← Tom Bilyeu's Impact Theory
Tom Bilyeu's Impact Theory
Survive the Global Recession and Build Massive Wealth | Raoul Pal (Replay)
02:27:58
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- [00:00]
Tom
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Raoul Pal
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Tom
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Tom
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Raoul Pal
and other limits in terms apply. I think there's three things you need to do here. Income Income pays your bills. Income can pay your mortgage. Income does everything. Without income you got nothing. Optionality. You need to have things that can pay off a startup or a hobby business on the side. That will never happen if you work for a corporation. Focus on your income. Work hard. Look for other opportunities that can leverage that. And then thirdly, if I've got this income, look for investment opportunities that can change my life. The financial system is not as bad as it was. So they're not the bad guys this time around. They got told off. They got said don't borrow as much money. The individuals have not been great, but not terrible. The government borrowed a lot more and corporations borrowed a lot more. So to put it in perspective, the US is about 25% of the global economy, yet they have 100% equivalent of global GDP and debt. So this is the most indebted economy in the history of world economics in terms of global debt because it's so big now. The US is not the only one here. Europe's got massive debts, Japan's got massive debts. So lots. And China's got big debts. Everyone's got debts because we borrowed for our future selves. Why get enough tax income for the road system I need to build? Why not just issue more bonds and build it now? Because the bet is I'll create more productivity in the future and then GDP grows and it's easier to pay off. And that generally works okay. Like the bet that you took is will my income be able to cover this debt in future? In most circumstances it is. But but what happens is when your debt becomes so large and something happens to Your income. Then you start to say, well, can I pay this debt? So we talked about that part. The other part is, well, everything's backed by collateral, as you mentioned before. That's the thing that you pledge when you take out debt. Now, if collateral falls too much in value, somebody taps on the shoulder and says that stuff you gave us in exchange for the money doesn't cover the money anymore. And then you get this liquidation that we talked about. This can't happen on a economic level. It can happen to you and I, it can happen to us in our crypto accounts, it can happen to us in our financial accounts, but we can't let it happen systemically because then everything goes. So we came from very close to the edge in the US and Europe in 2008. So much so that the banking system seized up entirely because the collateral, the
- [03:41]
Ash
house prices went down.
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Raoul Pal
And then the banks were like, oh shit, we don't have enough money against all of this. And then people weren't paying because we're going to recession. That big doom loop happens in Europe. It came, we got that. But then there was another one in Europe, which was the EU crisis. This time it wasn't the banks that were in trouble, it was the governments. Italy, Spain, France, Portugal, Greece couldn't pay their debts. And then that was the really holy shit moment is if whole countries that are part of Europe, these are big massive nations, can't pay their debts, then we're all fucked. Because then that's the whole banking system gone. That's the whole system of government gone. That's everything gone. So they backstop the system by saying, we'll do whatever it takes. This was Mario Draghi's favorite famous term. So basically the EU got together and said, we will buy these bonds to stop them falling to price in bankruptcy. Because against government bonds, as we talked about, it's the risk free rate. Well, if it's not risk free, then all of the other debt that's borrowed on top of it would have blown up too.
- [04:52]
Tom
How did they buy that? Were they printing more euros?
- [04:55]
Raoul Pal
Correct, Correct. That's been the answer since 2008 is to print currency to buy bonds, which is known as currency debasement. And there's many purists in the financial markets that it doesn't work that way. The mechanism. But it's very clear that this is basically monetary debasement. What monetary debasement means for anybody who
- [05:14]
Ash
doesn't understand is,
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Raoul Pal
let's say, you're thirsty,
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Ash
Tom, I sell you a bottle of
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Raoul Pal
water, you Want to buy it because you're thirsty, so I can charge you $5 for it. Then let's say, I say, well, you can't buy one bottle of water. No, there's only one bottle of water around. If I say, Look, I got 20 bottles of water, well it's not that panicky to get that one bottle. So it might clear at $3 for
- [05:41]
Ash
that bottle of water.
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Raoul Pal
Now if I've got a million bottles of water's worthless. So the more you create of something, the less value it has. So if there's one Picasso, it's worth a fortune. If Picasso had made 5,000 of exactly the same painting, they're worth less. So we see that with, for example, one on ones of Warhol versus Warhol's factory where he produced very similar pieces. They're worth less than the others. We see it in NFT world as well. So scarcity versus abundance. So what you do when you print more money means there's more money around. So it lowers the value of the money. So that's debasing currency. So this is why they can't let the system go bust. Because now there's so much leverage that everything goes. And we saw this in Argentina, famous moment in Argentina in 2001, I believe it was called El Corralito, where the Argentinians couldn't pay their bills.
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Ash
The government.
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Raoul Pal
So what they did is they had this dual economy. The Argentinian peso and a dollar based peso.
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Ash
They just took all the dollars from
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Raoul Pal
the bank accounts and convert them into pesos. So they got the dollars themselves to pay their debts, but basically utterly destroyed the peso and destroyed the economy. So much so that Argentina reverted to barter. It was an extraordinary moment in time. So that's the risk. The other time we saw something similar in a more developed country was Cyprus. Cyprus, a European country. Now Cyprus, they had a financial crisis. There was too much debt. It was based around property. And so what happens is the banks were insolvent like they were in the US and like they were in Europe. But the answer was the ECB said, we're not bailing you out. So what they did is took any deposit out of the banking system over €100,000 and took it. So it wasn't your money. This is what got me into crypto in the first place. Once I realized it's not your money, even if it's in a bank, it's not your money. So these are the laws of unintended consequences that happen if you allow the collateral to go under if we were less levered, like in India, the country's very unlevered. It's like call it 60% of GDP in debt. In a fast growing economy, it's growing 10% a year. That's like you taking the mortgage out and the mortgage isn't that big and you've got great income. The probability of you not being able to pay that debt is very low. So it doesn't matter if Indian assets fall a lot and stuff like that, because there's nothing systemic there. You're not going to destroy the population. But when it's the US or Europe, you can't allow it.
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Ash
You just simply can't.
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Raoul Pal
Because also part of this is you've got this huge old population of retired people or people trying to retire. If you allow the markets are clear, then their savings pool disappears. Now, it's all right for you and I, we've all gone through parts of our career where we've lost a bunch of money and we make it back. You know, you've created a startup, doesn't work. You work hard, but you can't do that when you're 75 years old.
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Ash
What's lost is lost.
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Raoul Pal
And then you have to halve your spending because you've just lost half your pool of money and you don't know how long you're going to live for. So this is why there's so much complexity with old populations or lots of debt. You just can't allow the system to go under.
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Ash
Wow.
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Tom
Yeah. That is really interesting and unnerving at the same time, the interconnectedness of all of this. And then of course it begs the question, what is India doing that we're not doing? Is it just discipline? Is it lack of opportunity? How are they at 60% when we're at 3 to 4%?
- [09:48]
Raoul Pal
Because their banking system didn't really function and they were more restrictive on their lending policies, which is a function of their economy being more emerging than developed. So people don't want to lend them as much either because they're more risky, like a startup, even though India is obviously a very old thing, but in these terms, and they ran a bit more inflation than other countries, so it's really that. And they have a culture of savings. It's because when you're able to borrow, because you're the richest dude in the street, who owns the most money, which is the United States, and humans have a propensity to borrow to create the image of this future self. The future self was the amazing United States of America. That dream that we had in the 50s, that dream died decades ago. And to fund that dream, the mismatch between the dream and the reality is, is debt. Sometimes debt is not all bad, right? Sometimes it can help accelerate some of the things. But if you're doing it to fund a dream that's never going to exist, that's the danger.
- [11:00]
Tom
All right, let's go back then to the. So what defined the American dream and what killed it?
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Raoul Pal
The American dream that came out in the 50s was about the wonder of economic growth, technology, peacetime and abundance and opportunity for everybody. Everybody could be the President, everybody could be rich. That mentality is terrifying because it creates a misalignment of present self and future self. So everybody feels like they never got there. This was the whole book. Fear and Loathing in Las Vegas by Hunter S. Thompson was basically, this is. That's what Vegas is about. We don't have gambling in the same way. In Europe you can go and gamble, it's just not a big deal. But in America it is because it's about this future expectation of yourself. I think driven by the American dream and obviously a frontier style economy and how the US gave birth to itself. So the American dream was set up and the whole construct was set around it. And then two bad things happen. Bad thing number one is everybody goes,
- [12:17]
Ash
this is fucking amazing.
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Raoul Pal
I want to have kids, right? Prosperity, great times. So all of the people who'd gone through the war or maybe two wars had kids. Those kids were the baby boomers. And they had too many kids. They had too many kids.
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Tom
In what way?
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Raoul Pal
For the planet, because for the children themselves. So what happens is, if two of us go for a job interview, we have a 50, 50 chance. If a thousand of you do, you have a one in a thousand chance. So what happens is, if too many people come into the workforce at the same time, they compete with each other for wages. And if you look back and inflation adjust wages for the average median American or the average American, particularly the median American over the last 45 years, it's not gone up at all. So there's been no productivity growth. The miracle never happened. But in the meantime, the price of assets went up.
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Ash
Why?
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Raoul Pal
Because there's a whole bunch of people at the same age who all want to buy a house at the same time, all want to buy into the stock market at the same time to stay for their retirement. They pushed up prices, so they got poorer because they didn't own it all. And so the more they tried to buy over time, the More it went up and they got this massive gap. And that gap between their earnings and the costs of assets that you secure your future income in kept going up. So they borrowed money. When you basically adjust by asset prices, like house prices versus wages, the difference is the debt. And then the government started doing the same. So it was all driven by the baby boomers. But the baby boomers had a second shock and a third shock. Second shock came really in the late mid-80s, which was computers. Computers started competing for jobs with people slowly at first, and then faster. And then 1996, the W. 1999, 2000. Well, 1996, the World Trade Organization, WTO agreed that. What a great idea. Let's all trade without tariffs with each other. Free markets. Yeah, well, the free market actually meant that when China entered the global workforce, they would work for a fraction of
- [14:55]
Ash
what you and I would work for.
- [14:57]
Raoul Pal
And so that meant labor costs never went up and the cost of goods got cheaper because China could produce them cheaply. So we just gorged on this stuff because there's cheap goods. We borrowed more money because we had this future expectation of ourselves being rich, the American dream. And we gorged on more money and we borrowed money to see if we can make money from asset prices. So this whole thing was driven by demographics and that came out of World War II. So it was World War II that drove all of the mess we're in now. And that's the same globally.
- [15:29]
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- [16:30]
Tom
Was there a baby boom all around the world?
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Raoul Pal
No, the U.S. yes. Sorry. There was a baby boom everywhere. The difference was Europeans didn't have a second Baby boom, which is the millennials. The US has the millennials, and that's helped the US economy outperform Europe over time. Japan didn't have millennials either. So they're all older populations. The US had the millennial population. So the millennial population, it pops into the workforce. You know, the millennials, you know, about four years ago, started hitting 30 years old, that big thing. This is a big bunch of people. Problem is they look into the world. Their parents are still in the workforce, so they need to compete with jobs with their parents. There's a whole bunch of them competing with each other. They all try and go to university to see if they can get a better job. So they drive up the cost of university, but then come out of university. They try and buy a house, they. They drive up the cost of how. I mean, it's just a mess. When you have these bulges of population, you create all these distortions. So these millennial population are pretty screwed because their parents have driven up the price of assets so high trying to save enough to retire, which has never really happened, that they look, they come out and say, right, I'm earning money now.
- [17:49]
Ash
What do I buy?
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Raoul Pal
Oh, the equity market, at all time high valuations, the bond market, all time low yields, property prices are too high to afford.
- [17:56]
Ash
I'm fucked again.
- [17:59]
Raoul Pal
All of these are why I got to crypto, because I knew that I had a different expected future return because their parents hadn't owned the stuff, and therefore they themselves could help drive the price up and the adoption as long
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Ash
as they bought it and owned it.
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Tom
Okay, so demographics are destiny. That's something that you hear said a lot, which is terrifying, I suppose. I don't like anything to be destiny. I. The idea of the American dream. So going back to what you were saying about Vegas, that is a fascinating take. So what may have somewhat distorted my view of all of this is that the American dream worked for me perfectly. I'm a Gen Xer. But I.
- [18:43]
Raoul Pal
Why is everybody watching your show? Because they want it to work for them. Yeah.
- [18:51]
Tom
So here's where we get into something really weird. So what you and I were talking about last time is, hey, I see this opportunity in crypto, which, by the way, my thesis is still intact in terms of that. And so I hope that people aren't panicking, that they didn't take leverage, that they were slow and steady wins the race. I haven't sold a single satoshi to give me a sense of where my head is at. But Raoul, the reason that things Worked out for me is really twofold. One, I have an obscene work ethic that makes even myself sometimes uncomfortable. There's a Jordan Peterson quote that I think is really insightful, which is don't ask why there aren't more women running Fortune 500 companies. Ask why there are any men at all. And what he meant by that is it is so grueling that why does anybody do it? And since I got into NFTs, I've been working for the last eight months at this point, maybe nine, I've been working 120 hour weeks and even I'm like, what am I doing? This is crazy. So that's number one, my work ethic is insane. Number two, I believed it could happen. Now you put those two together, it does not necessarily equal a good outcome. I am hyper aware of the role luck has played in my life. But if you take either one of those away, it is a guaranteed failure. So if you don't work hard, you are fucked. If you don't believe you can achieve, you won't do the things you need to do to be successful. Because why would you? It doesn't make sense if you don't think it's going to work out. And, and so while there can be no guarantee of success, one thing I am really trying to get people to do is believe that it can happen. Now I will define it differently as in if you can make something that people want more than they want their money, then you can be successful.
