Welcome To The Exponential Age

INTRODUCTION
Raoul has had an epiphany.
All too often, for reasons both founded in habit (or as behaviouralists would call it, confirmation bias)
and lack of imagination, we all tend to look at the world from a linear perspective. On top of that, a
tendency to look for mean reversion against a linear trend adds to the feedback loop. In his piece this month,
“The Exponential Age”, Raoul challenges this approach which, like most ‘macro’ traders, he has adhered to
as long as he can remember.
What changed? Deflating asset price structures by the denominator of Developed Market Central Bank
balance sheets completely changes the picture. This is an extension of the fiat money destruction thesis only
applied differently. In a fascinating article, Raoul uses this approach to look at the trends of equities and
arrives at the conclusion that technological developments over the next few years will change our world in
dramatic fashion. It will be exciting, terrifying and transformational. Trends will go exponential. The losers
will be out-of-date business models who fall victim to the new environment. For the evolutionary leaders,
there will be outsized gains. How to identify these will be an ongoing process. Some of the beneficiaries
he has discussed at length before (like India and the “Monsoon” Economies, Bitcoin, Network Effects etc).
Others, like the market leaders in EVs or green technology will require further investigation. But it will all
take place in the world of the Metaverse; in a newly digitalised economy; in the Internet of Things. The old
financial economy will simply fizzle out. As Raoul concludes towards the end of the piece:
”And the Exponential Age happens to be the biggest period of change in world history.
This is not about just one exponential trend such as social media, but a HUGE number
of exponential trends all interacting at the exact same time.”
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THE EXPONENTIAL AGE
Instead of looking at the linear progression of
asset prices in nominal terms, we should be
deflating them by the engorged denominator
of central bank balance sheets. As soon as
you perform this exercise, the trends become
clear… and they are non-linear, exponential
trends. We are at the beginning of a journey
to a digitalised economy where innovation
will force us to change, ultimately for the
better. The Metaverse is in its infancy.
Embrace it and adapt or face the consequences.
THE EXPONENTIAL AGE
Traditional macro...
As you know, I am a macro guy that grew up honing my skills on the observed relationship of the macro
economy on asset prices. After all, that is what macro investing is all about.
Anyone involved in macro knows that the return profile tends to skew towards the negative part of the
business cycle. The reality is that in the eighteen-month period an average recession or crisis lasts, returns
can be highly concentrated. For example, stock markets often fall 50% in a twelve-month period. Bond
yields usually halve too, or more.
This is the opportunity that was given to us last year and many of us shot the lights out in terms of returns.
During the expansion phase in the business cycle, macro returns tend to come from carry (yields across a
variety of instruments) and some asset price appreciation in cyclical assets such as commodities and equities
or emerging markets.
That is really all macro is about.
Old-school macro guys like me tend to really focus on capturing the downside and chip away to make a
living on the upside cycle. Others tend to focus on low-vol, levered returns in the upcycle and try to not give
back returns in the downcycle or try to profit from it.
My GMI macro framework

My entire macro framework has been built on the understanding of business cycles and how they combine
with secular cycles. As you all know, since beginning GMI way back in January 2005, I have identified the
key secular drivers as debt, deflation and demographics (and those led to sub-themes such as Monsoon and
The Pension Crisis).
The End Game

Thus, with that framework I knew that each cycle would likely be worse than the previous one, unless the
three Ds had been adequately dealt with. Over time, it has become clear that there is no way to deal with
those secular risks and many of us have begun to focus on some sort of end game – the disaster scenario
– and also identify sub-themes that could help find alternative returns in that backdrop.
Something weird...
But something weird happened last year and it took me a long time to process it...
In the largest recession in 100 years (and in some cases like the UK, in 250 years), the price of assets fell
and then bounced really fast, catapulting in many cases to new highs. This was regardless of the underlying
economic fundamentals. Sure, the market was always going to rally (I closed out all my shorts in March
2020) but every single cycle I have ever studied saw continued weakness and eventually a recovery over
the subsequent eighteen months.
The fact that the largest recession in history was an outlier seemed odd to me.
The economic impacts on employment, on the structure of business and main street, on the banks, on the
global psyche etc., are real and will linger for years.
The narrative doesn’t sit right...

The macro narrative explaining this phenomenon is, “Fed printing kept the system awash with liquidity and
that has created a new bubble in all assets”.
I have studied this Fed phenomenon for a while now and have never got comfortable with it. The transfer
mechanism from QE to the markets just didn’t work in reality. Some mystery force was at play, leaking money
from the banks into the hands of speculators and investors.
Yes, as yields fell, it pushed pensions into stocks. Yes, at the margin there was more ability for hedge funds
to borrow. But this doesn’t really explain it well.
The Lightbulb Moment x 2

