‘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’.
All of the signals that we are in a recession are here. Most markets are down year to date, and now many analysts and pundits are guessing when the recovery will occur.
In an interview with Robert Kiyosaki, Macro analyst, and Ceo of Real Vision, Raoul Pal, provides hope about the future. Raoul visited World War II and provided eerie comparisons to our current situation. Raoul argued that in 1948, post-World War II, there was no reason to have hope with the economic conditions looming, but soon after a significant economic boom followed, just as he’s predicting now.
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‘The question is what comes next, and that’s the key point. If my base case comes into play, which is the Fed pivoting, 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 you know it, we’re going to be talking about rate cuts, but we don’t have many rates to cut, you know, rates in nowhere. So the only outcome is that they’re going to have to print money. 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 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. There’s 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, so we’re not making more shares in the SP. Actually, what we’re doing is buying them back and making fewer of them. Therefore, the SP goes up. 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. 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 than 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 and the debt doesn’t get raised, so in the end, the debt is nothing, 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 is that you either have a fiscal stimulus, which is, let’s say, the republican view, we’ll have a fiscal similar 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% versus 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, 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% of GDP in debt; the world has never been this in debt in all economic history.
And what I’m saying is, regardless of your philosophy, it’s difficult to find other outcomes that kind of make some sense. So, let’s go back to the 1940s now and figure out how bad it was then. This was a very similar setup to the worst supply chain issues: massive inflation, everybody coming back in, but what happened was the economy collapsed. Then interest rates came down and they stabilized. They stabilized because the Fed stabilized them. Oh, and inflation was running slightly above 3% and bond yields were about 2%. So real rates mean you in the property market are going to make a lot of money. So, negative real rates become very good for assets. What happened in the 1940s and 50s was a massive economic boom. What we actually got was the value of the war debt eroding because of this financial repression. We had the value of assets like housing. The equity market went up 900% over that period of time. There was a lot of fiscal stimulus because you had to rebuild after the war. Companies were building factories. So if you think of it now, companies are going to be rebuilding factories in the United States or in Europe and not in China.
So that’s going to get some stimulus. Yes, the jobs are not there, it’s robots in the factories, but it’s still stimulus for the economy. The government will do some stimulus, as we’ve talked about. Interest rates will remain relatively low; inflation will remain controllable, but a little bit higher than it has been, and what that sets off is a period of stability and boom because there’s so much technology. I think there are a lot of big things happening in the world that could be, so that would be my rosy outcome. And I think that it is still my highest probability that we kind of muddle through this in a way that we don’t expect because it feels like the end of the world. Imagine what it must have felt like in 1948. All you could see was the end of the world and then you got this massive inflation. You just think this is the worst thing that could possibly happen. What actually came out of it was something very different. It was the rise of technology, it was the rise of the US as a big superpower, it was the rise of the rebuilding of Europe, the rise of Japan, you know, it was an incredible period.’
[This article is a transcription of a video made by Only The SAVVY]
Original video: https://youtu.be/W7Qvz6UnIQA]