- [20:53]
Raoul Pal
So let's talk about it in financial market terms or macro terms. I think there's three things you need to do here. 1. Income. Income rules the world. Income pays your bills. Income can pay your mortgage. Income does everything. Without income, you've got nothing. Income takes hard work. It's hard to get up the ladder, earn more income. Secondly is you need to have optionality. You need to have things that can pay off. A startup or a hobby business on the side can give you optionality because you can build a business and a business has intrinsic value plus it can increase your income. That will never happen if you work for a corporation. Yes, you can have a great career and do fine, but you'll never have that extra upside that you and I have had by building businesses. So that is another thing is focus on your income, work hard, look for other opportunities that can leverage that income and opportunity set that you've got for you. And then thirdly is if I've got this income, look for investment opportunities that can change my life. And that doesn't mean being a degenerate gambler. It's like simply putting, if there is a thesis, for example in cryptocurrency that you and I share, that this is a long term network adoption of this incredible technology that is exponential in nature and highly volatile. You should be looking at the moments of extreme weakness, the blood on the streets moment, to be buying more, not on leverage, but just putting your money into it. So if you'd have bought a house after the 2008 crisis, you'd have done very well. If it had bought it at the peak, you'll have done less well, right? So timing matters. And I looked at this to give you a specific example, just wrote a whole article about this is I went back with a bit of honesty thinking I'm looking at my ETH price and I'm going why didn't I sell it at 3000? I should have just, you know, I could have bought it back cheaper. And I know that that is a siren song that goes in your head. Right? Mental torture. And I've been in this space since 2013. So I went back and looked at my entries and exits and what I did in the past and what had happened if I just bought and hold and what had happened if I bought and hold and added when it was this far oversold. It's very simple. So I figured out that if I'd. So what I did is I bought in 2013 $200 per bitcoin. It went up to. Whoa, it went up to a thousand. Sorry, it went up to a thousand in six weeks.
- [23:55]
Ash
I was like, oh my God.
- [23:56]
Raoul Pal
But I had a long term thesis. I wrote the first kind of macro strategy paper about the valuation of bitcoin. I thought this could be worth a million dollars. And let's assume I'm an idiot by 90% it's still worth 100 grand. So this is the best bet I've ever seen. So I held on and then it fell 82% and I'm like wow. But I'd taken the bet and I put money in was not levered and I could afford to take the bet. So I just thought I'm just going to forget about this and just see because this is a longer term thing and you don't normally make money that fast and doesn't normally ball this far. So let's just see. And then I kind of forgot about it. 2014 and then 2015 starts going up again and then by 2017 I'm now mentally scarred from an 82% drop. Coulda woulda shoulda. I then see confusion in the market about are we going to fork bitcoin to two different chains. The price is 2,000. I'm now up tenfold. I'm a genius. My macro bet has paid off, sort of. I sell out, it goes up to 20,000 in three months later. And I don't mind, I don't mind because I've made ten times my money. What I did was deviate from my thesis. My thesis was this was a 10 year bet and I took the money off the table within five and then I went back and then obviously I bought back in June, May, something like that, 2020 and had a good run and put more money into it than I had originally my original bet. And I worked out that I had as opposed to just holding my original bet. I used a theoretical number. So I think it was if you put ten grand into that first bet, it would have been worth 1.4 million. By doing the right thing, buying reasonably low and selling reasonably high and timing the market, that was a small fraction. It was. In fact, I think I make 20% of what I would have meant if I held on. And then I went back and looked at, okay, well what did I actually do? Because I massively increased my position in June, I still underperformed by 5x. And then I went, okay, what happens if I'd done the right thing, what I should have done, which was my framework, which was you buy it when people, when it's on sale, when there's blood in the streets. So I went back and looked at the bottoms of the bear markets, assumed I'm an idiot and I can't catch the bottom of the bear market and miss it by 30% and just put the same amount in each time that I started with that 1.4 million would have been 30. Sorry, not 30, sorry, 3.
- [26:51]
Tom
I was going to say, good Lord,
- [26:53]
Raoul Pal
had I rolled my profits in, had I just doubled down each time or whatever, the numbers go exponentially larger. And that really stopped me in my tracks. It's like, here's me doing the right thing, you know, buying when it's in a bull market, selling when it's in a too strong a bull market, buying when it's down a bit and I still didn't do as well as just holding it. And if I just added to it, I would have done well. And my framework is this is a long term trend, right? We've got at least another decade in this, at least, probably two or three decades. But this part of it is going to continue to do very well.
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Ash
Sure.
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Raoul Pal
Bitcoin, over time, as it gets more users more adopted, it won't go up as much each cycle, but there'll be plenty of others and plenty of opportunities. So what we should be doing is using this, thinking of the money you've put in as your retirement money and writing it off and then just adding if you've got money in a bear market. Now, the problem is most of us don't in a recession. But a friend of mine taught me very early on, he said, raoul, there's a key thing I've learned is he who has cash in a recession is king. So that's that combination of income and opportunity. You've got income, you've got some cash, and now everything's on fire.
- [28:22]
Ash
Sale prices, you're the king.
- [28:24]
Tom
So what do we learn about the psychology through all of this? Because this really feels like a psychology game. I'm really glad that this has happened quickly. So for me, I've been in crypto for less than two years and I have seen now, even in that time, sort of multiple like, oh, it's all over. No, we're back. No, it's all over. And so watching the whiplash of how people feel, act, talk, even, like, what. Where I go from feeling like I am so smart, like, this is insane to. Ooh. Like, is this really going to play out, like, the level of doubt where to your point, I just have to turn off my brain. I'm like, I'm not going to think about it. I was perfectly willing when it was up, I was like, if it went to zero, I would be fine. So I'm like, if that's really true, then chill, you're fine. Just let it do what it's going to do.
- [29:24]
Raoul Pal
And if you were lucky enough, like you and I, to have bought slightly earlier in the cycle, then for goodness sake, don't look at your loss of wealth from peak. That's stupid. That's the American dream fixating on something that doesn't exist. Think, okay, fine, I'm still in. I'm probably still up. Don't think, oh, my net worth down 50%. This is the end of the world. No, that's not how it works. How it works is you need to be in it, win it. And you can't be in it to win it if you've got leverage or if you're out of the market. And so if you say to me, well, that's difficult for people, sure, then put less in. It's as simple as that you get to the point where you can sleep at night, then you've got the right size bet. And once you have made money and it's compounded, then don't look at it from the peak to trough. So one of the tricks I've learned with myself in a slightly different thing is wine. I love wine and wine. Good wine is expensive, but it's a lot cheaper if you buy it early when it comes out. So I bought, and I've just taken a delivery of stuff I bought 15 years ago. Now what I do is this little mental trick, which is I write off everything I pay for wine when I buy it because I don't see the wine for 15 years. Why do I care?
- [30:49]
Ash
Whoa.
- [30:51]
Raoul Pal
And so mentally it's gone to zero. So now I'm able to drink wine which I would never open because I haven't paid for it. I kind of like, I wrote it off. And it's really helpful to use mental tricks on yourself to stop yourself doing things you shouldn't be doing, which is
- [31:10]
Ash
selling at the low, buying at the
- [31:12]
Raoul Pal
high, or buying a bunch of wine and then not being able to drink it and you actually buy it to drink. I don't sell wine, but if I did, I would have just sold all my wine. I've never have tasted amazing wines. It's these mental tricks we have to play.
- [31:26]
Tom
It's interesting, you mentioned earlier the siren song of looking at like, oh, my God, if I had sold at that point, I would be so much farther ahead than I am now. It's interesting that you use the siren song. So for people that don't know the mythology, there were these sirens supposedly that would call to men. They would sing this incredible song and the men would want to hear it more. So they would sail the ship closer and they would crash. And so the sirens were intentionally trying to get you to ruin yourself, Basically. And in this story, the solution isn't to develop the willpower in order to resist the siren song. His whole thing was tie me to the mast so that I can't move all of you, block out the sound so that no matter what I say, you don't listen to me and I can enjoy the sound of it without being able to take action on it. So basically, you have to find a mental trick in order to deal with it. Your the lashing you to the rail is to write off the wine so that you can enjoy it when you get it.
- [32:28]
Raoul Pal
Yes. Write off the investments I've got in, in, in crypto. And then I observe the sentiment. I observe the sirens, I hear the song, but they don't affect me. But they obviously do affect you. But you, you, you try not to let it affect you as much. You distance yourself from Price Action because your theory is that it's going to go from here to a lot further over time. That keyword is over time. And we've all said, all of us have said, and we know it does this a lot on the way. So then if you know that it's a known, known, why the hell when it happens, do people forget? It's so funny. When Bitcoin and ETH crashed last year, fell 55% from the high. I spoke to my wife and I'm like, God, everybody's freaking out. And she's like, why, what's happened? I said, well it's down 50%. She said, but you said that's normal. And her exact words said, just shut the fuck up. You should be buying here, not freaking out. I'm like, yeah, sure, you have to
- [33:34]
Tom
remind yourself, yeah, like this is a two part process if you want to succeed. So going back to answering the fundamental question that we're here to answer, how do you thrive in a time like this? So, one, you have to have the understanding of the market, the macro trends, all of that to know what to buy. And then you have to have the psychological resilience that even though you feel it to your point, like I feel that we're down and it does not feel good, but it hasn't changed my behavior. And so because the thesis is still intact.
- [34:04]
Ash
Yes.
- [34:04]
Raoul Pal
And so let's look at other opportunities. So maybe not everybody likes crypto. Another thing that is patently obvious is technology is not going away. Now, it's not easy to pick the right technology stocks, much like it's difficult to pick the right NFTs or tokens, unless you really know what you're doing or you know that particular company or that project. But if the thesis is that technology is going to continue to have this ridiculous adoption, whether it's AI ev, whether it's robotics, whether it's genetic sciences, all of these things that are around us, space travel, well then if it's being sold in a fire sale because everybody's panicking, well surely that makes sense because technology has outperformed the market for the last 40 years. So you always want to be buying technology. So if you're thinking of your 401k, you're a, you know, you're in your 30s, you look at your 401k and you've still got your income because that's the most important thing of everything. You've got your income. You should be going, okay, I should be buying technology stocks and I should be buying crypto because these are long term megatrends tired of overpaying with DirecTV.
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- [35:45]
Raoul Pal
When you manage procurement for multiple facilities, every order matters.
- [35:49]
Tom
But when it's for a hospital system,
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Tom
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- [35:57]
Raoul Pal
room for shipping delays.
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Tom
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- [36:03]
Raoul Pal
keep your facility stocked, safe and running smoothly.
- [36:07]
Tom
Call 1-800-GRAINGER click granger.com or just stop by hi Granger for the ones who get it done. Now is there so we're living in a very particular moment, but one thing I like about Ray Dalio is his idea of this is another one of those. Is this like another time? Is there something that we can learn from historical trends that we could be applying to our investment thesis now?
- [36:37]
Raoul Pal
So the investment thesis, I don't believe so necessarily. There's a lot of macro similarities with the pasts, past episodes, and everybody makes it very dramatic. There tends to be a lot of doom porn and I've been proponents of that as well. Everything looks like the 1929 crash. Everything looks like we're going to go to World War II. Everything looks like it's 2001 all over again. Yes, those things happen. But things go on. And if you bought tech stocks after 2001 crash, you'd be very, very wealthy indeed. If you think of Jeff Bezos, he launched Amazon, bright eyed and bushy tailed, has his ipo. It explodes in price. Everyone's like, oh, amazing online bookseller. It then falls 96%, right? So this is exactly what I went through in crypto. Exactly the same. And then what happened is, well, unlike
- [37:40]
Ash
most of his investors, he held on
- [37:43]
Raoul Pal
and it went up a lot again. Still didn't make up the high. It fell another 80%. It went up again, then fell 60%. And then before you know it, this online bookseller was suddenly worth more than all the book selling Companies in the world added together and it was still trading at a price earnings ratio of like 800. Everyone's like, this is crazy, this is a bubble. But what we didn't realize is he was building a network, this network for E commerce and then the computing power that drives it. And so over time Amazon just did that. And these are the things you need to think about in this is where are we in the volatility and is
- [38:22]
Ash
this going to survive?
- [38:23]
Raoul Pal
Those are the two questions. And if the long term trend is is there then you should be buying
- [38:30]
Ash
into all of this.
- [38:31]
Tom
What are the smartest people buying right now? Anything. Are they sitting in cash? Are they moving on something?
- [38:38]
Raoul Pal
There is a lot of cash. So I have my global Macro Investor Roundtable, which is a bunch of my subscribers from my very high end institutional research service, bunch of the world's most famous hedge funds, family offices, asset management firms. And we all have this little enclave here in the Cayman Islands with a lot of wine and a lot of discussion and trade ideas and stuff like that. And generally people are a lot in cash. The real estate developer guys, the kind of wealthy guys who were in real estate as their primary thing, a lot of them had sold quite a lot then. The hedge fund guys were very concerned about recession, but were looking and so they were buying, let's call it cash, bonds, cash, anything to kind of just not be involved in risky assets like stocks and stuff. But they were looking for the opportunity for the other side, which is what is that opportunity? And that opportunity was technology, crypto and commodities. Commodities have gone up a lot recently. But we've got this, it's this greening thing that's going on, right? We're going to green the world. We have the political willpower to do it. And it's going to happen faster than the market can take. And that means we under invest in mining stuff and we over invest in battery technology, wind farms, solar farms. And the idea is eventually you accelerate this so much that it becomes the adopted technology and electricity becomes cheaper from doing it. The issue is there's not enough copper for the electricity we need to generate. So we're about to go into this enormous copper shortage. You don't notice it now because the economy's weakening and so less people demanding copper. But once we come through the other side of this, you're going to have this huge demand for copper and it's a problem, but it's part of that green energy transition. Green energy transition also is going to require a lot of other stuff to build These wind farms, these solar farms, the hydrogen power, and whether we go to atomic energy or whatever it is, it's a whole change in how the world works. It's very similar to the 1950s when we kind of rebuilt America factories and
- [40:53]
Ash
all of that kind of stuff.
- [40:55]
Raoul Pal
So that moment in time means that these guys wanted both commodities and technology because they know this one's probably kind of a good five or ten year cycle and the technology cycle is limitless right now. So that's, I guess, what most people were thinking. But everyone was very nervous over this next three month period about what happens to the economy and what could happen to markets.
- [41:18]
Tom
So what signals are they looking for? I'm assuming everybody going into cash is thinking, okay, blood is in the streets. But I'm not yet sure which way things are going, whether I've got the timing right. But I imagine there are certain signals that they're looking for. So if it's copper and we're looking for that transitionary moment, or are they buying it now, what are the signs that they will look for to go in on something?
