Raoul Pal on his outlook for monetary and fiscal policy

Raoul Pal, Global Macro Investor Founder & CEO and Real Vision Group Founder & CEO, joined Yahoo Finance to discuss his outlook for monetary and fiscal policy and the role bitcoin and crypto may play in banking.

Video Transcript

MYLES UDLAND: Joining us now for that conversation, we're joined by Raoul Pal. He is the founder and CEO of Global Macro Investor as well as the Real Vision Group.

Raoul, it's so great to have you on the show today. So let's just start right now-- maybe your highest-level view on how you see the current setup. And take that however you want. Are you looking at commodities? Is it what's happening in monetary policy? Is fiscal policy most interesting to you? What are your keys as you take lay of the land today?

RAOUL PAL: Yes, so for me, I've had a thesis from the beginning, from February last year, which was called the unfolding, which is that recessions play out in three distinct phases. One, first, is the liquidation phase-- that happened into March-- then the hope phase, which is the period when everyone thinks, you know what, it's not going to be that bad, which is the phase that I think we're just in the process of ending.

The final phase usually is despair. And in this case, I'll call it insolvency, because I think that GDP growth is likely to remain negative for longer than people expect. And that's going to mean that corporate cash flows, household cash flows, are quite impaired, and there's going to be a rise of insolvencies, bankruptcies, and that kind of thing.

So I guess the key indicators for me are the banks, which you were talking about earlier. They go down almost every single day. In Europe, they're even worse. I also look at the bond market, which never confirmed this whole reflation idea. And I think bond yields fall over time.

So those are the two key things, I think, to keep on the radar screen from the macro perspective. The dollar's also been pretty stable. And if the dollar makes a break one way or the other, it's going to give us some more granularity as well.

JULIA LA ROCHE: Raoul, it's Julia La Roche. I want to talk about crypto. You put out this tremendous video, 35 minutes, unpacking this fascinating thesis on the future of monetary policy, fiscal policy, and of course, cryptocurrencies. I would love to dig a bit more into that and understand where you see it going, and why do you think we're going to get there?

RAOUL PAL: So let's take the backdrop I've just given you. So what is the outcome for that? We're also lacking fiscal stimulus, both in Europe and in the US. So we've got this dead patch, and we can see the real-time economic data in Europe rolling over, and I think the US will follow suit.

So we have the rise of the virus, which is creating that problem again. So we have all of these factors affecting it, this insolvency phase. So the only answer we have is either more monetary or more fiscal stimulus.

More monetary, from here, means, just as the UK just did, going negative. In terms of more fiscal, it means that the government will launch big fiscal packages, and the central bank will try and monetize it to help the bond markets. So what it means is more printing of currency. And that's not just the US. Basically every single country on Earth is doing the same thing.

And that's driving down the relative value of fiat currency overall. It's not just a dollar story or a euro story or a pound story. It's the whole lot. And that's driving higher gold, but particularly crypto.

There's another thing going on in the background. There's two other stories all converging with crypto. So there's the central bank story. There's the central bank digital currency story, where they're creating their own digital currencies as they realize the whole world is pivoting to this new digital world. And that creates a whole bunch of other issues in terms of, what control do they have over you if your direct banking relationship is with the central bank?

Sure, they can give you fiscal stimulus directly, but they can also tax you or give you negative interest rates. Or Julia, they can give you a negative interest rate and me a positive one, because they want my savings and they want to penalize you for your savings. So we don't know what world that is. And Bitcoin gives us an option out of that.

The other thing is the wall of institutional money coming into this space, whether it's the custody allowance in the US that basically is a code word for prime brokering for the hedge funds, where the hedge funds are coming in. Paul Jones was one of the first people to really pound the table about this, although many of the famous guys that we all know have got it personally as well.

Then there's also, the RAAs are coming into the space here. The Grayscale fund helps. But really, once the ETF gets launched, and one will get launched, that's going to suck in much more capital from the RAA space. The endowments, the pension funds-- they're all coming into the space, slowly dipping their toes in. Fidelity, who are doing the custody for these kind of institutions, are giving that layer of trust that they need to get involved in the space.

So we've basically got everybody coming into the space. And the larger the market cap goes up-- so it's currently $240 billion, which is kind of a large mid-cap S&P stock. But once it gets up to $500 billion or $1 trillion, well, suddenly it's a real asset class, and it sucks in more money.

