IsRecessionComing Transcript

Transcript: Is Recession Coming?
Featuring: Raoul Pal
Published Date: July 15th, 2019
Length: 01:05:18
Synopsis: Raoul Pal sees rising risk of a global recession — and due
to the precarious construction of the recent economic expansion, the
resulting damage could be unusually devastating. In this deep-diving
presentation, Raoul presents many specific indicators of weakness,
speaks to the potential market impact, and explains how a “doom
loop” could quickly take matters from bad to catastrophic. He also
suggests steps that savvy investors could take to prepare themselves.
Finally, he previews some of the conversations he plans to have over
the next two weeks on Real Vision, as he seeks to better understand
both the current risks and the potential opportunities. Filmed on July
8, 2019 in New York.
Video Link:
https://www.realvision.com/rv/channel/realvision/videos/ef207abeecc7404a8e4283fef43544f
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the contributor’s personal views and is for general information only. It is not intended to amount to specific investment advice on
which you should rely. We will not be liable to any user for any loss or damage arising under or in connection with the use or
reliance of the transcription.
Expert View: Is Recession Coming?

RAOUL PAL: So today, I'm going to talk to you as Raoul Pal from Global Macro Investor, not Real
Vision, because Real Vision doesn't have a view about markets and a view about economies. But I
do have a view. And I've got a strong view that's been developing for a while now. As most of you
know, I'm a student of the business cycle. I look at the ups and downs of the undulations of GDP.
And you realize that things aren't linear. And most economists don't put some cycle into their
forecasts. Once I realized how cyclical things were, I realized there is an element of predictability.
Now, obviously, sometimes with the cycle, things don't work out exactly as you imagine the time it
doesn't work. For example, I didn't think we were going to get a full recession in 2015. Didn't quite
happen that way. We came very close with it, a manufacturing recession around the world. We
had a few emerging market crises, but it didn't quite get to full recession. But it came incredibly
close. But now, we've got to a point where I've been monitoring how the cycle is developing. And
I've come on to Real Vision a couple of times to talk about the bond trade because I said, look, the
cycle's turning, the best thing to do is be long bonds. And that's been a spectacular trade.
So, particularly in the short end of the euro/dollar market, and even in the long end, whether it's
TLT, or bond futures, there's been a huge amount of money to be made in that. But now, we're
getting to the point where the Fed look like they're about to start to ease. And we need to decide,
okay, how far they're going to go? And are we going to go into recession? This is probably the
only call that matters.
And I've talked before this, the only asset class that matters right now is the dollar which is range-
bound. So, it's currently not the predominant factor. Outside of that, it's trying to decide is the world
going into recession and is the US going to go in recession? My hypothesis is, it looks like that is
the case.
Now, one of the things anybody who knows me knows that I don't talk uncertainties. So, I'm not
saying, look, it's definitely a recession, we're all screwed, whatever it is. I don't even know how
severe it can be. But what I'm interested in is the probabilities. And the probability that we're going
into recession or even in recession now, are very high.
So, having realized this, I thought I'm not the only person who thinks this. But there was a whole
group of people who think the opposite. And it's one of those turning points where I felt insecure to
know, am I right or not? I think I'm right. And I think that people I advise, they think I'm right. But
there's a whole group that doesn't. And I thought it would be really interesting to explore this thing
fully on Real Vision for me to essentially take over the platform for two weeks to really dig in an
interview all of the best people I can find in the world, people I really respect, people who don't
have the same view as me, who may happen to have the same view, or just different perspectives,
to find out really what's going on.
And it's going to help me and all of you go on a voyage of discovery to really figure out are we
going to recession or not? And then we'll try and figure out over the course of these two weeks as
well, the opportunities and the trades that we can make to protect ourselves, or to make money,
whichever way this goes.
July 15th, 2019 - www.realvision.com 2


The Fed's mistake.
So, let's start at the beginning. The Fed started raising rates a while ago, back in 2016. And it was
really incremental. And that incremental rate rise really didn't mean a lot to most people. We
brushed it off, because rates were going from a very low level to another low level, but they kept
going up. There were rate rise after rate rise after rate rises, but all very incremental and small.
Then the Fed started QT, quantitative tightening. They started shrinking some of their balance sheets
as well.
And again, it didn't look a lot compared to how much the balance sheet has grown over the previous
decade. But that it continued for a while and nobody was that concerned about it. I started getting
a different perspective from about August of last year. And it really came to the fore in September,
October, November and December, where I suddenly thought the Fed have overtightened.
And that nuance shift happens incredibly quickly. Because everybody at the time saying the Fed
aren't tightening enough. And oh, my God, the economy is heating up. And if you remember,
everyone's talking about labor inflation, wage inflation, the Fed are behind the curve. And from
everything I looked at, the Fed had gone too far already. And they pretty much baked the recession
into the cake.
So, what was I looking at? The first thing I looked at is it's the rate of change of interest rates that
counts. And I think I showed this on my last presentation on Real Vision back in- I think it was
October last year. The rates of change of Libor. So, that's just interest rates. They had gone up
enough over two years rate of change basis that it was the largest percentage increase in rates in
all history.


And again, many of us said, yeah, but the rates are so low, why does it matter? But the point being
is, in fact, almost everybody refinanced at the lows. So, everybody with a house, everybody with
a business, every corporate balance sheet, every bank, everybody took out more debt at low rates.
And that exploded. So, even my mortgage had gone up 40%. And I was a little bit shy, I didn't
realize, and it was only one, I suddenly got this statement thrown out. Wow. 40%.
And then I wrote about it at Global Macro Investor. And there was a large family office. And the
principal of the family office called me up and said, we finance all of our debts for the family office,
all the leverage that they use, and all the other bits and pieces in their businesses and all of that
stuff. He said, I refinanced in 2015. He said, it's gone up 80%. I'm like, wow. And how much
leverage have you got? He said, well, reasonable because money has been free, so we took
reasonable amount of leverage, but it's got up and it's meaningful. So, I started to think they really
have overtightened.


