← Raoul Pal: The Journey Man
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- [00:00]
Raoul Pal
Hey everyone.
- [00:01]
As you know, on this podcast, I bring the best guests in the world at that nexus of understanding of macro, crypto and the exponential age of technology. If you're enjoying the show, a quick five star rating goes a long way. It helps us grow and keep these conversations coming with the best guests in the world. Thanks a lot.
- [00:20]
Hi, I'm Raoul Powell and welcome to my show, the Journeyman. The Journeyman is where we travel to that nexus of understanding between macro creating crypto and the exponential age of technology. Today, we're going to cover macro. Macro is obviously dear to my heart. I've been in macro for three decades or longer now, and it's how I think about the world. It's the lens of which I operate, it's how I invest as well. And all of us can learn from the greats of the industry. How to invest better, how to think about investing, how to join the dots, how to manage risk. And this is a conversation that I want to have for you with a good friend of mine, Alex Gurevic. Alex has been on many times. He's one of the great macro thinkers, but he's also written many books about trading and investing and I want to pick his brains on how to think about investing better. But before you go, I just want to thank our sponsors.
- [01:14]
Today's episode is brought to you by
- [01:16]
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- [02:10]
Join me Raoul Pal, as I go on a journey of discovery through the macro, crypto and exponential age landscapes. In the Journeyman, I talk to the smartest people in the world so we can all become smarter together. Alex, always a pleasure to get you on Real vision.
- [02:31]
Alex Gurevich
Yes, always. Super Fun to be back. I love being back on Real Vision.
- [02:35]
Raoul Pal
Yeah. I've not seen you for a while. We bumped into each other in person in London, but we don't see enough of each other and it's always a good conversation. So for people who don't know you, let's just do your quick background so people understand who you are, what you do.
- [02:49]
Alex Gurevich
So I'm a hedge fund manager. I run a hedge fund called Honte Investments. It's a global macro fund. We're located in the Bay Area. My background is that I used to work for JP Morgan doing global macro trading there. My educational background is mathematics. And over the time of working on JP Morgan, which was like 25 years ago almost, I developed a strategy, a certain strategic approach. I wrote a couple of books about my strategic approach and I jumping ahead with my book plug. About 10 years ago, I published a good book called the Next Perfect Trade, which delineated the set of my.
- [03:27]
Raoul Pal
Which was a fantastic book. I read both your books. I have not. We'll come on to the new book in a sec. But they're amazing.
- [03:32]
Alex Gurevich
People should read. There it is.
- [03:34]
Raoul Pal
The Next Perfect Trade. Yeah, yeah.
- [03:37]
Alex Gurevich
The new. The second edition is out and I had this idea that over this 10 years, I laid out some set of strategic principles 10 years ago. And it would be kind of interesting, look back and see how they panned out, where I was disciplined, where I was not. I'm sure we'll go more into this, but this was the idea, not just clean up the first edition, but also add some notes from 2025 to see how. How those ideas panned out, what proved to be wrong, where I was able to be steadfast, where I was led astray. And I wrote another book which is about pandemic finance, the trades of March 2020.
- [04:16]
Raoul Pal
So talk us through the first book. You know what, what was going on at the time? What were you trying to get across? Because I want to go through the journey of the books and talk about the new book. We'll talk about markets and stuff later, but I just want to. Because I think it's important for people because they learn a lot from these books, learn about how to invest, how to think about investing, and you've taken people on the journey of the mistakes, the victories, all of that, which I think is a very honest and useful approach for people.
- [04:45]
Alex Gurevich
Right. I think my book was when I wrote my first book, the first version of the Next Perfect Trade I wrote in 2014 and 2015. And that was inspired by partially by the highly unusual setup the Markets had in 2014, which I considered to be one of the two greatest opportunities in the history of financial markets. The first One was in 2002 and the second one was in 2014. And I probably most people will not think of those years as the years of greatest opportunities financial markets. But at least according to my strategic system, those are the two years and those are the two perfect trades I cannot find equal to them neither in the past nor since.
- [05:30]
Raoul Pal
And what was took us through that trade?
- [05:33]
Alex Gurevich
Well, I probably should walk through both of them for a second. But the setup in 2002 was. It's really 2002 was a very. It's kind of like a proof of great minds think alike or whatever you want to say. Somewhere in the end of 90, beginning of 2000s, I don't know when Cliff Asness was doing it with aqr. I don't know when Ray Dalio was doing it with Bridgewater. But several people started to discover risk parity which is a really. When people always thought about bond stock allocation, they were thinking okay, we'll have to sacrifice some of our investments in stocks to put them in bonds to make it safer. Their risk parity was really equivalent of theory of relativity for finance because suddenly people realize that you can have your stock portfolio and you could buy some bond futures on top of it. You can make it both more profitable and safer in the long run. And you don't have to sacrifice any of the upside because you actually don't need to sell any of your stocks to have a duration exposure because you
- [06:42]
Raoul Pal
use leverage on the futures side, yes.
- [06:44]
Alex Gurevich
But your portfolio actually because of this leverage becomes not more risky but safer and has positive income on both sides. And they work in opposite phases typically so you have much smoother return profile. Risk parity was, as I said, it was as important for finance I think as theory relativity for physics. It was a complete revolution. But what I think risk parity thought of it is in a more narrow sense stocks and bonds. And that is what I was thinking in 2002. So I was probably a little later arriving that the first pioneers of it. But I have no idea what other people were doing. And I did an internal presentation at JP Morgan proposing a volatility weighted portfolio of S&P 500 futures and Euro dollar futures. And if you look back at that presentation it's like so spot on. Risk parity. I had no idea like all of this stuff I just did completely independently we're going to have a volatility Weighted based on the implied volatility portfolio. And of course it was a stellar trade for the next.