- [41:42]
Raoul Pal
So we talked about income plus opportunity. So they've got the cash. So one of the world's best technology investors, CO2, I think that's 70% cash.
- [41:56]
Ash
Whoa.
- [41:56]
Raoul Pal
Which is extraordinary because these guys are, you know, they're aggressive technology investors. 70% cash. There's a whole bunch of people who are. So what they're saying is the future opportunity is going to be big and it's going to be cheaper than it is today. Now, will they time it properly, et cetera? Doesn't really matter. But here's what the smartest people are saying is the future opportunity is better than the present opportunity.
- [42:25]
Tom
That's a little scary though, because that means prices are going to go down further.
- [42:29]
Raoul Pal
Well, we don't know when they had that bet. They might have done that four months ago, in which case it's been a very good bet and they'll be looking to deploy. And if I read their investor letter, they say they're now starting to look to deploy stuff into interesting opportunities where things are really cheap. Which is the thing I said before. When the market throws out the baby with the bathwater, that's when you start finding the things you really like in crypto world. Things like Solana, great project, down 85%. There's a whole bunch of these big layer ones with network adoption effects already. These are not super speculative assets. They're obviously speculative, risky, but not super risky. They're all down 80, 85, 87%. Okay, that becomes interesting.
- [43:18]
Tom
What is it that makes Bitcoin interesting enough that so many smart people see this as ultrasound money? And what does ultrasound money mean?
- [43:29]
Ash
The world has a history of money, whether it's backed by gold or not, where government gets themselves excessively into debt and they devalue the money. So the Romans used to clip the edge off the coins so there was less gold in each coin. And eventually people would lose faith in the coins because they blend them with silver and then blend them with copper. And, you know, the coins were worthless because that was supposed to be worth the value of the denarii in Roman times. But governments can't help themselves. Humans, we're just humans, right? Humans are fundamentally flawed creatures, and we always will be.
- [44:08]
Raoul Pal
So then we have these gold standards.
- [44:11]
Ash
The US and the UK were on gold standards. World War I, World War II, we all have to leave it because we've got too much in debt again. We've overly financialized yet again. Because humans love leverage above all things. It's kind of sex and leverage are the two things that drive humans for some reason. Then we adopt a new system which has been around before, but it keeps getting abandoned, called fiat money. Fiat money is money not backed by anything. It's backed by the promise of the central bank paying it. So that's the dollar bill that we all are familiar with. And every country in the world now adopted fiat currency. But as with everything, if you're really thirsty and I gave you a bottle of water or sold it to you, you probably pay me 10 times too much for that bottle of water. If I give you a million bottles of water, they're worth precisely zero to you. So scarcity has value. That's arts, that's cars, that's almost anything. Humans value scarcity for whatever reason. We do. And so if you're printing too much money, you're creating less scarcity.
- [45:20]
Raoul Pal
So, yes, there's money everywhere, but the
- [45:23]
Ash
money has less value. So once you understand that, you say, well, what does it mean? The dollar hasn't collapsed. It's kind of where it was versus the Euro in the last five years or whatever it is. And then you say, huh? But my $50,000 salary now can buy me much less shares in Apple, Amazon, Google, Microsoft. In fact, units of the S&P 500, I suddenly can't buy as much. Since 2008, it's a fraction. I can buy like a third of what I could. Same with real estate, same with gold. And then you're like, huh, Assets have suddenly got expensive. They haven't. The value of your savings has gone down or your money. So you can't afford to buy assets. What is an asset? An asset is deferred consumption from the future. I buy a house, I sell it in the future. I get to retire whatever the things are. We don't buy the S and P because we want to hang it up in our wall. We buy it because we want to sell it at a future date to realize money. So that means our future selves are now poorer. That's essentially what this means. That's what currency debasement is. So bitcoin comes along in 2008 in the middle of the crisis. It's kind of like it was perfectly prepared for this. And said satoshi goes, hey, look at this. I can create an algorithm that only creates so much of this thing, the bitcoin, and it can never vary, ever. So therefore, this is scarcity that humans can't fuck around with. Now, humans have this propensity to fuck around with scarcity because they're economically incentivized to do so. Here, they can't. So then they become economically incentivized to own this asset because it's scarce and it cannot be changed because it has this consistent supply curve and a limited number. So bitcoin becomes this great store of value, and it would look like gold, because gold's a good store of value. It's worked for thousands of years. But bitcoin has this other thing to it. It's a network, which gold isn't, and it's technology, which gold isn't. So we have use cases and the benefits of building a network. So suddenly it goes up exponentially in price. Roll on to 2015, and suddenly somebody's looking at the blockchain and they start saying, imagine if these bits on the blockchain, which is where you record the ownership of something in bitcoin itself. What happens if we could put a contract in there? Because humans live off contracts. Everything is basically a contract in our legal terms. And that was the rise of ethereum. It became a platform where you could programmably change the blockchain, not the attributes of the blockchain. You couldn't remove anything off that ledger, but you could change the little holding buckets and say, well, it can look
- [48:25]
Raoul Pal
like this, can look like that, it
- [48:26]
Ash
can adopt to this. And those things were verifiable as well, so they couldn't change. So this created ethereum, which became the platform. So if you think of bitcoin as this store of value, this very pristine, beautiful thing. Then you think of Ethereum as also a very beautiful thing, but it's a much broader application because it's like programmable money.
- [48:49]
Tom
Yeah. There's one concept that I want to nail down here, and if you think I'm crazy, let me know. But when I think about, so I've worked in the inner cities a lot and you begin to realize, wait a second, the generational poverty is a mindset knowledge problem far more than it's a money problem because they manage to pass on a likelihood of being poor. And so when you think about, okay, well right now in the, in the US for sure, and I would imagine most of the western world, that your zip code is the number one predictor of your future success, more than your iq, which I'm just not willing to live in that world. But that's a really fascinating phenomena. And when you begin to ask the question, how is that possible? So you have extraordinarily smart people that regardless of their IQ, are going to be trapped in a poverty cycle. Why is that? And some of it has to do with what a guy named Jeffrey Canada discovered in terms of the language centers of your brain. And if you're not hearing enough words when you're an infant, just the language centers don't develop well. And you're going to have a hard time interviewing for jobs and climbing the sort of traditional corporate ladder in that way. And then they just also help you with communication. But the other part is what is what I call your frame of reference? What do you believe to be true about yourself and about the world? And one of the ideas that fails to get passed on in that poverty cycle is an idea of ownership. And once you understand ownership now, you get into that cycle that you're talking about where you can sell something in the future because you own it today and you hopefully buy low and then sell high. And that really is like just the dead simple equation. And I just a plan to flag that we'll come back to hold all these ideas in my head. You had mentioned earlier as like a throwaway that a lot of wealth was generated in the collapse and of the economy. And so I want people to understand that this is a game. And I don't mean that in any sort of derogatory way, but it has rules. And if you understand those rules, there's always an opportunity, especially in moments of disruption. And we're living through this incredible technological disruption right now. Okay, so back to this idea of ownership. So when I look At Bitcoin, what I see is something that I can own, right? There will only ever be 21 million of these. Now, like anything, as Noah Yuval, Noah Harari says, even money is just a story, right? It's a fiction that we all tell. And it only has value when we agree that it has value. So Bitcoin has that same sort of Achilles heel that if tomorrow everybody stopped believing that owning that has any value, then it would have no value. But we have this ultra scarce thing that the last 10 years have proven people believe has value and you can own a piece of that. And as we go, if it is true that more and more people will pour into this digitization of economic value, essentially then that those 21 million units are going to become hyper scarce and hyper valuable. Now the great news is that you can fractionalize it so you don't have to own one, you can own some tiny, tiny, tiny fraction of it. But now you, you have ownership. So you're able to buy something now that you can own as it appreciates in value and then you can sell it later. And so it becomes just this buy and wait game that real estate maybe still is, but that's why real estate has worked over time. You owned it, you could also live in it, which is certainly advantageous. And then the expectation was that it would go up in value. When I think about Ethereum, at first I was like, okay, I like how much, you know, we haven't even talked, we haven't named Metcalfe's Law, you've talked about it. But this how you can value something based on its network adoption curve. And so I could see there was something going there. And then when I got into NFTs, I realized I just had to buy a bunch of Ethereum to use it. And so I was like, okay, well wait a second, if I'm over here like scrambling just to buy it, to spend it, I'm like, this is me being able to buy into the dollar when it's like new and nobody's sure if we're going to use it, I thought, whoa, I would take that opportunity. So that's how I see the difference in the two. One is just sort of straight ownership of something and then one is like, well I know people use this and because people use it and there's controls around the supply, that the odds are that it will go up in value.
- [53:02]
Ash
Ethereum's kind of like owning a part of the Internet. As you said, everybody has to use Ethereum, basically that uses this Crypto Rails, unless you're just in the Bitcoin world. But everything that we talked about and everybody will have, even if you're not very familiar with the space, will have heard the term DeFi or NFTs or tokens. Basically most of that is still being built on Ethereum and as you said, the network. So what is this Metcalfe's Law that you and I have referred to? Metcalfe's law is it really started to become understood in the 80s and then much more so as mobile phone networks started, these giant connected networks, right, because digital technology allowed networks to connect before it's humans. We couldn't connect with each other in the same way. So networks connect with mobile phones, suddenly they explode in value. All these phone companies, huge companies, and
- [53:57]
Raoul Pal
if you added them all up around
- [53:58]
Ash
the world, they'd be worth tens of trillions probably. We just don't even think of it in those terms because they're fragmented networks. Then the Internet comes along, this free network, and everybody builds on top of it and they create network effects. The most classic example is Facebook. Facebook connects us with friends and family and in exchange they get your data, they sell you adverts and they. So you've got a bunch of people using it, bunch of businesses now building on it and this advertising monetization structure, shareholders get rich. You and I get to unfortunately meet somebody from university that we don't want to talk to, that we met 20 years ago and we're now connected with again. It's that. But the network that Ethereum and Bitcoin does is different. You're the owner of the network and the user. So as a user, like you said with the nft, you're actually owning a share of the network itself. So everybody uses it, owns a part of it. Therefore if the network's going to get used a lot, you're all going to get rich and the value of the network is going to go up massively the more people built interconnections. So Metcalfe's law is not only just the number of nodes, that is the number of users, but how much they connect with each other. Well, you're seeing it because there's NFTs and there's DeFi and there's all of these applications or the store of money aspect, these things altogether. And then there's the linking of all of these, like Chainlink or some of these other protocols, polkadot, they're linking all this ecosystems together. So I can send you a dollar instantaneously and we have no Idea whether it went on Bitcoin, Rails, xrp, Rails, Ethereum, Rails, and guess what? We don't care. I promised you a dollar, you want to get the dollar instantaneously. That's interoperability. That's all coming. So this is what Ethereum is about. It's the magnitude of this network where everybody's developing everything on top of it and it's scarce supply. So it's seeing an even faster adoption rate than Bitcoin now for the reasons that seem pretty clear. Because it has more use cases than currently the bitcoin blockchain does. Doesn't mean bitcoin blockchain can't in due course. But right now there's a lot more use cases in Ethereum. It's super exciting.
- [56:14]
Tom
Do you think that Bitcoin would need to do something like that in order to retain its value proposition?
- [56:20]
Ash
No, I think its value proposition stands above all things. It is pristine, it's pure. It is what it is. And the way it's so impossible to change any of the attributes of bitcoin makes it a bit clunky. And that clunkiness is its beauty. It is so secure. It's the most secure of all protocols. So let it be what it wants to be. Now people are building things like the lightning layer which allows you to do lots of fast payments over the top. Maybe that scales, maybe it doesn't. Doesn't really matter. That store of value for every person to think of, like it's owning a piece of Manhattan real estate at low prices, that's never going away, not in the conceivable future because humans have now said it has value and it's being adopted very fast. So no, Ethereum's a very different thing. It doesn't compete. That's how I like to think about it. And unfortunately when you go online people will tell you, well, it's competing and it's not as good. You have to ignore all of that and look at the whole space overall and say, and just be honest saying, we don't know where this is going to be in 10 years time. And like you say, so therefore I can own three of these things and probability is I'm going to capture a large part of this and maybe I'll adapt in due course.
- [57:42]
Tom
One thing. Sorry, go ahead.
- [57:44]
Ash
Yeah, so it's don't over force the narrative, just be broad, be open and always be learning, as you rightly said, because we don't know. This is all new and it's happening at lightning speed.
- [57:57]
Tom
Yeah, that's the thing that I, I am certainly most attracted to with you and the way that you are and seems to be something that people echo a lot about you is you're very open minded. Is your open mindedness the reason you have been successful or is it a response to the struggles of getting to where you've gotten in your life?
- [58:19]
Raoul Pal
You know, I think it's part of
- [58:20]
Ash
it is my background. You know, my father's a first generation immigrant from India. My mother's a first generation immigrant from Holland. They met on a blind date in Birmingham in the uk I've lived in India, I've lived in Spain. I grew up in the uk I've lived in the Cayman Islands. I've traveled the world. So it forces you to be open because you've got different religious backgrounds there, you've got different, massively different cultural backgrounds. All of this stuff forces you to be open minded. So I'm generally open minded by nature just because of that. And macro investing is all about being open minded to other possibilities. So once you learn the trick that it's okay to say you don't know, but I think this might be how it plays out. So you think in what's known as probabilistic terms then for that to happen, for you to say, look, I think there's a, there's an 80% chance that Bitcoin over the next five years is going to $250,000. That's a reasonable odds. What's the 20% chance that it doesn't? Okay, so you need to open have both of those things in your mind at any one stage and be assessing them. I learned that from the book, I think it was the Alchemy of Finance by George Soros, who was probably the most famous of all of the macro investors and he would talk about this a lot, that you have to have these kind of logic trees of probability trees. And once you understand that, you can even bet against yourself, which is really hard to do. And I can't do it. But some of the best traders can be long the S and P, they think the S and P is rising, but then they think the odds of it falling are getting high and they start selling against themselves. It's like it's very hard to do. But that kind of investing teaches you to keep an open mind because you're looking at the whole world and you have to know that we don't know the outcome. Anybody who tells you that they know what's going to happen, it's just a fraud. It's just the open mindset. I don't know. But I think, and this is why I think that's all you need to do. That's open minded in a nutshell. Admitting that you are fallible.
