Interview with the founder of Global Macro Investor: How does the global liquidity cycle drive the goal of a $1 trillion cryptocurrency market?

Raoul said that the current macroeconomy is in a "summer" phase, with the US dollar depreciating, interest rates falling, and debt needing to be refinanced. He pointed out that this is usually when the economy performs best, with the business cycle beginning to recover and investment increasing.

Edited & Translated by: DeepTechFlow

Guests: Raoul Pal, Founder of Global Macro Investor; Dan Tapiero, Founder and CEO of @10tfund & @1RTPartners

Host: Jason Yanowitz, Founder of Blockworks

Podcast Source: Empire

Original Title: How Global Liquidity Cycles Drive Crypto's $100T Target | Raoul Pal & Dan Tapiero

Broadcast Date: August 27, 2024

Background

In this episode, Raoul Pal and Dan Tapiero explained how global liquidity cycles could potentially drive the cryptocurrency market to a staggering $100 trillion scale. They detailed the concept of "The Code of Everything" and revealed how broad economic trends pave the way for explosive growth in cryptocurrencies. Pal and Tapiero delved into the economic challenges facing China, debated the impact of artificial intelligence on the job market, and shared their investment portfolio allocation strategies. From the potential for Bitcoin to reach a valuation of one million dollars to the rise of new Layer-1 blockchains.

Guest Company Background: 10tfund is an investment firm focused on investing in the growth stage of the digital asset ecosystem, while Global Macro Investor is an institution-level research service founded by Raoul Pal, focusing on global macroeconomic trend analysis and investment strategies.

Global Macroeconomic Liquidity Cycle

Overview of Liquidity Cycle

Raoul stated that since the global debt reset in 2008, countries have restructured debt by lowering interest rates to zero, which has brought significant advantages to the system. He pointed out that the debt refinancing cycle is closely related to the business cycle, typically occurring every four years. This cycle aligns with the cryptocurrency cycle and the US election cycle, indicating that the current period is a crucial cycle node.

Impact of Debt Refinancing

Raoul emphasized that the current debt requiring refinancing amounts to $10 trillion, and liquidity injection will help meet this demand. Major central banks worldwide are engaging in similar debt refinancing, with China possibly being the weakest link due to its shortage of US dollars.

Federal Reserve Policy and Global Impact

The two discussed the impact of the tightening policy of the US Federal Reserve on the global economy. Dan pointed out that the strength of the US dollar puts pressure on other countries, especially China. Raoul predicted that as interest rates decrease, financial conditions will become more accommodative, thereby driving the recovery of the business cycle.

Who is Driving the Cycle?

Combination of Government and Central Banks

Raoul stated that this is actually a combination of government and central banks, which are no longer independent entities. He pointed out that on one hand, there is a need to refinance debt and increase new debt, while on the other hand, it is necessary to ensure the management of these debts.

Investor Reaction and Market Dynamics

Dan further added that individual investors' decisions in asset allocation play a crucial role. He believed it is a complex power combination, and when global investable capital begins to move in the market, it will have a reflexive effect. He mentioned that market participants make predictions based on economic data and invest accordingly, which in turn affects the economy.

Definition and Impact of Liquidity

Yano pointed out that the decisions of the Federal Reserve are often based on data from a year ago.

Raoul explained the composition of US liquidity, including the Treasury's general account, reverse repurchase agreements, and the use of quantitative easing. He emphasized that these factors are interrelated, managing the flow of liquidity to drive the economic process.

Clarity of the Cycle

Raoul believed that the current cycle is the clearest macroeconomic cycle he has ever seen, although this situation will not last forever. He pointed out that with the release of liquidity, capital gains will increase, providing funds for fiscal deficits.
Dan also stated that due to artificially high interest rates, the current economic situation has become exceptionally clear.

Structural Changes and Technological Impact

Raoul believed this is a significant deflationary shock that many people have yet to realize is about to happen.
They discussed the improvement of productivity and how to address the issue of labor displacement. Dan stated that despite concerns, new technologies may create new forms of employment.
Raoul finally suggested that there may be more technological superpowers in the next decade, and while there are structural challenges, overall GDP growth may increase, and how to allocate this growth will need to be observed in the future.

Will the US President Affect the Economic Cycle?

Yano raised a question about whether the US president would affect the global liquidity cycle. He mentioned that although different presidents may accelerate or delay the economic cycle, these changes seem to be pre-programmed.

