

So it's a very, very complicated world. I don't want to get involved in the total shit fight between everybody, because they're turning it into politics, but what you need to be I think is pragmatic and understand there are no right answers and every answer has a bad outcome for all of us. I understand people have a different view and a different value system too and that's fair. I'm a very liberal person and different people can have different views. Yes, you will be imposed one view by your government and that's what you vote for. There's one other element that comes into this, sorry to...

Peter McCormack: No, it's good!

Raoul Pal: The other element that comes into this is the fear of the restriction of freedom of the individual. So for example, if you look at Singapore and South Korea, everybody's on an app, they track everybody, they knew who it is. So that's a new world where governments are now tracking everything you do, including your health and some people are very uncomfortable with that. Other people are comfortable with it, it depends. Can there be abuse of power by passing emergency regulations and legislation? For sure. We've been in that slightly... Well not slightly, we're in a populist, slightly authoritarian strongman world, so that could be used against you, I get it.

I also get that it becomes a party political thing. So could the other party take it, beat you over the head with it and then impose their system? Probably. All I kind of know, and we probably talked about this before, societal change is coming out of this, whether anybody likes it or not, we're not returning back to what we know. What the future lies? I've no idea. In economic terms, I think it's even bigger. I think potentially, again as you and I talked about last time, the financial system and the system of money and debt, these are all at risk within this. We don't know how it's going to play out in the shorter term, but we kind of know where it's going.

Peter McCormack: Yeah, it's really interesting that you gave such a long answer and not a criticism in that! There's so much nuance in this. It's very... You can't debate this on Twitter. You have to try and look at all the scenarios and something you said about knowing with certainty just reflects a tweet I did put out though, conversely. I said that some people will be on the wrong side of history in a few months, either they under reacted as many died or they over reacted and the economy collapsed. Both scenarios have other consequences and I struggle to see how anyone can know with certainty what is best.

Raoul Pal: And the worst thing would be blame. If you start to blame people with the opposing view to say, "You screwed up!" What you're creating is the kindling for societal unrest. People have got to stop this, even though they think they're right and they're trying to do the right for the greater good. It's like, we've seen it in your world, in the crypto community as well, is tribalism does not solve anything for anybody.

Peter McCormack: Tough world! Yeah, it's a very tricky world as well, because especially in the Bitcoin world, we've got a lot of libertarians and anarcho-capitalists and people who very much fear the government and dislike the government and do you know what Raoul, I empathize with so much that they have to say about the company because we have a history of poor government performance, governments started wars, governments mismanaging the economy, I get all of that. I get all of that. But I came out the other day and said, "You know what, right now I'm a statist. I think we need the government. I think we need to centralize the decision making around this because..."

Raoul Pal: Their argument would be yeah, because they created panic and turned you into a statist. So now you're their puppet. I'm like you, but I think that's a European view as well, because don't forget out of World War Two came the National Health Service. Out of World War Two came the pension system in the UK. So we're used to the state playing a collective role of which we're comfortable with and we don't think of it as necessarily a threat.

Different people see it differently and I veer between the two. I'm a big believer in free markets and everything else and freedom of the individual. I also believe in the role of state. Those two don't have to be the opposite ends of the spectrum, there is a way that they can coexist. But this world that we live in is a terribly polarized world.

Peter McCormack: Yeah and I think you can believe in a role of the state, but not agree with the state as it is. I like the libertarian view of a smaller state, a much smaller state. I don't see a world where you can just eradicate the state and the world not descend into a kind of Mad Max. I think you have to be practical about some of your ideas around this. But I think also with this, a lot of it comes down to is, right now, the decision is the economy and risk to life and like you said, we've got imperfect information.

We don't know if this would have led to tens, hundreds, we don't know the numbers. It's imperfect information, but it's certainly a disease that spreads quickly and it's certainly a disease that is killing a high number of people in the outbreaks that we've seen so far. So I just come from the position Raoul of, I think I would rather take the economic pain and focus on saving life. Then people come in and say, "Well the long term economic pain might cause the loss of more life" and I always think, I can only deal with what's in front of me now, not a model that I can't see happening.

