Top-down - Raoul Pal
What is the state of play of debt in the US
US GDP growth trend - 1.7%
US Debt - 350%
US Government Debt - 120%
US Private debt - 120% down from 145% (2008 onwards - basel rules)
How US could run such high levels of debts
Governments can run this high level of debt using debasement or in effect financial repression
Interest payments on the debt - every cycle, the government issues new debt, rolled over every 4 years, but there is not enough GDP growth to pay for it. Then the government will use debasement or inject liquidity. Therefore liquidity will follow the US debt growth trend - indicated by either the annual interest payment growth or any such indicators. Normally, this would go into a debt crisis if it were for any other nation. But the US doesn't need to have a debt crisis as the financial system's reserve currency where those very same debts across global markets are held in US currency. That puts the US in a very unique position to continue to print currency for the foreseeable future (or debase currency) without breaking its financial system (at least until the US-led global order is in place or till such point when this global order finds another viable alternative). Debt ends up getting monetised or ends up in the balance sheet of the central bank or disappearance by debasement.
What are the implications of high levels of debt and its growth?
Now what leads to continued growth of debt? Lack of GDP growth. What is driving the lower GDP growth - an ageing population and lowering productivity. Growing debt results in growing interest payments at an exponential rate. Such growing interest payments are paid from the debasement which introduces more liquidity into the markets. More liquidity drives up asset prices. Any asset which has a chance of reasonable growth prospects takes even more of an exponential curve - reflected in US equities, US dollar assets in general, Commodities including food, and Cryptocurrencies. Most of those assets are riding a momentum growth - ie there is a force multiplier effect on the actual growth of the assets from the liquidity growth (or increased supply of US dollar).
Equity prices should follow the growth in earnings, however excess liquidity introduced by monetary and fiscal policies (or debasement of the currency - in this case specifically the US dollar) drives up prices disproportionate to the underlying profits (or growth). This is now starting to reflect across assets. Therefore though equity may look extremely expensive, but reviewing against the liquidity, the picture moderates. All investors are trying to do is protect themselves from the debasement of the currency itself on assets which will offer returns above the hurdle rate (calculated as 12% - considering 8% debasement on an average since 2008 and considering a typical 4% inflation in the economy).
What are the reasons for debt growth?
As stated earlier - demographics are a key driver for growth. The ageing population is slowing growth. And it is immovable. The US birth rate is slowing down - It's half of what it was in the 1980s, and below replacement levels. People living longer is only going to compound the problem because now there is an ageing population problem too. The labour force participation is the real measure we are interested from an economic perspective. Labour force participation is at 62% in 2024 down from 67% back in 1995, with the prospect of falling to 58% in 2035. That's a huge 10% gap in 40 years. Lower labour force participation leads to lower GDP growth which then needs to be compensated with debt growth. And there is a direct correlation between US Government debt and labour force participation.
What are the implications of escalating asset prices
The debasement of currency does not inflate wage growth earnings or even commodity prices. It only inflates the scarce assets. This has huge implications for society - those who start with the lower end of the asset cycle or even do not have any assets to start with are going to miss out on this growth cycle entirely. We can not have this kind of thing going on forever without a popular uprising - the middle class, the younger generation and the working class (who are asset-poor) will at some point realise that their lives are at the end of an ever-losing prosperity vis a vis their previous generation. I doubt they will forgive politicians and policymakers.
How does this impact crypto as an asset class
That takes the discussion to crypto and bitcoin. Bitcoin is the advent of the alternate financial system. However, it is yet to reach the utility of an alternate financial system in terms of the adoption of cryptocurrencies for day-to-day usage. It is currently another asset class, which is serving as a protection against debasement, and that narrative has so far served Bitcoin and crypto in general. Therefore it is also correlated to the liquidity cycle. This will change however when the adoption and usage of cryptocurrencies start to expand, and at that stage, it will be a force multiplier of 10x and 100x.
Why asset prices won't crash in the long term
Can these asset prices crash - interestingly, it can't. Why - because the assets are the collateral for the financial system's huge leverage. If asset prices crash, the whole debt stack collapses and no government will ever allow that to happen. So the governments world over have to keep propping up the asset prices so that those creditors are incentivised to continue to invest in the system. So with one side of the balance sheet protected against any significant long-term downside and another side always trending upwards (exponentially, that is) there is only one way ahead for the investors - keep the money in high-momentum growth assets.
Cyclicality of the liquidity cycles
If one were to predict and manage the asset price volatility induced by business cycles or liquidity cycles, one needs to understand what drives those liquidity cycles. By observation, it's clear that the business cycles (as measured by ISM charts - Institute of Supply Managers - an indicator of demand in the economy) are recurring every 4 years. Where is 4-year cycles coming from?
In 2005 heavily indebted governments thought up a way to service those debts. The solution was to bring interest rates to near zero and then restructure the loans to 1-year and 1-5-year terms (government bonds). This resulted in recycling debts every 3-4 years and with that comes business cycles. These also developed a correlation with US presidential elections as the rates were influenced by the political need to win the elections. Coincidently, there is also bitcoin halving every 4 years which also started to align similarly. Both US presidential election years and Bitcoin halving years are well known ahead of time, making these cycles too obvious if you pick up the pattern.