So, if you look at this chart of the 2-Year on 2-Year of Libor and I put it against the business cycle,
so I used ECRI, you can see it suggests that the business cycle should fall significantly from here.
Now, that's one thing. The other thing is the Fed is still tightening by the balance sheet, that's not
stopped yet. We don't know whether it's in the July meeting, the September meeting. When are
they going to stop doing that? But really, there's a mass tightening going on. And if you can see,
that keeps going on month after month.
There is another nuance about to hit us and that is the debt ceiling. At some point, they're going to
have to agree a new debt ceiling, it's most likely be this summer. And that will also mean that the
Treasury, who've been funding the government in the meantime, are going to start withdrawing the
funding by issuing bonds. So, there could be a huge tightening to come in the August, September,
October time period of this year. So, there's some further tightening to come even if the Fed end up
cutting interest rates.
The other thing that most people don't realize, is even with these ultra-low rates, people have been
really penalized. Now, if you talk about what upsets people about the 1% and the 99%, one of the
simple things where this shows up is credit cards. If you look at interest rates on credit cards, they're
in fact at all-time highs, higher than they were when interest rates were much higher in the '90s, the
early '90s, 2000s. It's extraordinary how much people are being penalized to borrow money while-
and that's at a household level, while at the corporate level, there's many corporates around the
world- not yet in the US, who are borrowing at negative rates. And I'll come on to a whole lot about
the corporates in a bit later in this whole thesis.
So, you can see, we've got the setup, where it feels like rates may have gone too far. And I'll come
a lot more on to the rates market later in the yield curve and some of the signals there. But you see


what turns a slowdown- and we started to see the slowdown happening in December, we saw the
volatility rising again in the equity markets. And we started to see the bond market rallying like
crazy, the yield curve inverting super-fast all across the curve is what then happened is what you
normally need to turn, what looks like something like 2015 into a much higher probability of being
a recession is the extraneous event. And that was trade wars.
Trade wars.
So, trade wars are not what everybody thinks. There was a lot of noise about them. And at first,
people weren't sure what Trump was going to do. But he first went after the Chinese, then he went
after the Europeans, and then he's been going around after Canadians and the Mexicans. And then
he's done a deal with the Mexicans. And he's done a deal with the Canadians. But trade wars are
happening. And China, the Chinese situation is very, very complicated. And with Europe too, they
haven't got anywhere in the Europe negotiations yet.
You see, the problem is this, his aggressive negotiating tactics have created a knock-on effect that
most people don't understand. If you're a corporate, and you have this game of cat and mouse with
China and the US about not only normal trade, but also about technology and the banning of
technology to stop technology spreading. There is a definite move within the US administration to
really isolate China in numerous ways, but particularly economically.
But don't forget, we've just come from the most globalized world we've probably ever had. So, if
we back up maybe six years, we're the epicenter of globalization, and everybody has decided that
China is the future, all the big corporations around the world, whether it's BMW or General Electric,
have all moved to China. They're building factories, they're outsourcing, and they have supply
chains.
Suddenly, they're being told, well, you don't know whether those supply chains are going to stay.
You don't know whether you can actually stay in China, or maybe even the Chinese end up booting
you out. You don't know whether you can produce cars in Mexico or not. It's really confusing
because is Trump going to go back against what he's just done with the Mexicans? What happens
with the Canadians? How does that work? Is there any labor arbitrage anymore in a world where
he's even going after Vietnam or countries so small to be irrelevant to stop the Chinese circumventing
trade tariffs?
He's also manipulating OPEC, and you don't really know where this world is. And no doubt, there'll
be a time when he start picking on India as well. So, he's picking on all of the countries in the world.
And that's all well and good. And I've talked about this on Real Vision before is a shift away from
globalization is not the end of the world, it is the shift itself, that rate of change that matters. That
rate of change is incredibly unsettling for corporate America, particularly, and the global
corporations, the multinationals.
Almost across every boardroom around the world right now, the conversation is, can we outlast
Trump? And that's a bet. If we don't, we've got hell to pay with our shareholders. If something
happens, and we don't have an answer, we're in trouble. Well, okay, we'll build some inventory.


So, everybody's built inventory, just to give them some buffer. And now, they need to make the
decision. Do we pull the plug now? Or do we wait? Wait and see where Trump goes, wait and see
whether there's any option.
So, those two outcomes are really interesting to me. Because if you pull the plug now, you break
the global supply chains. That's happening everywhere. We've seen the announcement from Apple
this week alone, that they're doing it. The others decide, well, we'll wait and see. So, what does
that really mean? That means corporate expenditure stops. They tend to then spend fortune on
somebody like McKinsey or KPMG, or somebody else, who's going to give them that advice on
building new global supply chains, bringing their business back to the US. It's a two, three or four-
year project before they make the choice of where they're going to spend and rebuild their supply,
their factories and all of this stuff.
So, that generally means is a big crimp on spending that comes from corporations, particularly in
FDI. So, that's going to hurt several countries around the world, particularly China. But there's a lot
of countries and a lot of companies who are going to see the spending freeze and have to wait and
sit it out. So, that is going to have the effects of lowering growth. And I think that is what tipped this
situation from a merely a slowdown that was looking nasty into, for me, an almost certain recession.
So, the question is, is where are we now? Many of you remember, I used to use the ISM as my
main way of looking at the business cycle. I don't use it much more anymore, because it got a bit
broken. And the reason it got a bit broken was not because of Fed manipulation or anything else,
it's because the oil sector became so large that the oil price became the largest influence of the ISM
itself, particularly the refinery cycle every year. So, I shifted away to the ECRI. And that's the
Economic Cycles Research Institute measure, and it's a weekly indicator, and I use the year on year
return of the weekly indicator to give me the business cycle. It works very much like the ISM. And it
correlates with everything like GDP.


So, you see the chart here of ECRI with quarterly GDP. And you can see how well correlated it is.
It's indicating that we've got some weakness to come. Okay, so that's the first interesting point. Then
I like to put the ECRI against a number of other indicators that may be forward looking. And this is
where it gets interesting. I'm going to show you a whole series of charts now for you to look at.


So, this chart is the Cass Freight Shipments Index. You can see how dramatically freight shipments
have fallen, and how much they're suggesting that the ECRI could fall from here and therefore, the
GDP as well. Carloadings, a similar way of looking at transportation, it's collapsing. Capital goods
orders, these are the big ticket items, the things that a lot of times, you use financing for, or are
involved in the global supply chains, you can see how they are rolling over as well and following
ECRI lower. If you believe in this supply chain story, and it seems to be bearing itself out in the press
almost daily, then you've got to imagine the capital goods orders are going to come lower.


But households are also struggling with the rates. So, you've seen that in how much car sales have
fallen. So, car sales have languished, and they're expected to go further. Clothing sales have
collapsed in recent months as well, which has been an extraordinary move. And restaurant sales
as well have been extremely weak. So, you're starting to see not only is shipping and moving goods
around weak, but you're also seeing a weakness in the consumer and a weakness in business
expenditure.




Another great global indicator I've looked at is semiconductor sales. Semiconductor sales are
extraordinarily weak right now. And they too are suggesting the global business cycle has a lot
further to fall. Back in the US, we've also got the housing cycle, it looks like that the Case Shiller
House Index is starting to weaken significantly. And it's now at the weakest level since before the


previous recession. And we also have weakness in house prices overall and construction. So, I'm
concerned that all parts of the economy are showing evidence of weakness.


And I know many people say, well, unemployment is not, unemployment's strong, unemployment,
interestingly enough, is the most lagging of all indicators. And just remember that every time the
Fed cut rates and unemployment is below 4%, we went to a recession almost immediately
afterwards. They're all lagging, so don't get trapped in the unemployment, look at the forward
looking indicators. And they're looking problematic.