- [60:33]
Tom
Yeah, I think that that is extraordinarily smart. One thing that I've noticed about entrepreneurs is the most successful are the ones that are able to hold competing ideas in their head at the same time. And you. So when I'm teaching entrepreneurship, one thing that I talk about is, okay, you have to have this narrative. So you have a goal, you're trying to get there. You know where you are. There's a chasm between where you are and your goal. Your goal is probably, you know, skate to where the puck is to going to be. So it's something where you're making a bet about how either culture is moving or technology is moving. And then you have to create a narrative that says, this is how I'm going to go from where I'm at to there. And what that narrative does is it smooths out some of those like, leaps of faith that you're going to have to make in order to get where you want to go. But then, you know, bringing this back to somebody in the finance world that I've learned a lot from, Ray Dalio, where he had that just catastrophic learning event where he realized, you know, we had all this conviction about something that was happening in the market and he ended up being wrong and it just obliterated his company. And he realized, okay, you can believe you're right, but you have to hold open in your mind, how do I know I'm right? And constantly be looking for disconfirming evidence. So it's like I tell people, you have to have all this conviction. You have to be able to lead with conviction. You have to be able to go into something believing this is going to work. My narrative is true. That's how I'm going to cross this chasm to get to my goal. But, but motherfucker, you better have open in your head this idea of I have to challenge this narrative. I have to constantly look for the ideas and reasons why I'm wrong. And if you can't do both, race forward with conviction and constantly battle test that idea, you are in trouble.
- [62:12]
Ash
And that's why being an entrepreneur is so damned hard. That narrative of entrepreneurship is start thing in garage, borrow money off parents, or start it on your credit card three years later, billionaire.
- [62:27]
Raoul Pal
That's the narrative.
- [62:28]
Ash
And then you write your book on how I manage My company. That's actually not true. The best book ever written on this is Ben Horowitz's the Hard Thing About Hard Things. What you have to do is battle both your assumption, as you say, and test it endlessly. You have to be paranoid, excessively paranoid, but still confident in that you're right. And you also have to accept the risk of failure, because the moment you accept the risk of failure, which is very high in startups, you'll start hedging against it. Once you stop worrying about failure as the narrative, you tend to attract it. It's a really difficult thing. People who fear failure above all things tend to fail more. People who don't look at failure and just look at the moonshot tend to fail too. It's the people who can see failure as a wolf behind them and the testing of the ideas, but still having the conviction and maybe changing paths because the wolf is catching up. They tend to fail less, but it's hard. Makes you feel sick. You don't sleep at night. And that's the beginning of Ben Horowitz's book. Basically is two pages of what that feels like. It's called the Struggle, and that the Struggle is probably the most profound two pages in all of entrepreneurship. And it's true. And it's hard.
- [63:52]
Tom
That's a great book. So going back to investing, I want to lay out for people that might be new to this. They're not seasoned investors. The idea of dollar cost averaging was extraordinarily comforting to me, and I'd love to go into what it is, why it's useful, and whether you think that applies to what's happening in crypto.
- [64:16]
Ash
So there's a mythology of investing. The mythology is investing is Hedge fund manager George Soros spots the opportunity, gets in at the right price, makes a fortune. The reality is most people have no idea where the price is going over a short term. So what happens is you buy something, you put all your money in, you've saved up your 5,000 bucks, you put it all into Bitcoin. Bitcoin falls 50%, you panic, you sell it, you feel terrible, Bitcoin goes back up again, you feel even worse. Now you can scrape together, you've lost half of your money now. And then you keep compounding these errors, right? It's called market timing. And market timing is extraordinarily difficult. I do some market timing because that's been my job. And 30 years I've done more than my 10,000 hours, a lot more than my 10,000 hours, and that doesn't make me very good at it either. I'm not bad at it in long term investing. I'm terrible at short term.
- [65:17]
Raoul Pal
So what is dollar cost averaging?
- [65:19]
Ash
Dollar cost averaging is basically what everybody does with their 401. The problem is with 401 s or retirement funds is nobody cares about them. You don't know what's in it. You have no ownership. You just put some of your salary away and it goes in this mythical thing that you probably assume won't be worth as much money as you hope it is. That's what that's become. And you put it in every month. Why do you do that? Well, because you're averaging all of the highs and lows over time because markets tend to do this so you're kind of indifferent. In fact, you love it when it falls because you're buying more units at a lower price. Because your game is to own as much as you can at the lowest possible price. But if you don't know how to market time and 99.9% of people don't and cards and shouldn't, then you just average in over time and magic will happen. You just average a beautiful price over time. And had you done that in the S and P or anything else, you'd make money. Now what's so lovely about bitcoin is it's not a passive investment like your retirement fund, because a retirement fund you can't access until later. So you kind of write it off. And everybody's heard that it's never going to be worth as much as it should be anyway. So it's become a bit of a pain as opposed to something but this you own. You live and breathe that volatility and you live and breathe those gains when they happen. And you will be like wide eyed. I did it to my sister in law, forced her to do this. I said, listen, I'm going to make it easy for you. Just going to open a PayPal account, start that way. And she had some savings she could take out of another thing. She had like 5,000 bucks, 10,000 bucks and she put it in and we got the timing relatively right. So it shot up a lot. I think she got in about 13,000 in Bitcoin and it shot up a lot. So she's like, wow. And then it falls a lot and she's calling me up saying what do I do? Should I sell some? I'm like, no, you keep putting in part of your paycheck. And after all of these falls, these several falls, she starts to really Understand? And when they start falling a lot, she starts doubling the amount that she would have normally invested. And now she's taught herself to invest. Next thing I hear, oh well, I bought some Ethereum and this is how I'm dealing with that. So she's now looking at two different things and she's now thinking about the asset allocation, what's going to outperform Ethereum. She knew nothing about this stuff. This is a year and a half. And she now understands because of that dollar cost averaging and taking ownership that you, exactly as you said, once you actually own something that 401k you don't actually really own. It's like some other guy does something with it and hopefully he makes money. This is you, you're taking responsibility for your own finances. That's so empowering.
- [68:11]
Tom
One thing that I think is really important that I haven't heard people talking about and just because my mind is so simplistic when I, it comes to investing is I look at the stock market and I've got a money manager and like all that and she's trying to explain to me puts and calls and all this. I'm like, ah, this is so fucking confusing. I don't want to think about this. I want to go run my business. And so I, yeah, I just never wanted to get on the phone and talk about it. It was just too complicated. Part of the glory of what's happening right now in Bitcoin is if you stay or crypto, if you stay sort of at the top of the ones that have the most sort of crowd validation because you can get into the deep weeds on what's going on in altcoins. But if you just stay at the top, which has massive crowd validation and you go, okay, I'm going to buy a bit of Bitcoin, I'm going to buy a bit of Ethereum. And then you learn like your sister did, about the volatility and like how to ride that wave and to recognize and for anybody listening, if you're new to this idea, have a thesis you dollar cost average based on your thesis. So here is Tom's overly simplistic thesis that I believe that technology is a one way street, that very few people are in cryptocurrency right now, I believe that over time it will take over some massive percentage of the financial system. So let's say that it goes to, I don't know, become a $10 trillion asset so I can buy that. I don't, it doesn't take an extraordinary leap of Faith, it's at just below, I think 1 trillion as of the time that we're recording this. So I'm like, Whoa, 10x my money. Like that would be incredible. Okay, well, as long as I believe in that thesis, I want the price to drop. So when the price drops, I'm not panicking. I'm like, yeah, buddy, because like you said, now the amount has gone down. So when I first got into this, it was the height of the euphoria, like bitcoin was just going to the moon. It was just insane. And so I was like, oh my God, I have to buy into this. And so I bought in. I started dollar cost averaging. And the price is going up, up, up, up, up. And I'm still dollar cost averaging. And I'm like, oh man, should I be going faster? Like the price is going high. And I'm like, no, no, no. Dollar cost average, you never know what's going to happen. And then boom. Whatever happened, you know, I guess it was like a month ago, six weeks ago, something like that. It just fucking went down like 30, 40%. And I was like, oh, thank God I still have one, my thesis is still intact. Two, the amount of money I was willing to invest, I haven't hit yet. So now at this much lower price. So what I am training myself to be obsessed over is the break even point. So if my original break even point was, let's say $52,000 for Bitcoin, as that came down and I kept buying in and buying in and buying in, now my break even point goes from 52,000, I got it down to like 30 something. And so I'm like, this is incredible. So now that we're riding that wave back up and I'm telling my wife, like, we're up this much in 48 hours. We're up this much in a week, we're up this much in 10 days. She's like, what? Like, it's almost impossible to believe. And I'm very careful to check that. Like the, hey, the euphoria is dangerous. You have to be careful. You have to constantly, like the wolf is right behind you. You really do have to be thoughtful. But dollar cost averaging based on a thesis, that's the way to go.
- [71:37]
Ash
There's another thing I think it needs to be said is you're now faced with something that really offers people enormous opportunity. You're talking 10 for one. I think the space over the whole space over the next 10, 12 years is probably 100x. That's a whole asset class. We've never seen that in history in that space of time. But humans are humans. We go back to that fundamental flaw, is we love leverage.
- [72:06]
Tom
Tell people what leverage is for.
- [72:07]
Ash
The leverage is when you borrow money to buy something. So let's say you had borrowed to buy the original bitcoin purchases, and let's say you put down half of the money. So basically at 27,000 or 26,000, you've lost all your money. Now, bitcoin hit that, you'd have been wiped out, and you'd have had to pay somebody, and you'll have been liquidated. And then bitcoin goes back up in price, and you'll have missed it all. That's what leverage does, because it's okay in a house, because house prices aren't very volatile. So occasionally, once in a generation, you get a 2008 thing where the house prices start moving a lot, and suddenly the people's equity in their house wasn't enough, and everybody gets liquidated. That is, the bank says, we want our money back. That's okay to take that risk if you're cautious in housing. In crypto, this thing moves around like this. Its predictability in the short term is extremely low, unlike housing predictability. So just don't borrow money to do this. If I can get that across, then
- [73:21]
Raoul Pal
you don't care if it falls to
- [73:23]
Ash
26,000 or 10,000, because you can buy more units at the lower price over time, and you don't care. And then when it's trading at 500,000, you'll have become extremely wealthy. It's as simple as that.
- [73:38]
Raoul Pal
So if they raid your. If they put up your mortgage rates, you spend less in restaurants. If you find your food bills at the supermarket are 30% higher than they were, you spend less on something else.
- [73:54]
Tom
Why is that ever good?
- [73:57]
Raoul Pal
Because it stops the price of goods rising. So the price of goods moves either because there's not enough supply, which is what we've had a problem with, or it's because there's too much or not enough demand. So if you've got something with restricted supply. So let's think of oil. Right now, because of the Russian situation, there is not enough oil for the current demand out there. So the oil price keeps going up. So you and I pay more to drive our cars or to heat or cool our houses. So the only way of solving that one, because you can't get the Russian oil back into the market, is to make us use less oil. So the price does that automatically because it gets more expensive. We do it. But if you can also then just lower general demand for things, we'll drive our cars less, we'll catch less flights, all of that stuff. And that lowers demand and therefore prices, because prices rising, inflation is evil for our savings. Because the dollar in your bank account is worth less than a year's time, it's currently worth 8% less, which is quite a lot. And so it's this weird situation where we have to take the pain. We're told we can't buy as much and we're forced into it by rising our mortgage costs and our food costs and all of this stuff. And eventually things will slow down, people will be put out of jobs a bit, that kind of stuff. And then the overall demand in the economy comes down and prices come down. So we're all collectively taking the pain for this inflation that was created out of a whole bunch of different things, from the pandemic through to supply chain issues, through to underinvestment in commodities, through to the shift to green energy. All of these things have created this moment in time, which is tricky. And if we relate it to, for
- [75:48]
Ash
example, the crypto market.
- [75:50]
Raoul Pal
So why did crypto stop going up? Well, it was macroeconomic factors and people like, well, what's that got to do with crypto? Well, really simple is it's a retail based market and sometime last year prices started to rise and so people could afford to dollar cost average less. So then there's less demand for crypto and the price of crypto falls. It's as simple as that.
- [76:15]
Tom
Okay, so that all sounds very simple and direct. I think that what I wouldn't have understood a year ago, obviously now being into this, I have a bit more of a frame of reference. But I like to think that what I'm able to help people with is sort of the 101 of like how all this stuff works. It feels like I always thought of the economy as a thing external to human forces in terms of intentional human forces. As I was growing, growing up, now I'm beginning to realize that it is either rightly or foolishly the subject of a lot of human intervention. And so I would have thought, perhaps naively, that the goal would be to let the market determine, like if people are willing to pay more for oil, gas, whatever, then the price will rise to what people are willing to pay. And it just is what it is. And so inflation is going to be a thing that happens occasionally is if
- [77:18]
Raoul Pal
your wages go up to match it. If not, you're just getting poorer because you can afford to buy less stuff with the, with your, with your monthly paycheck.
- [77:27]
Tom
But why won't the market balance? Naturally, they're obviously you're getting poor, but theoretically it can't just inflate forever because people can't pay. So it'll inflate until the amount of poor is like too much, and then people stop spending and then it rebalances.
- [77:42]
Raoul Pal
And that's called demand destruction. It's exactly the same process. So the Fed can engineer it by trying to raise interest rates and it filters through to our mortgages and other stuff, or the market kind of clears of its own accord where prices get too much, people stop buying stuff, prices fall back again. So either way tends to work. And we're in this weird mess where the Federal Reserve are doing it, the markets are doing it, and we're having to take all the pain in the meantime.
- [78:09]
Tom
And is it better to engineer this? It seems like we at some point crossed a Rubicon and said we're going to engineer the economy, we're not just going to let it run its course. Given how well you understand the macro landscape, do you think that is wise? Or would we be better taking a laissez faire way, getting our hands off of it, and just letting the market do what the market does?
