Video Transcription:
Global Crisis Meets Macro & The Future of Crypto (w/ Raoul Pal & Dan Morehead)
RAOUL PAL: Dan Morehead, good to get you finally back on Real Vision. It's the first time we've sat down to chat for a long time and you reached out recently because of your macro views and I thought who better to talk through macro and then where we potentially could go with this than you. I'd love for you just to quickly let people know why you're involved in macro, because people now know you from a different space than the world that I knew from originally. If you could give a bit of background about yourself, I think that'll frame everything nicely. DAN MOREHEAD: I started out as a fixed income mortgage trader at Goldman in the '80s, actually right before the '87 crash so I've seen one of these cycles before. Then you and I met when I was at Tiger Management, we were trading global macro, big disruptions around the world, trying to see things from a very global macroeconomic standpoint, and in 2011, I got excited about Bitcoin and had been full on blockchain since then, and up until recently. Global macro really had no impact on blockchain. The reality is the worlds are now all interdependent and global macro is going to have a huge impact on blockchain. In particular, the fiscal and monetary policies that are going to impact cryptocurrencies. RAOUL PAL: I must admit, it was a genius move of you to do what you did. That was the best macro expression I've ever seen, which is basically to say, and we've seen lots of our friends go through the same cycle, but you were by long way first saying all of the macro opportunities added together is less than this one opportunity set. This is the macro view. That was essentially what you did. It was incredibly prescient of you to do that. I just thought it was just an amazing thing to have done and you got in at the right time and understood it a long way before everybody else. DAN MOREHEAD: Thanks. I've been fascinated by these disruptions that come along, Russian privatization, or Argentine farmland or Tesla Motors, every three or four years, some little shiny object in the forest that I pick up and try and figure out and spend a year or two investing in it, but I do think blockchain's literally orders of magnitude bigger than all of those trades and I think it's the second half of my career. I'm really excited to stay focused on it. RAOUL PAL: Talk to me through how you're perceiving the situation now, let's dig into the macro because there's a lot going on. A lot of people are confused where we are now and some of the probabilities of how things play out. Then we can dig in and chat about things as we go. DAN MOREHEAD: The first main thought is I'm not an epidemiologist, so I'm going to leave that to others, but having studied 35 years of global economics, this thing is just bigger than anything since World War II. I think even I'm trying to get my head around that. I think a lot of economists and market participants are still not yet appreciating how large this thing is. Here's just one quick thought experiment is the least bad way to combat the virus is for everybody on Earth to shelter in place for two weeks. At the end of that two weeks, we test everyone and those who are infected get medical treatment and the rest of us go back to work. That is absolutely the least bad alternative. Even that, if you take two weeks divided by 52, that's 4% of global GDP. That is just such a huge number. Yeah, some of us can work remotely like you and I are, adding a little bit to GDP here but for most people, most industries, it's very difficult to work remotely. The least bad outcome is 4% to global GDP. Then the unfortunate reality is this virus is ebbing and flowing around the world in a very asynchronous way. China who led us into this crisis a few months ago, is actually starting to come out of it, right at the same time, countries like the US and Canada and Europe are right in the essentially the nadir of it. Then there are other parts of the world that have yet to experience it, but unfortunately, are likely to. As this thing washes around the world at different times, it's essentially extending the amount of time the global supply chains are down. RAOUL PAL: My big concern is the market wants to believe in the old world, which is, it's an event like 9/11. You take the hit, there's a bit of a shock, and we return to normal. I look at two factors within this, one is the rolling nature. Countries like Brazil barely started in this cycle, while other countries are more advanced like South Korea, Singapore, or even Italy. The US has really messed this up in terms of how that works. I worry that this rolling cycle continues as huge and much longer than people anticipate. It's not a threemonth event that the market's hoping for. I also think that it's a lot more psychological damage that comes from this even when you reopen the economies. The Prime Minister of Singapore made an amazing speech explaining that, listen, Singapore is not going to open his borders, probably not for a year, because I can't. He said, look, we're going to have to take this hit, but nobody's going to be freely traveling, nobody's going to be congregating in groups. Barring a miracle, this thing's around for a long period of time so if you don't get a one-off GDP here, you end up with a drawn out recession. DAN MOREHEAD: Raoul, I think you're spot on. It's unfortunately our central case is that this will be drawn out for many, many months and there is a psychological impact to it. If you think about all other recessions, they're created by a lack of either credit or income. If the government provides those things, we can all get back to work and it's all fine. In this case, it's a psychological impact. This is all very distressing, and it'll be really hard to get people back to work in a lot of the economies, the consumption of services. I was thinking about how tough the Fed's job is here. One problem is they're already so close to zero like all other central banks when we came into this that they really had little to do but their last cut was 100 basis points, I think that's impudent like hey, honey, the Fed cut 100 basis points today, let's go to the movies. Like it doesn't have any impact. They could cut rates thousand basis points and wouldn't go to a movie theater. I think that is going to make this last a lot longer than people think. China's trying to reopen and there's a great photo of a movie theater absolutely empty like even if they're officially open for business, the psychological damage is going to take months or you even suggested, potential years. Then your point about 9/11, we actually mentioned that in our investor letter, there's already talk of this being a V-shaped recovery and it's just going to be right back to business as usual. I think there's so many things that I have no idea what's going to happen. This is incredibly uncertain time. One of the only things I really believe strongly is it's not going to be V-shaped, that comparisons to 9/11 are really starkly different. In that case, every aircraft was grounded for three days. Then three days later, every aircraft was in the air and commerce could restart. This is just the effect has been slowly percolating. The CDC knew that this was a problem in China in late 2019. This already, we're going