So, those are just some of the US indicators that I'm finding concerning. There is a general theme
of weakness that lies ahead. And if you go back to that first chart I showed you, of the 2-Year on
2-Year rate of change of Libor of interest rates, then you're going to expect to see a creek come
down further. And all of these things that are correlated, come down further.
Also, don't forget, the ECRI correlates perfectly to asset prices. If you look at the year on year S&P,
it basically is the business cycle. Now, I understand that equity prices is part of the ECRI calculation,
but I can use hard data and a bunch of other variations of the business cycle and they all show the
same thing, the equity market cyclical right now, just because of the construction of what he was
doing last year, it's at all-time highs, it should actually significantly weaken in October, November
if the ECRI stays where it is.


The other thing to bear in mind is that looks like there is a marginal pause in the data. And you'll
see that in the global data in a second. So, that's one of the things I'm waiting for over the summer,
is let's wait and see how this plays out and whether we get some weakness further on again, which
is my expectation, but it's really I want to pick people's minds about.
The global picture.
When I look at the world PMI, you can see the world PMI is just heading into recession territory.
So, it's weak, it's telling us that there is a definite susceptibility to anything else going wrong. And
I'll come to some of the banana skins later. But anything going wrong is going to turn this from a
slowdown into something much uglier. I think the Trump trade situation is that very thing. We're
starting to see many central banks around the world expressing concern and thinking about cutting
rates in response to this very weak economy that's starting to develop.


The other thing is the trade tariffs are showing up in the data when we look at World Trade volumes.
World Trade Volumes are starting to come up sharply. And I think that's really important. We also
have a GMI indicator for world trade. And it is also coming off very dramatically. So, it's something
we need to be very careful of to see how this develops. And again, the one thing and I'll talk about
it later that we really need to be worried about is if the dollar goes higher than here.


Another concern for me is the European economy. The European economy was really led by
Germany, which is different this time around. It's not the peripheral European economies. It was
Germany that started first. Firstly, a relatively strong euro. And secondly, trade disputes. So, trade
issues. Those two things suddenly started a market turn in Germany, and Germany has gone pretty
much to recession. GDP is not negative yet. But all of the forward looking indicators are showing
that Germany is going towards recession.


If you look at, for example, industrial production, or if we look at exports, we can see that there's
some concerning signs in Germany. And if we look at the ZEW survey, which is their forward looking
PMI, it suggested that the GDP is going to go negative 2%. That's quite a big move for one of the
largest economies in the world and the largest economy in Europe.


But you see, it's not just at Germany level, we've got Italy, that is actually in recession, again, a mild
recession right now. And we have France that is starting to weaken and is only just growing. So,
we've got the three largest economies in Europe, not in great shape.


Spain is the only one that looks okay right now. When we get to Portugal, again, it's getting weak.
And Holland doesn't look great. So, Europe is looking a bit of a mixed bag. And we'll come back
to Europe later because it's one of the weak points. And I think it's one of the places that we all
need to understand.




In this globalized slowdown, we can also get a bit granular with China. China struggled from loaded
monetary tightening a couple of years ago. And the government's trying to rein in the speculative
access of cheap money boom that came out of the backend of the global recession. So, China has
been tight and it broke. The financial system doesn't function properly in China any longer. And the
government is involved frequently trying to keep some liquidity. They're not interested in bailing out
the rest of the world by another liquidity event.
It's just not in China's interest. They just don't have the ability to do so. And why should they? Why
should they when the rest of the world is being so antagonistic. So, the point being is China's very
domestically focused, they're trying to unwind their bubble. They're trying to stimulate enough just
to flood it out, trying the Japan way of doing things.
But that means that China, which was the marginal rate of change the growth of the global economy,
they’re just not players right now, they are negative in terms of imports for most of the raw materials.
So, they're not going to be driving other countries' GDP growth. And I think that's a really important
matter. We've talked about the US, there's no real growth there. We talked about China, there's
no real growth there. And we've talked about Europe, and there's no real growth there.


So, where is the growth engine? There isn't one. And then when you broaden out to the rest of
Southeast Asia, you can see that South Korea is also starting to slow down. Exports there are weak.
And the same in Taiwan. And we can assume the same as across Asia overall.


Australia, far too small economy to matter in the globalized context, but as we know, Australia,
and as we feature on Real Vision, has a problem with its own domestic economy with its massive
house price broom, and the overhang from the mining boom as well. So, Australia's cutting rates,
they've got a slowdown going on, they're trying to manage it the best they can without it turning
too ugly, and without it turning and rotting the banks at the core.


We have to wait how that plays out. But again, it just tells you the number of countries who are in
a similar situation. And the same can be true inside of Canada too, which is one of the larger
countries in the world. But again, they've had some problems, they've got the backend of a
commodity boom, plus they've got an excessive leverage in the housing industry. And that all needs
to unwind. And they too, are going to be cutting rates.
So, I don't see a situation where anybody can save this. And we've got I think the tipping point with
tariffs, that overrides all of this. So, this is why I'm really starting to get concerned.
The bond market's wisdom.
But you see, I may be picking this up, but the bond market's always smarter than everybody. And
I'm always incredibly amazed how right the bond market gets these things. Everybody argue when
the yield curve is flattening, the bond market's wrong, it's just the Fed. Everyone says it doesn't mean
anything, the yield curve, it's just a different world right now. The yield curve started flattening, then
they started inverting, and they started inviting all the way across the curve.
We got the 2s, 10s US Swaps curve, which is the main one. Every time it gets to zero, we go to
recession shortly after we've hit that. We had the 1s 2s curve going to the second most inverted in
history. So, that means 2-Year Rates were trading below 1-Year Rates, suggesting that the easing
that was necessary was large. They were screaming the Fed had gone too far.


And then we had 2-Year Rates versus Fed Funds. The magnitude I think 75 basis points or so, the
magnitude of that was also extraordinary and was telling you the Fed had gone too far. And things
had to change quickly. The Fed suddenly started realizing this. By December, January, February,
they started changing their tune. Now, we are here with the market saying well, we had a good
employment data, the Fed now, they've cut 25 or not at all, they don't need to do this. It's ridiculous.