- [07:48]
Raoul Pal
So when you were volatility weighting it, therefore you must have had a massive euro dollar position because they're obviously much less volatile.
- [07:56]
Alex Gurevich
Well, you scale it, right? I mean everything could be scaled to the right size. And again it's a question which contract to use? I don't know. Now they call it spoos and blues, I think the term is.
- [08:05]
Raoul Pal
Yeah, that's right.
- [08:07]
Alex Gurevich
Like there are all sorts of variations and tweaks on that, but I think so I didn't. So in 2002 I arrived at that idea and the origin of this idea like this I talk right now about kind of the theory, but the origin of the idea is that in 2002, post the 2001 recession, interest rates were low like the spot interest rates went like close to 1%. Meanwhile, there was a moment when there was a bit of a recovery and the market was pricing fixed income rates to go back to 4 or 5% in the next couple of years. They are projecting tons of Fed tightening. Meanwhile, however, the stock market was still at a very, very low levels. And what I realized that there is no way the Fed will be tightening until the stock market recovers. So the only way I could, by being long fixed income, buying eurodollar futures, not only they would have to tighten, but they will have to tighten way more than projected, which was already a lot. And the only way they would do that if there was a boom in the stock market. Now the caveat, there was no inflationary pressure at that time. That's why that trade did not work in the beginning of 2000s. But there was no back then there was no inflationary pressure. There was no reason to Fed to tighten a lot unless there was a booming economy and booming stock market. So conversely, if I'm long stock market, it was already low, it has to be much, much lower. And the only way I could lose money on stock market if interest rates went basically in environment where I would lose money on the stock market, interest rates would go to zero. So I had two trades and if one of them were to fail, another one had to make a fortune. And it was quite possible for both of them to make money. And in the book, in the later portions of my book, the Next Perfect Trade, I kind of detail in the book I go through all the parameters which make a good trade and they include many other factors like trend carry, alignment with global growth, historical patterns and several other things. But I also Add this kind of intermingled trade relationship which I call concurrent necessity, which leads to the situation when basically two trades combined make what I call a perfect portfolio or a perfect trade. Now, my thinking by 2014 has evolved to not think of it as just risk parity, but think of it as a combination of any two asset classes which create a setup. And 2014 gave us the same type of layup. Dollar was very weak. Euro was trading like 100 and 40s. And Mario Draghi, who was the ECB chairman at the time, blasted us with do whatever it takes. US interest rates were sitting at zero, but they were projected to rise very high. 10 year note was trading at 3%. 30 year note was trading at 4%. So that created the setup that you could be long dollar and long U.S. treasury bonds. And if all of this tightening that was projected again were to happen and you didn't make money on treasury bonds, then you would surely make money on the dollar because it was very clear that ECB was not tightening and you would be just earning carry. And conversely, the only way you could possibly lose money on a long dollar position, if the Fed was very easy and kept rates at zero, which would eventually, one way or another, you would have to make money eventually on the long day, the treasury bonds of the rates are forever at zero. So this was a trade that. And as in the previous case, the setup of all parameters for both trades was so perfect that actually both sides were very likely to make money. And as we very well know, they both did all the way up to Brexit. From 2014 to 2016, we had a great bull market in Treasuries and at the same time we had a bull market in dollar which went I think like till 2018.
- [12:26]
Raoul Pal
Did you hold just the one? I mean, you obviously do other trades, but did you hold the position for most of that time?
- [12:31]
Alex Gurevich
Yes.
- [12:33]
Raoul Pal
And what did you look to be the case to take off the position? Because that's another thing people struggle with putting it on. Seeing a trade is good, you're making money. When do you take it off?
- [12:44]
Alex Gurevich
Well, well, you know what? If I knew when, if I had a magic formula when to take off positions, I'm not saying I'm not successful, but I would have been much more successful if I had that magic formula.
- [12:58]
Raoul Pal
It's hard, right? It's not easy.
- [13:00]
Alex Gurevich
It's hard. In fact, like last year was kind of a very interesting year like this. Typically sometimes I set target levels for myself. So I just say, like, if that's not just specifically for that, any trade I even talked about, I think a little bit about in the next perfect trade about this, about setting up very clear parameters for the trade up front. I'm holding this for two years, good, bad or ugly. Or I am holding it for till this price, until this exit level, till this price or a stop loss. What I always argued is that it could be very muddy when people say, is this trade successful? Because you could buy some stock, have it go down 80% and go up 500% and say, see, I am successful. The reality is if you invested in something went down 80%, there is no way you were successful because your capital vanished, right? You could have done so much more with this capital, buying the stock 80% cheaper. Right?
- [14:01]
Raoul Pal
That's right.
- [14:01]
Alex Gurevich
So clearly this was not a good trade unless your parameters was, I'm just holding this for two years, good, bad or ugly. And then when it's up in two years, no matter what happened in the middle, doesn't even matter, right? So you can set rigorous parameters and usually it works. However, I have a story from 2025 and the story is silver, right? And I had silver for years and I had a silver target of $60 for like a decade. But guess what, where it went? So it's. Sometimes it's, it's. It can be a little frustrating if you stick to your target prices and take off, take profits, and then you realize the thing keeps, keeps running.
- [14:45]
Raoul Pal
Yeah, I know. So then, so then you've kind of updated the book with thoughts as you go. So talk us through what, what's changed? What's the new book about?