So, while thinking and cogitating repeatedly on this topic, I suddenly experienced a lightbulb moment that
led to an even greater lightbulb episode, realising that I had been missing the really big picture.
Everything has changed and most people are slow to even grasp this. And when I say everything,
I mean everything.
We are about to undergo the biggest change in the global economy in the shortest period of time in history.
I do not now think we are headed towards the macro disaster scenario. I think we crossed that Rubicon last
year and that the actual outcomes will be wildly different to anything almost anyone is imagining.
I also don’t think we are in an asset bubble.
What I am trying to say is that I am entirely changing my macro framework for the first time ever.
Time for a story...
The best way to get you all across the line with my change in thinking is to lay out how I came to this
understanding myself...
About six months ago, I started to look at all asset prices versus the Fed Balance Sheet or the G4 Central
Bank Balance Sheet. This little trick allowed me to comprehend that bitcoin was the only asset that was
dramatically going to outperform this printing...
That gave me the confidence to really size my bet in bitcoin. I also created a bunch of charts of various
key assets versus bitcoin and it became absolutely clear that bitcoin’s performance was going to be a
super-massive black hole, outperforming all assets and sucking in incredible amounts of capital.
Those that particular struck me were Gold vs BTC...
... Emerging Markets vs BTC...
... and even the Nasdaq...
Also, in the January Think Piece, I readdressed a narrative theme which discusses that we are going to
witness the “Death of Macro”. What I mean by this is that the conclusion to a world where central banks
cannot allow the disaster of a global debt default to unfold, is that the central banks will not allow rates to
rise and will not allow the dollar to break the system.
Rates and FX are the biggest source of returns in macro and are the key macro variables that drive
everything else.
Essentially, the US Dollar is 85% of all global trade and thus US Rates are the key interest rate for the global
economy. Nothing else really matters.
But this recession has pushed the Chart of Truth (US 10-Year Yields) very close to the end game (zero rates
or less) ...
Yes, rates are backing up now, but the top of the channel is only 2.25%. We know that the Fed will undertake
yield curve control if rates rise further and there is also a risk that the economy is not as vibrant over time,
and so yields drift lower on their own accord.
The point being that the rate trade is more cyclical than secular at this point and the Fed cannot – and will
not – allow the Chart of Truth to break. It would be game over. It is not clear they can allow negative rates
for long either.
So that lowers the attractiveness of the rates market and that also means a lower attractiveness for credit,
carry, etc. You need more and more leverage to drive the same returns and thus the risk to generate returns
becomes less attractive.
Sure, I’ll trade bonds from time to time (I have some on now) but it won’t be the big P&L driver anymore.
Range bound fears
My fear is that the FX market will be the same. I think the Fed, ECB, IMF, BIS, BOE, BOJ and PBOC have all
acknowledged that they don’t want to see a large rise or fall in the dollar as it is too destabilising.
This has led to a sideways range for the last six years...
My fear is that this range holds for ten years or more. Yes, we can trade the cyclical opportunities but without
a secular dollar move, the returns are less attractive.
This world of a stable dollar would be wildly bullish for emerging market equities and equities overall.
Another layer of the onion... the bubble that isn’t
Ok, I think we can all see that. But this is where I really had to think...
Equities had immediately gone from fair value to overvalued in six months. The fastest rise in history. The SPX
has just seen the fastest annual rate of change since 1933 and the second largest on record.
Clearly, this is a bubble. Or so I initially thought.
Charts like this support the view that this is the biggest bubble in history: this is SPX price to revenue...
You can take any measure and it’s roughly the same. Things are wildly overvalued.
Just the price chart alone looks ridiculous. Since the 2008 low, over the period of the slowest economic
growth in the history of the US, the stock market has risen 500%...
But the chart of Gold versus Equities doesn’t show anything like this level of overvaluation. Gold is at its
20-year average versus Equities. This struck me as very odd...
The chart of the SPX versus the Fed Balance Sheet was the chart that wouldn’t leave my mind. It is telling a
different story...
The SPX in Fed Balance Sheet terms fell 80% in 2008 and has traded around its average ever since.
Observers of this phenomenon have generally assumed that the reason is that Fed printing was the only
driver of returns for the SPX. I assumed the same.
This is the chart commonly used...
You can also see the same when you use M2. The SPX is just above its average since 2008 and has
basically traded in a range versus the stock of money...
I also pondered that if money growth and the Fed Balance Sheet were leaking into the risk-asset market and
in particular equities, then why did Velocity of Money not show this? It showed the opposite...
It made no sense.
I had also been pondering the chart of Gold versus the GMI Basket of 27 Currencies and its outperformance
since 2008. Global currencies have underperformed Gold by about 60%...
No inflation and no dollar collapse
Also, the other thing going around in my head that made no sense was that everyone was suggesting that
all the money printing should create inflation but, outside of asset prices, there was no inflation. I wrote a
long article about this last year. It is near impossible to generate CPI inflation in a world of debt, aging
demographics, shrinking populations, globalisation and the rise of technology – a world where wage
inflation is crushed by all of these forces.
Others suggested that the US Dollar must collapse due to the printing, but it didn’t as every central bank was
also printing money.
The moment of clarity!
And then it all became clear. It is hiding in plain sight.
We are seeing a devaluation of the denominator – fiat currency overall.
This is what the charts are telling you.
This is why gold keeps going up versus a basket of 27 world currencies, why equities look at fair value
versus gold but look insane outright, why the stock market in Fed balance sheet terms is more reflective of the
economic backdrop and has traded sideways since 2008 when QE began.
This is why everything looks overvalued. If you adjust the SPX Price-to-Revenue by the Fed Balance Sheet,
it actually looks undervalued, just as it should do after the biggest recession on record...
Hmmm. This recession saw the cheapest equities in recent history if you use the right denominator.
I too am a cynic...
By now, you are probably assuming that I am just fitting a narrative to justify what is going on. But I also am
a miserable macro cynic like you, so I head-checked everything.
Real Estate is also exactly the same. The rise in RE prices across the whole of the US (Case-Shiller Index)
almost exactly matches the Fed Balance Sheet growth, i.e. Real Estate rises were not real wealth-generating
increases in price but merely reflected the change in the denominator...
When you realise that gold, real estate and equities are all flat in Fed Balance Sheet terms, it starts becoming
hard to argue against the premise that the denominator has collapsed.
If money printing were causing speculative activity over time (we are in a speculative period now but it’s
temporary and not a structural overvaluation) then equity volumes would have been rising over time with all
the extra money. They aren’t... and they haven’t...
And it is not a function of price; if we adjust for the price of the index, the SPX volumes are still some 25%
lower than in 2008.
This is the exact same reason that the Venezuelan stock market looks like this...
... but when you adjust for the collapse in the Bolivar, it looks like this...
... and when you zoom in to readjust the scale, hey presto! It shows the same characteristics as the SPX,
it has traded sideways (in dollar terms) after the big devaluation...
Starting to become clear?