These bond market indicators have never been at these levels without the Fed cutting 50 basis points
immediately and then 50 again soon after. So, my core view is if this continues in any way, unless
we see some trough in the very near future in the forward looking data, then the Fed are going to
cut 50 and 50 again. I don't see the point of the Fed trying to cut 25 and disappointing the bond
market, I think they have to play a very, very careful game here. And what they need to do is at
least trying to be in front of the curve.
That 2-Year on 2-Year rate of change tells you they can't be ahead of the curve, the curve's well
ahead of them. But the market needs some perception. But I do think there's a backup coming in
the bond market. We'll talk about this in a bit as people are trying to readjust the probabilities to
do zero, to do the 25, to do 50. I think they'll completely reverse. Is this a bump up meltdown
coming? I see all this noise on Twitter all day. And we'll address some of that in a bit.
The inflation question.
So, the other thing the Fed have got is the Fed have got a problem, because they're still tightening
the balance sheet as I talked before. But when they look at what they're trying to do, they have that
dual mandate, the dual mandate's employment. Well, employment looks fine right now. And it
always does at the peak of the cycle. And they always cut when unemployment is almost at the all-
time lows.
But the key is inflation expectations. They're collapsing. They're collapsing all across the world. But
if you look at the 10-Year Breakeven Rate, it's breaking this big head and shoulders pattern. And it
looks like we're going down to 1% or so. That's enough to be a 50% miss on the 2% implicit target


the Fed's got an inflation, this is 10 years out. So, it's telling you that the rates are so tight, because
there's so much leverage within the economy that they can't raise rates without collapsing future
inflation expectations and future demand.
So, I think it's a really important indicator. We can also see the five year on five year inflation
expectations that again, is breaking towards all-time lows. There is a complete collapse in inflation
expectations regardless of the narrative that we heard only up until November, December of wage
inflation. It's all going to come back. That was my, if you remember, my premise for the bond market
rally was that narrative was wrong, that appears to be playing out. But not only does it appears to
be playing out, it appears to be going from benign to nasty. So, I think it's something we need to
watch.


But inflation is not just collapsing in the US, it's collapsing around the world. So, the rest of the world
is also seeing an inflationary, deflationary or disinflationary issue. I think the most extreme is Europe,
if we look at the 5-Year 5-Year breakevens in Europe, we see this enormous collapse in inflation
expectations, and that's with an economy with negative interest rates. what the hell do you do about
that? Europe is going to become a big issue. And again, something I'll come on to in a second. But
that is a real warning of how to generate inflation in a world straddled by debt, it becomes really
complex, and how do you stop the downside becoming a much larger event that it ordinarily would
be?


When I look at these things, thesis, I like to crosscheck against asset classes. I like to look across the
world and see, okay, how the asset class is trading. And the first one I look at is copper. I look at
the chart of copper, and it's a clear head and shoulders top. And to me, that's telling me that the
economy is slowing down.


What's also interesting, if I put the copper charts against the 10-Year breakeven, you can see it's
the same chart. So, copper basically is a real time example of future inflation expectations, and
they look like they're going to break down together. If I look at the CRB Industrial Metals Index,
you can see that this big uptrend and this major topping pattern, a huge topping pattern is forming.
And I think that it's likely to break that.


And why I think it's likely to break is one of the I think it's probably the second ugliest chart pattern
in the world, which is the CRB commodities index. If you look at this chart, it looks like we're going
to go into a secular bust in commodities due any day now and to last into the next few years as we
reach for that final bottom. And I think that bottom could be uglier than many of us are expecting.
A, because of the size of the boom that we had, the amount of capital that flowed into it, and
particularly in the oil space and other some of the mining space as well. And also because what I
think is going to happen to the dollar.
So, these charts are really ugly charts, and it makes me very concerned that there is a broader
disinflationary deflationary world out there that's developing. And it's something I talked about in
the last video I did for Real Vision that subsequently now developed further.
The specific risks.
So, let's talk a bit about the risks. So, I think if we establish a case why it looks like there's a possible
recession coming, my probabilities are high, they may be higher than yours, you may think I'm
wrong. That's okay. But you have to understand that the likelihood of something happening here is
reasonable. So, you're going to have to factor this into your investments, or your working lives, or
all the things that a recession can affect. And I think that's really important in your businesses too.
So, let's think about the risk. Now, one of the risks is China. I don't think an implosion of Chinese
economy is much of a risk, because the US are basically forcing everybody out of China anyway.


So, it's happening in slow motion. We're also finding there's a trade ban going on with many other
issues with China. So, that's not great.
The Chinese themselves going to be propping up their economy, trying to stop their banking system
falling over. Okay, so that's relatively stable, because it's a closed system. They're going to have
some inflows from MSCI. And that was the inclusion of China both debt and equities in the indices,
although I think the US are going to try and overturn that, by putting political pressure on MSCI
themselves. We'll wait and see about that. But I know, it's just, it's a way for China to get capital.
And that's what China needs, it's dollar-starved. And the US knows it. So, if China's dollar-starved,
well, the best weapon you've got is the dollar.
And if you look at the chart of the Chinese RMB, it has been pressing its nose against that seven
ceiling for a while, forming what is one of the largest cup and handle formations I've ever seen. If
that does go and seven breaks, then we're going to see an almighty move in the dollar against the
RMB. Now, it doesn't necessarily mean there's a catastrophic devaluation coming out of China, but
a shift in the terms of trade, which has massive global ramifications, will obviously knock on all the
way through.


And I think you can see also, if I look at the ADXY, which is the Asian Currency Index, if I look at
the big monthly chart, there's an enormous head and shoulders top that's looking to break. This is
the largest chart pattern I've ever seen in any currency market. But that is an incredible chart pattern
that tells me there's a potential currency crisis in the making. And it's to do with a strong dollar.
The other one that's affected by the strong dollar and the weakness in global trade, and particularly
interest rates is Europe. So, the European Bank, something I've talked about extensively for many
years on Real Vision, as the European banks have gone lower, and lower and lower. And I said,
there's a big problem here. And I know many bank analysts will say, well, there's not a solvency
problem here, it's different, they've got the right capital resources. Well, I look at the share price, I
just look at the share price and it looks at the share prices want to go to zero.


So, the worst chart in the world, I've got to label at the GMI worst chart in the world, is the European
banks index charts. It is a truly terrifying chart, because this is all of the banks in Europe. And it
looks like if they break that key support, then we're going into a full banking crisis in Europe. And
I think that's a reasonable probability. And here's why.
You see, the European banks are international in nature, Deutsche Bank, even the Swiss banks,
Credit Suisse, UBS, Societe Generale in France, Santander, BBVA, all of these banks are
internationally funded banks. Yes, they get their funding and the collateral with the ECB. But the
reality is, the day to day funding is the dollar, euro/dollar market. And they don't get access to all
the capital they need. There's a shortage of dollars out there, which is a problem. I think the dollar
goes higher, which creates a problem for these banks.