- [14:58]
Alex Gurevich
So the new book is really the old book in some sense. I wanted to keep the integrity of my old writing. So I didn't want to go back and rewrite and make it prettier or rewrite it with a knowledge of what I have now. So what I did, I left it mostly intact. Like with just cleaned up, like, made it better format, better graphics, better cleaned up things. And then I put in well delineated notes from 2025 so you can tell what is my old writing, which is verbatim the same, and what am I thinking? And there are many points on which I asked the question. I think next time when this happens, I will be able to do this. And now I could say, okay, the question is answered. I was able to do that. Or I could say, you know what? I put trends as the very first chapter of my book. I put the importance of trends, and guess what? I screwed up on Fighting the trends. In X, Y and Z over this last decade. And then I could. But I could say, but you know what? One of the things, for example, one of the chapters in my book is about free lunch. Always take your free lunch if somebody offers you free lunch. And I like market almost never, never offers you free lunch. But sometimes it does. And when you dust, you really have to stuff your belly. And I was actually able to do that in 2020 and take the free lunch in when?
- [16:24]
Raoul Pal
2020. Yeah, yeah, yeah. So a quick break in your regular programming. If you're serious about your future, grab my free report called prepare for 2030. I think you've got five years to make as much money as possible. And this guide will help you navigate what's coming. The link is in the description. Download it now. It reminds me a lot of the Soros book. I think it was Soros and Soros, I can't remember which one it was where he kept a trading diary of the whole period and his observations. And you can look back and see where he was wrong, where he was right. And it was a fascinating time because it was the Plaza Accord, right? And how he kind of walked into that trade without kind of. He didn't really quite see it. And he was wrong at first. He was the other way around. He flipped his idea. It was just. It's a fascinating journey to see inside somebody's head of how to trade, particularly in global macro. I think because global macro is a much more 3D jigsaw puzzle of having to figure out is the perfect setup there.
- [17:24]
Alex Gurevich
Well, you know, you touch on a very interesting point here because kind of global macro usually like for three or four years it's business as usual. You're right about some things, wrong about some things. And then something really big happens once in a few years like Covid or even like bond market collapse in 2022. Or it could be the war in Europe. In more recent events in the past it could have been Brexit or European debt crisis or going back global financial crisis. Going back it would be September 11th. Going back it would be Russian debt crisis, savings and loan crisis. I could keep whatever 1987 stock market crash, you can keep going back in time and see that once in a while some something really big happens. And I think unless you're just a purely premium buyer, like if you just have a hedging portfolio with just own options, you have kind of a 50, 50 chance whether you're going to be caught by this crisis, right or wrong. Sometimes the crisis will hit your Broadside, wrong way around. It's very hard to be always right because if you could predict what the next crisis would be, that wouldn't be a crisis.
- [18:40]
Raoul Pal
But I do find that people who are either in global macro or observers of global macro, or people trying to learn global macro become obsessed by crises, when in fact you've made most of your money out of a crisis. The period coming out being long equities as opposed to being short. So many people look for the short trade, but the actual better setup is everything on fire. Sale discounts.
- [19:09]
Alex Gurevich
Yes, I would agree. Yes, I agree with this. And this is kind of what this example was source that you gave kind of promotes this idea. Suppose the crisis did not come from the direction you expected. Suppose you were not first oriented right way in your portfolio. So you just take your lumps, you reconfigure and it might take, in my case, it might take two or three years to find the new kind of texture of the market, to find your footing. What is the new regime? And then you get into this new regime and understand like, okay, well, things that I was trying to do before is not working. My portfolio did not work for this particular event. But what is the new set of opportunities? It is very important, I think that there is a very strong like kind of drive in, in macro markets if, if things go wrong, just cut everything, cut all the positions, get flat, get defensive. But I think the more important thing is I think that maxim about getting flat and getting defensive is more about clearing your mind and not being attached to your. It's not so much about that you have to get flat. It's about the fact that you need to clear your mind and see if today, this morning was the first morning of my trading, if I'm just given the cash, how would I put cash today? Now, in a regular life, you don't want to think about this like this every day because you're just going to keep like retrading your portfolio and churning and wasting money on transaction costs. But in the times of crisis when everything just blew up and your world changed, this is how you need to think. You need to think about, okay, good, bad or ugly. This trade is in the money, this trade is out of the money. This trade might have to go because look what, what other opportunities are out there. You need to just totally reprogram. But the important thing is to see, is there a way, do I see a clear way to through that trees? Do I see a forest behind the trees? Is there a way to deploy capital in the Middle of this commotion.
- [21:19]
Raoul Pal
Yeah, I remember very well when I was at GLG running the Macro Fund, you know, when things were going wrong and it's like none of my views are working. I would purposely just close every position. Winners and losers, close the book and go for a long walk in Hyde park and, you know, then not. Not work that day and maybe not the next day, then come back in with a clear mind. Because you need to ask yourself, you know, what are the biases I'm carrying now? Are they still applicable or are they not? Is my timing wrong or am I just wrong? And you'd have to see it clearly, because if not, you just. You're stuck with your biases still as well.