It is clear that it is the denominator that is falling in value, not the asset that is rising.
Fiat currency debasement

Think of the Fed Balance Sheet inverted as the value of money. Then it becomes clearer still...
This is the final point I want to make before we move on. The G4 Central Bank Balance Sheets combined
have risen by 619% since 2008.
This is a fall in the value of fiat currency by 15.5% per annum. ALL fiat currency.
If you have owned equities, real estate or gold, you have lost a fortune from the initial money printing and,
after 2008, your investments have kept pace with the devaluation of fiat. Post 2008, the G4 central bank
balance sheets have been growing at 13% per annum.
Now – as if this wasn’t all important enough – it tells you one other very important thing. Your savings need
to generate 13% to 15% just to stay flat in real, cost of capital terms.
This, taken into account with the wage deflation argument I have put forward, is why everyone except the
rich are getting poorer.
No one else can own enough assets to offset the devaluation of money.
People who rely on earning and income versus owning assets are getting screwed to the tune of -15%
per annum.
Wow.
The Fed have massively exacerbated the wealth divide. QED.
Then if we are going to add increased taxes on top, then Houston, we have a major problem.
This tells us that most uses of capital are non-productive. Only by using leverage can we juice returns enough
to offset this but again, only the wealthy can get leverage.
Not so fast, Buster...

Surely, this means we are going to head into the apocalypse when all fiat collapses and all debt is deflated
away to nothing and everyone gets poorer and, even if optically the pension system is saved by rising assets,
zero rates and the fall in the value of fiat leaves people with no purchasing power?
Not so fast, Buster. I am getting a strong feeling that this is going to play out in the exact opposite way.
The ongoing rise of technology
When I started looking through the charts of assets versus the Fed balance sheet, I realised that one sector
alone had offset the fall in the value of fiat: technology.
When you look at the NDX versus the Fed Balance Sheet, it has risen 220%. Hmmm...
When I began to dig into the stocks, I found an interesting pattern. The rise in the Fed BS has led to the
disguising of zombie companies.
The great example is GE in BS terms... it is worth basically zero...
The same is true of AT&T – it’s a zombie..
In fact, the entire BBB equity sector is in the same boat...
But when I switch to look at the tech companies, the world looks so very different...
FAANG has massively outperformed... by 304%. Not only has FAANG beaten the 15% per annum hurdle,
but it has smashed it by another 17% per annum...
Then I looked at the chart of Microsoft and another piece of the story came into play.
Back before 2014, MSFT might well have gone the way of GE as an obsolete giant, but the rise of their new
additional strategy of cloud computing, gaming and business communications saw their fortunes take off
again... and it massively began to outperform the Fed BS...
Clearly a bubble, right?
Obviously, at this point I thought that clearly tech was just in a bubble versus the SPX and other sectors.
The growth versus value thing is clearly a bubble, right?
Not so fast again with those assumptions, Buster...
My deep dive into crypto has taught me something and this unlocked everything else that follows
– bitcoin follows network-effect adoption curves and thus Metcalfe’s Law. Metcalfe’s Law is exponential and
not linear.
No one in crypto uses the linear chart of Bitcoin or it looks like the chart overleaf: “It’S a mASsIvE
BubBLE!” (This is my proxy for angry gold bugs shouting on social media about tech companies going up a lot
in price!) ...
But something that follows an exponential trend MUST be looked at in log terms. This is a good way to
represent Metcalfe’s Law...
So, when you look at bitcoin on a log scale, it shows an orderly trend higher – it is the trend of adoption
over time...
When you look at the FAANG stocks on a linear chart – “It’S a mASsIvE BubBLE!”
…but when you look at it on a log scale... a stunningly clean, perfect adoption trend!
This is nothing to do with real rates, inflation or anything else. It is due to the exponential nature of these
stocks, driven by network-effect adoption curves.
This is the exact same mechanism by which Microsoft rose in the 1980s to 2000, then it saw an S-Curve until
2014 as MSFT had saturated the market in software, before a new exponential trend as it pivoted...
Obsolete cars... as far as the eye can see

I found the final part of the jigsaw when I wrote the article about carbon. I realise now that every car I see
on the road, every single one, is going to be obsolete in ten to twenty years.
And then suddenly, it all fell into place.
We are about to enter the fastest period of change ever witnessed in the history of mankind.
We are about to enter the Exponential Age.
This changes everything.
The Exponential Age
We are faced with the undeniable mess of a world of excess population and excess debt. The excess
population strains our environment and thus our life quality; it puts restraints on our productivity capabilities
and the only way to offset the excessive debt is money printing and taxes.
It just feels like a catastrophe awaits. We all get the sense that we are hurtling towards an end game.
But I want to re-reference the Neil Howe and William Strauss book – The Fourth Turning – because that
suggests the outcome to this demographic cycle will be change. We could see catastrophe first, such as war
or we could see a change to something more optimistic.
The migration to a new system

I have spent a long time thinking about this and again bitcoin and crypto gave me the answer. Yes, the
financial system is dead meat but there is a parallel financial system being built at a pace that is so
fast that bitcoin has the fastest exponential adoption curve – and thus price curve – of any asset in all
recorded history.
The race is on to create something new before the old system destroys all our wealth or at least sucks all our
savings into assets in a mad race to just break even against the debasement of money.
But what is happening is that people are migrating across to the new system at lightning speed.
In the crypto world, you get massive price appreciation over time (around a CAGR of 200%), uncorrelated
returns AND you can get yields on digital dollars (stable coins) of 6% per annum and have no fees. There is
no central bank to change the game either.
The new system is vastly superior to the old...