If you look at that European Banks Index and look at it compared to the 10-Year Bund Yield, you
can see they're highly correlated. So, as bund yields go down, the banks go down. But you see,
the problem here is the ECB has one mandate alone, they've got the mandate of inflation. And we
showed you before the inflation expectations in Europe are collapsing. So, it's a one trick pony. The
ECB can only do one thing, cut rates.
I talked to the ECB recently at the Goldman Sachs event that I was hosting in London, and I asked
them, what are you going to do? What are you going to do when the next recession comes? And
they're like, well, we can cut rates a bit more. And we can do a bit more QE. But you can see,
there's a general understanding that they can't go that much further.
And that's a problem for the banks, because how do you stimulate? So, the banks are falling
because these yields are really bad, negative yields are bad for banks. The flattening yield curve
is not good for banks, the whole situation is a bad setup for the banking system. And the Europeans
can only deal with it by cutting rates, which is bad for the bank. So, you've created a bit of a doom
loop there. So, it's a bit of a cycle that's not good.
So, the question is, is how do you stop it? And my idea is Christine Lagarde was brought in
specifically for this. Why would you want her as a central banker? Why would you want her as the
head of the ECB? The ECB was a very technical bank. It's always very good with technical monetary
policy, because it was very policy-driven. It was less broad based macro-driven than the Fed, it was
really in the weeds.
But Lagarde is not that. She is the head of the IMF. She's a politician. And she's a lawyer. And what
does she do? She negotiates. And if you put something like that in control of the ECB, it tells you


that there's going to be a shift with from in the ECB, which is moving towards probably negotiation
for this banking settlement. Somewhere, everybody has to get together and do something. It's not
just Germany here, it's not just Deutsche Bank, that's the poisonous one. There's not one poisonous
apple here, it's a whole system that's in a mess. There's still too much debt in that European banking
system that's not been written off properly.
So, if these banks are probably going to have to go in the hands of the government's, they're going
to probably have to wipe out the equity holders somehow, and the bondholders will become the
government. So, that's the way you stop a systemic crisis, but somebody's going to have to pay for
all of that. And that's going to be a ton of issuance of debt. So, somebody has to negotiate new
treaties to allow all these companies to exceed their deficits and to increase their funding and the
ECB to buy more of this funding. And there's a whole load of stuff that needs to get done that's
much more political and legal than is monetary policy.
So, I think that's why Lagarde is there. If you want somebody for the next recession, clearly, the
person who ran the IMF that deals in bailouts is the right person. So, I get that, and I think it makes
sense. But Europe, that's a tricky mess. This is not a quick fix overnight. And it makes me concerned
that this can go from not very good to very ugly very quickly. And I have a feeling if I look at the
share price of the banks that by the end of the summer, we could be there already, where we
started to see some of the real strains and whether Deutsche Bank ever gets to its full restructuring
before they have to do something about it.
My guess is hearing the story of Renaissance Capital pulling its prime broking lines from Deutsche
Bank means that we're potentially in the debt spiral, where it goes from not being a solvency
problem to potentially being a solvency problem. Who knows? Wait and see, getting in the weeds
of the banks is not my thing. But looking at the macro setup, I can see that this is a problem waiting
to happen or is happening right now.
Tech problems.
The other thing I think is further develop is the tech market. I think there is a complete euphoria that
has taken place in the private sector, particularly within the private investment sphere. So, it's private
equity and VC. I think too much money has been allocated without thought of getting the money
back. And I think no better example than the poster child of SoftBank and how they put $100 billion
to work plus added leverage in and just basically, completely rewrote the rules of valuation of any
firm out there with no clear sight of how to get out of it.
I think there's some huge problems with what he is signaling, Masayoshi Son is signaling, by trying
to IPO the whole of the vision fund to start another fund. If you try to IPO a VC fund on this scale
without actually the companies themselves going public, it's telling you he doesn't think the future
IPO value is the same as the current private value. And we've seen that with some of the recent tech
issues, they traded higher as private companies than is it as public companies. There is a different
dichotomy between this.


And that's telling me that things got to effervescence in the private sector, and it's starting to come
off, and it will knock on through as people realize that the future of tech is not yet, not quite as
bright as people thought it was. And that there are some really systemic problems because of the
over-ownership of this sector and the expected returns that's embedded within it. I'm really worried
about SoftBank, and I'm really worried about what it says for the world. So, we'll wait and see how
that develops. But I think there's a tech problem.
I also think, as I've mentioned many times before, I think there's a tech problem coming. As I
mentioned before, there's a problem coming with Google and Facebook, and their battle with the
DOJ and various other parts of the US government. I think they're going to be treated as
monopolies. I think they're going to have shown to have abused their monopolistic power. I think
they are also using data in ways that people don't want. And I think their power is going to be
curtailed and they'll be broken up in various ways.
So, I think that's coming. And I think it will come over or through this next recession. So, there is
another delta on the bad news, something that can drive a little bit further, that worries me. And I'm
monitoring all of these themes as they all come together. And it makes me worried.
But there's two really big ones left that I haven't yet talked about on Real Vision. Some of you will
have read it in Global Macro Investor for those of you have subscribers. And then recently, I
published much less than I published in Global Macro Investor, I published it in Macro Insiders, and
in Think Tank, my doom loop article. And if any of you are interested in this piece, I think you should
go back and have a look at that article. If you're not subscribers, sign up for a free trial, and go
and have a look through this article. And this goes through all of what I'm talking about in great
length.
I think there is something really interesting. In Macro Insiders, Julian Brigden and myself debated
at length about what this really means and whether recession is coming. And I think we'll probably
show that later on this week as well, because somebody from Macro Insiders, I think will really add
value to you, much like this doom loop article. But the issue is corporate debt. And this is when it
gets really big. So, bear with me, and maybe get stiff drink while I sit down and talk to you about
the doom loop.
The doom loop.
You see, every recession needs a poster child. There's always one, there's always the thing you pin
it on. Back in 1990, it's a savings and loan crisis. Back in 2000, it was the tech wreck. And then
back in 2008, it was the housing market. And this time, I think there's an even bigger and more
concerning one. I think it's the corporate debt sector. I think this is the poster child of the next
recession. Let me explain why.
Firstly, you've got to realize that debt is basically a function of the business cycle. And you have as
most cycles, you have a super-cycle and you have the normal cycle. So, the normal credit cycle is
very clear. If I look at the ECRI against the, let's say the HYG ETF, you can see how highly correlated


they are. And also if you look at the ECRI versus Moody's BAA to AAA credit spreads, you can see
it's basically a function of the business cycle.
So, the business cycle drives credit spreads, and it drives the availability of credit. And it drives the
excess use of credit and all of the issues that come along with it. And obviously, the Fed drive the
credit cycle by raising interest rates or lowering interest rates. Also, the behavior of credit


availability, which is the credit managers, and how they give out credit, again, is really cyclical. So,
we can look at the index against the ECRI and we can figure out that if ECRI, the business cycle,
turns, then we're going to see some problems emerging all of the debt market.