into our fourth month of this. We're just starting to attack it. It's going to take many, many months to really bring this under control. RAOUL PAL: Yeah, but I've been looking at China because if China started this first, then we should be able to understand what lies ahead for us, it's worked pretty well to use them as a roadmap. Now, obviously they lied about that the numbers and et cetera. That's irrelevant for now. What's interesting is they've forced people back to work. We've seen factories start up again, we've seen pollution go back up. Problem is one, who do you think they'll sell those goods to? You're creating I think a default cycle not only in China but around the world. I think there's a solvency crisis that we have no parallel for that is coming. Additionally, if I look at simple stuff, like really fascinating, TomTom produces traffic data for any city in the world. You look at the traffic data for Beijing, it's almost at normal during the weekdays as people get to work, weekends down 80%. People aren't going anywhere. I just spoke to somebody who was in Beijing, and they're talking about restaurants. Yeah, restaurants are open, the problem is there's only 10 tables and you're only allowed three people in a table and there has to be social distancing. In a restaurant business, which is low margin business, you basically, you're compounding negative returns. It's that destruction of cash flow that really worries me in this that we end up with a default cycle. As you rightly said, the governments have started to try and inject money to repair balance sheets, i.e. at household level. The problem is they're not offsetting people's wages so you're basically just giving them subsistence living. That doesn't drive consumption, it's not stimulus. It's just trying to paper over some of the cracks. DAN MOREHEAD: I agree. I think it's unfortunately true that in past recessions, fiscal or monetary stimulus always could cure the problem. I really think they have very, very little efficacy here, unfortunately, because even if you replace the lost income, nobody wants to go to a restaurant, or nobody wants to go to a movie theater. I do think China and other countries like Korea and Taiwan are really good case studies of how to combat the virus. I think it's very important to note that China basically walled off 60 million citizens in Wuhan on January 23rd when they had only 17 deaths, and most other countries have taken less drastic measures way later in the cycle and so I think we'll end up with a larger economic hit and China is going to endure. RAOUL PAL: What's your view of the US situation? Because that's the one that seems quite concerning and I think it's the one which will drive potentially monetary policy and a whole bunch of other stuff, fiscal stimulus. What's your view of the US situation and how that's going to evolve? DAN MOREHEAD: I would say I don't have any deeper insights than the experts on it. I'm not the guy to say it, but from an economic standpoint, it seems like this is going to be a really big hit. The call now from Goldman Sachs is the 34% annual rate fall in GDP. That's just the number you and I've obviously never seen, will leave GDP 6.2% lower than it was. Honestly, I think that's highly likely, if not more. Again, if you go back to just the, if we all just didn't work for two weeks, and then we all went right back to work doing 100% of what we used to, that's a 4% hit to trend GDP. If trend was 2%, that's minus two. I think we have to keep in mind that the US is not even really into the worst part of this problem and so it's going to be many, many months until it's worked out. RAOUL PAL: What is the role you think that the government and central banks are going to play in this on a global level? What are they going to do? Because that's the next phase, is looking forwards and is trying to understand what they do, and whether they can address any of this and how excessive monetary and fiscal policy becomes. DAN MOREHEAD: Well, yeah, they certainly can be helpful, and I'm encouraged that they have been engaged very quickly. This is a totally different thing we're fighting. We're fighting an invisible virus rather than a lack of income or lack of credit. The coordination that we're used to where the Finance Minister and the central bank governor of all the countries who are used to working together and used to using monetary and fiscal policy tools, to combat these things that are very well studied, very well known what to do with a lack of income or a lack of credit. That's not the issue here. The issue is a medical one, a science one and so we are at war. I think it's a good analog. In physical wars, you have the general give the press briefings and talk about the issues in the war. In this, it should be the scientists that are telling us what the issues are and what are tradeoffs are, scientists and economists because it obviously is a tradeoff with the economy, but those groups are not really used to coordinating. In the United States, good example of three or four different health organizations that each have some remit here and coordinating between them is difficult. They're not used to coordinating with the Fed and with the Treasury and so it's very unprecedented policy challenge. Unfortunately, I think the fiscal and monetary stimulus are going to have less impact than people would hope. In the last crisis, the US was able to cut 437 basis points. Here, we only had 150 basis points of ammo left. Then globally, the world was able to cut 298 basis points in the 2008-2009 recession. Here, we're only going to get 55 basis points on average of global rate cuts. We're seeing one fifth of the monetary stimulus we had in the last recession. This is much bigger recession, so if we wanted monetary policy to be effective, we would want much more of it. Unfortunately, the one policy lever, monetary policy is really tapped out. Then the fiscal policy, we've seen a 10% of GDP stimulus signed days before a new stimulus plan has been talked about. These are just numbers that are literally off the charts. I think it's almost certain that the United States is going to exit this crisis with more debt than after the battle against the Great Depression and World War II. That's just an amazing place to be. We entered it with a very large structural fiscal deficit, the US was spending 31% more than it was taking in even with record employment, record stock prices, record real estate prices. Essentially, just creating a ton of money, increases the quantity of money. That's the whole objective of quantitative easing, is to increase the quantity of paper money. It's already having its intended effects, a very clear policy goal was to raise the level of stock prices relative to where they would have been otherwise. That is obviously working, but it's like hydrostatic pressure is going to raise the level of all assets that are not quantitatively usable. It's going to raise the level of real estate. It's going to raise the level of gold and cryptocurrencies and dozens of other things. RAOUL PAL: Using your macro viewpoints, if you weren't in the crypto world, what would you be doing now? How do you see this evolving in market terms? DAN MOREHEAD: That's a great question. Since I hung up my global macro cleats seven years ago, I really don't want to get over my skis here. The