- [78:34]
Raoul Pal
I generally think that the market is better at doing it. If you actually see it from my perspective, somebody closely follows interest rate markets and stuff like that. They did all of the tightening anyway well before the Fed. People like you hear the expression the Fed are behind the curve. What it means is the bond market's already priced it. Interest rates need to go up to slow down the economy because there's too much inflation and the Federal Reserve are trying to catch up. I actually think the markets do a pretty decent job in the way that you suggest prices rise, eventually it gets too expensive, we stop doing it. Now, there's different equations that people fear is when it becomes super entrenched in the economy and we all go to our bosses and go, I want a pay rise. And everybody does that at the same time. That pushes up prices further. You get more wage rises. And that's a wage price spiral. That really has only happened in the US really once, which was in the late 70s, early 80s, when all of the baby boomers hit kind of 30 years old at the same time. So if you think when you go back to 30, you're kind of settling down with somebody, you're probably thinking about buying a house, you're buying a car, you've Got a job, you're starting to earn some money. We had the largest group of people in all history turning 30 at the same time. And they all did the same thing and bought the same stuff. And that really pushed up prices. And that was at the same time there was issues with oil supply and other things. So we had this double whammy of a demand shock and a supply shock, which meant prices went crazy. But that's really only happened once.
- [80:11]
Tom
Okay, so we've got two mechanisms that are working to adjust the economy. You've got people with their hands in. Maybe it's better to not do it, but nonetheless, we've got the market and we've got the Fed, or human intervention, we'll call it. So we're in a really weird moment right now. We've got war happening in Europe. I put that in air quotes, maybe I shouldn't. But we have war happening in Europe or at least on the cusp of Europe. And that's obviously there's an economic fight going on between Putin and Europe. I've heard different things about whether he's winning that economic war. But certainly given their ability to export natural gas, I think is their primary export. They're able. Go ahead.
- [80:59]
Raoul Pal
Yeah, natural gas and crude oil. But Europe relies on Russian natural gas.
- [81:03]
Tom
Okay, so you've got them able to disrupt the market that way. We're just coming out of COVID We had a ton of stimulus thrown at the economy, certainly here in the US I imagine a lot of other countries did that as well. So you've got. That was pushing the inflation narrative. If I remember right, though you'd been saying for quite some time, I actually don't think we're going to have an inflation problem, at least not in the long term. What is it that you saw that led you to believe that? And I think part of your answer is going to be around bond prices and if you can explain what it means for the bonds who have priced that in, because I don't understand what that means.
- [81:41]
Raoul Pal
Okay. So my view, and it still remains, even though it seems pretty unfashionable right now with inflation at 8.5%, my view remains exactly what you talked about is as prices go up, the economy slows down for the exact mechanism and therefore it becomes self regulating. And it becomes that because people are quite in debt and it's a very old population in the US and Europe and elsewhere. So if you raise prices on your retired parents, they can't earn more money because they've got their pension.
- [82:13]
Ash
And that's it.
- [82:14]
Raoul Pal
So what happens is they end up buying less and there's a big cohort of people. So that's why I think it automatically over time kind of self corrects. But the other mechanism is the bond market, which is a fancy name for saying interest rates, the price that you and I and companies and governments can borrow. So if it becomes more expensive to borrow, so think of your mortgage. If you've got a mortgage, well then if it comes more expensive to borrow, then you spend less. So the interest rate market forces demand to come lower. Now let's say you don't have a mortgage and you're a renter. Well, the person you rent from has a mortgage, so they will raise your rent because of it. Which is why everybody's feeling this pain now, feeling a bit poorer. And that's the issue that's here.
- [83:04]
Tom
Okay, so bonds, if I understand them correctly, basically somebody's trying to raise money. So often this is a government bond and so they're saying hey, we want to build a bridge or whatever. And so they offer a bond either at the municipal level, the state level, the national level, I assume. And so you can buy these different bonds, the government is guaranteeing them. So but my understanding is that basically they're going to give you a return on that money. So hey, I'm loaning money to the government and in return for that they're going to give me some interest rate. So you said that that's though the price of borrowing money, but really I'm lending money at least as I understand it, everybody.
- [83:50]
Raoul Pal
Then if the government can borrow it, where is it today? Let's say two years, they can borrow at 2.5%. So if I buy US government bonds or I'm getting 2.5% now, that becomes what's known as the risk free rate because the government can pay you back always. But then if I'm a bank and Tom comes to me for money, I'm going to say, well, I'm going to look at Tom's credit rating, etc. And I'm going to say it's that 2.5% plus another 1% which is my extra profit for taking the risk. And so different people will borrow money at different rates so it filters through. So just because it's the government, it's actually what everything is benchmarked off. And so the riskier you are. So if you're just now a 30 year old in your first job and you've only been earning a salary for a year and a half, well, you might be able to borrow money, but it's going to be at 4% over whatever the government borrows it at because you're riskier. Or if you're a startup and you don't have enough cash flow, well, it's going to be harder than that as well. So everything's priced off that, which is why it's so important. It's probably the single most important factor within how economies play out is the price of which money gets lent and borrowed.
- [85:11]
Tom
Okay, so there's a couple of interesting things here. So one I think it's important to remember, and this is something that I find that I always get the hives over when people act like the government makes money, the government doesn't make money. The government taxes people and gets money from people that are productive and are earning money. So it's interesting that you're reminding me that we the people are both the borrowers and the lenders.
- [85:35]
Raoul Pal
Correct.
- [85:36]
Tom
So that's very interesting. Now, who sets the bond market interest rate?
- [85:43]
Raoul Pal
So it's set at two levels. One is what's known as the fed funds rate. And that is the price of money that the Federal Reserve will operate with the banking system, but that is for very short term money. So it's very risk free.
- [86:01]
Ash
Right.
- [86:02]
Raoul Pal
Because if I'm lending to you for a month, it's not very risky, but if I'm lending to you for 10 years, well then it's riskier. So you have what's known as, well you have a interest rate curve that is the further out you go, the higher the yield generally is. That's not always the case ahead of recessions. It actually switches around and I'll come into that in a bit. So why is the price of money in the future more usually than the price of money now? Well, because potentially there's more inflation in the future, there's more uncertainty. So I want to make sure I'm being compensated to get my money back. And that basically is what the bond market does all day, is figure out what's the future economic growth and what's the inflation rate in the future.
- [86:49]
Tom
Is there like a guy doing that or.
- [86:52]
Raoul Pal
No, it's the voting of crowds. So there's a guy doing it. Well, there's a group of guys and girls at the Federal Reserve who set the price of money. But then it's really the free market that sets the rest and nobody has
- [87:03]
Ash
a say in it.
- [87:04]
Raoul Pal
Which is why when I talked earlier about the Fed was behind the curve. We've just talked about the yield curve. And the yield curve had already started pricing in lots of Fed hikes, that is the cost of money needed to go up to offset the inflation. And the Federal Reserve hadn't raised the cost of money yet. So they're now busy trying to meet the expectations of the market. It's probably too late because we've probably already slowed down the economy anyway.
- [87:30]
Tom
So by too late, though, it doesn't sound like it's necessarily a bad thing. So the economy has slowed itself down. The market has done what the market is supposed to do. So the Fed is coming in behind us now. Are they going to create problems now by adjusting that too late or.
- [87:47]
Raoul Pal
I think there is a narrative that says that the Fed have to do this, but you and I don't borrow at Fed funds rates. The market's already chasing change down mortgage costs or whatever. So I think the market does its job, but there's some belief that it has to be driven by the Fed and their Fed funds rate. So that is, I think, more of a red herring. I think the free market does its job. However, they have one more other thing in their arsenal, and that is the balance sheet, printing money or taking money out of the economy. And they have been printing money for a long time to offset the pandemic and the extra borrowing that was required. That is, when they print money, they're buying the bonds of the government. So the Federal Reserve are buying the bonds of the government, so it allows the government to borrow more without causing any problems. So right now they're about to start tightening, quantitative tightening. People hear the terminology and what that basically is a fancy word for we're going to take some money out of the economy, they're going to take money
- [88:53]
Tom
out or they're just not going to put as much in.
- [88:55]
Raoul Pal
Well, if they stop quantitative easing, which is the first step, which they've done, that's not putting any money in, extra money in. When they do quantitative tightening, they take money out. So if there's a big pool of money sitting there and they say, listen, we're going to take 5% of that out every year, that less money around.
- [89:14]
Tom
So what's the mechanism? So if they want to put money into the system, they buy bonds, amongst other things, they buy assets. But if they want to take money out, what database are they updating? I don't understand.
- [89:25]
Raoul Pal
They sell bonds. They sell the bonds that's on their balance sheet. So they have trillions of dollars of this stuff sitting around where they've stimulated the economy. And then what they do is push it back into the economy. And the idea is it pushes up wages. Or all the banks have to buy these bonds now from the government. And so then they buy these bonds and they've got less money left to lend and do other activities with do
- [89:52]
Tom
the banks have to buy the bonds.
- [89:55]
Raoul Pal
There are mechanisms by which they're essentially forced to buy the bonds now.
- [89:59]
Tom
Interesting.
- [90:00]
Raoul Pal
So generally speaking, it ends up on the bank's balance sheets, and that makes money more difficult because they've now put that money into something so they have
- [90:11]
Tom
a finite amount of money to lend. The Fed more or less forces them to buy some of these bonds that they had originally purchased. So now the bank's amount of money to lend has become less, which means they're going to scrutinize the people that they lend to more, which means that they're going to raise the rates at which they lend them, I'm assuming, because they can. Okay, man, money's fucking weird.
- [90:37]
Raoul Pal
It is weird, but if you break it down to the human element,
- [90:43]
Ash
I'm
- [90:43]
Raoul Pal
going to lend you money when I've got plenty of it. And if you're desperately in need of it because you're going through hard times, you'll pay anything for it. And if you kind of would like to borrow some money but aren't desperate, you'll pay a lower rate. It's basically as simple as that. A transaction between two people is the same thing. So if a mate of yours comes to you and you know they're a terrible creditor, but he's a friend, you're going to have to set an interest rate that maybe to make sure that you get compensated for the risk you're taking. And if you don't have much money because you're feeling a bit tight yourself, you're either not going to lend it to him or charge a bit more money because you could have used that
- [91:23]
Tom
money for something else or lending less. And I'm certainly going to be more scrutinist of whether I lend it to him. Yeah, okay, so that makes a lot of sense. Now, you said something earlier. You actually said a couple of things. I'm going to plant the flag in the hope that I remember this. You slipped one thing in, which was that going green is part of the sort of inflationary stress. So that's interesting. I want to come back to that. But first I want to talk about debt. So you said that we've never been as in debt as we are now, or the baby boomers, just because of the size of the population, Even though they came into a situation where they almost couldn't lose with things like at all time lows, housing costs, all of that interest rates, it was amazing. Great time. They thrive. Millennials come in. It's the exact reverse. But even though they were in such an amazing situation, they still ended up getting themselves extraordinarily in debt. I want to give you a quote from somebody that you may know. His name is Raoul Pal. And he said, this is such a great quote. Humans love leverage above all things. Sex and leverage are the two things that drive humans. So why are we so fiendish about leverage? And what does it do for us that makes it so intoxicating?
- [92:45]
Raoul Pal
So leverage allows you to borrow future money to use now. So at two levels is humans are terrible. We just want everything now.
- [92:58]
Ash
We don't want to work for it.
- [92:59]
Raoul Pal
If I can borrow it and buy that Rolex watch or my new car.
- [93:04]
Ash
Right.
- [93:04]
Raoul Pal
We're trying to meet our future expectations of ourselves always. That's what drives humans. So that's why they use leverage. And it's the same with investments. So they do it for purchasing, purchasing power to bring that future expectations of themselves. Have I earned enough money to buy that car?
- [93:22]
Ash
No.
- [93:22]
Raoul Pal
But if I borrow money, I can get my future self here. It's kind of a trade off because you're actually in debt and now owe somebody. You don't actually own the car. You own the ability to use the car until you pay that off. It's the same with a house, really. And the other point is for investments, you know, people love to borrow money now because then you can make a bigger investment now. But the trade off is, is what happens if that goes wrong, then before you know, you get a margin call or liquidated. And that's a feature we see a lot in the crypto markets, for example, it happens kind of automatically. So humans just love this stuff because it brings their future expectations of themselves closer. I could be richer. I could have more stuff than I deserve now from my income.
- [94:10]
Tom
Yeah. So dicey. And you had said in our last interview, don't do this on leverage. And that was the one thing. So I lived the. I'll call it the lucky side of leverage. So I forget what year this was. Probably 2006. So for everybody that knows the drama that happens in 2008, in 2006, my wife, which is a whole nother thing about women and nesting and all of that, she convinces me to spend more than I was really comfortable spending on a house. But this was like, the height of.
- [94:46]
Raoul Pal
Because this was the future expectation of yourselves now saying, we deserve this big house and I'll borrow some money to do it.
- [94:53]
Tom
Exactly. And so this was when you could literally just. They didn't even, like, research you. They were just giving loans out like crazy. And so we got a variable interest mortgage, and I thought, oh, 100%. Within whatever five years, I'm going to be making way more than I'm making now. I'm going to bet on myself. This is amazing. And so I did. And as it turns out, I ended up making way more money than I had been making. And so all was well and we were able to refinance, and it was no problem. But obviously, for the vast majority of the world, it was a bloodbath now, because I felt like, whoa, I bet on myself. Yay. But, like, I realized only in hindsight how risky it was. And so now I don't fuck with leverage at all. I don't do anything on leverage. Like, it terrifies the life out of me.
- [95:47]
Raoul Pal
I'm the same. I'm terrified of leverage.