Now, here's an interesting chart for you. Talking about recession, I find it hilarious that the New
York Fed publishes a Recession Probability Index. The Recession Probability Index is in the 30s now,
30% chance of recession. It's ridiculous, because if you look back at every single time it's ever been
at this level, it's been a recession. So, when it gets to about 20-something, it's 100% chance of
recession. So, the Fed- New York Fed is basically telling you we're going into recession. So, if we're
going to recession, which is my core hypothesis, then we're going to see credit spreads widening.
Ordinarily, that's not a big problem, because that's what happens. And we had it in 2008. And
corporate spreads widened out and they're narrowed. Yes, the banks, that was a whole different
issue, the bank debt and household debt, we've had that as well. But this time around, it's somewhat
different. See this time, since that previous recession, the size of the global corporate debt market
has exploded. And in particular, in the US.
US corporate debt, as a percentage of GDP, is the highest in all recorded history. By using the Fed
data, we got about 47% of GDP in debt. But if I use other data, particularly from the IMF, we're
getting numbers of about 75%. The Fed data isn't taking the count off balance sheet. So, if it's off
balance sheet, derivatives and all the other debts that's on corporate balance sheets, which we
know are all over the place, then we get to about 76% of GDP in debt. That's a really, really high
number.


So, in nominal terms, debt is now $10 trillion. And it's just gone up in a straight line, as I said,
doubling in size since the last recession, and this is an extraordinary amount of debt. Don't forget,
this is the same time the households have been gently easing out of debt. The financial system has
been easing out of debt, and the government has not, but the government's been relatively flat. But
the corporate setup went on a massive debt orgy. It was one of the largest increases of debt we've
ever seen in history in 10 years, a truly monumental debt build up.
What do they do with this debt? Well, this debt has been basically used for one thing, that's equity
buybacks. They bought back more equity than any other time in history. In fact, they've been pretty
much the only buyer of the equity market. If we look at all forms of other equity market ownership,
they've been all in decline for the last five years, while buybacks have been stepping up, stepping
up taking into account all of the net sellers and pushing the market higher.


And there's less liquidity around because you're taking more shares out of the market by buying
them back. So, the less liquidity, the more your shares go up. And then when you add in passive
indexation, it's been pushing the markets higher from this enormous debt issuance. That's all well
and good. But once you start flooding the market with debt, you create a dynamic which is little
understood. And that's the lowering of overall credit quality of the entire market.


And this is not a US phenomena, this is a global phenomena. But in the US now, over 50% of the
entire bond market is BBB. BBB is essentially one large notch above junk bonds. It used to be a
world where there's a lot of AAA credit, AA credit, that all falling by the wayside, what you're
getting is everybody taking so much debt that they're becoming BBB, and all of the main bulk of
American large cap firms are now BBB debt.
And then beneath that, you've got a trillion dollars, you got $4 trillion of BBB, and you got $1
trillion of junk. That junk alone is the largest the junk bond market has ever been. But the real growth
in this whole thing has been the BBB sector. You can see from this chart, that if we put all the different
types of bonds in a nice stack next to each other, the size of the BBB market is absolutely enormous.
And when you break down the US BBB debt market, you can also see it's pretty lumpy, there are
five large behemoths that account for $770 billion of debt. And if you add in the US shale industry,
you're talking about a $1 trillion of debt. Those companies are General Electric, General Motors,
AT&T, Ford, and Dell. They account for everything here. It's huge. Obviously, there's a massive tear
of corporations behind it than a BBB, but really, the risk comes down to five big firms.


Just understand how leverage these companies are, here's the chart of debt to equity. General
Electric is over 200% debt to equity, General Motors, 250%, AT&T, about 100%. Ford, about
450%. And Dell, about 125% . AT&T is the largest, the most indebted company the world has ever
seen. It is $170 billion in debt and is over 100% of market cap in debt.
That dynamic can change dramatically if the share price falls. It's digested an enormous acquisition
in Time Warner. And if you remember, AOL Time Warner was ringing the bell at the top of the last
cycle, feels like AT&T and Time Warner are maybe ringing the bell for this cycle too. And it was a
debt orgy that allowed to do it because AT&T thought, fine, we're a phone company, we get plenty
of cash. The problem is, is corporate cash flow is correlated to the business cycle.


If you look at the ECRI and look at S&P cash flow, you see they're highly correlated. So, what looks
affordable acquisition now suddenly becomes unaffordable later. If that starts to happen, then
you've got a problem. And you've got a problem because, look, AT&T is not going to bust. But
listen, don't think so. But it's going to get downgrades to junk. There is no way on Earth the junk
bond market can take a downgrade like AT&T.
Realistically, if you start to get into recession, you should see- I don't know, 10%, 20% of these
BBBs get downgraded. So, we're talking huge numbers that have to get absorbed into that junk
space. But there's only $1 trillion there. And the buyers are different. And this is a crucial thing here.
The buyers of junk bonds are not the same buyers as the buyers of investment grade credit. Those
buyers of investment grade credit will have to sell if it gets downgraded.
So, that means that there is a huge amount of selling. But the people in the junk bond market don't
have 30% more, 40% more cash suddenly to buy this stuff. So, the old way of doing it is by
obliterating the junk bond market. So, if these get downgraded in any way, shape or form, you will
find that the junk bond market becomes completely insolvent.
But what's worse here is if you look at the debt that's coming up, it's a complete wall of the stuff that
needs we renewed over what looks like it's going to be the next recession. That's going to be a
huge problem to try and roll all this financing that all comes through at the same time when the
banks aren't going to be particularly keen on letting this financing out. And the companies are going
to be desperate to get it, but their cash flow is going to be going down, so the affordability becomes
a little more problematic even with rates being cut. This is why the Fed needs to cut rates and needs
to cut rates fast, because this corporate thing is an avalanche waiting to happen. And the butterfly's
flapped its wings and the avalanche is starting to crumble.


But you see this issue is not just the US, as I mentioned a couple of times, it's global. When we look
at the global corporate debt to GDP, we're at 95%. This is the same La La Land levels that we had
on household debt back in 2008. That is an extraordinary amount of corporate debt. And the worst
thing about it, almost all of it is in US dollars. Globally, it's in US dollars except in Europe. And
that's all trading at negative yields now, because it's European debt that can be used as collateral
that has a huge value for the system that's slightly insolvent.
So, we've got a huge problem, because if you think about that, it's globalized. And it's in dollar
funding. And there's not enough dollars around, certainly not to roll all this debt, particularly if the
banking system in Europe is going to desperately be sucking for these dollars. We've got a big
funding issue to come. And again, if the dollar starts going higher, it becomes a much bigger
problem for all of these corporates to deal with. And a big, big problem for the junk bond market
to deal with overall and the investment grade market.
See, I'm not the only one talking about this. Stan Druckenmiller has been talking about it, there's a
number of people who've talked about it. And the BIS and the IMF have both warned about it,
much like they did ahead of the 2008 recession. They're saying there's a huge problem with
corporate indebtedness. There's a huge problem with the buybacks. There's a huge problem with
the dynamics that it's creating.
And this is the thing, it's the knock-on effects that I'm really worried about this whole equation. A
credit event, okay, a secular credit event, really nasty. But with a couple of other things thrown in
like a retirement crisis, then we've got something really, really concerning that we have to avoid.
The Fed has to be really aggressive in this, or we've got a much bigger problem than we realized.