- [21:57]
Alex Gurevich
Yes, I think this is one approach, honestly, my approach. When, When. When there is. When I'm confused first, my first instinct is to do nothing and take just a deep breath. Like, for example, like, oh, portfolio is down this much money, margins this, margins that. I was like, okay, deep breath margins are not till tomorrow. You know how there's like a scene in the movie that I like, don't panic. We still have 30 seconds. So that is my motto in such commercials. So first, first do nothing. Don't like, rush to, but then let's be methodic. And what I like to try to do is gain control of the situation. For the position goes against me, cut it at least some of the risk. And that keeps you, like, kind of, you know, like when the boat is just like spinning down the water and rushing down the water, your first goal is not necessarily to start, like, rowing against the water. You want to just start steering it a little bit so you start being a little bit on the flow. So, like, the first thing what I try to do is just kind of get a little bit in the flow of the market, Get a little bit of a control of the situation. Because, for example, even if you incrementally reduce your position, if you took 20% off and then it goes further against you, like, okay, I cushioned my losses. I am in control. Just get that psychological sense of controlling the situation. So you can think clearly, but it is usually not my instinct. I don't think I've ever gone flat in the middle of crisis. I've traded aggressively, but I don't think I ever. Like, that's just my part. First of all, I usually have something illiquid and a lot of positions, and some of them go against me, some of them for me in the part. So I just try to methodically go through things and see which things extraneous and can be cut. Which are core risks which are contributing to bad P and L. I actually talk about this in my book about avoiding portfolio paralysis and the fact that you, unfortunately, when things go against you, you have to cut into your kind of start killing your darlings and cut into your most preciously held deepest value positions. Because if you try to actually stick to those and cut other little things that are actually working, you're not helping yourself. It's a very painful thing. But you're going to have to cut into some of your darlings to gain control of the situation. But I usually don't necessarily go flat. I just try to figure out what's going on. But that's just a matter of approach. Whatever gets you to the psychologically balanced point. I have this term psychologically neutral positioning in my.
- [24:36]
Raoul Pal
Yeah, makes sense. Makes sense. Or you know, regret minimization is where I get to as well.
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Alex Gurevich
It's like, yeah, that's a good term too. Regret minimization is a good term too.
- [24:46]
Raoul Pal
I also think the world has changed somewhat, that crises don't have the same left tail risk as they did, but the right tail is more skewed so that it's not a normal distribution anymore. I think overall, so a crisis because of debasement of currency whatever means that there's limited collateral collapse. But the other side, you tend to get these long tail risks. So I find the setups nowadays on the long side so much better. You know, like after 2022 it was an incredible opportunity because people's inflation expectations were insane. And so you get the opportunity. It wasn't the, the bond trade wasn't the great trade, but the equity trade was stunning or long duration equities was stunning at that point.
- [25:40]
Alex Gurevich
Yes, that's a good point. And I will tell you honestly, I'm of the two minds here, so I'm a little like in terms of assessing the future because you're right that the left tail looks differently because ever since, especially since the 2020 crisis, I think the methodology was put in place first versus global financial crisis. But in a very tentative kind of sheepish way, they're like, oh yeah, we're going to put a little bit of liquidity in the markets now. Fast forward to 2020, you will see they thought they were doing stimulus in 2008. That was nothing. That was like a drop in the bucket. Now we know what a stimulus is and now that we kind of think like, okay, well in the past crisis meant typically deflationary shock, bond Market rallies, people flee to the dollar, Stock market sells off, we get shot. Kind of like a tightness of everything, tightness of financial conditions. And gradually the Fed kind of reluctantly relieves it. Now it's kind of like at the whiff of crisis, there is an ocean of liquidity which makes think is like, well, can asset prices even go?
- [26:58]
Raoul Pal
I mean, if we didn't have Covid, I'm not entirely sure we would have had a recession at all because of this management via liquidity.
- [27:08]
Alex Gurevich
Yes. So technically, if you look at it from this perspective, technically you could say there can never be a market because if you print it, if the goal is to avoid any bear market, whatever, you always can print enough dollars, at least in nominal terms. There will be no bear market.
- [27:28]
Raoul Pal
That's right.
- [27:30]
Alex Gurevich
So however, what I'm afraid of here is a strap of thinking that like things are different this time. So I'm. Because who knows what the next. Because we don't know by definition what is the next shock will come from.
- [27:47]
Raoul Pal
No.
- [27:48]
Alex Gurevich
And is it possible? And I think it is now people are adjusting to the view that like every new shock is actually negative for Treasuries because imagine like there is a war breaks out. Imagine US goes to war with China. Will people really buy US treasury bonds? No, they'll probably sell them eventually at least they'll probably steep on the curve a lot. Right. Will stock market goes down? No, probably like defense stocks will rally this and that and before we know it, everything is going up. Right. Like what kind of shock could actually cause the old kind of recession, the old style recession, but because we're so complacent, maybe it can happen.
- [28:26]
Raoul Pal
Yeah. I don't know if it can, but I know we can have different variations. So an idea I wanted to raise with you is it is universally thought to be the truth that inflation is sticky, that any stimulus or tariffs are going to create inflation. The curve tells you that, everything tells you that. But we have a shock coming down the pipe, which is maybe the largest economic shock of all time, which is AI right now, theoretically it is probably the biggest disinflationary force mankind has ever dealt with.
- [29:06]
Alex Gurevich
Correct. I remember you even said it last time when we talked. It's like a deflationary nuclear bomb. Right?
- [29:10]
Raoul Pal
That's exactly right. And well, and I'm not saying the timing is right or whatever, but I just play with this in my head is like we all believe it to be true that inflation is sticky and if they do anything, if the economy runs too hot, inflation's going to be the problem because this is this prior anchoring mindset A of 2022 and the 70s and the Volcker years and this kind of glorification of the inflation fighting machine. But when I look at it, if I were to come from Mars, I'd say holy shit, inflation is going to go negative and there's almost nothing you can do about it. You've got an aging population and infinite intelligence and robots coming at a lower and lower cost every day.
- [29:53]
Alex Gurevich
Well, technically, again, technically they can do right no matter how fast as AI dropping the cost, Fed can print the money faster.