The Digital Asset space is superior in every way to our current system and therefore it will attract all the
capital over time. Yes, it will integrate with the fiat world via Central Bank Digital Currencies, but the old
system will not prevail over time. You simply cannot stop a distributed, decentralised, organic network.
To me, this means that we have a safety net as long as people migrate across over time. There doesn’t have
to be the big reset, more a gradual one.
To put it all into perspective, the current digital asset space is worth around $1.8tn. The global bond and
equity market are 100 times this at around $180tn. But the addressable market for blockchain technology
is much larger than just finance...
I think this space can go up 200x over the next twenty years as everything becomes tokenised – from real
estate to art, from music to insurance, from IP to supply chains, from money to debt, etc.
The Digital Asset ecosystem is the top layer of the internet – it is the value, transfer, storage and recording
of value of everything.
It is literally the biggest revolution in our system I have ever heard of. The network effects of technological
adoption make this change happen at exponential speed. It is something hard to get the human mind around.
Bitcoin as an asset is up 99,000,000,000% since 2009. In twelve years. That is what I mean by
exponential speed.
Exponential thinking about green adoption

But this article is not about crypto or digital assets. It was on applying the concepts of what I have learned
about crypto that made me stop and think about the cars that are going to become obsolete and will be
replaced by EVs, when I suddenly realised that the adoption of electric cars was going to be an exponential
trend – a total windfall for every participant.
It made me realise that VW was about to also go exponential... of course they are! They will follow Tesla,
which is also exponential...
But it is not just about cars. It is also about energy use – massive, global, government-mandated green
technology initiatives mean that there is going to be an exponential trend in green energy, battery
technology, water cleaning, pollutant cleaning, waste management. The whole enchilada.
In the next twenty years we will see the fastest pace of positive change on environmental matters in all
human history. The adoption of these new technologies will also be exponential.
Once I made it over this thought hurdle, I quickly realised that the next ten to twenty years is going to witness
the exponential adoption of new technologies on a scale and pace at which the world has never seen.
It was then I also realised that sure, we could own the SPX or real estate and break even in real terms, but
only technological investment is going to generate real wealth and, even though it has already generated
vast riches, it is actually going to create more wealth than at any time in human history (regardless of what
denominator you choose).
If the CB balance sheets are growing at 15% per annum and tech is growing at another 17% per annum on
top of that, and bitcoin and digital assets are growing at 200% above that, then it makes no sense to allocate
capital to anything else.
Technology of all types, due to the outperformance, is going to suck in all the excess fiat money that is
being devalued and spit out wealth at the other end. It is going to transform the fortunes of nations and the
entire world.
And this is why there is going to be no catastrophe, the adoption curves have started, governments
are throwing fuel on the flames and none of it will be inflationary. Everything is going to happen very,
very quickly.
We are going to go from a linear world to an exponential world.
Almost all investors are used to a linear world where things are overvalued and then revert to the mean.
This is why almost every macro investor missed the rise of technology. We looked at Facebook and said
“bubble”, Google “bubble”, Netflix “bubble”, Amazon “bubble”, and the list goes on and on but, ten years
later, it is clear that they should not be valued with P/E ratios because that doesn’t take into account both the
change in the denominator (the debasing of fiat) nor does it price in their adoption curves.
Metcalfe’s Law beat old valuation models but still no one dares to acknowledge it because claiming this
time is different has been a costly mistake over the years. The fact remains however, that everything is
now different.
The genius of a simple log chart and the exponential moving average
A simple log chart does a better job of assessing valuations, and then you need to keep an eye out for
S-Curves when things change.
But a crucial point is that exponential trends only correct to their long-term exponential moving average,
which is always rising, and not to the mean or linear trend. And this is a key detail that everyone misses.
Amazon went exponential from 2009 onwards, once it had established the Lindy Effect and had overcome
some nasty S-Curves... from then on, the stock just tested the 100-week exponential moving average only...
Bitcoin, which is a more volatile asset and has higher performance, tends to revert to the 250-week
exponential moving average...
What lies ahead?
Every single thing you will read here, I have already written about over the last five years. Every single part
of this is now all going to mesh together into the Exponential Age.
We have reached the horizon point and Covid was the trigger.
The world that I think is coming is not just one of cryptocurrencies and digital assets with some tech giants
and green energy. It is much bigger than all of that...
The Base Infrastructure Layer

Data networks
Ahead of us, in the immediate future, lies 5G and 6G, giving unparalleled internet connectivity globally. For
those areas without quality mobile phone signals, SpaceX and others are putting up strings of satellites to
beam WiFi around the world. Space is part of the Base Layer as well as of other layers.
In places like India, data over mobile phone networks is now free. This will happen everywhere.
In the next five years, almost every single person in the world is going to be connected. That is the beginning
of the largest network effect of all of mankind.
Computing power
After that, we need compute power to drive all the data. This will see the rise of distributed computing and
the ongoing rise of the cloud. Distributed computing is the next phase of the cloud where you don’t just store
data remotely, but you use gigantic, distributed networks of computers, phones, machines and the Internet
of Things to undertake cheap computing, but on a scale never imagined. Much like Uber and Airbnb reused
excess resources, the same is going to happen with computers... and we will be paid for lending out our
compute power.
Distributed or Edge Computing also involves the localisation of compute power as opposed to the
centralisation, thus cars and devices become sources of compute power, creating more efficiencies and less
latency across vast networks.
And some time in the next twenty years, we will see quantum computing too, prompting yet another
exponential rise in computing power and a collapse in costs.
So, in the next five years, we will have unlimited data, with every network connected globally and unlimited
computing, all of which will be improving each year exponentially. This is underway now.
Green, cheap electricity
On top of that, we need to create enough electricity for this new world, which will entirely run on low-cost,
green electricity. This will see a massive step change lower in the cost of electricity to accompany the
massive rise in its use. The stimulus by governments driving the green tech revolution will ignite adoption in
green tech globally from India to Saudi, from Berlin to Des Moines.
Abundant cheap energy is mandated as a strict goal by almost every major economy and they are all
aiming to get the bulk of the changes in place by 2030 – only nine years away. The EU is aiming to be total
carbon neutral in thirty years. They aim to have 30 million electric cars on the roads by 2030. China is also
in the race to clean up. Everyone is. 197 countries signed the Paris Agreement on Climate Change.
Green energy adoption is another exponential trend that is happening now.
The Productivity Layer

