‘I think it’s going to happen at a shocking speed, so in 1974 we went from everything looking okay to the worst recession since World War II in four months. I’m thinking it’s going to look similar because of the speed of the monetary tightening and the speed of the rise in prices. So I think we are going to have a very ugly few months, both economically and for markets’. – Raoul Pal.
From the stock markets to bonds and cryptocurrencies, the financial markets are feeling the full blow of a rapidly collapsing global economy worsened by a brutal war. When the Russia-Ukraine war started back in February, many investors were certain that it would end almost immediately after it started. However, it’s been four months and the war is still raging and has locked up tons of raw materials and food meant to be exported to other countries. No one knows when the war will end and how devastating it is going to be for both countries and the rest of the world.
However, it is certain that, in addition to other grave consequences, the war is terribly worse for the ailing global economy. In the past few months, we’ve watched some of the largest economies struggle with record high prices, weakening fiat currencies, and general economic collapse. In a recent broadcast Macro guru and Real Vision, Raoul Pal and renowned author Robert Kiyosaki vividly describe the extent of the damage. Pal predicts that the next few months are going to be quite ugly, especially as the Federal Reserve continues to struggle to bring inflation under control without crippling the economy.
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The IMF says the world economy faces the strongest headwinds or challenges since World War II. And so Ralph Pal is talking. He’s a macro-global economic economist. He walks the talk. He knows what he’s made Kim and I very rich on his recommendations of when to buy bitcoin. We’re very proud of that, but one thing that he mentioned is the debasement of the currency. So here’s a penny. It’s copper, and in 1964 I was looking at the quarters and dimes, same colour. Do I mean it’s the same colour? So basically, in 1964, dimes, quarters, and half dollars became copper and that’s what you were talking about debasement and I think we’re paying the price for it because I’m really glad you started with history. Because macroeconomics is history, you have to look back in time and every time people did this, the first was the Chinese, who printed paper money, and the Chinese empire collapsed. Then when the Romans did the same thing, debased the currency, the Roman Empire collapsed. So when the IMF made that announcement, I was going, “Oh my God, thank God Ralph’s coming on” because are we looking at the end of the American empire.
Can you go into what you’re seeing coming together?
‘I think it’s going to happen at a shocking speed. The question is what comes next, and that’s the key point. If my base case comes into play, which is the Fed pivot, they stop raising rates. They’ve already started suggesting maybe we’ll pause in September. My guess is June will be the last hike and after that they will say “well we’re just going to see” and we’ll see the economy start going down the toilet and they will start thinking. Well, we’re not going to do QT now either, so they’re not going to start shrinking the Fed balance sheet. And before that, we’re going to be talking about rate cuts, but we don’t have many rates to cut, you know, rates in nowhere. The only outcome is that they’re going to have to print money because the credit market’s already starting to dry up. That’s usually an indicator that the housing market is rolling over, and that’s a bad indicator’.
This stuff is printed money. You have a silver coin. You have a copper coin made into silver, right? Basically, it’s called debasing the currency, which the Romans and Chinese already did’
‘Because don’t forget, the basement currency works in a simple way. If you’re really thirsty and I have a bottle of water, you’ll pay anything for it. If you’re really thirsty and I’ve got five bottles of water, you’re kind of thinking, yeah, I’ll probably need some of that water. I’ll buy them all, but at a lower price. If I say, “Here’s a million bottles of water”, you don’t want any of it because there’s too much water now. It has no scarcity, so if you make too much of something, it becomes less valuable. So if Da Vinci created 50 million pieces of art, guess what? They’re worthless. And so it’s that concept. What it does is, if something gets devalued versus something else, we’re not making more shares in the S&P. Actually, what we’re doing is buying them back and making fewer of them. Therefore, the S&P goes up in real estate. Yes, there are periods where we try and create new real estate, but generally real estate prices go up Versus, the Fed balance sheet because it’s a relatively scarce asset, same with gold, same with crypto. So that’s the phenomenon’.
The question is when does the ball start climbing again?