Relationship between Politics and Economics

Raoul believed that all presidents must finance the same deficit and cannot escape this situation through contractionary policies. He mentioned that since 2008, both parties have taken almost the same approach to economic policies, so the influence of the president is limited.

Changes in Capital Flows

Dan believed that while the president may not fundamentally change the economic cycle, they can influence capital flows. For example, if a certain candidate is elected, it may lead to a decrease in investor confidence in the US market, causing capital to shift to Europe or Asia. He emphasized that market reactions are often based on changes in data and policies.

Stage of the Current Economic Cycle

Raoul stated that the current macroeconomy is in a "summer" phase, with the US dollar depreciating, interest rates falling, and debt needing to be refinanced. He pointed out that this is usually when the economy performs best, with the business cycle beginning to recover and investment increasing.

Relationship between Market and Economy

Dan believed that liquidity enters the market first, and then the economy will recover. He mentioned that although some economic indicators may lag behind, the market has already reached historical highs, showing strong performance.

Why Aren't We in an Economic Recession?

Data Revisions and Economic Conditions

**Yano mentioned a tweet about an economic recession, stating that the Bureau of Labor Statistics will revise down employment data from April 2023 to March 2024 by an estimated one million.
Dan believed that such data revisions occur every year and do not necessarily mean that the economy is actually in a recession. He pointed out that over the past 30 years, data has always been revised, which is normal in the economic cycle.

Market Intelligence and Liquidity

Raoul believes that the market has foresight regarding these data revisions, so these revisions are not significant events for the market. He mentioned that the market will realize the weakness in growth, so liquidity needs to increase, and the market's response to this information is often much smarter than people imagine.

Changes in Economic Cycles

Dan continued the discussion, stating that although economic conditions may change, the overall trend is similar. He encouraged Yano to focus on how to operate his business rather than being overly concerned about complex macroeconomic factors. He suggested that businesses should seize the opportunity to improve efficiency using new technologies such as artificial intelligence during economic recovery, rather than blindly increasing manpower.

How Businesses Should Respond to Change

Raoul stated that as the business cycle recovers, corporate earnings will increase, driving growth in advertising spending and subscription services. He believed that the future outlook should be positive after going through difficult times.
Dan also shared how their company restructured its business using artificial intelligence and mentioned that some of their investment companies successfully achieved profitability by streamlining processes and introducing new technologies in the face of market challenges.

Best Investment Portfolio Today

Observations on the Current Investment Environment

Dan shared the results of a survey on global family offices, pointing out that these offices have very high allocations in cash and fixed income, with 28% in cash, 50% in fixed income, and very low allocations in commodities and cryptocurrencies, which has raised his concern about gold and crypto assets.

Portfolio Construction

Dan stated that portfolio construction should be based on risk tolerance. He recommended allocating at least 10% to blockchain, cryptocurrencies, and Web3 digital assets, and suggested using Bitcoin and Ethereum as core assets. Additionally, he mentioned considering venture capital funds and growth funds.

Role of Technology and Gold

Raoul believed that in the current investment environment, technology assets are an important investment direction because technology is in a long-term bull market. He suggested adding a certain proportion of gold to the portfolio to hedge against possible market fluctuations. He pointed out that the Nasdaq index has achieved an average annual return of 17% since 2011, while the S&P 500 index is only 8%. He emphasized taking a more aggressive strategy in risk.

Risk Attitude of Family Offices

Dan and Raoul discussed the risk-averse nature of family offices, noting that these institutions tend to be overexposed at the end of a cycle. They pointed out that while the current investment portfolios of family offices may be relatively conservative, these institutions will eventually increase their allocation to risk assets as the market changes.

Trading Cycle

Mindset for Cryptocurrency Trading

Raoul said that he always feels like he made a mistake every time he sells BTC. He believed that one should increase holdings in a bear market instead of trying to sell at the peak. He shared his experience of buying Bitcoin for the first time at $200, stating that if he had held onto it, he would be much wealthier now.

Goals and Risk Management

Dan also mentioned that he sets some target prices, such as considering taking profits when Bitcoin reaches a certain price. He believed that understanding one's goals is crucial in market volatility. He mentioned that some companies are about to go public, providing him with a natural exit opportunity.

Long-Term Investment Opportunities

Dan emphasized that the cryptocurrency market is the largest macro investment opportunity he has seen. He believed that the value of Bitcoin could reach $30,000 to $50,000, or even higher. He mentioned that the total value of the gold market is between $15 to $20 trillion, and Bitcoin could become a $100 trillion asset.