What this has done in this kind of Bitcoin world is that statist has become an insult, "You're a statist!" It's kind of like, I don't know, I'm talking to my friends who aren't even in finance, I'm talking to my friends who are builders or doctors, or all different types of jobs and they're all very scared and they all very much support a lockdown. They really do! Because they don't trust people to make the right decision right now in these extreme circumstances and aligning with them and agreeing with them is almost career risking for me.

Raoul Pal: And that's unfortunate! It's unfortunate that people just don't understand the value of pragmatism in solving or creating solutions in suboptimal outcomes and so I'm just not interested in getting into that debate. So I've just withdrawn from Twitter, so I don't have anything involved with this and it's much like the US politics was before or the UK politics with Brexit, is there is no point, because your voice is trampled by the polarity of others. So for me, again like you, I'm extremely pleased with how the Cayman Islands has dealt with it. I think everybody here is because it works for our society.

Peter McCormack: Right, so I've got one question about the Cayman Islands and then really I just want to focus on the economics bit, I know you've got a limited amount of time. Just specifically with regard to the Cayman, because I was thinking about this, about a number of communities, how much does Cayman rely on imports of certain items such as food? And is that a risk in a lockdown that you cannot source enough supplies? Or is Cayman able to be self-sufficient?

Raoul Pal: No it's not, it imports everything. So that is the weakest link in the chain for Cayman. For a number of other reasons, it's one of the safest places in the world to live in a complex geopolitical world and also a world where global taxation has to try and offset the retirements of the elder population and the debt issues and everything else. So Cayman works very well, it's one weakness is that the global food chains are too important to it. Now obviously tourism is another, I think the movement of food still continues.

I don't see any real reason, war would be the only thing that would stop the movement of food because ships can't pass. But the Caribbean is patrolled both by the British Navy, the French Navy and the US Navy, maybe even the Dutch Navy, I'm not sure. So in which case, yeah, it's a relatively protected place amongst all the places in the world. But tourism and the freedom of travel when you live in a small island, that's what is going to hit us, because we will mainly reopen internally so we can do stuff and we've got a lot of outward facing businesses, the financial services industry, the lawyers and the accountants and stuff, they will continue to do work, bringing in GDP for the Cayman Islands.

The problem is, we have a huge tourism industry and we cannot let people in who are not disease free. We have no clear way of testing that at borders yet, but that will come. But again, we'll go to a world where we're all going to get tested for health every time we enter a country. The world is changing, society is changing and we can fight it all we want but it's not going away.

Peter McCormack: So I was thinking through that scenario now, and I imagine there's going to be agreements between countries that people are actually tested before they get on flights, before they leave the country.

Raoul Pal: Correct, same as passports. You'll need to show certificate of health. We do it with vaccination for yellow fever and you do it with typhoid, cholera and hepatitis. When you're traveling to certain countries, you're not allowed in without having that and if you come from an African country, and you wanted to get back and you haven't been inoculated, you're not allowed. So it's normal, people just forget that.

Peter McCormack: Yeah, they do! Another thing I was thinking about the supply chain is, will the foods just supply chains continue? But what about within the food supply chain, you might have the machines that people use for harvesting, are those companies continuing? Or things I was thinking like shampoo, have the chemical companies stopped work? What is critical business?

Raoul Pal: Well look, another question is, how many companies are going to go to the wall in this? We have no idea. What does that mean for global supply chains going forward? Well, we already had trade tariffs, so now we've had this and it's exposed how weak our globalized world is. We thought it was actually anti-fragile by having a large distribution network. Basically it's all China, which makes it difficult and now you realize that it exposes your domestic economy should something go wrong with your largest trading partners. So yes, I think it changes everything going forwards and I don't think the world will remain the same.