So it becomes a [INAUDIBLE] style reflective loop, where we've got the macro story backing it up, we've got the flow of funds backing it up, and then we've got the move to the digitization of the entire financial system, which the central banks themselves are driving. So it's literally the biggest story I've ever seen in my life.

JULIA LA ROCHE: And Raoul, it's interesting to hear you talk about it that way, in that it's a reserve but also kind of a call option on the future here. I do want to bring up the US dollar. For the last 76 years since the Bretton Woods agreement, obviously it's been the world's reserve currency. And we're increasingly hearing people bring that up-- how long can that continue here?

And of course, if you look at China what China's been doing around a digital currency-- I would love to understand your view as relates to the dollar. And what happens if we actually-- the US here, even, if we don't move in this direction, what do you think are the longer-term consequences?

RAOUL PAL: Yeah, look, I'm still a dollar bull. I still think the debt issue is a dollar bull-market driver. So I still think the dollar goes higher over time. But regardless of that, we know that nobody can deal with this dollar standard, that the US is 25% of world GDP and about 75% of all world trade in US dollars.

So the US dollar is oversized. It means that everybody's short of dollars all of the time. It's a structural problem. China and others who fight with the US want to have more autonomy out of that system. Countries like South Africa, who are commodity exporters, get penalized, because their currency is not as strong as the US dollar is. It becomes a real nightmare for everybody to manage.

So the IMF made it very clear last week that they want to move towards something different, based around central bank digital currencies. And more likely, we're going to see baskets of currencies, where you can have a commodity export basket or an Asian basket.

So they're going to try and move away from the dollar as the primary reserve currency. It won't happen overnight, and it's not going to be a massive collapse. But the chances are-- as I said, I think the dollar goes higher. But into next year or the year after, we'll see this move where everyone tries to start to decouple from this whole dollar nightmare scenario they've got. And I think the dollar then falls for an extended period of time.

EMILY MCCORMICK: Hi, Raoul, this is Emily McCormick. I have a bit of a two-part question here. First off, the future that you present is one where central banks have their own digital currencies and can give money to tax at different rates and alter interest rates directly for people, actually, who are using that system. I'm wondering what makes you believe that Bitcoin, in this whole process, won't be debased or delegitimized by the central banks as they try to build out the system.

And then the second part of my question is, what then happens to some of these other cryptocurrencies, like Litecoin, Ethereum, and Ripple? Do they get left by the wayside if Bitcoin continues to proliferate?

RAOUL PAL: Yeah, so I've read through the ECB papers, the IMF papers, the BIS papers, the Fed papers, and the Bank of England's papers. And they all state to say the same thing, essentially, is-- Bitcoin is here to stay. Digital currencies are here to stay. We're not going to try and compete with them, but we're going to create a digital world.

So they are regulating everything, putting it into place that this is a legitimate part of the system. So they bring the central bank digital currencies in, and it all becomes interoperable. So it all connects with each other. So it doesn't look in any way, shape, or form that they want to ban them, stop them. They understand the technology is out of the bottle. The genie is out of the bottle. There's nothing you can do about it. It's not going away, and it's too small to matter still.

So I think Bitcoin plays a role. And I think, as a person, it plays a role as the world's most pristine reserve asset for individuals, corporations, pension funds. It's an incredible asset, because it's the only one with a limited supply with growing demand. So it's like Metcalfe's law in a currency. It's an extraordinary thing. So I think that's ongoing.

In terms of the other cryptocurrencies, don't forget, they all play a different role in this ecosystem. This is not a currency game. This is an entirely new way of finance and trusted ownership digitally. This is the internet of money. So there's going to be lots of different platforms, lots of different ways of doing things, much like we have the Apple iOS and the Google Android system and all of these things that all speak to each other. We don't even notice.

So that connection of all of these systems is coming. And the central bank digital currency route is going to be the platform by which they can all connect in terms of ease of use and on-ramps and off-ramps into our normal lives.

MYLES UDLAND: All right. Really interesting conversation. Raoul Paul with Global Macro Investor and Real Vision. Raoul, so great to have you on. Open invitation to come back anytime. Hopefully we could talk sooner rather than later really appreciate you taking the time today.

RAOUL PAL: Absolutely great to be here. Thanks a lot.