At the same time the Base Infrastructure Layer is being built, the Productivity Layer is also being rolled out.
In this layer we have AI, robotics, 3D printing, autonomous vehicles, etc.
I have written extensively about all of this over the years in GMI and, while most people are familiar with the
technology, the majority are not aware of how fast this is all moving in its adoption.
Artificial Intelligence
AI is now not just being used for the commercial layer of user data in e-commerce or social media etc., but
it is being used for autonomous driving, military advancements and even greater – genetic sciences and
medicine development.
AI is even taking over as the core way to solve productivity breakthroughs and scientific breakthroughs. Even
the genome project is now being worked on by AI, which massively speeds up outcomes and hypothesis
testing. It also replaces the need for so many workers.
In terms of attracting new capital, AI for drugs, cancer and drug discovery received the largest share of AI
investment in 2020: $14bn, a 4.5x increase over 2019.
As I have discussed before, AI is now composing text (GPT-3), audio, and images to a level that humans now
have a hard time telling the difference between synthetic and non-synthetic outputs for some applications of
the technology.
AI technology has so many applications it is hard to get our heads around it, and all of it is rapidly being
rolled out and adopted. Take a look at all the applications within AI that are attracting investment, this is
fascinating as it offers us a glimpse into the future...
But what is even more fascinating is that the R&D phase is also going exponential, suggesting that there are
many more breakthroughs still to come...
But what is even more fascinating is that the R&D phase is also going exponential, suggesting that there are
many more breakthroughs still to come...
Robotics
Robotics is not only changing the world of production but also the world of healthcare, the military world
and the commercial world. Applications are everywhere and, as the costs of electricity and computing
come down, robots are replacing humans all along the production chain, driving down costs and increasing
productivity, dovetailing in with AI.
3D printing
3D printing is similar to robotics, but the biggest change is in organic-matter printing such as meat, human
parts, skin, etc...
https://www.sciencedaily.com/releases/2019/11/191101111556.htm
This is all moving so fast that it’s now a long way from only five years ago when we were excited about
printing ceramics. My dentist in Grand Cayman has already been 3D printing teeth, crowns etc., for a few
years now, but that is just the very bottom layer of what is coming.
I can hear you questioning 3D printed meat... well, here you go:
https://www.3dnatives.com/en/3d-printed-meat-040720204/
Autonomous vehicles
Autonomous vehicles are again something we can’t get our heads around. I see the usual “old man shouts at
internet” people railing against Tesla, but let’s get this right, if Tesla solves autonomous vehicles, along with
Google, it will be one of the biggest breakthroughs in transportation in history.
They are pretty close. Expect Apple and Amazon to be in the fray too, along with the car companies. If this
decade is the decade of the electric car, the next decade is the one of autonomous vehicles.
This would mean automatic transportation linkages with no people, direct delivery with no people, taxis
with no people. It is as big a change as the invention of the car. All of the Productivity Layer is exponential
in adoption. It destroys everything that went before it and every single business has to adopt it. There is
no choice.
The Digital Value Layer

The layer on top of the Productivity Layer is the Digital Value Layer. This layer is the layer of crypto. It is where
all digital value is created, stored, transferred, settled, saved, spent, etc.
People make the mistake of thinking this is just banking and finance, but this is the digital exchange of
everything and recorded ownership of everything, from insurance contracts to derivatives, from lending to
borrowing, from art to music, from central banking to Universal Basic Income.
The sheer scale of the digital value layer is probably greater than all the other layers by a significant factor.
And this is being built at lightning speed in front of our eyes. People are still arguing whether bitcoin is a
bubble while things are so advanced that entire worlds are being created as the metaverse is being
put together.
People are already earning, saving, spending, borrowing, lending and creating value inside
computer games and digital worlds. That money and those goods and services are already fungible in the
physical world. All of this is exponential in adoption and value creation.
The Human Layer