only thing I would say is relative to what everyone else is talking about, I think it's going to be a much bigger and longer recession than other people are talking about. All things being equal, I think it's probably negative for equities. Then I think in the end, you're going to see a divergence. There's always this knee jerk reaction in a crisis. Things like the dollar and treasuries always go up, flight to safety, potentially repatriation of assets. Developed countries selling emerging market assets to bring them back to their country. They trade weighted dollars up about 5%, I think. I would have to say, I think in the long run, all of the essentially the easing of the quantity of money in countries like the United States relative to some of the other countries on Earth, is probably negative for the dollar. Again, I haven't looked at the global macro markets very closely for a long time. That's just a hunch, not something I put some money on. RAOUL PAL: I'm more fearful because if we go through a solvency event, the largest financial position on earth is the $13 trillion short position held by foreign corporations in US dollars. I worry that as global cash flow goes negative, the chance of servicing that debt becomes almost zero. You have to go through a default cycle in generally emerging markets. That makes me fear that we get a much stronger dollar. My view for a long time has been this cycle breaks not from the weak dollar but from the strong dollar and eventually forces the other central banks who have been talking about this already, that the dollar standard is not something that is manageable any longer. It's broken. Triffin's dilemma is at play and as a reserve currency, there's not enough dollars abroad to deal with this. That's what I'm fearing, and I pick up a lot from the central banks, Mark Carney was the first one to make it clear that he'd love to move the Bank of England away from this dollar standard. The first step is towards a digital currency world. I don't know what your view is. Okay, we know this is screwed, my view is this is probably going to be the biggest insolvency event of all history. That's going to take a strain on the financial system and possibly force the dollar up. I don't know what your views on that is, and then where does this go? DAN MOREHEAD: Yeah, I love that US Treasury Secretary Connolly in the '70s said the dollar might be our currency, but it's your problem to Europe. It's a fact of the world that the dollar is the reserve currency right now. That's changed every 80 or hundred years over the last six centuries. It used to be the Portuguese escudo and the Spanish real, and now it's the-- then the pound, and now, the dollar. There really isn't another candidate in the fiat currency world. I do think in the long run, and this is decades, cryptocurrencies will become reserve currencies. Whether it's Bitcoin or Ethereum, Ripple, whatever, ultimately, some of those will be reserved currencies, but government's very slow to change and so I think that's a 10 to 20-year very slow progression, but that would be the answer. I actually thought the original construction of the Libra project that Facebook created was genius is to use a basket of four currencies. You're creating like a virtual SDR. The SDR is a great concept, but you couldn't actually transact in it. Creating a basket of currency where the Libra does it or somebody else does it, somebody will ultimately do it. That could easily become a reserve currency. It would be essentially like-- yeah? RAOUL PAL: I love the fact that the dollar was part of the basket. Therefore, the basket itself should only move up and down with let's say, global money supply. It becomes a true stable coin in our terms of the different world. That's an extraordinarily powerful thing. I think most people didn't understand what Libra was, until it came out. It looked at it was like, oh my God, this is game changing. DAN MOREHEAD: I agree. I thought it was beautifully designed. I thought they did an amazing job designing it and there was so much fuss about the rollout and that all the lightning rod attention to Facebook, the brand, but the product they designed was genius. Hopefully, they'll get theirs out but if they don't, someone will do something very, very similar to it. That's essentially what everyone on earth wants, is a currency that's tied to, if they're European, it's tied to the euro. If they're Japanese, it's tied to the Japanese yen. If they're in the United Kingdom, it's tied to the pound, and US tied to that. It's not too volatile relative to their own currency. If they're in some other country or region, it's not very volatile. I think it's the best of both worlds. It's not pegged to one single currency, but there's not crazy volatility, like Bitcoin or Eth would be. Ultimately, someone is going to do that. Then central banks will start using it. Again, it's going to take decades, but central banks will start using that, it's the only way I see to get away from the dollar hegemony that people are always griping about. RAOUL PAL: I'm a little more bullish on the time horizon because I think this event is bigger than people could understand. If there is an event that breaks the system, or at least forces people to adopt different things, and they would have adopted at this stage, I think this would be it and again hearing Benoît Cœuré of the ECB, and Mark Carney and a bunch of others talking about digital currencies, it feels like they want to move towards this basket idea. Now, whether it's done with Libra without Libra or something, I think they've all spoken about how the dollar standard just doesn't work for them anymore. I'm not so sure that that might be the surprise outcome of this which will massively help all the cryptocurrency world and everything else because then, the world is digital off ramps and digital on ramps. DAN MOREHEAD: Yeah, you're right. I think that one of the important things to do in this distressing time is think about the silver linings and the things that are positive about this massive disruption in-- like you and I working from home remotely might be part of it. The whole world might change how they actually do business. There's a lot of good things that could come up. You're right, really focusing on our monetary system, we might end up with blockchain being accelerated by it. I've seen great examples. We're invested in a company that helps people move money using physical fiat money, bills and coins, converting it into bitcoin and being able to send it to their family wherever they live, either domestically or often in a remittance payment. They're seeing record volumes because the fiat systems are grinding to a halt, where you can still go to the safe way, pump $400 in the machine and have it pop out the other end. I think you're going to see some use cases where blockchain really comes with its own in this crisis. RAOUL PAL: How are you seeing the space evolve and things must be accelerating. I've always thought of it as it's like a hive mind of people developing an entirely new architecture. It's not just a financial architectures or ownership architectures or trust architecture, it's a number of things. It feels like there's a hive mind of some of the smartest people I know, are all focused on it. It's a huge group of people. What are you seeing that's