A super slide for stocks, bonds, and cryptocurrencies rolled all the way into last week, right up until Friday, when the Nasdaq posted its strongest one-day gain since November of 2020. Despite Friday’s gains, the major averages posted losses for the week, with the Dow closing down more than 2% and posting its first seven-week losing streak since 2001. The S&P 500 fell 2.5% and hit its longest weekly losing streak since 2011, while the Nasdaq fell 2.8%. It’s been a rough, rough year across capital markets. A full $35 trillion in global market value has been erased since the beginning of the year. That’s 14% of all global wealth, including a trillion dollars of losses in cryptocurrencies. To put those losses in perspective, 2008 saw a 19% decline in global market value, and that doesn’t include non-financial assets such as housing.
Still, perspective is everything, especially for investors who have been invested in the U.S. stock market for at least five years. Believe it or not, the S&P 500 is up 26% since the start of 2020. The Nasdaq 100 has returned an average of 17% over the past ten years. Pretty good returns. So, while it’s painful in the moment, and it could get worse, we have to lift our heads out of the sand and pay attention to long-term trends. That doesn’t mean do nothing. You have to allocate, you have to rebalance, you have to dollar-cost average if you can, and keep buying as prices keep falling if you want to ride through the downturn. The only problem is that we don’t know how long the downturn will last. So, if your threshold for losses is 25% or more before you can’t take it anymore, and you need the money you have invested for near-term expenses (like in the next one to two years) you have to think really carefully about your risk tolerance, your investment horizon, and the time value of your money.
Meet Raoul Pal
Raoul Pal is an economist, investment strategist, as well as the CEO and co-founder of Real Vision, a financial media brand. Mr. Pal is also the co-founder and CEO of Exponential Age Asset Management, an investment management company, as well as the founder and CEO of the Global Macro Investor, a macro economic and investment strategy research services. In total, he has over 44 years of experience in the finance industry.
What’s in This Episode?
Global markets are a mess right now. No two ways about it. Outside of the energy and mining sectors in the countries that are loaded with those industries, it’s a hard time to put money to work. We’ve seen markets like this before, but it takes someone special to see them coming. Raoul Pal has made a career of seeing around corners like these. He’s an economist, an investment strategist, a former trader, the founder and CEO of the Global Macro Investor, and the co-founder and CEO of Real Vision, a financial media company that we are big fans of here at Investopedia, and he’s a good friend in the business. He’s also our special guest this week on the Investopedia Express. Welcome.
“Hello, my friend. Good to see you as ever.”
“Good to see you. There’s so much to unpack, but I want to start with your global macro perspective right now. You’ve seen a lot of these crises come and go. You’ve called a couple of them in the past. How bad is it? How bad could it get for the global equity markets ?”
“So, I’ve been forecasting for some time that the outcome is going to be a recession , and I’ve been slowly counting down what’s coming. What we’re seeing now is this terrifying moment where inflation’s still high, but economic growth is starting to implode, and the markets are really struggling with that. I think this continues… the tightening of rates, the rate of change of interest rates … we’ve seen people’s mortgages go up ridiculously. We’re seeing tech companies already starting to talk about layoffs . We’ve seen the dollar going higher. We’ve seen all of these things. Commodity prices going higher. The cost of living, people’s wages, not going up as much. These pretty much guarantee a recession. That’s what the equity market’s telling you.
Inflation is at 8.3% right now. It may have peaked, but just because it may have peaked, it doesn’t mean it’s coming down soon or back to below 2%. Those days are over, for now. Consumer expectations for inflation is pegged at 6.3% for the next 12 months and 3.9% for the next three years, according to the Federal Reserve.
