Source: Empire Youtube account
Compiled by: TechFlow
Guests: Raoul Pal, Founder of Global Macro Investor; Dan Tapiero, Founder and CEO of @10tfund & @1RTPartners
Moderator: Jason Yanowitz, Founder of Blockworks
Background Information
In this episode, Raoul Pal and Dan Tapiero explain how the global liquidity cycle could drive the cryptocurrency market to a staggering $100 trillion. They break down the concept of "everything is code," revealing how broad economic trends are paving the way for explosive growth in cryptocurrencies. Pal and Tapiero delve into China's economic challenges, debate the impact of AI on the job market, and share their portfolio allocation strategies. From Bitcoin's potential million-dollar valuation to the rise of new Layer-1 blockchains.
Guest company background: 10tfund is an investment firm focused on investing in growth-stage companies in the digital asset ecosystem, while Global Macro Investor is an institutional-grade research service founded by Raoul Pal, focusing on global macroeconomic trend analysis and investment strategies.
Global Macro Liquidity Cycle
Overview of the liquidity cycle
Raoul said that since the global debt reset in 2008, countries have restructured their debts by reducing interest rates to zero, which has brought huge advantages to the system. He pointed out that the debt refinancing cycle is closely related to the business cycle, which is usually a four-year cycle. This cycle is consistent with the cryptocurrency cycle and the US election cycle, so it is currently at an important cycle node.
Impact of debt refinancing
Raoul stressed that the debt that needs to be refinanced currently reaches $10 trillion, and liquidity injection will help meet this demand. Currently, major central banks around the world are conducting similar debt refinancing, and China in particular may become the weakest link because it faces a shortage of US dollars.
Fed Policy and Global Impact
The two discussed the impact of the tightening policy of the US Federal Reserve System on the global economy, with Dan noting that the strength of the US dollar puts other countries, especially China, under pressure. Raoul predicted that with lower interest rates, financial conditions will become easier, which will in turn promote the recovery of the business cycle.
Who is driving the cycle?
The combination of government and central bank
Raoul said it was really a marriage between the government and the central bank, which were no longer separate entities, noting that on the one hand there was a need to refinance debt and take on new debt, and on the other hand there was a need to ensure that these debts were managed.
Investor reactions and market dynamics
Dan further added that individual investors’ decisions in asset allocation also play an important role. He believes that this is a complex combination of power, and global investable capital will have a reflex effect when the market starts to move. He mentioned that market participants make predictions based on economic data and invest on this basis, and this behavior in turn affects the economy.
Definition and Impact of Liquidity
Yano noted that the Fed often bases its decisions on data from a year ago.
Raoul explained the composition of US liquidity, including the Treasury's general account, reverse repo and the use of quantitative easing. He stressed that these factors are interrelated and that liquidity flows are managed to drive economic processes.
Clarity of loop
Raoul believes the current cycle is the clearest macroeconomic cycle he has ever seen, although it will not last forever. He points out that as liquidity is released, capital gains will increase, thus financing the fiscal deficit.
Dan also said that the current economic situation has become extremely obvious due to the artificial increase in interest rates.
Structural changes and technological impact
Raoul believes this is a huge deflationary shock and many people have not yet realized the changes that are coming.
They discussed productivity gains and how to deal with workforce replacement, with Dan saying that despite concerns, new technologies are likely to create new forms of work.
Raoul finally suggested that more technological supercapacity may emerge in the next decade, and despite structural challenges, overall GDP growth may increase. How this growth will be distributed remains to be seen in the future.
Does the US president influence the economic cycle?
Yano raised a question asking whether the U.S. president can influence the global liquidity cycle. He mentioned that while different presidents may accelerate or delay the economic cycle, the changes seem to be pre-programmed.
The relationship between politics and economics
Raoul believes that all presidents have to finance the same deficits and cannot get out of this situation through austerity. He mentioned that since 2008, all parties have adopted almost the same approach to economic policy, so the president's influence is limited.