surfacing now out of this that's getting your interest? DAN MOREHEAD: The way I'd see it is in our seven years of investing, we've seen a bunch of different eras. The first year was all about just exchanges and custodians, and really basic ways to buy bitcoin and then ultimately ripple and Eth and other things and store it. That was our first year to these investments. Then the next level is using cryptocurrency and in most cases, Bitcoin originally, to do some cross border money movement thing. We're invested in probably 12 or 15 companies around the world that help people move money across borders. That's the thing is really coming into its own right now. It's really been effective. If you think about it, the average cost of remittances right now for the hundreds of millions of people that migrate to earn money for their families is 9%. You and I are in the financial markets, none of our base points, whatever. It's just a number. That's a month's wages, the migrant spends an entire month working for their remittance company, and their family only gets 11 months wages. The companies that are doing it with blockchain, essentially are the interregnum solution, like ultimately, people will just have blockchain on their phone and they won't need a company in the middle. For the next 10 or 15 years, they're going to use these companies that charge say 2% or 3%. They're seeing very, very strong growth. A great example of that would be 5% of US to Mexico remittance is going over Bitcoin right now. That's pretty wild, like it's a real use case. That's helping humans and saving the money, get more money back to their family. That's what's really happening right now. Then the companies we're funding our the next level of that, they're doing non-financial use cases, they're doing scaling solutions. The two biggest blockchains, Bitcoin and Eth, can only do seven or 10 transactions per second. In order to compete with credit cards, we have to do 15,000 transactions per second. If we want all the promise of micro labor, micro payments, we have to do orders of magnitude more than that. We're investing in a lot of projects that help scalability. Then as you and I know, there's a lot of plumbing to trading, order routing, order management type systems. Some of our most recent investments are in companies like AMBER and Tagomi that help traders trade these things and since we've essentially been there first at doing all these different things, we've had to prototype everything ourselves and so we had to build all our order routing and stuff. It's really hard. There's hundreds of exchanges that trade cryptocurrencies and then all these different regulatory environments where it's really hard to move money around. There's thousands of tokens you could possibly trade. It's a very complicated business and there's huge need for companies to help traders do that. There's journalists in this space, like the block that we're invested in. There's just a whole lot of different ways. We're essentially creating a new financial system built on blockchain. You need one of everything you have in the existing system. RAOUL PAL: How about custody? Because custody is one of the things that worries me in a solvency crisis as you and I've gone through many times is who owns all the shit in the end is one of the hardest questions to solve. How is the space working on this issue? Because trusted ownership is one of the great things about blockchain. Who's doing that for the securities industry and all of the assets that we all own in this? DAN MOREHEAD: In crypto, you're essentially custody-ing a password. You're really just trying to keep custody of the private key that can move the cryptocurrency itself. The custodians in the industry, like Fidelity or Coinbase, or Bakkt or BitGo, the hugely important thing about them is they employ no leverage. In the fiat system, you have Lehman Brothers or whomever that are employing 40 to 1 leverage across their balance sheet so when something bad happens, problems have nothing to do with the assets they're trying to custody, essentially just wiped through everything on their balance sheet. I think the hugely different scenario here is blockchain custodians aren't levered so there's no systemic risk. Then they're normally essentially isolated from the financial markets. There was a time when the biggest custodians of space, which at Mt. Gox, which at the time had 85% of market cap, they went under, essentially, without a ripple, the price of bitcoin was up a week later, there's no federal bailout of MT. Gox. It's because they're unlevered and not backstopped by the government that essentially keeps them safer. RAOUL PAL: What about the transition of the existing securities onto blockchain? What are the DTCC and people like that doing? I don't know what tZERO are doing. How does that evolve? Because we're going to have a need for that because we can't have another Lehman event and in a big solvency event that's potentially going on now, we're going to run into problems again. It feels like it's going to be the time and a place for blockchain to start doing that part of the custody. DAN MOREHEAD: It is, and one of the lines I love using about blockchain is that when a technology is massively disruptive, they call it a category killer. Blockchain's a serial killer. It's going to go through dozens of different industries, including securities, transactions and settlement. The hugely important part of that tagline is it's going to do it serially. It's not going to do everything overnight. We go through these manic waves in blockchain where in 2013 or 2017, everyone's thinking oh, blockchain is going to change the world overnight. Then we go on these depressive waves where oh, it's a failure, it didn't do anything. The reality is somewhere in between, and it's going to do different industries at different times, I have been of the belief for a long time that the Wall Street bit of blockchain, it definitely can happen, but it's like a decade from now. The reason is, it's just so complicated, and it actually works pretty well like you and I've been in Wall Street for a long time, you can bitch and moan about DTCC or whatever, but they process 100 million transactions a day with an incredibly low fail rate at incredibly low prices. Like all these-- TD Ameritrade, they're going to free trading, what's the problem with free in two plus two, it's just not that big. It's not broken. Whereas like if you're a migrant and you spend the entire month of January working for your remittance company, that's broken. I think it will transition to blockchain, but I think it's going to take a decade. There are some really exciting projects people are trying to do in this space but as a firm, we've essentially passed on all the centralized Wall Street back office blockchain projects. RAOUL PAL: There's several big ecosystems out there between Bitcoin, Ethereum, Ripple, EOS, how do you see the evolution of those and how do they all play together? I'm incredibly concerned how tribal it all is right now, but I know in a pragmatic world that there's a space for everybody. What's your view on all of that? DAN MOREHEAD: Yeah, it's a fascinating question. I'm sure there's some great movies made about this someday. I would say there isn't a space for everybody but there isn't a one take-off. That's a really