Dialogue with the Founder of Global Macro Investor: How Does the Global Liquidity Cycle Drive the $1 Trillion Target for Cryptocurrency?

Source: Empire Youtube Account

Compiled by: Deep Tide TechFlow

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

Host: Jason Yanowitz, Founder of Blockworks

Background Information

In this episode, Raoul Pal and Dan Tapiero explain how the global liquidity cycle could potentially drive the cryptocurrency market to an astonishing $100 trillion scale. They delve into the concept of "code for everything," revealing how broad economic trends pave the way for explosive growth in cryptocurrencies. Pal and Tapiero explore the economic challenges facing China, debate the impact of artificial intelligence on the job market, and share their portfolio allocation strategies, from Bitcoin potentially reaching a million-dollar valuation to the rise of new Layer-1 blockchains.

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

Global Macro Liquidity Cycle

Overview of the Liquidity Cycle

Raoul states that since the global debt reset in 2008, countries have restructured debt by lowering interest rates to zero, which has provided significant advantages to the system. He points out that the debt refinancing cycle is closely related to the business cycle, typically occurring every four years. This cycle aligns with the cryptocurrency cycle and the U.S. election cycle, indicating that we are currently at an important cyclical juncture.

Impact of Debt Refinancing

Raoul emphasizes that there is currently $10 trillion in debt that needs refinancing, and liquidity injections will help meet this demand. Major central banks worldwide are engaging in similar debt refinancing, with China potentially becoming the weakest link due to its dollar shortage issues.

Federal Reserve Policy and Global Impact

The two discuss the impact of the U.S. Federal Reserve's tightening policies on the global economy, with Dan noting that the strength of the dollar puts pressure on other countries, particularly China. Raoul predicts that as interest rates decrease, financial conditions will become more accommodative, thereby driving a recovery in the business cycle.

Who is Driving the Cycle?

The Combination of Government and Central Banks

Raoul states that this is essentially a combination of government and central banks, which are no longer independent entities. He notes that on one hand, there is a need to refinance debt and increase new debt, while on the other hand, there is a need to ensure the management of this debt.

Investor Reactions and Market Dynamics

Dan further adds that individual investors' decisions in asset allocation also play a significant role. He believes this is a complex power dynamic, where global investable capital creates a reflexive effect when the market begins to move. He mentions that market participants make predictions based on economic data and invest accordingly, which in turn influences the economy.

Definition and Impact of Liquidity

Yano points out that the Federal Reserve's decisions are often based on data from a year ago.

Raoul explains the components of U.S. liquidity, including the Treasury's general account, reverse repos, and the use of quantitative easing. He emphasizes that these factors are interconnected, managing liquidity flows to drive economic processes.

Clarity of the Cycle

Raoul believes the current cycle is the clearest macroeconomic cycle he has ever seen, although this situation will not last forever. He notes that as liquidity is released, capital gains will increase, thereby funding the fiscal deficit.

Dan also states that due to artificially elevated interest rates, the current economic situation has become exceptionally clear.

Structural Changes and Technological Impact

Raoul sees this as a massive deflationary shock, with many people yet to realize the changes that are about to occur.

They discuss productivity improvements and how to address labor displacement issues, with Dan stating that despite concerns, new technologies may create new forms of work.

Raoul concludes that over the next decade, there may be more technological superpowers emerging, and although there are structural challenges, overall GDP growth may increase, with how to distribute this growth remaining to be seen in the future.

Will the U.S. President Affect the Economic Cycle?

Yano poses a question about whether the U.S. president will influence the global liquidity cycle. He mentions that while different presidents may accelerate or delay the economic cycle, these changes seem to be pre-programmed.

The Relationship Between Politics and Economics

Raoul believes that all presidents must finance the same deficits and cannot escape this situation through austerity measures. He notes that since 2008, both parties have adopted nearly identical economic policies, thus limiting the president's influence.