- [30:07]
Raoul Pal
Yeah, but that's.
- [30:08]
Alex Gurevich
But will they? The question is, will they what?
- [30:10]
Raoul Pal
But that's not necessarily inflation. Asset inflation and CPI inflation are two different things.
- [30:16]
Alex Gurevich
Yeah, it's different things. It's different things. But if the government starts basically the. It's almost we know, we already know, which it doesn't. This is not a political point. Democrat, Republican, we know which way the wind is going to blow next time. If people are going to start losing jobs massively. If labor's gonna get obsolete, we're gonna go down the road of universal basic income. There is no way to avoid it. Like we already try. It's already the tried out playbook during COVID It's gonna happen again. It's gonna like the amount of stimulus is gonna keep increasing, increasing. There'll be no choice because indeed majority of people are already finding and will more and more find their labor not being marketable. Like the value of their labor will not be. They will not be able to like majority of competent able bodies. Adults will still not be able to trade their labor for the life which is considered to be like decent life by this society. Of course in this AI future even the poor people by some kind of very materialistic life standards will probably have better life standards and people in the previous century. But that will not be acceptable to people because it'll be so much worse than what will be the new normal for the society when if 70% of population do not have marketable skills or assets to trade their labor or to use the assets to get a lifestyle which is considered to be respectable by the society. It's not a socially stable situation, not in democracy at least. Right. So in a democratic situation it's gonna result in inevitable some sort of equivalent of basic income or some sort of equivalent of negative taxation or stimulus or whatever. It's just again, whatever your political views is, that's the road we're going down. The question is how fast. And the question is what's gonna be like leading the way. My guess is like yours, that deflation will actually lead the way because especially because of the fears of inflation after 2000s, people will be reluctant to just be really, really blatant about sending stimulus checks right away. It'll take a while for this idea to take root again. And as you pointed out, just a mere easing might not do the trick. It might pump the asset prices, but. Well, it's kind of obvious, right? If you ease, it's really like a supply size stimulus, right? It only leads to, if you make money more easy, it only leads to more investment, innovation and investment in innovation will just lead to more people being fired.
- [33:01]
Raoul Pal
Yeah, I mean this is, you know, I've got to the point that I realized that this AI robotics nexus, all of this stuff is going to end up being a super massive black hole for capital. Because the more intelligence comes out, the more you can do, the more you can replace jobs, the more you can lower costs. It becomes this extraordinary flywheel because it's also. We're going to get to the point of self recursive learning here. So the flywheel gets faster over time. So you almost have no choice but to put capital into it as a way of, I mean, I think of it as hedging myself in the end because you know, we're all replaceable by AI because we're knowledge workers, you know, that's purely what we do. But and to think about that is how do you hedge yourself? You kind of have to be in the trade, correct?
- [33:49]
Alex Gurevich
Yes. It's like, well, it's the same argument that some people do for cryptocurrency. Right. You need to allocate for cryptocurrency just on the off chance that that's the only thing that will be tradable in 50 years. Right. If everything else will inflate away, maybe. Yeah.
- [34:07]
Raoul Pal
I'm not saying I put them in the same bucket. It's like, yeah, that new technology, stack of AI robotics, blockchain technology, these kind of things, it's like the inevitability of it all because they're kind of driven by network effects. Seems pretty clear. And because the output is more intelligent money, more intelligent capital markets, more efficient capital markets, more efficient intelligence, more intelligence. It's like, what else are you going to put your money in?
- [34:36]
Alex Gurevich
What I think is interesting thing about this AI black hole as you described, that I think everybody is very focused on AI stimulating like double digit, triple digit, six digit growth, right. Million percent annual growth, whatever, singularity Kardashev scale 1, Kardashev scale 2, whatever, right. People are very focused on that type of growth. But what I see in the new horizon, I think I still would punt on the growth effects of AI on actually direct GDP effects. Because what AI does, and this is hard for me to be very confident about because I'm not an economist, but this is how I'm thinking about this. In the past, technological innovations like even when things got cheaper it just became broad, accessible or people just would buy better models like TV. Yes, TVs like all TV would be really cheap now, but people just buy better and better TVs. So it's not like there's a GDP hit from TVs getting cheaper or people switched to other things. Like people invented cars, whatever. Carriages got out of style, but people started buying cars. Now what is interesting with LLMs that they make whole sectors of human activity no longer represent economic activity. So for example, what used to be getting like going to a lawyer for a simple consultation or asking a lawyer to like help you write a document. It used to be an economic activity, it's no longer an economic activity. Getting second opinion from a doctor is no longer economic activity. Because a lot of people like myself get one opinion from a doctor and one opinion from LLM. Yeah, unless it's a very severe case, right? But I always get sick. So incrementally I replace second opinion or call to a doctor by over routine issue to reaching out LLM. And same thing with legal stuff, any kind of simple form. I don't go to lawyers, I just put in my information and I get spat out the legal document I wanted. Right? So I so but that is not the GDP at all. It's like there are parts of our life which are vibrant but are not represent economic activities. Like when you're just meeting with friends and going for a hike with a friend, there is no GDP effect of you going for a hike with a friend. So there is very little GDP effect of you asking and your friend maybe like might give you some advice, right? Say you went to a friend and got some life advice from a friend. It's actually meaningful. But there is no GDP effect. Now there are whole sectors of areas where people getting various advice on help which were huge portion of the GDP which is going away because people are finding this advice.