You see, the bond market is supporting equity market as I talked about before. It's all the book
buyback. So, here's the graph of the buybacks that I talked about before, they're basically
supporting the whole market. So, if the corporate bond market gets a little bit tighter, and cash
flows go, all of the corporates are going to supply equity, the largest bubble have left the room
very quickly.
So, let's go through the causation here. ECRI widens, it starts falling south, for all the reasons I've
talked about, it starts widening out the spreads. As soon as the spread starts widening out, corporate
cash flows start going with ECRI. And corporate start going, okay, I need to be careful here. So,
what they do is they stop buying back shares. So, that's the largest equity market buyer who's left
the room. So, that's a really big deal.


So, let's go back to the ECRI chart with the year on year S&P, the ECRI falls and this credit cycle
falls, then the S&P is going to fall with it in the year on year terms, and also on outright terms. So,
we're setting ourselves up for something that could be quite interesting. Now, we know that
consumer confidence is pretty much tied to the equity market right now. And so, if the equity market
starts falling, because the buybacks have gone, then it's going to build on itself. And then it's going
to build itself in a way that's going to bring out the baby boomers, and I'll come on to that in a sec.
So, there's another issue here, we had a guest on Real Vision who talked about the corporate bond
market and the pension system. You see, I've talked about the system a lot, and I'll come on to that
in a sec again, but the pension system has been a buyer of equity, but increasing buyer of corporate
bonds, because there's been some yield there. And also, as you get an aging population, and
people are getting closer to retirement, you need more bonds, but they need you to take as much
risk as possible. So, they bought a ton of junk, and a ton of this BBB stuff. So, they've been the big
buyers.
Now, what's been really interesting is they've been in a loop like the buyback loop, which has been
driven by tax receipts. You see, places like Illinois, who have bankrupt pension systems have been
raising taxes. And with that tax receipts, they have been then putting into the pension system to fill
the gap, the pension funds have been buying bonds. So, you've got this cycle of tax receipts coming
in and you're buying bonds, it just creates this loop.


The problem is, is tax receipts are also cyclical. So, once that happens, and the tax receipts are
falling, because level of business activity is falling, well then guess what? The corporate debt buyer
goes away, too. So, you're creating a market where there's no equity buyer and no corporate debt
buyer because of how the pension funds operate. That's a real problem. And then if anything gets
downgraded to junk, who's the buyer of that junk? That doesn't really exist, either.


You can see the chart here of US state and local current tax receipts, year on year. And it's basically
the same as the business cycle, no surprise, and it's gone now active as tax receipts have been
lower than expected recently. And again, that should stop pushing the credit spreads wider.
And that brings us back to the baby boomers. These are the guys who all these assets are, the
equity investments and the bond investments. They're the owner of all of this stuff, and they need to
sell them too. And they need to sell them because they're going to retirement. And if there is a risk
in the system, they cannot take the risk of losing their money, because that is that pile that they retire
with. And I talked about this at length in the retirement crisis video.
So, the chances are, there's a behavioral adjustment of which they become net sellers into rallies,
and sellers into dips, as opposed to buyers in debt dips. And that's because they don't have work,
or the amount of work needed, or income needed to sustain an investment portfolio. It's more about
living expenditure. And those that retire, they don't have more money to put back into the market.
That is their pool, they're done. So, they need to reduce risk fast.
So, when you've got a situation where everybody's a net seller, you've got a problem. That
happened in Europe and it happened in Japan. We've seen what it does, it basically lowers for
decades the price of equities, and changes the structure of markets for a long period of time. And I
think that is one of the potential outcomes. Again, I'm not saying it's necessarily going to happen.
But there's a potential outcome here.
So, you start to see the various knock on effects. I'll put them on the screen here. And I'm going to
go through them a bit again later, because there is a lot of points to get across. So, as the BBB
credits get downgraded to junk, and the debt markets freeze, pensions will be forced sellers and
take enormous losses. And will switch to Treasuries at 1% yields or less. This will essentially bankrupt
the defined benefit pension system, it has to default on its promises.
When you throw in the net divesting of assets the baby boomers will do in the next recession, you
have the perfect storm. There'll be no buyers of equity, there'll be no buyers of debt. Corporations
will not be able to service the debt or roll them. The pension system will break. Then throw in the
EU banking system, which is fragile and needs dollars and the entire bloody system will freeze all
over again.
This is what I call it the doom loop. And it's small, incremental steps that create something quite
quick. Can the Fed get in the way of it? Can they stop this doom loop? Because there is a cycle
here, because the moment you start widening credit spreads, you start creating selling, you start
creating less buybacks, the equity market falls. If the equity market falls, then AT&T share price falls,
then they stopped- and pricing default risk or downgrade risk into AT&T. And then what you know
is the junk bond spreads widen.
The whole thing works in this endless cycle. So, let me go through the points of the cycle again as
well. Just to clarify. Phase One, the business cycle weakens, credit begins to widen, corporate cash
flow worsens a tad and shares fall and volatility increases. I think that's where we've got to now. I


think, Phase One, we accomplished, and it started really in about October. Phase Two, the business
cycle weakens again, credit widens more, cash flow gets worse as do profits, tax receipts fall, and
state pension funds stop buying debt. Big BBB stocks fall, and bonds fall even more sharply, equities
fall hard. So, I think this is the next phase. And I think it's coming after the summer. We'll wait and
see.
My forward looking indicators suggest that the Europe has a sassy up cycle right now. There's a bit
of stabilization of data. I have a feeling that if I'm right about the debt ceiling or the dollar breaks
higher, then I think we're going to start to see Phase Two come in. When we start seeing Phase Two,
we know where this is going because then the story becomes very clear. Phase One was the alarm
bells. Phase Two is strap yourselves in.
Okay, let's go into Phase Three. This is when things get ugly. The baby boomers start to panic to
get out of equities permanently. This downgrades the BBBs to junk, the EU banks can't take the
funding stress and the ECB and the government step in. Credit spreads explode, credit seize up
entirely as pension funds are forced sellers on downgrades. Equities going to tailspin, there are no
natural buyers. Credit widens dramatically, offered only, no bids, junk bond market overwhelmed.
Pension funds get to trouble, defaulting on obligations. Big famous companies are being forced
towards bankruptcy unnecessarily.
That's the really ugly face. And that's the one where I think many of us have got a sense that there
was an end game that's at the end of all of this. If there is one, it lies in the heart of that- whether
we get there or not, it's going to be a function of what the Fed does, and what the central banks
do, and how they deal with this. And there's many outcomes for that. And it is not going to be a
straight battle. But all I do know is these things tend to accelerate much faster.
I'm very cognizant of what happened in the UK with Woodford fund, and Neil Woodford fund and
also with [inaudible], these are liquidity problems. And we've talked a lot on Real Vision about
liquidity and the lack of liquidity in markets. And if you put in a bad event with low liquidity, you've
got a problem. And I think we're starting to see alarm bells coming. So, as I said, with Phase One,
let's see what happens with Phase Two.
The end of it is the Fed are going to have to buy credit. They're going to have to stop this, they have
to stop the doom loop. And the other thing they will do is underwrite the pension system. And this
is part of the MMT and also part of the way that you get rid of the quantitative easing, giving money
to the rich, or the people who need it the least, the people who can borrow, and this why you give
it to people who have a pension. And they also happens to be voters, huge numbers of baby boom
voters, you'll be bringing back into the system.
So, it's actually a very attractive thing for both the Federal Reserve and the government to push to
do. So, I think that's what comes of it, you're going to have to do something about this pension fund
black hole. And this is probably the way to do it. You see Europe and the UK dealt with a lot of this
in the past, because they started to put restrictions on what pension funds could do and the risk that
they could take. But they've still got a problem with credit for sure. And I think the Europeans will
be involved in having to support their own pension system as well.


