‘That’s the key thing. The ISM employment data has started to look at contraction. There’s a lot of data that looks at forward-looking contraction of employment. You’re seeing the tech layoffs day in and day out, so that’s coming. It’s not in the data yet because the data is lagging. There is a huge lag. Owner equivalent rents are the most significant lag in CPI. Inflation is reversed, which is why you tend to see after this inflation reversed. I’m going to say something that might shock people.’ – Raoul Pal.
In a 50-minute interview, macro investor Raoul Pal gave his take on what he sees coming within the economy, both at large and with crypto. Raoul backed his thoughts by using data from the ISM, which is the purchasing manager survey. Raoul believes the ISM is one of the most accurate indicators to determine what’s really going on in the economy, and so the Jet-Bot does. Jet-Bot is a copy trading platform where you may earn 200% to 2,000% APY by using Binance trading bots. Copy trading will help you stay ahead in the crypto game. There is one easy saying that you must remember: people should take a break, while robots should work for a living.
Currently, the ISM manufacturing PMI fell to 53 in June of 2022 from 56.1 in May, pointing to the slowest growth in factory activity since June of 2020 and below the market forecast of 54.9. When looking at how the economy crashed in the mid-1970s, Raoul believes our economic landscape draws eerie comparisons. According to Raoul, the ism fell from the mid-50s to the mid-30s, which would put us in a deep recession if it happened now. Raoul goes on to explain how this all ties into bitcoin:
‘This affects crypto too. If I look at the global money supply year over year against the year-on-year rate of change of bitcoin, you can see it’s a dominant driving factor of the overall direction. It is not the only factor, but a dominant driving factor.
Global money supply has been shrinking because everybody’s been tightening, so that has reduced the price of bitcoin, so that was the crypto bullseye. The winter was essentially in that chart. The following chart shows that the money supply is cyclical to two and the ISM leads it by nine months. The ISM inverted suggests that the M2 rate of change is going to start rising again, which basically tells us things like bitcoin and risk assets are cheap, which ties into the Nasdaq being cheap and the exponential aid stocks being relatively cheap and that there is a potential big turning point in markets to come.
What I’m waiting for is that turn in bond yields. I think it’s forming yields are forming a head and shoulders top with 265 in the 10 years and 275 in the 10 years as the neckline. If it breaks that, then we’re going back below 2%. Inflation break evens are already falling.
So we’ve seen them fall sharply, and I’m expecting the oil market to show more liquidation. We saw a big glimpse of that this week when we had some really rough days in oil. I know there’s a lot of oil bulls out there and I understand the longer term picture, and Dwight Anderson made this clear in his interview, is that the thing that will pause the longer term picture is demand destruction, and Warren talks about it as well. I think we are going to see more demand destruction in a shorter and sharper period of time. Then maybe oil will stabilize again in the $80 to $100 range, but the rate of change won’t be as high. It won’t keep going up at 100 increments, which means inflation is not as high.
The inflation we get out of this after this recession is going to be much less than people are expecting. People are overextrapolating past prices and rates of change rather than current prices.
That’s basically my macro view: maybe a bit more pain to take really unclear one gush lower. The thing that will happen is that we need to brace ourselves for the economic impact. It’s going to start to become clear to people that people don’t yet believe that story, but I think it’s going to be very clear that the question on people’s minds is can we get the 70s again where inflation came down and then it came back up again. Well, for that to happen, you know, there was a demographic demand shock. We don’t have that this time. Can we have another supply shot? Could China be a big problem? Yes, but we’re going to have to move the oil price to $200 or $300 to have the same magnitude of price increases as the year-on-year comps. It’s a really tough call to say that that’s the most likely outcome.
There are lots of possibilities out there, but not as many probabilities. The financial conditions are priced at an ISM of 35. The pain of tightening is already feeling the pain of tightening. The probability is that the other side of a recession where conditions loosen is the thing that eventually gets priced out of the crypto markets.
I showed that with that M2 chart has priced in this full thing, so it’s already there again. The Fed is a kind of noise because it’s the actual bond market that does the tightening, not the Fed. So the Fed, wherever they are in terms of rates, is meaningless because the bond market, as you know, pushed it all the way up to 3.6% or whatever it did in 10-year rates, and the same is true at the front end. I think it’s a lot of the bad news, however much that is, whether it’s 80%, 90%, or 100%, is in the price, and Sam sees that from the market clearing itself within crypto. You know how many of the bad positions have been washed out?
We’ve seen this kind of long-term capital management style blow up where everybody was lending to the same counterpart and then when the counterpart goes under, everybody goes under, and I’ve lived through that before. Yes, normally these things are towards the end.
I don’t know yet whether we’ve seen the low. I think so. I’ve been averaging it in quite aggressively, the biggest addition to my crypto trading bets since 2020 into this, but I’m not sure where the low is. Could a drop in economic conditions cause further short selling or panic? I think the low is close to being in, whether it’s in or not. I can’t tell, but I know from all of my economic work and I’ve probably got maybe 200 charts to back up all of the stuff I showed that suggests the balance of probabilities is that a lot of this has been priced, that we’ve got the inflation problem, that it’s probably a thing of the past and that economic growth is going to fall sharply.
What happens when economic growth falls sharply is that we now have this Pavlovian instinct of the market looking forward and saying the Fed is going to pause and monetary conditions are going to ease. Don’t forget about the global macro investor’s financial conditions index, which prices in commodity prices, the dollar, and yields. And when yields start coming lower, commodities start coming lower and the dollar eventually tops out, which it’s not clear that that’s going to happen yet, but at some point it will, you’ve got all of those reversing and that tells you that usually that’s when the Fed has started reversing course as well.
There is another scenario that is very real, and the scenario is that I’m wrong that the 1974 short-sharp contraction of the economy and the contraction of markets is not that it’s 2001, 2002, or 2008 all over again, in which case you get a false rally that goes on for a period of time. Then it rolls over and has another whole set of blows. Those are the 50% sell-off style scenarios.
I don’t see that in the forward-looking data because I think it looks sharper and shorter than people expect, but that is a possibility. It’s really hard to call these things, you know, trying to pick lows and stuff. It’s not easy because, you know, many people got carried out in 2002. If you remember it really well, then 2011 hit, and then the whole thing rolled over again and destroyed people, so these kinds of markets are not easy to trade.’
What do you think of Raoul’s thoughts here? Do you think he’s relying too much on the ISM data?
[This article is a transcription of a video made by Only The SAVVY]
Original video: https://youtu.be/K8TqzlkP_oc]