Changes in Capital Flows

Dan believes that while presidents may not fundamentally change the economic cycle, they can influence capital flows. For instance, if a certain candidate is elected, it may lead to a decrease in investor confidence in the U.S. market, prompting capital to shift to Europe or Asia. He emphasizes that market reactions are often based on data and policy changes.

Current Phase of the Economic Cycle

Raoul states that we are currently in the "summer" of the macroeconomic cycle, with the dollar depreciating, interest rates falling, and debt needing refinancing. He points out that this is typically when the economy performs best, with the business cycle beginning to recover and investments increasing.

The Relationship Between Markets and the Economy

Dan believes that liquidity first enters the market, and then the economy follows suit in recovery. He mentions that although some economic indicators may lag, the market has already reached historical highs, showing strong performance.

Why Are We Not in a Recession?

Data Revisions and Economic Conditions

Yano mentions a tweet about a recession, noting that the Bureau of Labor Statistics will revise employment data downward for the period from April 2023 to March 2024, with an expected reduction of about 1 million.

Dan believes that such data revisions happen every year and do not necessarily indicate that the economy is truly in recession. He points out that over the past 30 years, data has always been revised, which is normal in the economic cycle.

Market Intelligence and Liquidity

Raoul believes that the market is anticipatory regarding these data revisions, so such revisions are not significant events for the market. He mentions that the market will recognize weak growth, thus requiring increased liquidity, and that the market's reaction to this information is often much smarter than people realize.

Changes in the Economic Cycle

Dan continues to discuss that while economic conditions may change, the overall trend remains similar. He encourages Yano to focus on how to operate his business rather than getting too caught up in complex macroeconomic factors. He suggests that businesses should seize opportunities during economic recoveries and leverage new technologies like artificial intelligence to improve efficiency rather than blindly increasing headcount.

How Businesses Respond to Changes

Raoul states that as the business cycle recovers, corporate earnings will increase, driving growth in advertising spending and subscription services. He believes that after enduring tough times, the outlook for the future should be positive.

Dan also shares how their company is restructuring its business using artificial intelligence and mentions that some of their portfolio companies have successfully achieved profitability by streamlining processes and introducing new technologies in the face of market challenges.

Today's Best Portfolio

Observations on the Current Investment Environment

Dan shares findings from a survey of global family offices, noting that these offices have very high allocations in cash and fixed income, with 28% in cash and 50% in fixed income, while allocations in commodities and cryptocurrencies are very low, which raises his interest in gold and crypto assets.

Building the Portfolio

Dan states that portfolio construction should be determined by risk tolerance. He suggests having at least 10% allocated to blockchain, cryptocurrencies, and Web3 digital assets, recommending Bitcoin and Ethereum as core assets. Additionally, he mentions considering venture capital funds and growth funds.

The Role of Technology and Gold

Raoul believes that in the current investment environment, technology assets are an important investment direction, as technology is in a long-term bull market. He suggests including a certain proportion of gold in the portfolio to hedge against potential market volatility. He points out that the Nasdaq index has achieved an average annual return of 17% since 2011, while the S&P 500 index has only returned 8%. He emphasizes that a more aggressive strategy should be taken regarding risk.

Risk Attitudes of Family Offices

Dan and Raoul discuss the risk-averse characteristics of family offices, noting that these institutions tend to over-allocate at the end of cycles. They point out that while family offices' current portfolios may be relatively conservative, these institutions will ultimately increase allocations to risk assets as market conditions change.

Trading Cycle

Mindset in Cryptocurrency Trading

Raoul states that he feels it is a mistake every time he sells BTC. He believes that one should increase their holdings during bear markets rather than trying to sell at peaks. He shares his experience of buying Bitcoin for the first time at $200, stating that if he had held onto it since then, he would be much wealthier now.

Goals and Risk Management

Dan also mentions that he sets target prices, such as considering taking profits when Bitcoin reaches a certain price. He states that understanding one's goals is very important amid market volatility. He mentions that some companies are about to go public, providing him with natural exit opportunities.