frustrating lukewarm water answer to your question, is that we have 2000 tokens right now, I don't think we're going to have 2000 and I don't think we're going to have just one. There is a bit of an almost religious fervor in this space where the disciples of one group will be really, really excited about the other group. The punchline of this call long, I think there's going to be single digit number of very important blockchains. Each one's going to have its own use case, and it's already starting to shape up where you're seeing Bitcoin, not really changed very much, but being really good at storing wealth and so people like to call it digital golden, and I'm fine with that. You see Ethereum be really dynamic and you've already got an Ethereum 2.0 and it's really changing, really ambitious and then you have the next generation of things like Polka Dot that are coming that are doing very ambitious things. Then Ripple's taken an enterprise SAS version of this and trying to work with all the banks and work with all the regulators to essentially replace Swift. They probably don't like it when I say it like that, but I think it's easy shorthand for what they're trying to do. I think there's space for eight or 10 of those use cases in the long, long run. The main point is, we're not going to have hundreds and hundreds of very similar "all coins". RAOUL PAL: What is your view of tokenization? My particular view is that what we know of equities and fixed income won't exist within x period of time, whatever that period of time is, because tokenization can do a whole lot of things that currently equities can't do, or fixed income can't do. You can isolate-- I always use a great example, like a company like Exxon, maybe you want to buy their upstream and I want to buy their new green energy business and somebody else wants to have an investment in some of their assets, in their physical buildings. The idea of a corporation, which is to turn a company into a physical person by legal rights, I don't think has to exist in this world. I think that there's a huge change coming on what can be tokenized. We've seen it with people, obviously sports stars have started to tokenize themselves. There's a number of things. I just think the securities markets that we know of old, if we go into the future 20 years, will not look anything like the securities markets that exist today and have existed for the last hundred years or so, 200 years. DAN MOREHEAD: The things that don't work very well now, like say, music world rights, well, blockchain can add a ton. That's a great example of where like there's millions and millions of transactions happening every day. Each one's worth a fraction of a penny. There are often dozens of different people who own a piece of that work that's being streamed somewhere. Then you have a whole industry of these middlemen, accountants, agents, whatever that are processing payments. They call it Hollywood accounting for a reason, like the money always seems to get lost, and the artist ends up with a very small fraction of it. The blockchain could do an amazing fix to those broken systems like that. I think those are going to be really, really important. Replacing existing IBM shares or whatever, I'm less bullish on-- again, going back to DTCC does a great job, it's almost free. It takes only a day or two, so it's not really broken. I started my career as a CMO trader so you're slicing up cash flows, like you were talking about on upstream versus downstream. There are some uses for that. There are some people that want that, but I'm not sure it's a big enough use case. There was a huge push to do securitized illiquid market assets like real estate a couple years ago. We invest in a couple projects and looked at a ton of projects. There was a lot of talk about if you invest in commercial real estate, it's really illiquid and if you tokenize it, it'll be completely different. Some people did some projects and you realize, oops, maybe not everybody wants to buy a fraction of a building in South Carolina. Just because it's a token doesn't mean there's going to be 1000 people lining up under a Buttonwood tree somewhere to start trading it. That would be my only caution is that just because it's a token doesn't mean there's going to be 1000 people that are excited about trading it. RAOUL PAL: No, there's no liquidity and it's very early days. I'm just conceptually interested in where this could lead to because if this is, essentially an invention and a revolution all combined, well, then most of us will not be able to forecast the probabilities of the outcomes. The outcome is going to be very different than we think with something so life changing as this, much like the internet, we had no idea where that was going to go. DAN MOREHEAD: The one thing I would say on securitizing actual normal physical assets is it might not change your and my life because we have accounts in the United States and trade those things. If you're one of the 6 billion people that's not involved in it, securitizing it would be great. Like if you think back to the dot-com boom, if you want to buy a share of pets.com, you actually had to be an American citizen, even like a wealthy German would have a hard time figuring out how to get a hold of some pets.com stock. Here, anybody with a smartphone can buy a tokenized security. It will massively open up the access across borders for securitized assets, even IBM shares, somebody in Indonesia with a smartphone could be able to buy a tokenized version of that. RAOUL PAL: Looping back to the macro scene where we are right now, people are confused why Bitcoin's not done so well, because I think they're thinking of it as a hedge to traditional markets and I say slightly different now, serve as a call option in the future on a future system but how do you perceive it? What do you think about the price action of Bitcoin and how this might evolve over this, call it next 24 months? DAN MOREHEAD: That's a great question. Obviously, that's what we spend our time trying to figure out. The one thing I would say is, I don't think I would have called it a hedge to the global macro. What I would have said is it's uncorrelated with global macro. That is, I think its strongest advantage is over long periods of time, it has very little correlation to everything else to gold, oil, S&P 500. In the down spikes, there've been five down spikes since Bitcoin really became tradable. In each of those, it spent an average of eight weeks correlated to-- with 0.5 positive correlation to the S&P. When the markets gapped straight down, Bitcoin does gap straight down with it, but over a period of weeks, that correlation starts to break down. It starts to trade on its own based on its own fundamentals. When this crisis started, we actually reduced risk in our hedge funds, but we've already covered that back and are now fully long in our discretionary funds. Because as the dust settles, the correlations are going to break down again, like they have historically, and it'll be able to trade on its own. Then when people see oh, Bitcoin and other blockchains are actually quite useful when a bunch of these other systems are starting to get hampered by all the restrictions in the physical world. People will start realizing the fundamentals are not only affected by this crisis. They're actually quite