Changes in capital flows
Dan believes that although presidents may not fundamentally change the economic cycle, they can affect capital flows. For example, if a candidate is elected, it may cause investors to have less confidence in the US market, thereby transferring capital to Europe or Asia. He emphasized that the market's reaction is often based on changes in data and policies.
The current stage of the economic cycle
Raoul said we are currently in the macroeconomic "summer" when the dollar is depreciating, interest rates are falling, and debt needs to be refinanced. He noted that this is usually when the economy performs best, the business cycle begins to recover, and investment increases.
The relationship between market and economy
Dan believes that liquidity will enter the market first, and then the economy will recover. He mentioned that although some economic indicators may react with delay, the market has reached historical highs, showing strong performance.
Why We Are Not in a Recession
Data revisions and economic conditions
Yano referenced a tweet about a recession, noting that the Bureau of Labor Statistics will revise downward employment data for the period April 2023 to March 2024 by an estimated 1 million.
Dan believes that this kind of data revision is something that happens every year and does not mean that the economy is really in recession. He pointed out that in 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 is foreseeable about these data revisions, so this correction is not a major event for the market. He mentioned that the market will realize that growth is weak, so liquidity needs to increase, and the market's response to this information is often much smarter than people think.
Changes in the economic cycle
Dan went on to discuss that while economic conditions may change, the overall trends are similar. He encouraged Yano to focus on how to run his business instead of focusing too much on complex macroeconomic factors. He suggested that companies should seize the opportunity when the economy recovers and use new technologies such as artificial intelligence to improve efficiency instead of blindly adding more people.
How companies respond to change
Raoul said that as the business cycle recovers, corporate earnings will increase, driving growth in advertising spending and subscription services. He believes that after going through difficult times, the future outlook should be positive.
Dan also shared how his company used AI to restructure its business, and mentioned that some of their portfolio companies had successfully achieved profitability by streamlining processes and introducing new technologies in the face of market challenges.
Today's Best Investment Portfolios
Observations on the current investment environment
Dan shared the results of a survey of global family offices, noting that these offices had very high allocations in cash and fixed income, with 28% in cash and 50% in fixed income, and very low allocations in commodities and cryptocurrencies, which triggered his attention to gold and crypto assets.
Portfolio Construction
Dan said that the construction of the investment portfolio should be determined by risk tolerance. He suggested that at least 10% should be allocated to blockchain, cryptocurrency and Web3 digital assets, and suggested Bitcoin and Ethereum as core assets. In addition, he also mentioned that venture capital funds and growth funds could be considered.
Technology and the role of gold
Raoul believes that in the current investment environment, technology assets are an important investment direction because technology is in a long-term bull market. He recommends adding a certain proportion of gold to the portfolio to cope with possible market fluctuations in the future. He pointed out that the Nasdaq index has an average annual return of 17% since 2011, while the S&P 500 index is only 8%. He emphasized that a more active strategy should be adopted in terms of risk.
Family Offices’ Risk Attitude
Dan and Raoul discussed the risk-averse nature of family offices, arguing that these institutions are often overweight at the end of a cycle. They noted that while family office portfolios may be relatively conservative today, they will eventually increase their allocation to risky assets as the market changes.
Transaction cycle
The Mindset of Cryptocurrency Trading
Raoul said that every time he sold BTC, he felt it was a mistake. He believes that one should increase holdings in a bear market instead of trying to sell at a high point. He shared his experience of buying Bitcoin for the first time at $200, saying that if he had held on to it at the time, he would be much richer now.
Goals and Risk Management
Dan also mentioned that he would set some target prices, such as considering taking profits when Bitcoin reaches a certain price. He said that it is very important to know your goals in market fluctuations. He mentioned that some companies are about to go public, which provides him with natural exit opportunities.
Long-term investment opportunities
Dan emphasized that the cryptocurrency market is the biggest macro investment opportunity he has ever seen. He believes that Bitcoin could be worth $30,000 to $50,000, or even higher. He mentioned that the total value of the gold market is between $15 and $20 trillion, and Bitcoin could become a $10 trillion asset.