- [37:23]
Raoul Pal
But doesn't that just increase into productivity so you've become more productive because you don't have to email backwards and forwards with the lawyer. Even if the economic cost of the lawyer in the past was, I don't know, $500 to get this bloody small document done. You now do it yourself. Your productivity increases dramatically because of the time spent and the slight saving in cost in doing it.
- [37:47]
Alex Gurevich
Possibly, but I think it's like driving. I actually do more because of that. What am I going to do more trades because I didn't have to talk to a lawyer? It's almost like the time is almost the same. I could write a question to my lawyer or I could write a question to Chad GDP. The real difference is that there is $500 of economic activity that didn't happen.
- [38:07]
Raoul Pal
I'm not so sure because you have to wait for the lawyer to come back to you. You chase him up because lawyers never come back to you. You, you said that you.
- [38:15]
Alex Gurevich
Maybe I save some time, but yeah, I could use that time to like play board games or go for the set hike. Right.
- [38:21]
Raoul Pal
Or you could think more or you know, do other productive activity that helps drive whatever you want to do. Whether it's hiking. That's a productive activity in Alex universe. Right?
- [38:31]
Alex Gurevich
Yeah. Well it could be like for some people it could mean getting more productive but it also depends upon for of course, like honestly. Okay, if you're a hedge fund manager, possibly getting extra productive minute might be even more weight than not having to pay the lawyer for hedge fund managing. Managing large portfolio. Right. However, for many people the big impact is that like taking out those $500 out what I'm basically telling you that I'm not sure if there won't be an incremental drag to the GDP from certain activities just not happening anymore.
- [39:04]
Raoul Pal
Yeah, yes, that probably makes sense because they become non economic activity. So they drop out of the measurements.
- [39:11]
Alex Gurevich
They drop out or they become so incremental it's just like the electricity, like whatever the 10 cents of electricity that is spent by asking this question. Right?
- [39:19]
Raoul Pal
Yeah. And then we have to see, and neither of us know obviously is whether productivity then drives GDP because whether that translates into productivity. That is you can do more economic activity maybe.
- [39:31]
Alex Gurevich
But the final demand. Right. What you're getting is, what you're getting is like a lot of stuff taken out of GDP at the same time a lot of people taking out a workforce. So sooner or later that has to affect the final demand.
- [39:45]
Raoul Pal
Yeah.
- [39:46]
Alex Gurevich
And so far the final demand is somehow magically holding up well because of Capex.
- [39:51]
Raoul Pal
Right. Don't forget we're going to go through one of the biggest Capex cycles in history. I was looking with Julian today about Taiwan. Semi Taiwan exports of the US have gone, it's like completely like five standard deviations outside of normal thing because of this Capex demand.
- [40:12]
Alex Gurevich
And that's interesting is that why is Taiwanese currency weakening then?
- [40:17]
Raoul Pal
Who knows?
- [40:18]
Alex Gurevich
I mean it went much stronger but recently over the last year it's been weakening.
- [40:23]
Raoul Pal
I don't, I don't know. But what is interesting is because now there is a very defined Capex cycle which is you order the chips, you see the announcements from all these people. We're going to buy a billion, no, we're going to buy 5 billion, all of that stuff, then the chips have to get shipped, then they can build the factory. Not the factories, the data centers and all of that stuff which need to be then built. So, so we're seeing kind of this, I think a lead indicator to the size of the capex boom that's got to come and then we've got the energy side of that equation because we've got to feed all this beast with energy somehow.
- [41:04]
Alex Gurevich
Yeah, there are some mysterious things going on because on one part we have, on one part we have this. Yeah, this I definitely agree with you. Capax has to be the one making up for final demand and there is a trickle down because there are all sorts of drops. You, you build data centers, you create all sorts of jobs. But what is interesting is that oil prices have been going down despite the spiking energy demand for data centers. And that energy demand I only expect to be going up. In fact, I think when people talk about all those beautiful singularity dreams, I still do think that energy might prove to be the bottleneck for the singularity dream. We might not have enough energy to power all of this forward. Right. But what is interesting that I was actually thinking that oil would be going up. I cut out of, I was even long deferred oil, but I cut out of it somewhere in the middle of the year that fortunately because the trend was just not looking good.
- [42:06]
Raoul Pal
I think it's when I listen to Scott Besant, he basically and Trump, they basically want oil suppressed in price because they understand that energy is the input and oil is complicated for inflation, the economy and everything else. So this is the whole Venezuela idea, the whole kind of keep the oil price as low as possible, free up restrictions, let them pump as much oil as possible to keep the oil price down. Oil is too slow to scale for the speed these data centers need to be built. So it's going to be solar, it's going to be gas for the time being and eventually nuclear. So I don't know if oil picks up, but oil picks up always when the economy does. Even building data centers is going to use oil, right?
- [42:51]
Alex Gurevich
For everything it is. Well, I mean, I agree with all your points and probably, I guess if that is so, then they were successful as suppressing the oil prices artificially or naturally, who knows? Right. But there are some interesting conundrums there and I've heard some, I'm hearing right now that people already beginning to get concerned over the overcapacity of data center buildup and how some of the projects are beginning to get canceled. I'm beginning to see some numbers around that. What my concern is with all this data center buildup is that I don't really know the tech side of it very well, but given how quickly and everything evolves, what if you build like data centers designed for some particular kind of technology and they're not even going to be compatible with technology five years from now at all and it'll just empty hulks because it'll be completely obsolete. Right. Not that we won't need something like that in the future, but we'll need something entirely different.