- [95:49]
Tom
Oh, my God. And like, even Michael Saylor, who I have just a freakish amount of respect for, when I look at that, he took on leverage to do the bitcoin buying. Now, his number was very low. So we still have a long way to go before Michael Saylor has to worry about being liquidated. But all of that made me want to sit down and figure out, what does liquidation look like? Because I didn't even understand. I understood a variable interest mortgage rate, where, hey, at a certain date, the rate of the mortgage goes from whatever, 5% to 15%, and that's going to be a much bigger payment that I could understand, but I didn't understand liquidation. So as it pertains to a mortgage, which may be the easier one to understand. And once we understand that, then we can go to how people get themselves in trouble with crypto. But what does liquidation look like? If I have the house and my interest rate isn't going up because it's a fixed interest rate, how could I ever get in trouble?
- [96:46]
Raoul Pal
You can get in trouble if you can't pay your interest. So let's say the economy slows down and you lose your job. Now, what seemed like a reasonable payment suddenly becomes impossible, and then in arrears, and then you get the little tap on your shoulder, which is like, I'd like that house back now. Because you don't own that house. We, the bank do. This is what people don't understand. With Leverage, you don't own that thing. You only own it when you pay it off. So that's what happens when you lose your job. You then can't afford to pay your mortgage payments. Now, there's a difference between the US and Europe for this. So the US you give the keys back to the bank. It's not the end of the world. In Europe, the debt stays with you.
- [97:33]
Tom
Oh, God.
- [97:35]
Ash
Yeah.
- [97:36]
Raoul Pal
It's very different. So it is a.
- [97:38]
Tom
They get the house back and you still owe the debt.
- [97:41]
Ash
Correct.
- [97:42]
Raoul Pal
Because the house is valued less. Particularly when what you get, what we refer to as negative equity, that is, you buy a house for 300 grand and it's now worth 200 grand. You owe the bank 100 grand. Now, it's okay if you can still make the payments and eventually just pay off the mortgage, but the moment you can't, they're like, well, you owe us 100 grand, and they take you to court and you carry that and you go to bankruptcy. Housing is rare in the US Most other leverage doesn't have the same process. Most of the leverage get the tap on the shoulder saying, I want my money back, and you end up going to court and you end up going bankrupt.
- [98:26]
Tom
But you're never going to lose the house as long as I can make my payments. Even if the value of the house changes because you get in the bank, could actually get into a pretty dicey situation where, let's say the house was valued at 300,000 when I initially bought it, it drops down to 200,000. If I'm making my payments, the amount of collateral could have changed such that they're actually not in a good position. But as long as I'm making my payments, there's nothing they can do, right?
- [98:51]
Raoul Pal
Correct.
- [98:52]
Ash
Okay.
- [98:53]
Tom
Now, when we get to crypto, it's different, right? Because I'm not making any payments. So what is it? Or am I making payments? How does leverage work in crypto?
- [99:04]
Raoul Pal
So leverage works in crypto that you have some Bitcoin and you want to borrow some more Bitcoin or some US Dollars or whatever it is you want to do. So you will pledge your Bitcoin and your interest payments as collateral. As collateral. And your interest payments are whatever they are. But what happens is if the collateral falls and the exchange or whoever it is, or the defi protocol says, oh, it doesn't cover the amount, you get liquidated immediately. There is no negotiation. No, oh, please, no nothing. Just like, boom, out. And you take the loss because they're
- [99:45]
Tom
saying, hey, you've reached the point at which what you owe us, the value of what you owe us, has now been reached. And so if I don't take this back now, I run the risk of it dropping even lower. And now I'm out. And I'm not going to let that happen. So it's like a house you can repossess instantaneously.
- [100:04]
Raoul Pal
Correct.
- [100:05]
Tom
And now you're out of the market, you don't get a. Like, if it dipped down, even like a penny, it's gone. And so now if it bounced back up, you're still done. Gone.
- [100:13]
Raoul Pal
Out of the market. That's right.
- [100:15]
Tom
Whoa. Okay. But you're never going to end up owing because they're just going to liquidate you right at the moment.
- [100:24]
Raoul Pal
Correct. So when you go into the financial markets, like the futures markets, which is mainly for accredited or sophisticated investors, it's not an instant liquidation. And that's terrifying because suddenly something like the oil price, let's say you've bought some oil futures, what that is is leverage on the future price of oil. That's what you would do with Bitcoin. But oil sometimes can go down 10% a day. And because you've got leverage, before you know it, you're losing enormous sums of money. They don't liquidate you, they call you up and tell you you owe the margin and you can get yourself in a huge mess. So leverage is very scary. The nice way of playing leverage is options. Options is something definitely worth people learning about and a lot of people learnt on Robinhood, because then you're only putting up what you can afford. If you say, I can afford to lose $1,000 on this bet, it's basically like the instant liquidation thing. And you can only lose the thousand dollars, but you don't lose your whole underlying position, you just lose the thousand dollars. You've bet on the price of something going from here to there by whatever date. But that's an options bet.
- [101:35]
Tom
Yeah. I don't know if I want to derail us trying to really wrap my head around options. I have tried many times. You have an option to buy or sell. Is that the idea?
- [101:46]
Ash
Correct.
- [101:46]
Raoul Pal
You have the right, not the obligation is the official terminology, but you have an option to buy and sell.
- [101:53]
Tom
Now, the amount of money that I put up, is that taken or did I not actually put it up? I only promised to put it up?
- [101:59]
Ash
No, you put it up.
- [102:00]
Raoul Pal
You put it up so you can write it off.
- [102:01]
Tom
It's there, it's locked in the system, so boom, they'll take it you can't
- [102:04]
Raoul Pal
lose anything more than that.
- [102:05]
Tom
Got it. But futures, so I remember, and I don't remember what platform it was on, but this was like a Wall street bets thing on Reddit and there were people, kids that just got in way over their head. They ended up owing $75,000 and they killed themselves. And I remember thinking, what the hell? So what are you doing in a futures that can get you in that kind of trouble?
- [102:30]
Raoul Pal
Open ended losses and it's leveraged so you can put $1,000 down, you can get $10,000 of exposure and if the thing falls 20% overnight, you've lost your thousand plus another thousand like that and it's open ended. If it goes down again and you still haven't met your margin call, you've lost another thousand. Before you know it, it's entirely wiped out. And that's the problem because when you've got, when you borrow 10 times, a 10% fall is wipes out your initial margin, the bet you put. But in the options market it doesn't because that premium is all you put in. You can't lose anymore. And it can and it has a time. So let's say it's three months. So even if it falls below and is worth nothing, it's still in existence and maybe it comes back again three months later, you're okay still. So it's just a different way of doing risk.
- [103:30]
Tom
Guys, you must get into crypto. And they were all sort of paralyzed by indecision. So I said, look, my wife and I are going to help you open the account and then we will give you money. The only catch is you must spend it on crypto. And so we did all of that and then watching everybody's like emotion flip when the price started dropping. And for a minute I was like, wait, do I have like enough conviction in this? And I was like, okay, technology is a one way street. I believe that this is gonna digitize as an asset class. I will watch and pay attention if something new comes along. But for right now, yes, it all holds. And so I was like, okay. And so I just kept investing. And then as I like I said, I started focusing on that, that break even number, pulling down my cost of interest. There's a name, what's the name of that? Like your, the point at which your average buy in cost of entry. Perfect. So watching that come down became like my obsession. And then so I start getting that low and I'm really excited and I keep buying in. And then it flips again and it Starts going back up. And so now I'm like, okay, I've ridden a wave. I know what it feels like when it drops. I know how you still have to like check your thesis. 100% dollar cost average, 100%. But now, because I did that, now I'm getting the gains as it swings back up and I'm still in a range. That's what's crazy. There's so much money to be made even just by taking advantage of that, like, momentary volatility. Now I'm not. I am a macro guy in the making. I think only long term I'm not going to sell. As I keep telling my wife, as fun as it is to watch it go up, everything is noise sub five years. So just don't even think about it.
- [105:05]
Ash
It's quite funny because I've become pretty public in all of this space and I've got a very clear idea of where I think it's going and how it's going to go. So I have my thesis and when everything starts falling apart, like the market starts moving a I look like, how has it moved in the past? It's done similar things and I've been telling everybody who's ever got into the space, you need to expect a 50% correction in a bull market and you might see a 70% bear market and over five years you'll have still made more money than you could imagine. So you have to accept those things. So this thing starts tanking. Bitcoin starts first, then Ethereum rolls over later and it's all down 50%. And I've got this weight on my shoulders. I've got all of these people, they've been following me. I have been telling them this, but messes with your mind. And I pick out the one chart that matters to me, which is the adoption chart. Is anything that's going on with China and mining and this and that changing the adoption curve or not? No. So then, as you said, the relentless rise of technology continues. So la la la, I can't hear it. So I turned around to my wife and I'm like, you know,
- [106:29]
Raoul Pal
it's fallen 50%.
- [106:30]
Ash
Everybody's freaking out. And she just looked at me and goes, you are all so ridiculous. She said, you said, you should expect this. Now it's happening. Everybody's freaking out.
- [106:39]
Raoul Pal
And she just walked off and said,
- [106:41]
Ash
she just said, don't say stupid and walked out of the room. And I'm like, yeah, just Twitter is
- [106:47]
Raoul Pal
somewhere sometimes or Reddit or whatever forum
- [106:50]
Ash
you're on is Sometimes your enemy, and sometimes you just need to turn that off. Now, it's been the same with investing in Amazon. The reason Bezos is so wealthy is
- [107:04]
Raoul Pal
because he was probably one of the
- [107:05]
Ash
only people in the world who had Amazon shares from the beginning and never sold them. Because it went down 95% in 2001, too. It's had several 60% falls, and it still made him the richest man in the world. This is what exponentiality looks like.
- [107:28]
Raoul Pal
And for people who are a little
- [107:30]
Ash
more savvy, there's a magic trick to everything to keep your sanity in this. Because this stuff goes like this. And then it does this and is. You'll see this free charting almost on every platform now, trading view, something like that. Just change the scale to a log scale, logarithmic scale, and what you'll find is, you look at Facebook, it goes like this. You look at Amazon, goes like this. And it always feels like, I can't buy this. It's gone up too much. That fear that you had at 52,000, that's real. You change it to a log chart and it's a beautiful trend. And you realize it's all noise. And yes, those movements can be 50%, 60%, but it's just moving in that lovely little trend. Facebook has done that since 2012, never deviated. Nor has Apple, nor has Microsoft, nor has Google. None of these have. Not even Tesla. And nor has Bitcoin. And nor is Ethereum. They're all network effects, and they're priced in the same way. They're all exponential in nature, which we can't get our heads around until you put it on a log chart and it makes you calm down.
- [108:43]
Tom
What does the log chart do? I've heard the phrase, but I honestly don't know what that means.
- [108:48]
Ash
The scale. So normally a scale would go like a bitcoin chart. Well, because it starts really low, it might start at $10, and then it's got to go up to $65,000. So suddenly you're seeing a move, $1,000 move. It looks small, but before it was big. So what happens is it squashes the chart because most of the price action has happened from, let's say, $10,000 to 65,000. So you keep getting this looks like this all the time.
- [109:21]
Tom
And so this is just by stretching out the timeline.
- [109:23]
Ash
No. So what a log chart does is change the scale where it doubles every measure. So it goes $10, $100, or it goes 10x, let's say $10, $100, $1,000, a million dollars. What that little trick does is smooth out all of this issue so you'll get comfortable when you look at it, just to realize that and look at the scale, look how it's changed versus the other scale. And you'll see from that it basically compresses all of this. It's the same as if you used percentages. Because a 5,000 point move now in Bitcoin is not the same as a 5000 point move. When it was at 5000 it would have been 100% and now it's not. Now it's like whatever it is today, 10%. So it's changing that and that really, really, really helps.
- [110:18]
Tom
It's interesting. So you're getting into the psychology of all this, which I find utterly fascinating of. It doesn't matter what you look at, it matters what you see. So you're looking at this chart. You have to be very careful because if you. Most of the charts, at least I use Coinbase Pro. So it defaults to like a really short time period. And so it's just like, oh my God, like this is all over the place.
- [110:39]
Ash
Why do they do that? Because it makes you trade more.
- [110:42]
Tom
Yes, yes, yes, no doubt.
- [110:46]
Ash
You're like, oh my God, I need to sell, I need to buy. What do I need? And then you zoom out and put the 5 year chart or 10 year chart and it's like, oh, this is noise.
- [110:56]
Tom
That's exactly what it feels like. And I've heard people talk about that. I think it's very sage advice when you're feeling stressed. Zoom out. Like literally zoom out the timeline so that as you broaden out and it's like, oh, okay, okay, okay. This all gets very smooth and easy to handle. Now the best way to look at somebody's conviction around their thesis is to see what their percentage allocation of their net worth they have in said thesis. So when I started in crypto, I was like, okay, 1%, I'll get to 1%. I just don't want to be a fool. It's sort of schmuck insurance. Then as I got to 1%, I was like, well, this feels pretty good. I'm going to go to 2%. And then that's where I was about when it started to fall. And so I was like, okay, well here is my opportunity to buy in. Thesis is still intact. Why don't we go to 5%? And so now I'm like, well, 5% feels pretty good. I'm thinking about 10%. So what is your allocation? Of course I know this punchline, but it'll be interesting for people that don't know.
- [111:56]
Ash
So I am. This is going to sound weird when I tell you, but I'm actually risk averse. So I own a few properties myself and I live in them. So I don't rent anything out. This is my bank is lifestyle. And I like to live in nice places so that I don't consider money that I'm investing or doing anything with that's just buried in lifestyle. My shares in real vision as an entrepreneur, they could be worth nothing. They could be worth gazillion. That's not part of it. So what really matters is your liquid net worth, the money that you've got available to invest. And I'm 100% in crypto and I feel like I'm underexposed. So maybe I didn't start with enough cash that I should, you know, I should have had more in cash, you know, as opposed to in real estate or whatever. But it's 100%. I feel massively underexposed now. Why can I do 100%? Because I have income, I have numerous sources of income. So I've always got money coming in. If I lost, well, you're never going to lose 100% because I've got no leverage. So it could go down 80% and it'd be back to roughly where I bought it. So I'm kind of safe in this crypto space now. I can't really lose money, but I've got cash flow coming in. So even if I did lose it, it's not going to change my life. And in fact, cash flow coming in gives me an ability to buy at lower prices. So I'm structurally set up to take advantage of the biggest opportunity I've ever seen. And I'm comfortable with that. Now. I don't know what percentage of my total net worth it is because I don't think of total net worth as total net worth. Because those are things that are never going to change. My beach house and it'll Cayman door, I sell it and buy something else. I'm not going to invest in something else with it. That is the answer. Lifestyle is the answer to everything. We don't do anything else for any other reason, I don't think or you shouldn't. To be rich is not a future state. To have the lifestyle that you want is the future state. And that can be anything. You can live on a shack and a beach in Nicaragua and be the happiest man in the world, go for that so that's what I care about. But liquid net worth. Yeah, everything. And I feel underinvested. I'm desperate to waiting for the next quarter when more income comes in to put more in, because I feel underinvested at all times. That's how much conviction I have. And I've never done that before. Ever, in my entire lifetime have I ever taken a bet like this.