While the Infrastructure Layer, the Productivity Layer and Digital Value Layer are all being rolled out at
the same time and beginning to reach their exponential adoption phases, the Human Layer is doing the
same. Here reside wearables with healthcare diagnostics, the Internet of Things, voice recognition and
home robotics.
Biotech
But the biggest part of this layer is biotech, which will make exponential improvements to human longevity
and health span. The rise of the mRNA vaccine is a breakthrough for mankind. The speed at which this could
unlock even cancer treatments or vaccines, is astonishing. Twenty years of hard work is now about to be
accelerated by regulators and capital poured into it.
Expect to see malaria and other key diseases solved very rapidly. Once you add in all the other layers,
especially the ability to compute vast amounts of data and the rise of robotics and AI and 3D printing, things
are about to change ridiculously fast for mankind.
Remember, it took roughly only two months to crack the mRNA code for the Covid vaccine... two months!
Wearable technology
Within five years we will all have constant monitoring of our health signs, diet, exercise, etc., and
not just from a watch but smaller wearables. This data will be collected and will help accelerate faster
breakthroughs. The Apple Watch and Fitbit are key examples of the start of this trend. Apple Watches
are already going exponential...
Virtual Reality will change how we interact with the digital world, building bridges from the physical world.
It is already changing remote medicine, robotics, gaming, etc., and it is a key part of how the metaverse
will develop. VR adoption is already gathering pace...
... and is going to grow 4x in the next four years...
There is going to be exponential improvement in this field as the applications along with the adoption rates
go increasingly exponential.
Internet of Things
The Internet of Things will see a rapid rise as machines begin to talk to each other, transact with each other
and learn from each other. Our homes and workspaces will become intelligent as all these electronic goods
begin to integrate with each other.
Obviously, wearables are part of the IoT but this also expands into Smart Home applications, Smart City
and Smart Industry.
Edge Computing and AI are also integrating with IoT to drive development.
All of this is already happening. These is not just ideas in a research phase but the real-world applications
that are already seeing massive adoption...
The Metaverse
At the same time, we are about the see the adoption of the Metaverse – I talked about the Metaverse last
month but this article is a good read:
https://www.matthewball.vc/all/themetaverse
And this video is an absolute MUST WATCH (this 22-year-old kid gave me the most mind-blowing interview
in the history of Real Vision:
https://www.realvision.com/shows/the-interview-crypto/videos/piers-kicks-earning-money-in-the-
metaverse
As an aside, the metaverse is so much bigger than just gaming or a virtual world. It is where all aspects of
the digital ecosystem reach their logical conclusion – a seamless world that meets the physical world where
we will all end up working, earning, saving, exchanging value, engaging, competing, creating, investing,
communicating, socialising, trading, educating, etc.
Blockchain technology will allow interoperability of value across all of this, it will also help keep vast swathes
of it decentralised and it will secure digital value, which without blockchain is nigh on impossible over time.
THIS is where everything is going... it is beyond massive and it’s already rapidly underway.
I cannot express how big this is. The metaverse in the next twenty years will create an economy as potentially
large as the existing global economy, and that layers on top of the current global economy.
More broadly, the Metaverse stands to alter how we allocate and monetise modern resources. For centuries,
developed economies have transformed as the scarcity of labour and real estate waxed and waned. Under
the Metaverse, would-be labourers who choose to live outside cities will be able to participate in the “high
value” economy via virtual labour.
It is as similar a thing as the discovery of the Americas and what that did for global GDP. This is an entirely
new world that is being created, right now.
Again, this is without question an exponential adoption underway. There are 2.7bn gamers who live in the
digital world, they are already there earning money, trading and socialising, and we will see the rise of
education in there too and most ordinary life experiences will transition. We are already seeing new
real estate, music festivals, art galleries, advertising companies, casinos, etc. Everything is being built in
the Metaverse...
Behavioural Economics
We are also about to see the rise of behavioural economics spread at breakneck speed to governments and
central banks, expanding out from gaming, social media and e-commerce where it has already changed the
world. This will completely change our government policies and political and monetary infrastructure too.
All of this is happening at the same time in the human layer.
The Big Picture

As we transition out of the massive global recession, we are going to see continued low or zero rates, we will
see ongoing expansion of the central bank balance sheets and we are likely to see global stimulus packages
beyond our wildest expectations. Government and central banks have crossed the MMT Rubicon and, if
they continue to turn a blind eye to the denominator change, will see nothing but good outcomes for assets
and economies.
They don’t realise that it is all for nothing as everything except technology investing is underperforming due
to the fall in the value of fiat money.
But out of this will be new kinds of stimuli such as the New Green Deal, new digital infrastructure and
maybe Universal Basic Income. There will have to be a wholesale change to the governmental and
regulatory infrastructure to allow for the changes that have to happen to make way for this digital world,
driven by the massive ongoing stimulus.
The extra money created, along with savings will get sucked into technology investment, driven by
government incentives and will accelerate all of the layers of the Exponential Age.
People fear change

At first, people will not understand the changes and the shift in asset prices. There will be continued talk
about bubbles. They won’t understand the denominator effect, they won’t be able to see the relative
outperformance of technology nor the rise of the Digital Asset system.
People fear change and there will be a great deal of denial, but over time the benefits will become clear.
I think we are about to go into a new age of growth globally, but it won’t be universal growth.
Rapid growth, slower growth

The impediments of debt and demographics remain, these don’t go away. But they can be offset. Growth
won’t be instantaneous – it will likely ebb for a while after the current stimulus goes away – but the next
round of stimulus will likely cement the change in growth trajectory in the new parts of the economy. Old
areas such as retail, office space and older manufacturing businesses will continue to wither on the life
support of the central bank balance sheet.
Over time, the fast-growing Exponential Age economy will take over, driving the overall economy. It will take
a bit of time, but it will happen.
We will also not see secular inflation in this world – technology is too deflationary.
If we can avoid major conflict, this is likely to be the most exciting, fastest-changing era in human history.
It will feel terrifying too. There will be unintended consequences on society that will have to be dealt with.
Fewer humans
It will also trigger an acceleration of the depopulation of our planet over the next 100 years. We are
already seeing many populations shrink around the world and the pandemic has accelerated that trend too.
We will eventually see the populations of India, Indonesia, Pakistan etc., begin to turn negative, and then
finally that of Africa.
As software eats the world, humans will adapt by creating new digital worlds in the Metaverse to give more
opportunity to create income.
As the physical world becomes automated and replaces humans, the Metaverse is where humans will earn
their living. And in due course, human population will likely fall as the Metaverse becomes automated too...
In this world, per capita GDP rises rapidly, longevity of life rises, longevity of health rises and environmental
pressures are dramatically lowered.
But it’s a world where society has to adjust to living in a digital world, where human jobs are endlessly under
pressure from technology, forcing a mass migration into the Metaverse.
The Investment Opportunity

If you cast your mind back to the beginning of this article, I talked about how macro investing had
traditionally been driven by the superior returns of the downcycle. With interest rates pegged and
currencies range bound and even more central bank intervention, the world has now changed. That
downcycle opportunity in bonds, credit and equities has gone.
Equities will become a larger part of the investment mix, which is traditionally not a good macro instrument
but, as I said, the world has changed.
+50% vs 20x returns

The other thing to understand is that all of this new era is exponential in adoption and growth (hence the
name the Exponential Age). We go from looking for 50% downside, a sharp rally in bonds, a quick rise in
the dollar or a widening of spreads, and instead we look for 10x or 20x upsides in technology stocks.
Hold, not trade to make the big bucks
The ability to generate wealth is going to be huge. Crypto has shown us how this all works. It is a world of
real conviction in a theme and a world of holding, not trading.
The business cycle will be different