The question is, ‘How long does it last for, and what will the Fed do?’ Because the Fed showed us in March 2020 what they can do, which was massive stimulus can stop a very ugly situation. In this situation, they’ve got high inflation. So, they’re going to have to do what they did in 2008, which is ignore the noise of the inflation and realize the economy’s imploded. In 2008, inflation was at 6%, and they were cutting rates at peak inflation. Oil was $140, and they were cutting rates. Now, the Fed now is kind of saying, ‘No, we’d never do that. Let’s just wait and see.’ So, my macro view is that we’re in recession. It’s going to be pretty nasty. The Fed shouldn’t have done what they did, but the bond market tightened for them anyway. The Fed actually didn’t do a lot, the bond market did it all, and that the Fed are going to have to unwind this mess, but it will get messier first. Using all the technical indicators that I look at, my view is, ‘If we are going to reach a proper balance or a low, it happens in June.’ So, we’ve got between now and June for everyone to freak out.”
“Between here and June, there’s another Fed meeting, right? We’re going to get another raise in interest rates. Probably a half a percent. We’re going to get another read on inflation. We got one this week, 8.3% year over year . That’s still close to a 40-year high. And there seems to be no slowing of the bull market in commodities. And you can look at just pure fossil fuel energy, oil and gas, but look at the other ones that I know you look at very carefully and you have for your whole career. Does this bull market in commodities just continue unabated right now?”
“No. I think this is where the narrative has got too far ahead. So, the narrative is based all on supply , which is, ‘We haven’t invested enough in oil and gas, and we haven’t invested enough in metals and therefore… and food.’ Now, food is a different situation because of fertilizer, but the others, everybody’s forgetting about demand .”
“Now, I was lucky. I was on Real Vision, I interviewed Pierre Andurand, the world’s most famous oil trader, and Dwight Anderson, ex-Tiger, who’s one of the most famous hedge fund managers in commodities. Those guys are like, ‘If we’re not careful, we’ve got demand destruction .’ Now, we haven’t got that yet, but watch the price of crude oil. If it squeezes higher, it’s only going to hurt people’s pocketbooks even more. But if it breaks down, it tells us demand is now gone. So, I’m watching this like a hawk. Copper’s not been out for a long time now, and copper has been telling us demand is being eroded. The Chinese are basically out of the equation because they locked down their economy again.”
“So, it is a precarious situation. I think the commodity prices come off and come off pretty hard. Again, very similar to what we saw in 2008, where oil was 140 bucks, and it eventually broke in the summer of 2008, even though the Fed have been cutting all the way from July.”
“I’m so glad you brought in the 2008–2009 perspective. And then again, demand destruction. You know, the cure for high prices, Raoul, is high prices. So, sometimes it takes care of itself, but hopefully it doesn’t wipe out the economy.”
“Because don’t forget, think about the U.S. housing market, right? It’s clearly slowing. Mortgage rates have gone up. People have built too much inventory . So, what are those builders going to do? They’re going to stop buying product, and that is how you destroy demand. And that’s happening everywhere, and it’ll happen everywhere. People hold off their plans because of the costs. So, it’s coming.”
“You’re a crypto enthusiast. You didn’t just get here. You’ve been following these markets for quite a long time and investing in some of them. But what do you make of the big steep sell-off across the big, widely held coins like Bitcoin and Ethereum ? Do we go too far too fast like we always do with our animal spirits , or is this a reckoning of the market in other ways? Because it’s still kind of like a teenager.”
“It is like a teenager. But let’s face it, Etherium is down 40% this year, and the Nasdaq’s down 25%. So it’s not terrible. And Etherium, for example, hasn’t made a new low versus last year, while we’ve thrown inflation and rate hikes and wars and everything at it. So, I think the likelihood is… I don’t think we got the massive blow-off top . We got a sort of blow-off top. And I think we’re in this very wide, sloppy range because the space is not going away. I mean, central banks are building digital currency rails. Everybody’s building everything, so it’s not going away.”