Emotional Fluctuations of Young Investors

Dan pointed out that young investors are easily influenced by emotions in market fluctuations, especially during price declines. He recalled his experience in his twenties, stating that after experiencing many failures, he is no longer sensitive to market emotional fluctuations.

Choice of Investment Strategy

Dan and Raoul believed that in the current market, there are two strategies to choose from for investors: long-term holding (HODL) and active trading. However, active trading requires more time and effort, and few people can do it. Raoul believed that many successful traders tend to prefer long-term holding rather than frequent trading.

Introduction to Limited Partners

Yano asked Dan what his current recommendations are, whether he emphasizes Bitcoin as a hedge against chaos, or better technology and currency.

Current Investment Environment

Dan responded that he mainly focuses on growth-stage companies rather than venture capital. He mentioned that there are unique opportunities in the secondary market to purchase shares of some companies at highly attractive valuations.

Opportunities in the Secondary Market

Dan explained that due to the collapse of FTX, many traditional private equity funds suffered losses in the crypto field, leading to a liquidity gap in the current secondary market. He mentioned that many large companies have hardly raised funds in the past year, and he is buying shares of some companies at a discount of 60% to 90%, which are still performing well in terms of revenue and profit.

Investment Strategy

Dan emphasized that their strategy is to focus on companies they already own and look for opportunities in the secondary market. He mentioned that he has invested over $600 million in four funds, becoming the largest buyer of these companies. He believed that the current market's dysfunctionality allows investors to acquire high-quality assets at reasonable prices.

Risk Management and Long-Term Perspective

Dan also mentioned that he prefers to hold cash-flow-positive companies for the long term rather than engaging in competitive startup investments. He stated that despite many young investors seeking quick returns in the market, their goal is to achieve long-term returns of 5 to 10 times. He believed that maintaining low risk while achieving steady returns is crucial in the current environment.

Outlook for the Future

Raoul added that the lack of liquidity in the crypto market presents many opportunities for investors. He mentioned that early investors sell tokens during market fluctuations, causing prices to plummet, which provides professional investors with the opportunity to screen for good opportunities.

Predictions for the Next 12 Months

Market Outlook

Raoul stated that he does not want to give specific price predictions because the online environment is complex and susceptible to attacks, but he believes the market will experience significant growth. He expected Solana to potentially increase tenfold from the current price, while Bitcoin could increase four to five times, which is consistent with typical bull market performance.

New Investment Opportunities

Raoul also mentioned that new Layer 1 projects will always emerge in the market, providing good investment opportunities in the early stages. He believed that while these projects may experience rapid growth and significant pullbacks in the short term, it is still a trading opportunity worth paying attention to.

Interest Rates and Market Impact

Dan further simplified the market analysis, mentioning that the current interest rate is 5%, and the price of Bitcoin is close to its all-time high. He believed that if the interest rate falls to 2.5%, the price of Bitcoin is likely to easily exceed $100,000.
Dan emphasized that despite many dynamics in the market, this point alone is enough to give investors confidence.

Innovation and User Applications

Raoul also pointed out that there is currently a lot of innovation, and on-chain activities are increasing rapidly. He believed that with the widespread adoption of user applications, especially breakthroughs in the gaming sector, the market will enter a new growth cycle. He mentioned that the transition from Web2 to Web3 will occur on a larger scale.

Impact of Elections

Political Atmosphere and the Crypto Market

Dan did not believe that a Democratic victory would have a negative impact on cryptocurrencies, leading founders to have to move out of the United States.

Historical Experience

Raoul also pointed out that the cryptocurrency market has experienced multiple national bans, such as multiple bans in China and India, but these have not had a substantial impact on the market. He emphasized that regardless of changes in the market environment, the decentralized nature of cryptocurrencies makes it difficult to stop them.

Confidence in the Market

Dan further explained that despite various negative emotions and uncertainties, the market is still able to overcome these challenges. He mentioned that many times the market's reaction is just short-term noise, and the real investment opportunities lie in long-term holding and patient waiting. He believed that the adoption of digital currencies is irreversible, just like the internet.

Simplified Thinking

**Yano agreed with Dan's viewpoint, stating that many macroeconomic analyses are overly complex and can lead to confusion. He emphasized that focusing on simple and clear investment logic is more important.
Raoul also added that investors should not be disturbed by market noise but should focus on the core factors that truly affect the market.

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