Peter McCormack: Right, okay. So look, the thing I'd like to focus on now with you is something that I think you could be really helpful with is there's going to be a lot of people worried or unable to interpret what is going on in the global economy. They will recognize that the government are making huge payouts. So for example, in the UK up to 80% of wages are going to be paid and they've just announced even for freelance or independent workers they'll pay up to 80% of profits on the average of the last three years.

So there's a lot of government borrowing/money printing going on. None of my friends understand the potential risk with inflation to this. So it would be really great Raoul and this might even be a long answer, but if you can just kind of interpret what is going on and interpret for people what it actually means and what the risks are to them. Big questions!

Raoul Pal: Very good that the government is trying to fill this short GDP gap. Everybody's been here, so the government's going to step in, that's what governments should do. Exactly the right thing! Now they can't fill the whole gap, but they're going to try and make it like it's an average recession for people and not the biggest economic event of all of our lifetimes, which is what it actually is. That's fine, I don't think that's inflationary and that doesn't do anything. It just means that the overall net outcome is less bankruptcy initially.

The real question is, if this drags on, a) whether the quarantining or the national psyche, how scarred we are from it, or just the other countries don't shut down enough and the virus spreads and we get a second wave in the winter and this thing rolls into March 2021. Okay, then we've got a big problem, because governments can't afford to help everybody out. So what they've done is given their best shot. They've bought everybody six weeks to two months, maybe even three months. So in the Cayman Islands, I just got a phone call from the bank, they've just paused my mortgage for three months.

Okay, great! They can't pause it for six because then they're going to be out of business. So my fear is after this period, what does the world look like? And if that's the case, then it is going to be ongoing unemployment. So for many of our friends it's going to be tough. It's difficult, the governments will then try and borrow more money to try and help people and again, it's the right thing to do. Problem is, if you're taking essentially all of the economic burden, plus helping firms with their debts and people with their mortgages, you're basically taking all of the economic burden and all of the debts and putting it on the government balance sheet.

So people in the UK will remember that they did this with the banks, but now we're doing it with the credit markets, maybe the equity markets, maybe the pension system and the economic losses. Well the only way to fund that is by printing money and if every country is doing it at the same time, you're going to create an environment where money is worth less. Now does that mean we get inflation? I think in a debt deflation, which is what this is, we don't create inflation, but we create a situation where the purchasing power of money versus let's say gold or Bitcoin will go down and we will see a system where, and I think Japan gets to it, where it ends up buying all of its debt and putting it on the balance sheet of the bank, in which case currencies can collapse.

Now that does look like that could be one element of hyperinflation or high sustained inflation would be a collapse of currencies at the end of this, this is exactly why Bitcoin exists. This was the problem that it was built for to start with, in that world where the financial system is struggling. Well, the ability to make payments, to have a store of value and to record ownership are basically the three tenants of what Bitcoin and cryptocurrency overall does and the blockchain does and that's a very reassuring thing, to know that there is a plan B.

Now maybe that doesn't all happen, but my fear is for everybody, and this is talking to non-finance people, is be really careful in assuming that this goes away quickly. Just be careful. I know also saying that, by telling people to be careful, almost guarantees that the economy will be slow because people won't be spending. But I think people understand that, you're going to have to survive this and it's going to take some real effort.

Peter McCormack: Is it also here, are you dealing with imperfect information In similar to try to map the virus itself, in that this is such an unprecedented scenario. We've seen localized collapse of currencies, but we've never seen this on a global scale, such a situation like this. Is this a similar situation where it's very difficult for anyone to predict what's going to happen?

Raoul Pal: Correct. All I know is there's several outcomes that are very bad. There is the, eventually everything returns to normal, it's a slightly U shaped recovery and by September, October, we're seeing the back end of this and it's okay. Let's use that as our base case, that's fine. But we as humans have to plan for the worst case, because we need to make sure that we can survive it in terms of economically.