“We’re in this period where retail investors couldn’t afford to dollar-cost average anymore because their pocketbooks got hit by negative real earnings (i.e., their wages didn’t go up as fast as inflation). So, they have to spend it at the supermarket and not on crypto. So, yeah, and now we’ve got a risk-off because of recession. I’ve always dealt with this space knowing that it goes up and down. It goes down 60%–70% within a long-term log trend, much like Amazon did. If you’ve had to buy Amazon after the IPO , it went down 96%. It then rallied a few hundred percent, then fell 85%. But if you look back over history, it’s a network model and it goes in a nice, long logarithmic chart and it just fits in a channel, but it always feels terrifying. But you don’t get a hundred ‘x’ upsides with no downside. Volatility is a function of the game. It’s the price you pay for long-term returns . And our job is to filter out, ‘Is the volatility worth paying or not?'”
“Let’s talk about NFTs , those non-fungible tokens, and crypto. What do you see the future state of those in a Web 3 world? I know you’ve put some thinking around this, so what’s Raoul’s take on that?”
“So, the breakthrough of NFT is not about monkey jpegs, of which obviously I own one with the Bored Ape Yacht Club. It’s not that. It’s in a number of levels. Firstly, it means a unique digital asset or contract can be recorded on a blockchain . That’s really what it is. So, if you think of unique contracts you have… your house deeds, they’re unique. Well, that could be an NFT. So, why would we do that? Well, it means that I can transfer it to you if I sell you my house, instantaneously, without middlemen. These kinds of things are really interesting.”
“Most insurance contracts at larger scale tend to be negotiated derivatives, OTC derivatives , in financial markets. All of these can be NFTs. They can also be a digital identity because within that smart contract, we can have who we are, our KYC . So, I can put you my NFT, and it can confirm my KYC, and I can do it without even revealing who I am. But it just says, ‘These things are true, he’s of the right age and of the right income bracket, and the money is clean, and it’s been verified.’ That can all happen as well. So, NFTs are that.”
“NFTs are also the ability for, in a digital world where the cost of everything goes to zero because everything gets cheaper, like cloud storage, everything, it goes to zero. So, how do you stop everything going to zero in value? Well, one of it is put it on the blockchain and creating scarcity . And so that was they do, they stop that thing to zero. So, now you can put digital art because music went to zero, right? That’s a great example.”
“Napster did that to music, you’re right.”
“That’s right. Now, I could be in a band, create music that’s an NFT, and it’s now scarce because only certain people can use the music or own the rights to the music. Same with art. It’s happening with art. It’s happening all over the place to allow people to create scarcity in a digital world. And we’re moving to a digital world. We’re moving to the metaverse regardless. And you and I speaking on a Zoom now is the metaverse experience because this is a digital image of you and a digital voice. It’s not real, but we think it’s real because we’re now used to it. We’re going into this digital world, so we need to create scarcity. If not, there’s no value in anything.”
“So, I think it’s a lot. It also does something around community, which is a really powerful thing. You and I know from the media industry, community is everything, because if not, you’re just a broadcaster, and broadcasters don’t have community, and they’re not very valuable. But once you’ve got a two-way relationship with your audience, then you’ve got something really interesting, and NFTs to do that. They create community because it’s an identifier, it’s like the membership of a golf club or Soho House or whatever it is, but it’s transferable. I can pay five grand a year for my Soho House membership, but I can’t transfer it to you. I just have to let it lapse. But if I can buy it and then pass it on to somebody else, then it has ongoing value, which is interesting in itself. So, there’s lots in NFTs. It’s just a really big area.”
“Scarcity, community, authenticity. Sounds like three things that we’re going to need and cherish as we go into future generations here because you’re right, we’re going into the metaverse. You look great digitally, by the way, and…”
“As do you, my friend.”
“It’s working for you. So, I can’t wait to see you in Web 3. All right, let’s get into Real Vision. This video platform you started back in 2013. It’s still going strong today. Folks, I love Real Vision. We’ve been partners with Real Vision. If you want to watch really smart conversations with the top investors and traders in the world who get into the mix like us, Real Vision has a lot of that. I heard you once describe it real as a ‘Netflix for finance,’ but it’s become so much more than that. For folks that aren’t familiar, tell us what it is today and tell us what your plans are for it going forward.”