‘Is it kind of, and do we either go through a scenario like 2000, which was a typical old-school recession, where equity markets unwound excesses, when the bear market lasted 18 months or so, and then the Fed kept cutting rates and eventually it stabilized? But if we look at 2008, which was the next recession, as soon as the Fed used the balance sheet, we pretty much stopped in our tracks. It happened really quite quickly. They first cut rates, which didn’t really help, because the banks had seized up. Then they used the balance sheet, and then they did it again. In 2010, 2012, 2016 and then 2018, was the Fed pivot, the Powell pivot, where they went from hiking to “Oh my god we need to cut”.’
After the 7-5 basis point interest rate hike in June, Jerome Powell, the chair of the Federal Reserve, stated that a similar hike might be in store for July. However, the third quarter and second half of the year could bring in unexpected surprises that would necessitate a different direction for the apex bank. If the economy declines further and the threat of recession increase, then we could see another palpable pivot. What is your prediction?
Let’s get back to Raul Pal’s interview.
‘What choice do you give people? Well, you’re going to get destroyed because of the supply chain issues because of all of this, and your wages won’t keep up, so we’re going to destroy your household net worth and everything’s leveraged. So all the borrowings against houses and all the borrowings against equities and all of the borrowings on top of borrowings, you’re going to let the collateral go down and blow the entire thing up.’
But isn’t that what they’re doing when they say they’re going to pay off the student loan debt? If there’s debt, there’s also forgiveness.
‘That’s right, which is coming whether we like it or not. So what you’re trying to do here, what they’re trying to do, is reduce the debt via financial repression, which means you basically have inflation running slightly higher, so you have higher interest rates. So what you want is to reduce the real value of the debt. So if you think back to your parents’ how much they paid for a house and the mortgage they had, the mortgage seems laughable. It’s because, over time, inflation raises the value of the house while the debt doesn’t get raised, so in the end, the debt is nothing.’
So the way that this stuff here makes the money less valuable
‘Correct, and make the debt less valuable. So it’s okay if you’re in debt, but if you’re borrowing, if you’re lending money, it becomes complicated. But anyway, the point being is that you either have a fiscal stimulus, which is, let’s say, the republican view, we’ll have a fiscal stimulus cut taxes or we’ll put some spending in and what happens is that it doesn’t go to the people who are the worst off, right. So it’s creating this issue of 1% vs. 99%, which everybody can see and nobody knows how to solve. The issue is actually the balance sheet because all of the expensive assets keep going up because they keep printing money. The rich get richer, but doing this blanket fiscal stimulus is hard because the rich get richer again.
So I think people have thought, “Well, maybe we should just try and give it directly to the people who are most affected.” Okay, fine, those are the two choices. One is to do nothing, which is too late because there’s too much debt. So you can’t let the system clear anymore. The old way would have been to let the system clear. It’s all okay. You just have a recession. Everyone stops borrowing as much money. The world is 400% in debt. The world has never been this indebted in all of its economic history. Well, I hate to say this, but I’m seeing your point of view. Yeah, and what I’m saying is, regardless of your philosophy, it’s difficult to find other outcomes that kind of make some sense’.
Let’s take a quick look at the cryptocurrency market. Bitcoin, the world’s leading cryptocurrency, has traded in the $21K range as of press time. The crypto asset has gained around 6% in the past week and is now exchanging hands at $21,294, with a market cap of $406 billion and a 24-hour trading volume of $3.97 billion. As of press time, popular coin Dogecoin has also had a favorable week. The crypto asset is back among the top 10 largest cryptocurrencies with a market cap of $9-6 billion. The meme coin has gained over 23 in the past week. Other top cryptocurrencies have also recorded similar gains in the past week, from Solana’s 24% gain to Cardano’s 7.15% gain to Ethereum’s 12.64% gain. The slight recovery has taken the overall cryptocurrency market closer to the one trillion dollar mark, at $957 billion. However, we are still far from what the market looked like during November’s peak. What do you think about the recent trend in the cryptocurrency market? Is it going to be another short reprieve before more pain, or are we getting closer to the beginning of another bull market?
[This article is a transcription of a video made by Savvy Finance]
Original video: https://youtu.be/EpYLNjEVHHU]