Raoul Pal’s Last WARNING Ft. Robert Kiyosaki

This is about as macro environment as I’ve ever seen and I think most people’s read on it is probably wrong right now. So, let’s go back and say I’m going to go take you through a history lesson. Then we’ll get to today. That’s why I’m concerned about World War II. World War II was a fascinating period because like Covid. The entire world had basically been stuck at home or been on battlefields. Everyone came back and there was no supply of commodities and goods. Global supply chains were broken. Everybody came back and started consuming again and guess what inflation went up to 13 or something, maybe even higher, and that period was fascinating because interest rates went up. The first thing that happened was the economy went straight back into recession and rates, and inflation went negative because there was a massive tightening of monetary conditions. You raised the cost of goods on people and didn’t raise their salaries enough. People couldn’t get the goods they wanted exactly like now and everything collapsed, so we went back into recession and then eventually some better times. I’ll come back into the 1940s and 50s because I think it’s a really important parallel that most people misunderstand the next time we saw anything remotely like this was 1974. A lot of people tell you it’s the 70s again inflation.

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Well, the inflation episode we had in the late 70s was driven by demographics that were the baby boomers entering the workforce all at the same time. It was the largest demand shock the world had ever seen and we had a supply shock from the oil crisis to the Arab embargo. That’s not repeating now, what is actually more similar is 1974 was the Arab oil embargo. The price of oil tripled and interest rates went up, inflation shot up and the immediate effect was the economy went down the toilet. Inflation fell in 1974, afterwards, people are still thinking inflation goes on forever. It did not and it did not in the 1940s either. Then the next one up is 1984. in 1984 we saw an issue where there was a huge amount of trade disputes. The dollar was pretty strong like it is now. Interest rates were going up and inflation was high. Everybody was fearing looking back and saying we don’t want the early 70s late-80s. Volca was tightening rates too much and the economy collapsed. It didn’t go into recession because the Fed quickly started cutting rates, but the dollar went up a lot more and created a lot more problems when we ended up with the plaza record in 1985.

 When everybody had to stop the dollar from going up from destroying the global economy inflation was high. The fed was hiking rates trying to tighten the balance sheet. What happened is the economy rolled over really quickly again. So, what’s going on here? Why does this phenomenon keep happening? Everyone extrapolates inflation out forever. What actually happens is consumption falls because we’ve tightened monetary conditions tightening money, and monetary conditions to ordinary people mean the cost of your mortgage has gone up at the fastest pace in history. Over a one-year period mortgage rates have never risen this fast, so any money you borrowed has suddenly got much more expensive, your wages haven’t kept up with the cost of just basic services like food, so you’re actually feeling poorer.

You can’t consume as much and you start not consuming other things and it’s suggesting that if we’re not careful, we could have a very sharp nasty recession meaning kind of a negative five percent GDP recession. It might be short depending on what the Fed does and we’ll come on to that in a bit. So, we’ve got the setup that we’ve seen many times in the past. We’ve got the forward-looking indicators of this monetary tightening suggesting we’ve got some real pain to come then the anecdotal evidence. We’re seeing all the tech companies who were bulletproof laying off staff and giving earnings warnings because everybody can’t raise prices enough. So, their margins are falling and people have overextended amazon and said we’ve hired too many people. They’re one of the biggest employees in the United States. This is not good. The answer to higher prices is higher prices and that’s what’s happened. Everybody’s looking around you themselves saying well what’s going to break when stuff like this happens. The market goes down, something’s going to break. We’re looking at what bank is it, what hedge fund is it? The actual answer is it’s the economy. The economy has just broken and the Fed is gonna have to pivot. They’re saying and it’s dead right, the monetary conditions that we’ve imposed on corporations. People is the biggest tightening in all history, we’ve also got china slowing down very fast because the lockdowns.

But also they’ve been in recession, so we’ve got no Europe with war and having to deal with this energy transition. So, we’ve got no leg of global growth here. Now the question is how bad does this get? What choice do you give people? Do you say well you’re going to get destroyed because of the supply chain issues because of cloven all of this. Your wages won’t keep up, so we’re going to destroy household net worth. Everything’s levered, 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. 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, I’ve got five bottles of water. You’re kind of thinking I probably need some of that water. I’ll buy them all but at a lower price. If I say there are 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 if something gets devalued versus something else. So, we’re not making more shares in the s p actually what we’re doing is buying them back making less of them.

Therefore, the S P goes up in real estate. There are periods when we try to 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 the crypto right. We either go through a scenario like 2000 which was a typical old-school recession where equity markets unwound excesses. The bear market was 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 Fed balance sheet we pretty much stopped in it. Tracks happened really quite quickly after they cut rates first and didn’t really help because the banks had seized up. 

Then they used the balance sheet then they did it again in 2010-12-16 and then 18 was the Powell Pivot where they went from hiking. We need to cut it’s the fourth turning and that’s where we are and this may be the final event of the fourth turning. It may be just another phase of pushing this towards 2001. We need to stop what we’re doing and change what we’re doing. It is so important for people to get the right education, it is imperative and there are lots of kinds of scams around education. We wanted to democratize the same kind of quality of financial education that we’ve done with financial information. You watch real vision. It’s not that I can’t fully announce what we’re doing. But we’re really going to change the game on what it is because these things cost fortunes thousands for a good course. It’s thousands of dollars most of them are not even done by people who’ve been in the markets. But we’re going to change everything and create something nobody’s ever done before you. 

This article is a transcription of a video made by Jamie Tree

Original video: https://youtu.be/VGSJ7VKrW60