“Yeah, thank you. We started off being just a content provider. We saw… the thing was that most people weren’t getting the quality of information that I had at the epicenter of the hedge fund industry. And people went through 2008, and 2012 in Europe when we lost the banking system, and they didn’t know about it. And I thought, ‘I need to do something about this. This is not right that we get the information as insiders and the outsiders don’t.’ We saw the Occupy Wall Street movement, the Indignados in Spain. Everyone was angry because they didn’t know.”
“So, I thought we can change that by starting this video platform, which interviewed the world’s most famous investors. And so, people got leveled up with information. The idea was to democratize the very best financial information. We then started providing research reports as well. We had written research, plus all these incredible interviews where we can all learn from the world’s best. But after a while, we realized we’d actually built community, which is what we were talking about before, because people realized like-minded people were attracted to Real Vision. People wanted to learn. People who wanted to think about the world around them, how to invest in it, how to protect their savings, all of that stuff.”
“That community led us to start accelerating those plans and start building new communities. So, we thought, ‘You know, there’s a bigger opportunity here to create a super-community of finance.’ The next big community we we brought on was crypto because I’d been passionate about it, and I’ve been in the space since 2013. We launched a crypto channel. So, that’s to bring that community and service that community with the kind of information that we were servicing the macro community. We’ve actually just bought a family office network of 800 family offices, which will be another community. We just launched Real Vision India. That’s going to be another community.”
“So, we’ve got a lot going on on the community side. Then what we’re doing is also creating a platform for them. Most people won’t even see or know of this yet, but we’re creating a platform experience for all these communities and servicing them in many ways. The first product launch that’s coming is education. And I know you guys at Investopedia are all about education. We’ve got very well-known course. Well, you remember Lex van Dam. So, Lex’s course we bought and retooled and re-filmed with some amazing investors as the mentors for the whole thing. That whole education course and programing starts rolling out in June. So, that’s a big one, and that’s going to be part of our membership tiers as well. We’re not going to charge extra for it, it’s going to be part of the experience.”
“Then we’re looking at all sorts of other tools and experiences for people. We’ve also got a social media platform called the Exchange, where we have a lot of discussion. So, because we’re all heads down building right now, we’ve got a lot going on, and Real Vision in a year’s time is going to be very different to Real Vision now. There’s going to be so many more unique experiences that add value to the community to allow people to have all of the tools and information that they need. And the really exciting thing is our community is one of the smartest groups in the world. We call it the Hive Mind. We’ve even started surveying them to see the allocations to assets , and they outperform the markets because this is a self-selected group of people who have been learning the content, ingesting it, and spitting out output. So, we can do a lot with the community Hive Mind knowledge as well, giving it back to people because if we’ve got an expert network within Real Vision, we should open it up to everybody.”
“Well, we’re birds of a feather because we love education, you guys love education. And folks, there is so much content. It is a never-ending buffet of really smart interviews, podcasts, newsletters. Raoul, you have your own channel there where you’re talking about crypto. That’s available to folks, but you’ve got to check out Real Vision out because it has been such a valuable resource for us. And like I said, these are educators just like us, but they’re talking to some of the smartest minds and investing kind of like what we’re doing right here, right now. We always like to ask our our special guests, Raoul, about the best investing advice they’ve ever gotten in their lives. Who gave it to you, and why has it been so important to you?”
“It was actually from Paul Tudor Jones, which sounds like I’m showing off, but it is what it is. And he said the best investors that he saw were people whose trade time horizon matched their idea time horizon. So, what does that mean? A lot of people say, ‘I think that the central bank is going to debase currency and gold should go to the moon.’ And you say, ‘How long is that? How long over what period?’ They said, ‘Ten years.’ And then they buy gold today and then get stopped out three days later. They’re not matching the time horizon. Usually that means they haven’t sized the position and kept in their heads.”