What does it all mean for understanding asset prices
So at this stage, we not only understand the secular asset inflation trends induced by an ageing population, low productivity and high debt growth, but we also understand short-term business cycles. It almost feels like we have god-like prescience over what happens in the economy! Too good to be true.
By tracking ISM's 15month lead trend we can get an estimate of the liquidity trend at the moment ISM is tracking at 47 (the lowest point in this cycle) for Sep 2024 and that is the point at which liquidity will experience the highest acceleration and therefore significant upside to the asset prices, particularly all growth assets.
Further ahead - NASDAQ is forecasted at a 25000 peak in June 2025 and Bitcoin at $400,000 for Bitcoin!
Bottom Up (Julien Bittel)
Business Cycle
ISM is the most important factor for the business cycle as it comes directly from the businesses. Below 50 is a slowing economy and above 50 is expanding economy. ISM inventory forecasts potential will indicate potential new investments and, therefore bank lending tendencies. When lending improves usually growth follows.
Business cycle indicators:
Nasadq usually trends ahead of ISM
Business cycles are illustrated by 'cyclical' vs 'defensive' stocks
Business cycles are also illustrated by 'staples' vs 'industrials' from a commodity perspective
Small cap vs large cap is another indicator - higher means growth
Crude oil is also another indicator - higher means growth
Copper is another key indicator - higher means growth
Copper/Gold ratio - higher means growth
Even Bitcoin follows a cyclical trend - but more due to the liquidity cycle - being a monetary asset
Business cycle dominoes
There are leading and lagging dominoes in the cycle. If we treat ISM as the t0 in the timeline, below indicators will fall on the timeline as below
Financial Conditions Index (by GMI research): +9months (Regression of: $ + Commodities + Interest rates)
Equities: +2-4 months
New Orders - Inventories: 2-4 months
New Order: 0-1 month
O/T hours worked: -1 month
Industrial Production: -5 months
Unemployment: -6 months
Cyclical jobs: -5 months
CPI: -6 months (Central Banks are operating at this level)
Wages: -12 months
CPI Shelter: -18 months
Asset prices are sensitive to liquidity rate of changes - or more to the signals of rate change from central banks and treasury. However, liquidity signals from central banks are influenced by the actual business cycles which are driven by growth and inflation. So it's better to focus on those - which in turn is linked to ISM. Having said that if we were to use ISM and its lead indicators only we would be getting only a 4-month lead in getting ahead of the game, but with GMI research financial indicators which is trying to gauge liquidity signals we get a 9-month lead time. It does feel like there is a misalignment between Raoul Pal and Julien Bittel on the approach.
Macro seasons
Spring: Disinflationary boom
Summer: Inflationary boom
Fall: Stagflation
Winter: Deflationary bust
CHAPTERS
(00:00) Introduction and Sponsor Message
(01:15) Raoul Pal Introduces the Show
(01:47) Raoul's Background and Career Journey
(02:47) Origin of Global Macro Investor
(04:22) Economic Growth and Debt
(06:23) Government Debt and Financial Repression
(09:23) Demographics and Economic Trends
(12:55) Business Cycle and Liquidity
(15:01) The Importance of Liquidity in Asset Prices
(18:13) Predicting the ISM Cycle and Asset Prices
(22:48) Global Liquidity and Debt Cycles
(25:36) Impact of Demographics on Debt and Growth
(27:24) Correlation Between Liquidity and Asset Prices
(30:31) The Role of Debasement in Asset Prices
(33:26) Forecasting Liquidity and Asset Prices
(36:06) The Role of Cycles in the Economy
(38:13) Correlation of NASDAQ and Liquidity
(41:04) Forecasting the Liquidity Cycle
(43:25) The Future of Asset Prices
(46:23) Summary of the Everything Code
(49:57) Business Cycle and Asset Allocation
(53:21) Macro Investing Tool and Real Vision Services
(56:37) Importance of CEO Confidence and Earnings
(01:00:09) Macro Summer and Seasonal Investing
(01:03:43) Performance Across Different Macro Seasons
(01:06:13) Identifying Macro Trends
(01:08:29) Expansion and Recovery Indicators
(01:11:14) Real-Time Example of Growth Momentum
(01:13:57) Using Lead Indicators for Investment
(01:16:22) Commodity Prices and Financial Conditions
(01:18:57) Small Caps and Earnings Cycles
(01:22:09) Materials, Industrials, and Financials
(01:24:45) Banks and Cyclical Performance
(01:27:13) Copper vs. Gold Ratio
(01:29:47) Altcoins and the Business Cycle
(01:32:22) Altcoins Market Cap Breakout
(01:34:31) Technical Analysis of Altcoins
(01:36:58) NFTs as Trophy Assets
(01:39:26) Impact of Liquidity on NFTs
(01:41:57) Crypto Adoption and Growth
(01:44:32) Super Massive Black Hole in Crypto
(01:47:23) Macro and Crypto Convergence
(01:50:17) Conclusion and Final Thoughts
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