What now?
So, what does this all about leave us? Well, that's what this week is going to be about. You can see
how important this all is. And this is not just do mongering, this is the reality of the probabilities. You
cannot deny that the business cycle is weakening, you can deny that it's going into recession. But
we need to find out more, we need to find out from other people. I really want to find out, I want
to have that debate with people. Because I really want to know and assess the probabilities and
figure out whether my probabilities are right.
So, I'm going to leave you with a few things, the things that really matter to me. I've given you a
bunch of charts to look at that you can follow. I would use that Euro STOXX Banking Index as one
very important chart. You can use maybe FedEx for World Trade tariffs and stuff like that, FedEx
looks pretty bad. But I think the primary chart is the charts of truth that I've always called it, which
is the bond market, the 30-year channel, and how perfectly it poked his head at the top of the
channel and then reversed. It's telling us that bond yields are going to go probably down to zero,
that's 10-Year Bond Yields.




If I show you the chart here of the long term pattern of 2-Year Bond Yields, it's very clear that they're
going to go negative. And this chart suggests they're going to go to negative 2%. Now, for
somebody in America, that might sound outrageous. To anybody else in the world, it's normal.
Europe's had negative rates now for a long time, as of Japan, all across the place, we've seen
negative rates.
So, get used to it, it's the mindset of what's coming, I don't think you're going to be able to avoid it,
because of the confluence of events that we've got coming with the excessive debt that massively
built up over the short period of time. And then with the waves of retirees coming and the Fed
having overtightened. I think the dollar chart is extremely important, use the broad Trade Weighted
Dollar Index.


It is a huge handle formation as well. And if it breaks this 130 level, then we're going to see the
final catastrophic, large rise in the dollar that could break the rest of the system. I've been warning
of this for some time, the dollar has been range bound, it keeps looking like it's going to break
down and then suddenly, it break up and then break down. I don't know, but I do know it's going
to break. And it'll be the last of the asset classes to make its move.
If it breaks down, okay, we're going to give ourselves some breathing space, we're going to save
the emerging markets, we're going to save some of this debt situation for another day. And we'll
extend what is the longest business cycle in all history. But if not, then we're going to start to
accelerate all of these events. And a global recession, with some really nasty outcomes, is becoming
more and more likely.


And also the ADXY, the Asian Dollar Currency Index, I think that's an important chart to keep on
your screens, and maybe keep your focus on the EEM, the equity market, the emerging market,
ETF. These things are all within this basket of what we need to be looking at.
And in the end, what do I think the trade is? My personal view, and again, I'm going to talk to other
people about this. I think it is bonds. If I'm right, and we're going to get worse, we may see a bounce
in bonds now. I've just taken profits in a whole bunch of my bond positions. But I'm looking to
aggressively add. Now, this is one of the biggest, highest conviction trades I've ever had. And I
think that the bond market, particularly the short end, the euro/dollar futures, and the 2-Year
Futures, need to leverage up and buy as much as you can of these, it's any bands.
I think we're hopefully getting a short bounce now. But I think once we get through and we start to
see the economic data weakening once more, you won’t be able to buy bonds. I'm really interested
in buying dollars, I'd like them to break. Once they break higher, then I want to add all sorts of
dollars. I don't want to short the equity market, it's too dangerous. It's too difficult. And I think it's a
vanity trade versus the bond market trade. Obviously, I'll be get drawn into it again. But every time
I try, I get my ass handed to me. So, I'm going to try and avoid doing that one.


The last two are pretty obvious. One is gold, because gold is an option on the end game. So, if we
are going to go to extreme monetary policy, which looks like I've walked you through a set of pretty
easy probabilities that that could happen in the next 18 months, well, then gold has to go higher.
Now, sure, if the dollar goes higher, gold's going to come back a bit, but over time, I think the
dollar and gold go higher, and gold goes a lot higher over the longer run. And it's now acting as
that probability on this end game.


And the final one is Bitcoin. Bitcoin is, again, a probability on the ability to build a different financial
future. We're seeing noise coming out of China about building a cryptocurrency. We've seen the
very interesting thing that Facebook's done. It's another thing that I will do for Real Vision at some
point, is talk about that more debt. Not that I think the Facebook cryptocurrency is the answer, but
the globalized currency and what they were doing with the globalized currency I think really is very
interesting.
Something I talked about on Real Vision from the very beginning, maybe in the first ever interview,
they were all talking towards coming toward this moment now. This is why we started Real Vision.
And also, this is why I do Global Macro Investor. We're in a very macro environment. It's super
interesting, but it's also super dangerous. So me, publishing Global Macro Investor, I thought how
to get this across to use, everybody understands the risk ahead and can do their own work on it.
So, I'm really looking forward to taking you with me on this journey. There's going to be a lot of
learning, there's going to be a lot of debate. And I'm going to bring different angles, I'm going to
bring people from the oil market, the retail market, the car market, the VC market. I'm going to
bring macro experts, Bitcoin experts, gold experts. I'm going to bring everybody to the table, and
we're going to talk it all out and figure out okay, what the hell is going on, and what the real
probabilities are.
JUSTINE UNDERHILL: Hey, there. since you got to the end, I'm guessing you like the video. And
that's probably because we don't just turn on a camera and film, we work really hard on getting
the narrative flow just right. And that's why many finance companies are actually now hiring Real
Vision to make videos for them. One of our recent client videos just hit 100,000 organic views on


YouTube, and there were no kittens in sight. So, if you want to find out how Real Vision can make
a video for your company, just email us at customvideo@realvision.com.

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IsRecessionComing Transcript

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Transcript: Is Recession Coming?

Featuring: Raoul Pal

Published Date: July 15th, 2019

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The Fed's mistake.

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The global picture.

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The bond market's wisdom.

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The inflation question.

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The specific risks.

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The doom loop.

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