So, going back to answering the fundamental question that we’re here to answer, how do you thrive in a time like this?
‘Let’s look at other opportunities. Maybe not everybody likes crypto. Another thing that is patently obvious is that technology is not going away. But if this technology continues to have this ridiculous adoption, whether it’s AI, EV, robotics, or genetic sciences, all of these things that are around us, and space travel, well then if it is being sold in a fire sale, because everybody’s panicking. Well surely, that makes sense because technology has outperformed the market for the last 40 years, so you always want to be buying technology. So if you’re thinking of your $401k, you know, you’re in your 30s, you look at your $401k and you’ve still got your income because that’s the most important thing in everything. You’ve got your income, you should be going, “I should be buying technology stocks and I should be buying crypto because these are long-term mega trends.”
On Friday, the US Labour department announced that the consumer price index increased by 8.6% in May from the same month a year ago, marking the highest reading since December 1981. The market’s reaction was instantaneous. In just around 24 hours, the crypto market had shed around $9 billion, falling to $1.10 trillion, its lowest since January 2021.
The Carnage is similar to that of the stock market as a whole. The S&P 500 finishes below $4,000. This is the third time it has traded below $4,000 in 2022. On May 11, the index fell to $3,935. It regained some of the losses shortly afterwards, but dipped further just a week later. By May 19, it had fallen to a record low of $3,900. We are back to the same range now. At $3,986 the index has fallen by 5.66% in five days.
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With the continued bloodbath in the financial markets real vision, Raoul Pal, CEO and Macro investor, attempts to answer the question on everyone’s lips: how do you successfully trade in volatile markets? In a recent interview, Pal discusses, among other issues, how the world’s biggest sovereign wealth funds and family offices are allocating their assets despite the market volatility and economic uncertainty. Let’s get right into Raoul Pal’s interview.
Is this like another time? Is there something that we can learn from historical trends that we could apply to our investment thesis now?
‘So the investment this is, I don’t believe, is so necessary. There are a lot of macro similarities with the past episodes, and everybody makes it very dramatic, so there tends to be a lot of doom and gloom. And I’ve been a proponent of that as well. You know, everything looks like the 1929 crash, everything looks like we’re going to go to World War II, everything looks like, you know, it’s 2001 all over again. If those things happened, but things went on, and if you bought tech stocks after the 2001 crash, you’d be very well indeed.
If you think of Jeff Bezos, he launched Amazon, bright-eyed and bushy-tailed, with his iPhone. Its price has exploded. It was like, “Oh, amazing online bookseller.” It then falls to 96%. So this is exactly what I went through in crypto. It was exactly the same and then what happened was, well, unlike most of his investors, he held on and it went up a lot again. It still didn’t make up the difference. It fell another 80%. It went up again. It then fell to 60% and then, before you knew it, this online bookseller was suddenly worth more than all the book-selling companies in the world added together, and it was still trading at a price-earnings ratio of like 800. Everyone’s like, “This is crazy.” This is a bubble, but what we didn’t realize is that he was building a network. This network for e-commerce and then the computing power that drives it, you know, and so over time, Amazon just did that, and these are the things you need to think about. This is where we are in the volatility and this is going to survive. There are the two questions, and if the long-term trend is there, then you should be buying into all of this.’
What are the smartest people buying right now? Are they sitting on cash? Are they moving on something?
‘There is a lot of stuff. There’s a lot of cash. So I have my global macro investor roundtable, which is a bunch of my subscribers from my kind of very high-end institutional research service. We are a bunch of the world’s most famous hedge funds, family offices, asset management firms, and we all have this little enclave here in the Cayman Islands with a lot of wine and a lot of discussion and trade ideas and stuff like that, and generally people are a lot in cash the real estate developer guys. The kinds of wealthy guys who are in real estate as their primary thing, a lot of them have sold quite a lot. The hedge fund guys were very concerned about the recession but were also looking, and so they were buying.
Let’s call it cash bonds cash anything to kind of just not be involved in risky assets like stocks and stuff, but they were looking for the opportunity for the other side, which is what that opportunity was, and that opportunity was technology, crypto and commodities. Commodities have gone up a lot recently, but we’ve got this greening thing that’s going on right. We’re going to green the world. We have the political willpower to do it, and it’s going to happen faster than the market can take. And that means we under-invest in mining equipment and we over-invest in battery technology, wind farms, solar farms, right? And the idea is that eventually you accelerate this so much that it becomes the adopted technology and electricity becomes cheaper from doing it. The issue is that there’s not enough copper for the electricity we need to generate, so we’re about to go into this enormous copper shortage. You don’t notice it now because the economy’s weakening and so fewer people are demanding copper, but once we come through the other side of this, you’re going to have this huge demand for copper. It’s a problem, but it’s part of that green energy transition. The green energy transition also requires a lot of other stuff to build these wind farms, solar farms, hydrogen power plants, you know, whether we go to atomic energy or whatever it is; it’s a whole change in how the world works. It’s very similar to the 1950s when we kind of rebuilt America’s factories and all that kind of stuff ’.
So, at that moment in time, it means that these guys wanted both commodities and technology, because they know, this one’s probably kind of a good five or ten-year cycle, and the technology cycle is limitless right now. so that’s I guess where most people were thinking, but everyone was very nervous over this next three-month period about what would happen to the economy and what could happen to the market’.
According to Pal we have the biggest family offices and sovereign wealth funds keeping a lot of cash handy for future opportunities.
Going by his explanation, these big money investors have been on the side-lines for a while now and might soon be ready to put some money into the market now that prices are falling rapidly. When these big money investors showed a lot of interest in the crypto markets earlier in the year, do you think they are waiting for the bottom to allocate some of the cash they have lying around into the space when they do come aboard? How will their involvement impact the crypto economy?
Let’s back to Raoul Pal’s interview.
What are the signs that they will look for to go in on something?
‘So, we talked about income plus opportunity. They’ve got the cash, so you know, one of the world’s best technology investors. I think that’s 70% cash, which is extraordinary because these guys are, you know, aggressive technology investors, 70% cash. There are a whole bunch of people who are. So what they’re saying is that the future opportunity is going to be big and it’s going to be cheaper than it is today. Now, in that time it properly doesn’t really matter, but here what the smartest people are saying: the future opportunities are better than the present opportunity ’.
So, that’s a little scary though, because that means prices are going to go down further.
‘Well, we don’t know when they had that bet. They might have done that four months ago, in which case it has been a very good bet and they’ll be looking to deploy. If I read their investor letter, they say they’re now starting to look to deploy stuff into interesting opportunities where things are really cheap, which is the thing I said before. When the market throws out the baby with the bath water, that’s when you start finding the things you really like. You know, in the crypto world, things like Solana, great project, down 85%. There are a whole bunch of these big layer ones with network adoption effects already. These are not super speculative assets, they’re obviously speculative and risky, but not super risky. They’re all down: 80%, 85%, and 87%. Okay, that becomes interesting’.
Technology and commodities are Raoul Pal’s most conviction asset categories for this volatile market environment. What do you think? Is he spot on or far off the mark?
[This article is a transcription of a video made by Savvy Finance]
Original video: https://youtu.be/ERkwPqcCtSA]