positive for blockchain itself. Our forecast is Bitcoin's probably going to do very well, but it's over the next 12 months, not the next 12 hours. We send our investor a letter couple weeks goes, we think it's going to take two or three months for institutional investors to basically just triage the damage to their existing portfolio assets, just trying to figure out what the heck has happened. Then it's going to take three to six months to really look at new opportunities like distressed debt. There was 10 years of no distress at all and now, there's going to be all kinds of amazing opportunities. There's going to be things like gold and cryptocurrencies. I think it is going to take six to nine months for the markets really to get going, but I think everything-- we've taken a super sober look at this and there's some really big economic impacts, but the only conclusion we can come to for cryptocurrency is that in the say six to nine-month timeframe is going to be very positive. RAOUL PAL: One of the things that that correlation that picks up to the S&P is simply liquidity. It's everything gets correlated, has a correlation to one an illiquidity event, and that's okay. As you say, then decouples very quickly, then it has zero correlation, which is extraordinarily powerful as an asset that has, yeah, it's not a huge asset, still whatever, 200 billion or just under, but it is very powerful to have an uncorrelated asset in this world. Everybody I speak to is definitely becoming interested, the family offices. I don't know a family office, really, that doesn't have a bit of it now. DAN MOREHEAD: We've taken that thought process one step lower in our analysis and within blockchain, we have very similar phenomenon going on, is that in the immediate down spike, everything becomes highly correlated, and Bitcoin typically outperforms, and so it has outperformed everything else in these stressed markets. One of our first moves was to increase, basically double our Bitcoin exposure at the expense of the smaller non-Bitcoin assets. Then we also increased our systematic trading, which does well in very stressed markets. Another view we hold in crypto is that Bitcoin is going to outperform, again, for a period of say, three, four or five weeks, that order of magnitude, not months or years. Then over time, we'll reduce that and get back to our normal allocation. The other thing to think about is, this is actually the best time to invest after a crisis. If you look at the returns for venture, for the years, the decade coming up to the last crisis, so 1999 to 2008, the average return of venture funds was 6.28%. These are numbers from Cambridge Associates, one of the most respected advisors out there. Then in the years 2009 to 2015, the returns tripled to 18.21. That is our strong view, is that over the next two or three years, there's going to be some great opportunities to buy things at much cheaper valuations. Then we were seeing a year or two ago when everything was at record highs, the whole world was perfect. RAOUL PAL: That's total sense. Again, this is still early phase so the ability to be able to pick up cheaper investments in the space, if you're right about the macro view about where this is going, and obviously, I agree with it, we don't get many of these opportunities in our lifetimes is my view. I've not seen risk rewards like this, ever. DAN MOREHEAD: That's why I'm all in, is that like you say, this is a call option on the future payment rail of the world and yeah, it could go to zero, but it could go up 10x, you just don't see those trades in a generation. RAOUL PAL: What do you think is going to happen to all these central bank balance sheets at the end of this? Because if this goes on a bit, they're going to have to do extraordinary amounts. That obviously should help Bitcoin in the end. What's your view on that whole situation? DAN MOREHEAD: I lived in Japan, I was trading interest rates, Nikkei, back in the early '90s. They had overnight rates at 6%. Then they had what they call the Japanese recession, which was sub 3% growth, and then oops, it's a real one. They invented zero interest rate policies, or they called it the lost decade. That was 25 years ago like, rates I think are going to be zero for the rest of our careers. With that, with no more monetary policy as a lever, then you have to start extending what assets you'll put on your balance sheet and how much money stocks to create. We've seen the first fiscal stimulus package the US Congress passed was $8 billion. That was about three weeks ago. Now, we're at 2 trillion. There's a great line attributed to Senator Everett Dirksen, a billion here, a billion there, pretty soon you're starting to talk about real money. It's trillion here, it's trillion there, it just has to have an impact. We're already seeing it, the intended impact's already helping the S&P be a lot higher than it would absent that stimulus package. Real estate doesn't have any real time pricing. It's hard to see where that is, but it's obviously higher than it would be had the $2 trillion not been allocated. I think you're going to see it in all other assets. Cryptocurrency just being one of them. RAOUL PAL: Gold is the other one that people focus on as well, but it's traditionally done well in these markets when the value of money broadly falls because there's excessive amounts of it. DAN MOREHEAD: Crypto is a lot from its low on the 12th or 13th , it's already up 40% or whatever. You are seeing the impact start, but I think over the next 12 months, you're going to see it more fully get priced in. RAOUL PAL: I'm personally accumulating as much crypto, Bitcoin as I can right now, just because I too believe that within this, the hard money elements of Bitcoin, even discounting for the volatility, but looking at the risk reward makes it an extraordinary opportunity that I have literally never seen before. As you know, I've been involved in this space on and off since about 2012. I just don't see any other outcome. I've never-- even for gold as well. I think, look, gold can go up three to 5x, Bitcoin can go up 50 to 100x over the next five years. You don't see a whole asset class go up 100x, but you've seen it, because you've been involved from the beginning, I guess. Also, how do you deal with the volatility? When you first got into this, you're not used to taking 90% drawdowns but now you are. Talk to me a bit about that. DAN MOREHEAD: Oh, yeah, I know, it's hard. The market's super crazy. It goes up 1,000% and down 90%. It's already done two huge round trips since 2013 when we lost your fund and a couple big ones in the year two prior to that, when I was studying it. What I try and tell our investors, I try and tell myself is, even though this-- it's basically a venture with a real time price feed. You're investing in a very early stage project but there are tokens that trade on little apps every two seconds. What I like to tell people is although our Bitcoin fund offers daily liquidity, you should invest with a five to 10-year horizon and try not to look at it. It is true that for anyone that's ever bought a Bitcoin and held it for four years, they've all made money. If you can do that, that's great. Unfortunately, human nature is very procyclical. Unlike many others, when it's going up, it feels great and you feel so smart and you feel like you don't