- [43:48]
Raoul Pal
Yeah, and I don't disagree, but the one thing where I play through the data center thing now, so what we know is this technology is so important, arguably the most important technology humans will ever invent, and maybe the last technology will invent that everybody has to be in the race. So let's play through a scenario where anthropic goes under, they can't compete or OpenAI or whoever it is, you choose your large LLM, they give up and say that's it, we've run out of cash. What happens the following day? That's what really interests me because the following day Microsoft or whoever it is will buy all of the chips, all of the data center, all of the power, and they will double their compute capacity overnight. Doubling of compute capacity is shown via scaling laws to have produced even more amounts of intelligence. So they suddenly win the entire game. That's a really interesting game theory where if anybody goes bust, anybody who buys it ends up doubling their intelligence output.
- [45:01]
Alex Gurevich
You know, I was recently in this very debate and the debate is not so much in the debate, but we're discussing something because I don't have the strongest views whether in the future AI will be like a utility or it will be like a winner take all situation. Like with search, right? That originally, yeah, there were a few search engines this and that tried and Google just won the whole game. Right. Same thing with like Facebook won the social media game and Amazon won the retail online game. So will it be like what you're describing as a scenario in which one wins all or will there be like multiple utility like providers?
- [45:42]
Raoul Pal
I think it would be the worst world in the world, but the worst thing to ever happen if this technology ends up in the hands of one nation or one company. So it has to be because of this game theory. Everybody has to scale at the same time. There's almost no way out of this. There's almost no way for them to go bust really in this scenario from the very big LLMs. And we're still going to have open source build out because I think people are going to understand how important this is not to be in the hands of, of one company.
- [46:14]
Alex Gurevich
Well, people understand it, but what can they do about it if the scenario describing that one of them cannot compete and goes under and gets bought out, how can we stop that?
- [46:29]
Raoul Pal
Yeah. Now whether it depends whether the government wants to stop that, whether these. It's too important to fail because if you suddenly say, oh, Microsoft buys it all in an auction, they pay 50% over price for it. Right. And suddenly now Microsoft have all the compute. Is that agreeable to the government or not? Or is Microsoft now so powerful that even governments can't stop it? I don't know. It's just a really interesting. It's a very different world, this whole thing, right?
- [46:53]
Alex Gurevich
Yes, yes. We live in a very different world. It's like not the questions. In some sense, singularity is happening exactly on schedule. And I've been watching this for 20 years and I was expecting it to happen in the 20s and it is happening in the 20s. What is happening in the 20s is exactly as outline. Some things are happening faster.
- [47:14]
Raoul Pal
Yeah. By Ray Kurzweil.
- [47:17]
Alex Gurevich
Yeah, yeah. It's basically a Ray Kurzweilian schedule is holding up very strongly. I think if anything, LLMs came a little ahead of Ray Kurzweilian's schedule. Some other things might have been a little more delayed, but basically it's only within like one or two year range. Actually his schedule is just. Since the 80s is holding up. And this is, this is what really convinced me of singularity is because when I was introduced to Ray Coel's rally on schedule, which was 20 years ago, I was skeptic of it. I was captivated by the idea. So I was like. And I looked at the historical evidence and I looked at the charts and they all look convincing to me. But as always introduced to something new. I was skeptic. I always Noticed that, like say you introduced a new trade, some new asset. You can look at the history of this asset, but you will never really get a feel for this asset till you own it for a few years. You'll never really know how to trade the asset until you traded it yourself. Until you were the one picking up the phone and calling the brokers and you were the one stuck in illiquid situations. You're the one watching the screen with it. That's when you get it. So same thing with singularity. Over the last 20 years, I was actually, okay, I was already introduced to the idea, so I was able to watch the benchmarks and I was like, oh wow, it's all falling into line. It has been falling into line. And when people say like, oh no, it's not happening. And I think I talked about this. All these people were saying like, this is bullshit. They were very dismissive of it. But people who were dismissive was not showing any math or any graphics while the pro Singularity people were showing the charts, the computations and everything was going according to charts. But people just refused to believe where the charts lead. And even now, even I myself, like, I don't think any human, no human being alive is capable of really fully accepting where these charts lead. I like, they talk as if they accept. We all can say like, oh yeah, but we don't really in our bones. We cannot accept it because it's completely crazy where the charts lead.
- [49:16]
Raoul Pal
Yeah. If we went back four years and said, oh, by the way, somewhere around 2026, human intelligence is going to be replaced by new Apex intelligence, everyone would have said that's utter bullshit. And yet here we are.
- [49:31]
Alex Gurevich
Yeah. But also at the same time, if we look at the charts at any of these years, that's exactly when it is supposed to happen.
- [49:37]
Raoul Pal
Exactly.
- [49:38]
Alex Gurevich
But by like 2030, that was the timeline.
- [49:41]
Raoul Pal
Yeah. Even with this short period of time, four years, we miss forecast exponentiality. We just can't do it.
- [49:52]
Alex Gurevich
Yes. And I think like what is also within with this captivation and LLMs, I feel like so many other things suddenly went vertical too. And it's not even noticeable, but so many. For a while I feel like we had almost like 80 years or maybe even longer of stuck technology. Like fundamental way of living was not changing. Like we had airplanes since we went to the moon. Like we had everything basically. We had computers, we had lasers, we had cars, we had airplanes, spaceships, and we didn't even go to the moon since 69. Right. But the fact that we could go to the moon, to 69. And in 69, barely can do it now. It just kind of stuck. Things were just getting a little bit miniaturized and the only thing that was really progressing is information technology. And then suddenly I'm hearing all this shifts in robotics, right? Robotics. Like people writing about robotics, science fiction about robotics for over a century. The word robot now is more than 100 years old. It came from a novel by Carl Chapek. R U R. He invented like Chuck Ryder invented the word robot. And then I forgot what year it is. But it's early 20th century now. We actually having robots now, suddenly they're like all over the place and they seem to be doing. Were actually getting them even flying cars. Flying cars were like for decades, people asking for flying cars. And guess what? Like flying cars. Okay, that technology exists now and they're beginning to get used and so many other things.