So I don't know the outcome, but my hunch is actually it goes on longer and that's my job as a markets and economic forecaster to start thinking that through and fleshing that idea out. I understand that society overall thinks that this is a shorter event. That's good, let's hope it is and we'll see!

Peter McCormack: I wouldn't tell you to give people financial advice, but I think a better way is, ask you the type of things that you are doing to be prudent through this. I know what I'm doing and actually just one thing I've done is, which might sound mad, is I'm okay with my amount of Bitcoin, I'm okay with my amount of cash, but I've never actually had any gold and I've just started looking into getting some gold right now. Physical gold, not any kind of gold notes, actual buying some physical gold and having it stored away.

Raoul Pal: I hate this, because it sounds extreme, and every time you do this, and you'll get proven wrong, everyone calls you a fear monger, but I'm the same. Cash, including physical cash, gold, physical gold, Bitcoin and hustling for revenue and saving money.

Peter McCormack: Yes, so I hadn't thought of the other two, but you're right and it's obvious when you think about it. I haven't seen any economic impact on the work I do yet, so that hadn't crossed my mind, but that actually...

Raoul Pal: No, but it may do. So what you should be doing is trying to bring your pipeline of any income stream that you can earn forward, spend less, so you've got a better balance sheet should that play out. If I'm wrong, who cares. You've just got a better balance sheet! So it's making your own balance sheet better.

Peter McCormack: It's funny, during this process though, I've warned people about considering buying a little bit of Bitcoin just to ride through this process, but it's always been a very difficult thing to try and convince people. But listen, look, I'll give you one more question and we'll leave this as a short one, I know you've got something to get onto. Just a final question. Have you ever found a good way of explaining or convincing people they should consider Bitcoin? Because I've still yet to do it and I wonder if it's really a post pain event that people learn from.

Raoul Pal: I don't think you could have convinced people to understand what fiat currency was, I don't think you could tell people what gold was. If you went to a Martian and said, "Oh well, this is this shiny metal, that you can't destroy and can't create, it just is and we call it money and we're going to exchange it with each other, so I don't have to swap bread for a part of my cow." They'll go, "Why would you use this?"

The point being is adoption takes time. It is not an instantaneous moment where the light bulb goes off, it is that adoption curve, it always will be and there's almost nothing we can do about it. Even though we're part of trying to create an adoption curve, the adoption curve is just going to happen over time and that's okay, it's just how it works and what you get paid for in Bitcoin, which makes it interesting, is you get paid to be an early adopter.

Peter McCormack: Right, I'm going to steal those five points by the way, but I will hat tip you! Listen, Raoul, I appreciate your time at short notice to do this, I know you're busy, let's catch up maybe in a month or two and see where we are in the world.

Raoul Pal: Would love to! Now also I can't fail but give a plug to Real Vision.

Peter McCormack: I was about to do that!

Raoul Pal: Perfect! We create a daily briefing that gives everybody an idea of what's going on with the coronavirus, and how it affects things, the analysis. We've got all the world's leading financial experts. So just we're realvision.com and there's a number of options. There's a free option, there's various tiers of subscription, but you will get all the information you need of what's going on in the world from that and there's a $1 trial as well. So there's no real excuse not to educate yourself sharpish because this is a very, very important time.

Peter McCormack: Yes it is. So I'll put that into the show notes and I wish you the best with it and I will wax lyrical about Real Vision, I've watched a number of the videos, they are bloody brilliant. Not just good content, but really high quality production. Would you say it's fair to say it's the financial Netflix?

Raoul Pal: Yeah, it's either the Netflix of finance or The Economist of the video age! The only problem is, is our high production values are out the window right now because we're on Skype doing it from home. But we get extraordinary guests, so we're very privileged situation in this.

Peter McCormack: All right, well listen, all the best, anything I can do for you, just reach out to me.

Raoul Pal: Brilliant, thank you mate. Good to speak to you as ever!