have enough and then when it's down 80%, you're super bummed and you're trying to rationalize why you ever did this stupid idea anyway. I might only suggest to people try and think about it in a five to 10-year time period and only put in as much as you can afford to lose, because there is a chance that all goes to zero, but there is a chance that goes up 10 or 20x so try and stay focused on the super long term. Then we've seen in our own inflows massive pro cyclicality, huge fractions of inflows coming at the highs and very, very little comes in like right now when the market's way down. If you're an investor and you have the emotional and financial resources to invest, you want to invest at the lows, and then potentially scale out at the highs rather than having the FOMO devil whispering when it's at 20,000 and getting in. RAOUL PAL: You must have a wry smile in your face when you see one by one of our old friends, the old macro guys all coming across to you, whether it's John Burbank, whether it's even Dan Tapiero, whether it's Alan Howard, whether Jim Palazzo, you name it, one after the other is basically crossing the Rubicon and going into this new world. You were the leader in that by a long way, so I'll give you credit for all of that, but it must make you laugh a bit. DAN MOREHEAD: Oh, it's great. No, it's great. It's all the old same friends of mine, like Mike Novogratz and Ivan Palin and after 35 years, we're still doing it. It's hysterical. I think it's because our job has always been look for big global disruptions. Man, this is disrupting global payments, remittance, gold, and it's disrupting money and money is a $100 trillion market, now $102 trillion. It's not surprising there's a bunch of global macro investors that are the ones that really, really are embracing this. RAOUL PAL: Disrupting money. That's a great, I've not really thought of it that way, but it is disrupting money and the whole system of it. DAN MOREHEAD: There's a lot of people even get religious about money, because money is one of the only other faith based systems on earth. There's nothing intrinsic behind the US dollar, it's just a piece of paper. People get super fired up, the dollar is great, and we don't need another currency and all that. They forget there's 200 currencies on earth already, like, why not have 201? Bitcoin's just one more currency. There's already 200. The US dollars one of the least bad paper currencies out there, but 6 billion people live in countries with terrible currencies. Bitcoin or Eth or Ripple or whatever, if they switch their entire economy to Bitcoin, it'd be way better. That's why people should just keep it all in perspective, there's already 200 currencies. This is just like 201 through 210. RAOUL PAL: Just want to ask you one question, because I don't really understand it. What is the value of stable coins apart from transaction across platforms? Why the focus on these stable coins right now because they're basically US dollars, but in digital format? DAN MOREHEAD: There are a couple advantages, all tokens, including stable coins have these two principal advantages, they're borderless. Venmo is great, but I can't Venmo somebody from here to Indonesia, but I can send Bitcoin to somebody no matter what country they're in. That's awesome. They're essentially real time or instantaneous. Even the United States, which is one of the most sophisticated countries on earth, it takes three hours to send a Fedwire. If the most sophisticated bank on earth wants to send money across Wall Street to another very sophisticated bank, it takes three hours, whereas with a phone, you can scan Bitcoin in one second, and it'll be there. Those are the two principal advantages that will help even a dollar-backed stable coin or any national currency back stable coin, just much faster, much quicker, and it's borderless. If you had one that was in global use for commerce, it'd just be a lot easier, like a global Venmo, you'd be able to get on a bus. RAOUL PAL: That's what Libra is, if they get off the ground. DAN MOREHEAD: Yeah, that's the goal essentially and that's what the Chinese version of this is, is to try and make a digitally native currency that is easy to transact instantaneous, essentially free. It cost 35 bucks to do international wire. Like think about that, like if I wanted to send money to you, it would cost $35 back in the old days before the ban on international travel, it'd be quicker for me to go to the airport with a brick of cash and fly to the Caymans than it would be to wire it to you because it takes a couple of days. Even stable coins have huge advantages over our existing system. RAOUL PAL: I hadn't thought of it that way, but yeah, it's ridiculous. It's ridiculous that physically, you can move the cash faster than the system can actually process it. DAN MOREHEAD: Yeah, yeah. It really is, and the first time Roger Ver actually showed me how to use Bitcoin and he scanned it on my phone, and it popped up literally one second later, I was like, oh, wow, this is going to be big. It's way better than flying to the Cayman with a suitcase of cash. Although, should you extend an invitation, I would be much more than pleased to come join you down there. RAOUL PAL: You can bring a suitcase of cash as well, it's fine. Look, Dan, thank you very much for your time. I think it was really interesting to hear your perspective. What I'm going to do now if you've just got a few minutes, I'm going to ask you some fixed questions that we asked a few people and they're just standard questions that people get to know you with. If there's one person living or dead, who would you want to interview more than anybody? If so, who and why? DAN MOREHEAD: I'm actually taking an online course on Beethoven right now. It's through Stanford. It's like adult ed type class, it was supposed to be physical. When this whole thing started, and everyone's starting to get in shelter in place, the professor was way ahead of everybody and sending out a note saying, hey, these are super trying times, but if the composer could suffer the most devastating loss any musician could ever have in deafness and still created best works, we can at least do a Zoom class. I'm studying Beethoven, it is a super-fast thing so I'd love to interview him if I could. RAOUL PAL: What is the book or books that have changed how you view the world, and how so? Also, what are you reading right now? DAN MOREHEAD: I decided with this, hopefully rare opportunity to have months of a different lifestyle. I'm rereading War and Peace, which is about a scourge that swept over the world called Napoleon. It seemed apropos to our war that we're at with this little virus that we're battling. RAOUL PAL: Are you struggling through it, or you find it relatively easy? Because it's notoriously difficult to read things so long. DAN MOREHEAD: Yeah, I have learned from past attempts and I have a printout of all the principal characters and all the patronymics and nicknames and everything. I refer to that like, every 10 seconds, and it's still super confusing to remember who everybody is, but I'm endeavoring to just get some momentum and make sure I just plow through it. RAOUL PAL: As an individual and a leader in your field, how do you stay engaged and relevant in a world that's moving so quickly? DAN MOREHEAD: Well, so these days, actually, there