- [51:27]
Raoul Pal
But Alex, nobody's prepared for the fact that we're probably in the AGI year this year, whatever, however you want to define it, AGI, we're pretty damn close to it.
- [51:37]
Alex Gurevich
And.
- [51:38]
Raoul Pal
And we're going to put that into a humanoid robot.
- [51:43]
Alex Gurevich
Yes.
- [51:43]
Raoul Pal
I mean people are not ready because people are thinking the robots are like a controlled thing, but they're not thinking they're going to have super intelligence and they're going to be around us. I mean, I don't think people. Society is not prepared for this. Not in any way.
- [52:03]
Alex Gurevich
That's right, yeah.
- [52:05]
Raoul Pal
So when you look at what's going on now, do you see any interesting trades, any interesting opportunities? What are you looking at?
- [52:13]
Alex Gurevich
Well, a lot of it is, I think duration is a good trade given what we discussed. I think interest rates have space to go much lower because I feel like the whole tariff bump is kind of dissolving. And with the loss of, with the labor market slowing down, I think duration is becoming a great trade.
- [52:31]
Raoul Pal
And nobody believes that trade at all.
- [52:33]
Alex Gurevich
Right, well, I'm in it, so we'll see. I think duration is a great trade. I think in a precious metal space, obviously, like I mentioned that silver ran beyond my wildest dreams. But there are, I think like platinum still has a lot of space to run because precious metals go on very long cycles that are sometimes not synced. And like you could see gold like was way ahead of silver and people like, when will silver go? When will silver go? Now silver is going and platinum is only beginning to wake up. So when silver gets stuck, it's probably platinum will start going. So I think like playing this catch up game I think it's an interesting game. There are a lot of interesting currency dislocations which could be taken advantage of in the long run. I think like extreme weakness of yen probably will not persist. Everything is against yen. Like everything is for Swiss Frank. Everything against Yen. And all the stories are going that way. But at some point location wins. So I think you have to look for locations.
- [53:32]
Raoul Pal
Yeah.
- [53:32]
Alex Gurevich
Versus stories sometimes. And sometimes you have to work for continuations of stories.
- [53:37]
Raoul Pal
Yeah.
- [53:38]
Alex Gurevich
So I see kind of both location and story
- [53:44]
Raoul Pal
and anything. Anything else. What about what do you do with the equity market here? Or is it too late in the trade? You either.
- [53:50]
Alex Gurevich
I really shrug with the equity market because again, history shows that at some point you'll buy it cheaper. Yeah, I mean you could. I'm not saying that that's the top, but I'm also history shows that no matter how much it runs, how impregnable it seems, at some point you'll buy cheaper for whatever reason. I don't know. But I think odds overwhelming that in the next few years there'll be a chance to get in an equities market at a better level.
- [54:15]
Raoul Pal
Yeah.
- [54:16]
Because for me this year will be a year I would be peeling off the equity trades I've had on since 2022 and then waiting for whatever the cyclical downturn is, whatever the shock is, whatever happens to then reenter that trade. And so is the book out?
- [54:35]
Alex Gurevich
So the book is coming out next week, early next week. This is. I have this as my advanced copy so I'm inviting everyone to get their hands on it. I think it'll be available for sale already. Not pre sale, but real sale. Next Tuesday, next Monday it'll be available for sale. So please write reviews. What?
- [54:56]
Raoul Pal
It's on Kindle as well.
- [54:57]
Alex Gurevich
It'll be on Kindle as well. There'll be ebook and physical book available. And I think the useful point of it, even if you read the first version of the book, would be just kind of to go back to it and see how did the principle play out over the next 10 years. And this is going back to that idea. If you introduce something retroactively, it only makes that much impact. But this book already has been there in the world working for 10 years and now we can see how it has been working. And I promise you I'm not just tooting my horn. There is plenty of places where I show I screwed up, that I didn't do this. Right. I didn't do this. So this was the idea in my other book, the trades of March 2020 where they did full transcripts of trading in the March of 2020. The idea to show things as they are with all the, with all the screw ups, all the lapses of discipline, all the mess ups that happen, just show the world things as they are.
- [55:53]
Raoul Pal
Yeah. And I think it's very important for people who are trying to learn their skills. Your books are really helpful for it because again, as I said, it gives you a framework. You test your own framework, you show where they go wrong. You know the one about the pandemic was very human as well. You know, the was fear there, there was all of the things that, you know. Robot Alex the trader also was human. Looking at this, thinking, oh my God, what, what is going on here? You know, they're really good books and super helpful. So I haven't read it yet, but I, I've, I've got a copy on its way and I'll be reading the digital version as ever and urge other people to do the same.
- [56:31]
Alex Gurevich
Excellent. Thank you very much.
- [56:33]
Raoul Pal
Alex. Fabulous to see you as ever and I'll see you as well.
- [56:35]
Alex Gurevich
Pleasure as ever. Always nice to chat and it's nice to have a good two way conversation. Thank you always.
- [56:41]
Raoul Pal
All right, my friend, you obviously enjoyed the episode because you're here with me at the end. But listen, don't forget to go to realvision.com join and grab a free membership. It's an incredible community packed with alpha great investment ideas and the research that you need to help you unfuck your future. So get started now. Go to realvision.com join.
- [57:06]
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