Yes, the business cycle still matters, but any negative part of the business cycle will be met with by more
central bank interventions. The real business cycle will not be seen as much in asset prices, but in the
purchasing power loss and central banks’ debasement of the currency.
Emerging markets will have less intervention by nature (EM central banks can’t print easily without losing
their currencies in the process) but there will be more intervention necessary once rates get down to zero.
There are traditional macro plays still to be had in EM, e.g. Indian rates will trend to zero, but they won’t last
very long in this new world as global capital flows will arbitrage them away.
But the biggest thing about the Exponential Age will be the step change coming for emerging market
economies. They get to leapfrog all the non-productive legacy technology, become connected to the
worldwide digital economy, gain health care improvements, sounder money, and better access to credit and
saving products.
Emerging market growth over time will begin to outperform. EM technology stocks that exhibit network
effects will explode in value.
But first, you will see this theme begin in the developed markets.
And just like with bitcoin, investors will first have to learn to drop their cynicism and understand the enormity
of the changes underway.
Examples of Exponential Era Investments

I don’t want to pile on a load of investments immediately just because I have a new framework. As you know,
I don’t think anything outperforms crypto this year.
Crypto
I want the most concentrated bet on crypto I can possibly have in the portfolio. I feel that adding a few
trades here and there is generally suboptimal.
Just to remind you, I think bitcoin goes to somewhere near $400k with an outside chance of $1m this year
or into early 2022. I’ll start peeling off some risk over $200k.
Remember – log charts with regression are your friend in an exponential world...
ARKK
The next single best investment I think is to allocate money to the one manager on earth who truly
understands what is going on – Cathie Wood at Ark Invest.
I can hear a bunch of Gen X macro cynics sucking in through their teeth, “Cathie Wood!!! She is crazy, ARK
is just a retail speculative vehicle. It’s full of illiquid stuff! It’s going to zero when rates go up!!”
“... It’S a mASsIvE BubBLE!”
Actually. I think she is a genius.
Back in 2014 she spotted that the world had changed, when the only people who figured that out were a
few VCs in Silicon Valley, pioneers like a16z (most VCs are just sheep).
ARK looked past the internet era and began to see the point on the horizon where the technology
advancements all met, creating what I refer to as the Exponential Age. Covid was the horizon point.
The ARKK ETF (The ARK Innovation Fund) has started to exhibit all the characteristics of an exponential
investment vehicle after a few years of lacklustre performance. (My view is that Cathie Wood was incredibly
early to most themes – too far ahead of the narrative but still 100% right.)
Everyone gets caught up in the single stock analysis in her portfolio or the illiquid names, but they are missing
the bigger picture. She has nailed the big themes, in my view. Has she made the right stock picks? We will
have to see...
But as the market rotates out of tech, it might continue to suffer for a bit and even form a larger top...
I will keep my eye on it because I really like the ETF. Wood’s major themes almost exactly correspond with
my own.
She has also understood the dynamic of creating a community around herself and her business. Old
cynics will call it being “promotional”, but for me this is the modern age of business – deep communities,
where everyone is their own media brand, multiplied by social media reach and direct connections with
your customers.
I will buy ARKK or a few of the thematic ARK ETFs in due course. I think the ARKK ETF can 10x or more if the
stock picks truly represent the themes.
Reliance
I also think that Reliance Industries in India is a pure exponential play, driven by network effects. Reliance,
which I have written extensively about, is THE digital play in India. It is the largest mobile data player and
will become the largest e-commerce and social media player. Reliance literally built the network from where
it will build the network effect, all on 4G and soon 5G.
Reliance has undergone two exponential phases – the first was building out the largest energy business in
India – and it is now beginning to build the largest technology network, from infrastructure to applications...
Like ARKK, Reliance is currently correcting, which is fine. I’m unlikely to pull the trigger on anything this year.
India
I also think India itself will see an exponential step change. Again, I have written about this, but we are going
to see the mass adoption of the digital initiative as Reliance rolls out its new products and services, along
with government digital initiatives AND the huge rise in e-commerce, biotech, software services etc.
India will become one of the largest tech, service-based economies.
In US Dollar terms, the Sensex is just beginning to break out. I think there is another Covid issue to come and
growth will splutter again but, if we get a correction in the Indian market, it will be a very good opportunity
to invest...
But India really is defined by exponential growth. The Sensex in local currency terms shows a perfect log
regression channel as 1.3bn people move from poverty to the middle class and the economy goes from rural
to digital. This trend is not going to stop, and the regression channel of the log chart suggests India is cheap!
PAGE: 4 4 // 50 | D E E P D I V E | 28 T H A P R I L 2021 | © M AC RO I N S I D E RS
But India really is defined by exponential growth. The Sensex in local currency terms shows a perfect log
regression channel as 1.3bn people move from poverty to the middle class and the economy goes from rural
to digital. This trend is not going to stop, and the regression channel of the log chart suggests India is cheap!
VW
VW is another company that I think represents a massive opportunity to capture the Exponential Age theme
with regards to electric vehicles. VW have gone through the largest part of the investment hump (spending
on R&D for EVs), and the upside is going to be massive new car sales...
Carbon
I think that EU Carbon ETS also fits perfectly within the macro framework too. As the EU transitions to green
energy, EU Carbon ETS will rise exponentially. The world needs to price carbon correctly...
If you can’t buy the futures, you also have the KRBN ETF of global carbon pricing...
Saudi Arabia
I also looked at Saudi Arabian Equities and can see the obvious chance of an exponential rise as they
transition from an oil economy to a technology and renewable energy economy. If MBS gets this right, Saudi
will see its stock market explode higher...
Taiwan and semiconductors

Taiwan is the world’s centre of semiconductor manufacturing. The Exponential Age needs more and faster
semis. The Taiwan stock market is about to go parabolic...
We are still early...
These are just some of the examples of where we can allocate capital. I am not keen to do so yet as I think
there is excessive speculation currently (so we might correct further) and the theme is very early (you can see
from ARKK which has only begun its move) but this is going to be one hell of a big opportunity.
Changing the framework