Long-Term Investment Opportunities

Dan emphasizes that the cryptocurrency market is the largest macro investment opportunity he has ever seen. He believes that Bitcoin's value could reach $30,000 to $50,000, or even higher. He notes that the total value of the gold market is between $15 trillion and $20 trillion, while Bitcoin could become a $10 trillion asset.

Emotional Volatility of Young Investors

Dan points out that young investors are easily influenced by emotions during market volatility, especially when prices drop. He recalls his experiences in his twenties, stating that after experiencing many failures, he has become less sensitive to emotional fluctuations in the market.

Choosing Investment Strategies

For investors, Dan and Raoul believe there are two strategies available in the current market: one is to hold long-term (HODL), and the other is to trade actively. However, active trading requires more time and effort, and few can do it successfully. Raoul believes that many successful traders tend to prefer long-term holding over frequent trading.

Pitching to Limited Partners

Yano asks Dan what his current pitch is, whether he emphasizes Bitcoin as a hedge against chaos, or better technologies and currencies.

Current Investment Environment

Dan responds that he is primarily focused on growth-stage companies rather than venture capital. He mentions that there are unique opportunities in the secondary market to buy shares of some companies at very attractive valuations.

Opportunities in the Secondary Market

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

Investment Strategy

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

Risk Management and Long-Term Perspective

Dan also mentions that he prefers to hold cash flow-positive companies long-term rather than engage in competitive startup investments. He states that although many young investors chase quick returns, their goal is to achieve long-term returns of 5 to 10 times their investment. He believes it is crucial to achieve steady returns while maintaining low risk in the current environment.

Outlook for the Future

Raoul adds that the current lack of liquidity in the crypto market presents numerous opportunities for investors. He mentions that early investors often sell tokens during market volatility, leading to significant price drops, which provides professional investors with the space to identify good opportunities.

Predictions for the Next 12 Months

Market Outlook

Raoul states that he does not want to give specific price predictions due to the complex and vulnerable network environment, but he believes the market will see significant upward movement. He anticipates that Solana could rise tenfold from its current price, while Bitcoin could increase four to five times, aligning with typical bull market performance.

New Investment Opportunities

Raoul also mentions that new Layer 1 projects will always emerge in the market, which may present excellent investment opportunities in their early stages. He believes that while these projects may rise rapidly in the short term and then experience significant corrections, they also represent trading opportunities worth watching.

Interest Rates and Market Impact

Dan further simplifies the market analysis, noting that current interest rates are at 5%, while Bitcoin's price is near its historical peak. He believes that if interest rates fall to 2.5%, Bitcoin's price could easily exceed $100,000.

Dan emphasizes that despite the many dynamics in the market, this alone is enough to instill confidence in investors.

Innovation and User Applications

Raoul also points out that there is a lot of innovation happening right now, with on-chain activity rapidly increasing. He believes that as user applications become more widespread, especially breakthroughs in the gaming sector, the market will enter a new growth cycle. He mentions that the transition from Web2 to Web3 will occur on a larger scale.

Impact of Elections

Political Climate and the Crypto Market

Dan does not believe that a Democratic victory would negatively impact cryptocurrencies, forcing founders to migrate out of the U.S.

Historical Experience

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

Confidence in the Market

Dan further explains that despite various negative sentiments and uncertainties, the market can still overcome these challenges. He mentions that often the market's reactions are merely short-term noise, while the real investment opportunities lie in long-term holding and patiently waiting. He believes that the proliferation of digital currencies is irreversible, much like the internet.

Simplifying Thought Processes

Yano agrees with Dan, stating that many macroeconomic analyses are overly complex and can lead to confusion. He emphasizes the importance of focusing on simple and clear investment logic.

Raoul also adds that investors should not be distracted by market noise but should concentrate on the core factors that truly affect the market.