“I’m going through this in crypto right now. My view is I’ve got a ten-year view. So, I cannot be concerned about the movement’s short term because if not, I’m trading short-term views and not the long-term view. How do you solve for that? You solve for it by trade sizing . It’s not so big that when it goes against you, you don’t get stopped out of the trade in the middle of your long-term thesis. And it takes skill to learn it, but that basic thing is, if you’ve got a long-term view, then trade the long-term view. Don’t trade it on, ‘Oh, my God, the market’s gone down. I need to get out.’ You’re not trading your view. And people get chopped up and lose money. So, Paul’s view was trade view. There’s some people… and he’s amazing. So, he has long-term views, but he changes it, and his trading view is what he trade. So, he’s like, ‘All I care about is what can happen over the next three days, and it can be the complete opposite of my long-term view.’ That’s really, really hard to do.”
“Yeah, that’s multi-dimensional chess. But that’s why he’s Paul Tudor Jones and why you respect him so much. Last one, Raoul, your favorite investing term. You know we’re a site built on our investing in terms. What’s your favorite investing term, and why does it speak to you so much?”
” Risk-adjusted return . That encapsulates what we just talked about. What you’re looking for is how much risk you’re taking versus how much reward you get from it. So, if we go back to cryptocurrencies because it’s a great example, and so many people are involved. The risk, if you say to your mum, ‘Oh, it goes down 70%,’ she’s like, ‘What are you doing, are you an idiot?’ And then you say, ‘Yes, but it tends to go up 10 to 50 ‘x’ over three to five year time horizons.’ And you’re like, ‘Down 70%, up 50… that is a huge risk/reward.’ It’s the units of risk versus reward. People, if you understand that, you get to choose the better bets. So many people just take 50/50 bets on a hunch… You need to say, ‘Okay, my stop loss is 1% away. I’m going to stop it out there. But my objective, my view or my trade, is I think it’s going to go down 5%.’ So, now you’ve got one unit of risk, five units of reward. If you think in those terms, over time, you will win.”
“I love it. You’re the first person to bring that one up, but it’s so valuable and it makes a ton of sense. But that’s the thing. We let our animal spirits take over, and we do that 50/50 bet. So many of us, instead of thinking, ‘What is that risk-adjusted return? Also, what’s my time horizon?’ Folks, you’re wondering why I brought Raoul on? That’s why I brought him on. You’re wondering what’s on Real Vision? Smarts like that. You got to check it out at realvision.com . Follow Raoul and his team and what they’re doing over there, and sign up for some of those newsletters and their podcast because they are tremendous. So good to have you on the Investopedia Express, my friend. Thank you for being with us.”
“Caleb, always great to see you.”
Term of the Week: Oversold
It’s terminology time. Time for us to get smart with the investing term we need to know this week. This week’s term comes to us from Carsten Burch from La Grange Park, Illinois, just outside of Chicago. Carsten recommends oversold this week, and we like that term, given the steep sell-off in tech, biotech, recovery stocks, and cryptocurrencies of late. According to my favorite website, the term oversold refers to a condition where an asset is traded lower in price and has the potential for a price bounce. An oversold condition can last for a pretty long time, and therefore being oversold doesn’t mean a price rally will soon come or even at all.
Many technical indicators identify oversold and overbought levels, like relative strength and moving averages. These indicators base their assessment on where the price is currently trading relative to prior prices. Investors can also use fundamental analysis to assess whether an asset is potentially oversold and has deviated from its typical value metrics, like price to earnings or price to sales. The thing is, oversold is kind of subjective. So, while you can say an asset is oversold relative to historic trends, it’s really only worth what the next person is willing to pay for it. Good suggestion, Carsten. We’re sending you a pair of Investopedia’s finest socks for your next trip to Wrigley Park or Comiskey, now known as the Guaranteed Rate Field. But we’re going to keep calling it Comiskey, though, please.
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