I have not changed my macro framework in sixteen years of writing GMI, and it has worked very well
indeed. Over time I will begin to transition to the new macro framework whilst simultaneously keeping the
old framework of business cycle analysis to give us added protection.
A lot of the new framework was already in my existing one – bitcoin, EM, India, etc., but I think the big
difference will be a shift towards buy and hold in equities that express the big picture view (with periodic
hedging and some opportunistic trading) and less focus on rates, FX and commodities overall.
I’m a macro guy so I am not super keen on individual stocks where I don’t have an edge, except large ones
that truly represent a macro view. Sometimes I’ll uncover some small names, but I’ll mainly stick to macro
expressions of the view.
All said and done, I am excited to move into an exponential upside world!
And the Exponential Age happens to be the biggest period of change in world history. This is not about just
one exponential trend such as social media, but a HUGE number of exponential trends all interacting at the
exact same time.
Mankind has literally never seen anything like this in such a concentrated period of time.
All the key layers for the Exponential Age are already beginning to accelerate and in a years’ time or so, it
will become pretty clear to us. I think many others will be left scratching their heads or wringing their hands...
and then it’s going to keep accelerating for years and years...
This is somewhat like the Industrial Revolution (which lasted eighty years) but in a much more compressed
time period.
And in the meantime, I think the current financial system ends with a fizzle and not with a bang...
as increasingly people migrate across to the new world.
SUMMARY
It takes quite an epiphany to make someone change a framework they have relied on for years to something
new. Actually, it is not so much that the “exponential trend” environment is new per se. Rather, that the old
and new have been competing for supremacy ever since the Central Banks broke all the rules with their
persistent, deliberate financial repression approach since the GFC. The watershed was Covid. It acted as an
accelerator to structural changes that were under way beneath the surface but that might have taken years.
The effects have been hiding in plain sight as the charts in the first half of the piece illustrate. Once you
accept that it is the denominator of price measurement that is falling rather than just the asset price rising,
the whole landscape changes. This is all part of the inevitable consequence of the devaluation/destruction
of fiat money… globally.
If you then use a methodology like Metcalfe’s Law (as illustrated on p.22) and start applying network effects
that we have become more familiar with through Cryptocurrency adoption, it then becomes clearer that
technological advance is running at such a pace that it will transform our world at breathtaking speed.
As investors and as people, there will be a tendency to resist the change, fear the change, dismiss the
opportunity. But opportunity it is, and if Raoul is right, we are still in the very early phases of recognition. Let
go of the linear, let go of the comforting concept of mean reversion to some out-of-date norm. Embrace the
Exponential Age and we can develop the practical applications of the implications over time.
BACKGROUND
Together with Julian Bridgen of MI2 partners, Raoul Pal launched Macro Insiders, institutional-quality
research service but for the more experienced retail investor. Macro Insiders forms a core part of the Real
Vision Pro membership.
Raoul also publishes Global Macro Investor (since January 2005) providing original, high quality,
quantifiable and easily readable research for the global macro investment community hedge funds, family
offices, pension funds and sovereign wealth funds. GMI draws on his considerable 30 years of
experience in advising hedge funds and managing a global macro hedge fund. Global Macro Investor
has one of the very best, proven track records of any newsletter in the industry, producing extremely
positive returns since inception: www.globalmacroinvestor.com.
Raoul retired from managing client money at the age of 36 in 2004 and now lives in the tiny Caribbean
island of Little Cayman in the Cayman Islands.
He is also the founder and CEO of Real Vision, which is a digital media group: www.realvision.com.
Previously he co-managed the GLG Global Macro Fund in London for GLG Partners, one of the largest
hedge fund groups in the world. Raoul moved to GLG from Goldman
Sachs where he co-managed the hedge fund sales business in
Equities and Equity Derivatives in Europe. In this role, Raoul
established strong relationships with many of the world’s
pre-eminent hedge funds, learning from their styles and
experiences. Other stop-off points on the way were NatWest
Markets and HSBC, although he began his career by training
traders in technical analysis.

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Welcome To The Exponential Age

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INTRODUCTION

Raoul has had an epiphany.

That is really all macro is about.

My GMI macro framework

The End Game

The narrative doesn’t sit right...

The Lightbulb Moment x 2

I also don’t think we are in an asset bubble.

Those that particular struck me were Gold vs BTC...

... and even the Nasdaq...

Clearly, this is a bubble. Or so I initially thought.

This is the chart commonly used...

The moment of clarity!

And then it all became clear. It is hiding in plain sight.

We are seeing a devaluation of the denominator – fiat currency overall.

This is what the charts are telling you.

Starting to become clear?

Fiat currency debasement

The Fed have massively exacerbated the wealth divide. QED.

Not so fast, Buster...

The great example is GE in BS terms... it is worth basically zero...

In fact, the entire BBB equity sector is in the same boat...

Not so fast again with those assumptions, Buster...

Obsolete cars... as far as the eye can see

And then suddenly, it all fell into place.

We are about to enter the Exponential Age.

This changes everything.

The migration to a new system

The new system is vastly superior to the old...

Exponential thinking about green adoption

We are going to go from a linear world to an exponential world.

The Base Infrastructure Layer

Green energy adoption is another exponential trend that is happening now.

The Productivity Layer

In this layer we have AI, robotics, 3D printing, autonomous vehicles, etc.

The Digital Value Layer

The Human Layer

All of this is happening at the same time in the human layer.

The Big Picture

People fear change

Rapid growth, slower growth

The Investment Opportunity

+50% vs 20x returns

The business cycle will be different

Examples of Exponential Era Investments

“... It’S a mASsIvE BubBLE!”

Actually. I think she is a genius.

India will become one of the largest tech, service-based economies.

Taiwan and semiconductors

Changing the framework

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