Mood swings among young investors
Dan pointed out that young investors are susceptible to emotions during market fluctuations, especially when prices fall. He recalled his experience in his 20s and said that after many failures, he was no longer sensitive to emotional fluctuations in the market.
Investment strategy selection
For investors, Dan and Raoul believe that there are two strategies to choose from in the current market: one is long-term holding (HODL) and the other is active trading. However, active trading requires more time and energy, and few people can do it. Raoul believes that many successful traders prefer long-term holding rather than frequent trading.
Pitch to Limited Partners
Yano asked Dan what his current pitch was, whether it emphasized Bitcoin as a hedge against chaos, or a better technology and currency.
Current investment environment
Dan responded that he focuses primarily on growth-stage companies rather than venture capital, and mentioned that there are unique opportunities in the secondary market right now to buy stakes in some companies at very attractive valuations.
Secondary market opportunities
Dan explained that due to the collapse of FTX, many traditional private equity funds suffered losses in the crypto space, which led to a liquidity gap in the current secondary market. He mentioned that many large companies have barely raised funds in the past year, and he is buying shares of some companies at a 60% to 90% discount, and these companies are still performing well in terms of revenue and profits.
Investment Strategy
Dan emphasized that their strategy is to focus on companies that they already own and look for opportunities in the secondary market. He mentioned that he has invested more than $600 million in four funds and has become the largest buyer of these companies. He believes that the non-functionality of the current market allows investors to acquire high-quality assets at reasonable prices.
Risk management and long-term perspective
Dan also mentioned that he prefers to hold companies with good cash flow for a long time rather than participate in fiercely competitive startup investments. He said that although there are many young investors in the market pursuing quick returns, their goal is to achieve a 5 to 10 times return on investment in the long term. He believes that in the current environment, it is very important to maintain low risk while achieving a steady return.
Outlook for the future
Raoul added that the current lack of liquidity in the crypto market has brought a lot of opportunities to investors. He mentioned that early investors will sell tokens during market fluctuations, causing prices to fall sharply, which provides room for professional investors to screen for good opportunities.
Forecast for the next 12 months
Market Outlook
Raoul said he did not want to give specific price predictions because of the complexity and vulnerability of cyber environments to attacks, but he believed the market would see significant upside. He expects Solana could rise tenfold from current prices, while Bitcoin could rise four to fivefold, in line with a typical bull market performance.
New investment opportunities
Raoul also mentioned that there will always be new Layer 1 projects in the market, which may have good investment opportunities in the early stages. He believes that although these projects may rise rapidly in the short term and experience a sharp correction afterwards, this is also a trading opportunity worthy of attention.
Interest rates and market impact
Dan further simplified the market analysis by mentioning that the current interest rate is 5% and the price of Bitcoin is close to its all-time high. He believes that if the interest rate drops back to 2.5%, the price of Bitcoin will most likely easily exceed $100,000.
Dan stressed that despite many dynamics in the market, this alone is enough to give investors confidence.
Innovation and user applications
Raoul also pointed out that a lot of innovation is going on and the activity on the chain is increasing rapidly. He believes that with the popularization of user applications, especially breakthroughs in the field of gaming, the market will usher in a new growth cycle. He mentioned that the transition from Web2 to Web3 will happen on a larger scale.
The impact of the election
Political Climate and Crypto Markets
Dan does not think that if the Democrats win, it could have a negative impact on cryptocurrencies, causing 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 those in China and India, but these have failed to have a substantial impact on the market. He emphasized that no matter how the market environment changes, the decentralized nature of cryptocurrency makes it difficult to stop.
Confidence in the market
Dan further explained that despite all the 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 opportunity lies in long-term holding and patience. He believes that the popularity of digital currency is irreversible, just like the Internet.
Simplify your thinking
Yano agrees with Dan that many macroeconomic analyses are too complex and easy to get lost in. He emphasizes that it is more important to focus on simple and clear investment logic.
Raoul also added that investors should not be distracted by the noise in the market, but should focus on the core factors that truly affect the market.