is potential for like over stimulus, like there's so much information and it's also important, and a lot of it's hugely distressing. The one thing I am actually trying to do is essentially limit my intake of just general news like normal news to only a couple periods per day. One of the things I did to get some space to actually think without all this white noise just like reverberating is I did just block out like three days to write our investor letter a week or two ago, where I essentially tried to not read or talk to or get involved with anybody else, and just actually be able to think. That'd be my only advice for everyone these days, is there's so much stimulation. A lot of it's really distressing. Obviously, we're all worried about our own physical and mental health, our kids, our community is to try and block out time, big chunks of time, four hours, six hours or whatever, where you can just think and not like-- basically stop the input of stimulus and potentially just create a space for your brain to stop throbbing from all this input of data, and to see if you can process what you already have in your head. RAOUL PAL: Yeah, I found that really hard for the first week of shelter in place because my wife's not here, so I'm on my own at the moment. She comes this weekend because she, I think she had COIVD and she's in Grand Cayman. I'm here, and just spend everything on my Bloomberg, Twitter, email, new sites, and after a while, I'm like to stop. You have to carve up your day differently and change because it's just overwhelming. DAN MOREHEAD: Yeah, the other thing I'm trying to do is put some structure you know back into life because in the normal world, our lives are probably overly structured. In this new world where, like everything that you had plans being canceled, you can easily have it drift. I'm trying to have a very structured day where I do the same things at the same times to try and get that rhythm back. I think humans and all animals have their own circadian rhythms that need to stay in tune. RAOUL PAL: Some of our guests can tie their success to one key breakthrough. Did you experience a tipping point in your career? DAN MOREHEAD: I'd say my experience at Tiger management was just a huge transformative thing for me because I came in having run a hedge fund before Tiger, which I think was unique at the time. I learned a few things on my own experiment with successes and failures but getting to work with Julian Robertson and 40 other really smart nice people is such a boost to my career. I've learned a ton from the lessons that all these peers of mine gave me. RAOUL PAL: By the way, did Julian ever get involved in Bitcoin? DAN MOREHEAD: He has. He's a very forward thinking man. Many years ago, four or five years ago, he invested in our funds and then, coincidentally, my son actually goes to the school Julian went to in the '50s and so I've seen him there and he's up on stuff. RAOUL PAL: Good man. Can you identify a failure that had the most significant impacts on your career, and what did you do to overcome it? DAN MOREHEAD: Oh actually, it's a good story. It's quite germane to our current environment. I started out as an asset-backed securities trader at Goldman in the '80s. The Wall Street stock market crash happened and like Solomon cut their entire mini department and everyone's cutting, and cutting, and cutting. They said they had to cut the department by like 20% or some and they were going to thinking about laying me off and I was like, what? That's outrageous, because I've just been sitting there, but I really hadn't been learning. I was just sitting around playing liars poker with the other guys on the desk and new channel. I really wasn't stressed I might-- I wasn't stretching myself, I wasn't really doing anything, so I quickly grabbed the phone, and I was looking for that headliners number for the job that offered me like six times or whatever I was making. I went and switched, I went to Bankers Trust and it was awesome because having gotten thrown out of a really comfy situation and it just kicked me into gear. I realized I should just like put myself out there, just go for it. Since then, I've been just like put my whole heart and soul into everything I'm doing. Especially with blockchain, it's the same. I think we're going to make a lot of money in this business but like I'm passionate, we're actually changing the world. 20 years from now, we're going to look back and blockchain is going to have improved a ton of people's lives. It was basically getting kicked out of my comfy gig forced me to actually get engaged and get going. That'd be my advice for graduates that are potentially going to have their jobs pulled from now, is dislocation might be the best thing that ever happened to you, and just embrace it and be open to it. My son showed me this great clip from The Rock about him getting cut from the NFL and that was the best thing that ever happened to him. That would be the spirit I would be looking at this. RAOUL PAL: Absolutely. Last two questions, who's a person you admire and why? DAN MOREHEAD: Oh, there's a lot of people, but the one that's relevant to this conversation is, and I know it sounds trite, but it's actually super earnest thought, Satoshi Nakamoto. The reason I say it is, I'm just not aware of anyone else has ever contributed something of such incredible value to the world, blockchain's 200 billion, as you say, and not taking anything for themselves. It's amazing that the open source code was just contributed to the world, it wasn't patented, and even the million bitcoins that Satoshi owns, he or she or whatever, hasn't sold or done anything with them in many, many years. I think that's inspirational. Again, if it's true the blockchain actually improves people's lives and I think it's going to have a huge impact on people. It's just really cool that Satoshi essentially gifted that to humanity and I think it's great. RAOUL PAL: Final question. What view do you hold that's most controversial in your professional life? DAN MOREHEAD: I would say my views right now are not like eight sigma outside consensus, but the views that I expressed earlier that it's actually a great time to invest in venture might sound self-serving or might sound like a knee jerk reaction, but I hold it very sincerely. That's when I think most people probably wouldn't vote with their checkbooks to agree with me on. That would be the one I would say is the most controversial, relative to the professional community. RAOUL PAL: Dan, listen, thank you ever so much. It was really good, thoroughly enjoyable, and lots of people to get their teeth into as well. I think it was really great to tie up your macro experience and your understanding now, you've let back into macro world just try and make sense of what this all means because you have the intuition that this is going to mean a lot for your current life in terms of the assets that you look at, and I think that's fascinating. DAN MOREHEAD: Well, Raoul, thanks so much. It's been a pleasure being with you in these trying times. RAOUL PAL: Yeah, absolutely. Take care of yourself and look after your family as well. JUSTINE: If you're ready to go beyond the interview, make sure you visit realvision.com where you can try real vision plus for 30 days for just $1. We'll see you next time right here on Real Vision