- [114:35]
Tom
I want people, I want to make sure that they hear, though, that you've got the income coming in, that this is not a leveraged trade. I think that that's very, very smart.
- [114:44]
Ash
I don't have debt. This is my pool of investable savings. It's my entire life savings because I don't count the house, and all of the houses and stuff is there, so I can't be forced out of it. I can't lose everything. And I've got an income that tops it up so I can buy more. Or if I get the bet wrong and it doesn't go anywhere for five years, I can buy other stuff. I can cover my cost of living. Everything is fine. So, yes, it sounds, and I call it irresponsibly long, but it's actually not very irresponsible. It's actually quite responsible. It's just a very high conviction bet.
- [115:24]
Raoul Pal
Yeah.
- [115:25]
Tom
This is such a fascinating time. And I'm very aware, and it sounds like you are as well. I'm very aware of. Of. Okay. I'm a. By Internet standards, I'm a somewhat public figure. There are people that listen and I feel this obligation to tell people. You just have to be aware of what's going on. I don't trust my understanding of investment strategies enough to tell people, hey, go do exactly this. But when I really think about the things that would mess with my head. It would mess with my head if cryptocurrency ends up being what I think it's going to be. And I didn't tell people to at least research it because what, so my wife and I end up getting just fantastically wealthy. And you have this moment where I know you've dealt with this, where it's like, do I buy an island and retire and just, you know, check out and sit my ties on the beach all day? Or do I recognize that what really matters is meaning and purpose? And so I want to do. I want lifestyle. I'm with you on that. But at the same time, I want to matter and I want to help other people. And so then you come into the game and you go, okay, who am I? Going to help. And because of our background, we had about a thousand employees that grew up in the inner cities. And you just see what a devastating force it is. You come to the realization I talked about earlier, which, this is a mindset problem. And so we start thinking about, okay, how are we going to address this? You get in, you realize people, people's money towards, people's attitudes towards money. And that becomes one of, like, the key areas where I want to help people. So originally, it was all about giving people an entrepreneurial mindset so they could control their life. And I really believe in that. And I think that when you think, which to me is just taking ownership of your life and recognizing when you have a company, the buck stops with me. I have to figure this out. There's no way to hide, because I'm either going to be able to pay my employees or, or I'm not. Like, there's. There's just no bullshit in that. And so you realize, okay, the market's always going to win. I have to figure out how to run this company well so that I can pay everybody. So super powerful mindset now. Crypto comes along and I'm like, oh, my God, this really is this. It is a moment where all the people who are angry, frustrated, disenfranchised, this is your fucking shot. And I heard you say this. This is so powerful. Thinking about the words you said are giving me the chills where you said, this is the first time where the retail investor, so the average everyday person gets to front, run, meaning go before the big institutions. It's always been the other way around. The big institutions take the cream off the top for themselves, and then all of us get the leftovers. And this is the first time where it's flipped.
- [118:08]
Ash
So if you think about Robin Hood or any of these big IPOs that have just happened, what they're basically doing is there's a bunch of VCs who've made 1000x, 100x, whatever the number is, and have got obscenely rich investing in something that you're not allowed to invest in because of the law because you're not an accredited investor. And in fact, the system's so set up that you're never, ever going to be shown this opportunity. And then at the very end, when the asset's gone up so much, they then list it on the New York Stock Exchange or the NASDAQ and dump it on retail when the best gains have been had. Now, within that, there's always going to be an Amazon and a Microsoft and an Apple, but your chances are getting it at the higher price. So you're the 52,000 guy and not the averaging at 30,000. Your probability of success is always lower than those guys. So the system is against you in this. The institutions are being held back by regulation and can't do it. But we're not. And we know that they have a lot of money because it's actually our pensions. And so they're going to put our pensions in this in the end. Well, we might as well make money from them coming into the market later and driving up prices ridiculously, because that is what's going to happen once this ETF is listed. Every RAA in America is going to be advising their clients to buy the Bitcoin ETF and the Ethereum etf and it'll drive another half a trillion dollars of price appreciation. This is all coming and it is the opportunity. And I tried to set everybody up like you. I've had that sense of responsibility. Real Vision was about that.
- [120:02]
Raoul Pal
But it's also subscription model.
- [120:03]
Ash
So I purposely give ridiculous amounts of information out on Twitter that's free. Subscription model is because I need to pay my staff and create a proper business that has value. But I give a much out on free. We give tons of stuff out on YouTube and tons of stuff out on the podcast. And then with crypto, I just thought,
- [120:21]
Raoul Pal
fuck it, we're going to give the
- [120:22]
Ash
whole thing away free.
- [120:23]
Raoul Pal
So kind of Real Vision, Crypto is a free channel.
- [120:26]
Ash
We just said we're going to get sponsors from these big players because they're making tons of money. The exchanges and others, they can pay for everybody else to get access. So I can pay the staff for the crypto stuff because it's that important to me. It's like, guys, I'm giving you everything you need. We do five interviews a week with everybody in the space.
- [120:44]
Tom
And they're so good.
- [120:45]
Ash
So there's no excuse not to educate yourself. It's all there a thing. First you go in there and go, whoa, I don't know what this is all about. That's okay. You'll find the thing that interests you and you'll find your way in and then you'll go down the rabbit hole. But yeah, I passionately believe, you know, that the future of everything is based around community. You have a community and what you do. I have a community around what I do. And part of community is the inherent or the inherent agreement that you're all in this together.
- [121:15]
Raoul Pal
I'm not going to be extractive of
- [121:16]
Ash
you and you're not going to be extractive of me. But together we can all benefit from being part of this community. Crypto is a community in its own right and we're all benefiting from being part of that. We're all part of that community. But I think that that's why both you and I are very passionate believers in bringing everybody along for the ride. Because everybody around us has enabled us too to build this amazing network and do all of these things. So everybody should share. This is something that you'll pick up from my interviews. I've been talking about a lot. All of this is going to get tokenized too. Culture is going to become an investment. The probability of there being a tom coin within five years is something like 100%.
- [122:01]
Tom
Yeah. So I definitely want to talk about that because I think you've got some really fascinating ideas there. Before we move on. I haven't talked about this publicly, but. But this idea of accredited investor. So I don't understand why people aren't rioting in the streets. It is the most obscene and it's masquerading. And so I'll explain what it is to people. You tell me because you understand this a lot better than I do. Tell me if I go astray anywhere. So the government is basically saying, hey, you're not savvy enough to invest your money wisely. You're going to get taken advantage of. So we're going to protect you just by making it impossible for you to do these early stage investments unless your net worth is a million dollars or more. It's something sort of that basic. And I remember when I crossed that and suddenly my net worth was over that. And I was like, but wait, I'm not any savvier when it comes to investing. I know how to build businesses.
- [122:55]
Ash
And most of it might have been your house.
- [122:57]
Raoul Pal
So it's not like you've got more money.
- [122:59]
Ash
It just so happens that your house
- [123:01]
Raoul Pal
has gone up because you bought it
- [123:02]
Ash
in a nice neighborhood. It's ridiculous.
- [123:05]
Tom
Ridiculous. And so I'm like, how are people not complaining about this? That's the one thing that I sort of look around and go, wait, this is madness.
- [123:16]
Ash
And you're allowed to bet so you can go to Vegas, lose all of your money. And there's no regulation. But if you want to invest in a group of startups or a single startup, it's deemed too risky by somebody. And a lot of that is a power grab by Wall street. Because what does that mean? It means you can't do it. You have to give it to somebody
- [123:37]
Raoul Pal
else
- [123:39]
Ash
and they can pool the money so then you're not taking specific risks. What that means is somebody on Wall street gets rich on your behalf because you're now paying them fees that you didn't have to pay. That's the beauty of Bitcoin. You're basically a VC investor in the future of money. Not Bitcoin, Ethereum, even. Even better, you're a VC investor in the future platform of the Internet of value and you're paying nobody any fees.
- [124:10]
Tom
Dude, let that sink in. It's really, really crazy.
- [124:16]
Ash
There's no bank saying, well, you have to do it through us. If you want to do this, you can buy it and store it on a hard wallet and there's nobody involved. That is the power of what is happening here. This is true distributed power within wealth creation that people only dream of. This is the system not being against you, but working for you for once.
- [124:43]
Tom
Yep, this is the chance. It's really exciting. And the more you learn about it, the more, the more you just start freaking out like, whoa, this was really custom designed. Of course it was. I haven't read the Satoshi white paper, which probably would benefit me. I think it'd be make it easier to communicate to people. But it is. It's kind of like that ultra secure bank you were talking about starting. It's like somebody who really sat down and thought, how do we put the power back in people's hands and make sure that it's uncorruptible? It's really pretty phenomenal. All right. Getting into like this idea of tokenization. First, if you don't mind explaining, explain to people what tokenization is and then we'll get into like where this is all headed.
- [125:23]
Ash
Their heads are going to be melting by now.
- [125:25]
Tom
Yeah, but this is how it starts. And in fact, sort of a quick primer. If they made it this far, they probably don't need it. But here's how learning works. You start not even fucking knowing the terms. And so you take the first step down the rabbit hole. You're like, this is madness. I don't even understand the words people are saying. You start to get the vocabulary. Certain words will jump out at you go, look those up. Now you begin to cobble like, ah, I kind of know what's going on. Then you can, like you said, you pick that path that you understand. You go through. So that sense of like overwhelming confusion. A, it's perfectly natural and B, in the beginning, just find the words. Once you understand the words, that'll be the key to unlocking things. Okay, so with that, one of the words that we need to define is tokenization. What does that mean?
- [126:05]
Ash
So, remember we talked about smart contracts? Smart contracts are this thing that you can attach to the blockchain, and that contract can be any kind of contract. So that brings up the word tokenization, because you can therefore attach anything onto the blockchain because of this contract.
- [126:25]
Tom
Piece of art, fractionalized real estate.
- [126:28]
Ash
Whatever, whatever. So bitcoin, okay, that's attached on the blockchain, but now it can be other things because the contract will say, well, legally, it has the right to this. So it starts off with people conceptualizing about real estate, artwork, other things. Why real estate? This is a really powerful thing, real estate. None of us can afford the $50 million apartment in Manhattan, but that goes up 100% in two years, unlike something in Queens that goes up 20% in five years. So the rich dude's getting richer while the poor are getting less well off. The rich poor divide, once you fractionalize it like you can with bitcoin, that anybody can own 10% of their net worth in a $50 million apartment. We're all making the same amount of returns. The rich don't get richer, we all get the same. If it goes down in price, we all go down in price. That is what it should be. That is what tokenizing real estate is going to do. And you can do it with tokenizing artwork. So you're allowing fractionalized ownership of all sorts of things that is recorded. Nobody can take it away from you. It's written and recorded on the blockchain. And on that ledger, it's confirmed by lots of people to say, tom owns this piece of this real estate, and nobody else can take it, okay, that's genius. But then what happened was this massive explosion this year in digital art or just happened last year? Digital art was where you start tokenizing the recorded ownership of something digital. So people say, digital art, well, it's just a jpeg. Well, a JPEG has no scarcity. Now, it's the same with photographic art. So photographic art has no real scarcity until it's signed or you have the negative. Then it's priceless. That creates scarcity. And I collect signed rock and roll photographs of music artists signed by famous photographers now, because it has scarcity, and I like that. So that applies with digital art, too, because if you say there's only going to be one of this and it's recorded on A blockchain. And it's called a non fungible token. It's a token, then I can sell it to you, and you now have the rights to it. We have scarcity. There's one. And this guy called Beeple creates I can't remember how many pieces of art. It's like 14,000 pieces of art. No, it's more. So he did 15,000 pieces of art, which was all into one JPEG, which was 13 years worth of daily art and all incredible. And then he sells it at Christie's or Sotheby's for $69 million. And everyone goes, oh my God. It's the same when Banksy started selling graffiti art and everyone's like, this is ridiculous. And now suddenly everybody wants a Banksy. And it's the same when Jackson Pollock started spraying paint, and now everybody wants a Jackson Pollock. Nobody believes in art until they do. And it's that same human system you talked about. Once we perceive it's got value, it's got value. That's how it's going to be. And we will trade it for whatever it is. So we can put digital art, we can tokenize it and own it, but that also means we can tokenize things like IP rights. So this video we could tokenize, and only token holders can watch it, or there's advertising that comes attached to it or whatever it is.
- [130:07]
Raoul Pal
And anybody who owns part of the
- [130:08]
Ash
token or one of those tokens can get some of those rights. So that means that music artists who are getting screwed by Everybody, they lose 80% of their economics by the ticket sellers, the middlemen, the music publishers, the
- [130:25]
Raoul Pal
record labels, the talent management business.
- [130:27]
Ash
I mean, everybody, including Google, Facebook, everybody's taking money. They're bringing massive communities, handing them over for free and getting back 20% of the economics. It's terrible. But imagine now you can tokenize the IP to a song, so every time it's ever used, it directly attributes to you. So let's go back to that Beeple example. He cleverly put into that contract that every time it change hands, he gets paid a commission 20%. That never happened to artists. So Damien Hirst, every time he sells stuff, he gets the money at the beginning, the gallery takes 50% and then every time it trades, he never makes a penny again. But this people will make money forever and so will his family every time that ever trades.
- [131:18]
Raoul Pal
So it's like Van Gogh, his family
- [131:21]
Ash
always having a share of that. So super interesting. IP rights to songs, IP rights to all sorts of things. Video in a digital Age, it could be anything. And then you think about, okay, well, where's this all going?
- [131:40]
Raoul Pal
Well, it's going to community.
- [131:42]
Ash
Because community is the new powerful business model where a group of like minded people coalesce around an idea, a person set of ideas. So if you go back, you talked about Harari's book. The other great book is Jared Diamond's Guns, Germs and Steel. Very similar kind of book. In that book he says, he talks about complex adaptive societies, human groups, large human groups. How do you hold those people together? How you do that is basically you have a leader, you have a mission, you have a set of rules, and then you usually have a value or money. And that's true of all religions. It's true of almost all groups. But what was missing in most religions had the value part, because it's like if you didn't follow the rules and follow the leader, you went to heaven or hell or you didn't get reincarnated. Whatever religion you're part of. In modern society, like us, you have a leader, you have kind of a mission, you have a set of rules, and then you have money. And money is what binds them together. That is your national accounting for your society. But tokenization means we can all have a system of money. Bitcoin is the system of money for the people on the bitcoin network. But I can have a system of money based around real vision because we have hundreds of thousands of users who all want to gain value from the ecosystem and want to create value within the ecosystem. But more obviously, it's with musicians and sports stars. If you're Rihanna, you're the third largest social media influence in the world after Barack Obama. And I can't remember who the next one was. So it's her and biba. She has 150 million followers. Whoa, that's just on Twitter.
- [133:49]
Raoul Pal
So her reach is something like 400
- [133:51]
Ash
million people on a daily basis. They all want to be part of the community of Rihanna. We saw that with Lady Gaga and her little monsters. If you give them a leader, a mission, a set of rules, and then a system of money, you've created an economy, a country, a digital country, and that has value. If you make your society successful, it goes up in value and you create more gdp. So this is now us getting rich from culture. We coalesce around this idea. We create the system of money and this rules, and then we look after our society. And if we look after it, our network grows. We bring more people into the Rihanna network. The value of our Tokens go up, Rhianna gets wealthier and the fans get wealthier. That is a whole change. In the old world it would have been Rihanna gets super rich, all of these other people around her get even richer, and the fans don't get anything except some experience. That's the old Facebook idea. The shareholders got rich, but the people who use Facebook got nothing except abused. Really, this tokenization changes everything. We can all participate.
- [135:08]
Tom
I look at the world as not a macro investor. I still see a hyper amount of uncertainty and I want everybody. If this is your first time watching me, I do not consider myself a talented investor. I have always considered myself to be focused on learning how to make money. And that's where I've been successful. Investing money is a big question mark and I'm exploring that. But I look at the level of uncertainty right now and I am deeply, gravely concerned about where we're going. When I look at what's going on in Russia and the Ukraine, that obviously gives me pause. But really more so China potentially going after Taiwan, if that is. Xi Jinping has said that part of his legacy is going to be the reunification of China. He's already got Hong Kong. Taiwan becomes the obvious next move, which is super nerve wracking. Are there big things like that on your mind to hit the pause button to wait to see how they play out, or does that not strike you as a big concern?
- [136:17]
Raoul Pal
Yes, always, obviously. And being a macro guy, you're endlessly reassessing the odds of different outcomes all the time. And there's multiple outcomes. It's not like I go, this is the outcome and I'm assessing the odds. It's like, well, could this happen? Could this happen? Could this happen? Is something changing? That's what you're doing all the time. So we know that the global economy is splitting regionally. There's a bunch of go back. The US dollar, the US economy is 25% of the world economy. It's, as we said, a huge amount of the world debt. It's 100% of GDP in debt. The real problem is 80% of all trade transactions on earth are in dollars. So the US is 25% of the economy, but dictates 87% of everything else. That happens when the dollar goes up, the dollar goes down, everybody pays the price. If the dollar interest rates go up, everybody pays the price. And everyone's kind of had enough of was known as the global reserve currency, but it's too big as a percentage of the global economy. And China, Europe, everybody said we need to change this. And obviously having control over money is power. So the Chinese want to create regional power and that will happen. There's virtually no way we can stop it. And it's a matter of how you accept it and by what manner. Do you want to go to kinetic warfare with them or do we just continue with cyber warfare and geopolitical struggles, which has been the way of our relationship with Russia, our relationship with China for a long time? I don't think anybody wants to go to kinetic war. Just see what happened in the Ukraine. Nobody did anything. What they did was, we'll sanction you and we'll give you some weapons. But there it is, a war in the heart of Europe. And NATO didn't do anything because the outcome of getting involved was bigger than getting involved.
- [138:23]
Tom
So let me ask then, what is China going to do to force. So if the whole world wants there to be a balance that the US making up 87% of global transactions is not something that they're willing to do anymore, is it that China starts building a consortium of people that are going to denominate in the yuan? Is that how this plays out?
- [138:49]
Raoul Pal
We don't know yet. Obviously they'd like it, but it's not ready because they've got to what's known as a closed capital account, which meaning people can't get money out and in easily. So if you think what China did, they did something called the one belt, one road policy. So they basically went around the world and found a bunch of people who were desperate for money and said, we'll give you money in exchange for us being able to have some of your natural resources or your access to your ports. Now, that hasn't been the most successful strategy, but it's in place. And China's footprint across Africa, some of Europe, all over, even down to the Caribbean, South America is all over the place from this one belt, one road. So there was trading power that they created. They then created leverage on it, because if I lend you money, you, I own you. So that's what they did. And then they formed a. Like a. I think it was called the East Asia or the Asian Investment bank, which was an idea to create an international Monetary fund for a bunch of countries in East Asia and Asia overall to try and think about separating out these worlds where China's the dominant trade partner for Asia.
- [140:01]
Ash
So why should the US Dollar be used?
- [140:02]
Raoul Pal
I get that point.
- [140:03]
Ash
Why should it?
- [140:06]
Raoul Pal
So they've started splitting that up. Then the next phase in what happened, I think was when The US and the west essentially froze Russian central bank assets. They basically said the same as Cyprus said, which is your money's not your money. So if you're China, you understand that is now a weak link. So if you want Taiwan, and again, I'm not a geopolitical guy really, but, but it makes logical sense. If you want Taiwan, what you need to do is disentangle yourself from the global system. We're already splitting up supply chains to detangle these two groups because they want to separate. They're going to get divorced. So they're trying to just sort out their financial affairs, move apart. And then China could then think about this. So they need to separate themselves financially, economically, and then you can have Taiwan and then that's the way it seems to be moving. And it hasn't really deviated from that path for a long time.
- [141:14]
Tom
Do you think it's fair to call this a de globalization?
- [141:20]
Raoul Pal
I think we have a tendency to look at everything through Western eyes. What it is is a change of the global order system. And yeah, there's a great book called the Fourth Turning. I think I've recommended it before. Everybody should read it. This is the Fourth Turning. It's exactly what's happening. And that's not like geopolitical doom and gloom. It's actually driven by demographics and the changes and the opportunities and the threats that happen over it. But what we're doing is we're moving away from an old system into a new system. And I don't think it's going to be a one currency system. I think we'll just regionalize. Is that the end of the world? No, we've been to many times in worlds like this before. So people think of it as cataclysmic because it's changed from what we know. But really, is somebody in Indonesia better or worse off if they don't use the US dollar, better off? Are they better to borrow and lend money with their main trading partner, which would be China? Better off. So it's going to happen and it's just splitting apart. Now does it end up in two economic zones or three? Or does somebody try and build an alliance of a globalized currency? Which is something that's been talked about, the Bancorp idea, something that better reflects global trade maybe too, I don't know. But change is happening and you can fear it, but you're not going to stop it.
- [142:49]
Tom
Yeah, that's really interesting. One way to look at this is a way that as a media guy, I think about this a Lot is there's this constant movement in media where there's money to be made in grouping things together, and then there's money to be made and decoupling them, and then there's money to be made in bringing them back together and then decoupling them. And so it'll be interesting to see, if we start seeing on a long enough timeline, this sort of globalization de globalization. Globalization. De globalization.
- [143:17]
Raoul Pal
Well, that's. Don't forget when the Brits were the predominant power, in the late 1800s, early 1900s, just before World War I, the world was pretty much the most globalized it had ever been. Well, World War I and 2 got rid of that, and then it created another reglobalization, which was the rise of the US and then we go to a deglobalization.
- [143:43]
Ash
These things are kind of normal now.
- [143:45]
Raoul Pal
How fractured do we get? Does Europe fracture into, you know, into different regions? Does Spain fracture into different countries? Does the US Fracture?
- [143:54]
Tom
Is that on the table?
- [143:56]
Raoul Pal
Oh, yeah. I mean, the Catalans want to separate, the Basques want to separate. You know, we see this all over. Those could happen, or they may not happen, but over geopolitical time spans, they
- [144:10]
Ash
will happen because it's always happened.
- [144:12]
Raoul Pal
Italy wasn't a country, and we forget this, we'd look at present state and assume that's the same. So these things do move. But it sells a lot of newspapers and eyeballs and attention span to worry over it. And most of the time you shouldn't. Most of the time the opportunity is there and we want to worry about the existential crisis. It's very human again. One of those human traits is go back and read literature over the millennia, it's always about, we're all going to die. It's a survival instinct within humans. It's like, we're all going to die. Oh, my God. Everything's terrible. And yes, it is terrible, and it can be terrible. If you're living in the Ukraine now, it's absolutely fucking awful. But as all of those people who came out of World War II who end up having kids, things do go on. Things do change over time. And so always out of bad times eventually leads to good times. And it's the same with investing. That cycle is pretty common, and it's a very human trait.
- [145:27]
Tom
So as you had this big forum, you know, where different people are deploying their capital to what are you doing? Are you waiting for a given opportunity? Are you still deploying on a dollar cost averaging basis into crypto? What's your strategy?
- [145:48]
Raoul Pal
Right Now So I haven't dollar cost average generally because you know, I spent 30 years in financial markets so I
- [145:55]
Ash
think
- [145:57]
Raoul Pal
hubristically that I can time them a bit better. So I have bought into big sell offs and I'm kind of cleaning up my portfolio, sorting it out, getting ready to do that to try and add as much as I can in crypto specifically or into crypto specifically. But I've also been buying technology stocks for the same reasons and I don't really care about. Yeah, I've owned bonds as a trade because bonds, once the economy weakens bonds tend to go up in price. So people, you can trade things like the TLT and they go up when yields fall. So you can make some profits from doing that. But generally speaking I've been looking at these two mega themes because I really believe in them. And you know, meanwhile as, as we, what we talked about, I'm increasing my optionality by building businesses. So you know, I built an asset management business in the crypto industry. So it's called Exponential Age Asset Management. And we, the first product we launch is a fund of funds investing in crypto hedge funds to allow people like you and I to stay in the trade and not spook ourselves out and give it to experts as it gets more complicated. So building that business, I built another business co founded called Science Magic Studios. It's not really announced so a lot of people see this for the first time. Science Magic Studios, it's called Science Magic Studios. It's a token studio that advises it. It tokenizes the world's largest cultural economies. So that's massive music stars, sports, fashion, movie, TV and book franchises. Those are the four kind of verticals we look at. And as opposed to exactly.
- [147:39]
Tom
Sorry, what do you do exactly?
- [147:43]
Raoul Pal
So this is a JV between myself, Delphi Digital, Kevin Kelly, who's a co founder and a very good friend of mine who kind of grew up together who was the CEO of the Guardian Newspaper Group. He's got another business called Science Magic Inc. Which is the kind of nexus between influencers, brands and community. So when he was building that business I said look, what we're missing is tokens. So we put this together. We've got some of the world's most amazing investors on our cap table and incredible advisors. It's a ludicrous group. So sciencemagicstudios xyz and so that team builds the entire strategy and execution for tokenizing entire economies. So that's from NFTs. So if you think about how Bored Ape Yacht Club did it. Or Yuga Labs did it more specifically. Which was. They started with NFTs, they start building community, they add other communities, they build on and then they have a social token around it and experiences.
- [148:41]
Ash
That's the hard way. The easy way is if you've already got 100 million fans.
- [148:47]
Tom
Wow, that's really interesting. I didn't know that you were getting into that.
- [148:51]
Raoul Pal
Yeah, that's why we're talking so much about this. I've been working on this for a long time and a couple of the. I mean, fingers crossed. But the first two that we do will be some of the biggest things ever attempted in web 3.
- [149:03]
Ash
So we'll see.
- [149:04]
Tom
What are your thoughts on regulation?
- [149:08]
Raoul Pal
We know regulation. You have to figure out how to do this airdropping. Let the market set the price. And it's all about utility. It has to be utility and not speculation. If it's speculation, then it's a security. It has to be about creating a kind of digital economy where tokens have utility and scarcity for that community.
- [149:29]
Tom
And have you guys engaged with regulators or are you just reading the tea leaves?
- [149:35]
Raoul Pal
No, I mean, we have some of the world's best law firms working with us and stuff like that.
- [149:39]
Ash
So there's a lot of these that
- [149:40]
Raoul Pal
already exist, obviously, these token economies. And it is slowly, slowly, slowly catchy monkey. You can't go rushing into. Because the size of these things, I mean, one of the projects has a reach of 1.3 billion people.
- [149:55]
Tom
Whoa.
- [149:57]
Raoul Pal
Yeah.
- [149:57]
Tom
And so are you able to talk about it? I'm super curious.
- [150:02]
Ash
I can't. Not allowed to.
- [150:04]
Tom
When is it supposed to launch?
- [150:06]
Raoul Pal
That won't launch yet. We're just finalizing that. This stuff takes time because you have to go small. Nobody needs to know what you're doing. You kind of develop it and then build it out into a much larger ecosystem. So we'll see. But that's just very early stage. We're still hiring the final people on that. So that's the investment in myself, real vision I'm retooling towards. Not entirely towards, but putting these macro and crypto worlds together, which you and I have talked about in the past, because I passionately believe that all part of the same thing. And this is a huge opportunity set. So doing that, buying the other stuff and trying to make sure I maintain income. Because without income you're fucked.
- [150:44]
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