Coronavirus: The Largest Economic Event in Modern American History? (w/ Raoul Pal and Dan Tapiero)
RAOUL PAL: It has been my opinion for a while that this is probably, well, not now probably, it's factually the largest economic event of probably all modern history. It's unprecedented in the US, or in western developed countries. We've never had a global supply, shock and demand shock and an oil shock, all at the same time whilst we were having tariffs and trade wars. Crushed, you couldn't make this stuff up. No wonder it moved fast, and that's everything rolled into one. DAN TAPIERO: I think the oil story-- if we hadn't had the virus, the oil story alone would have taken us down, maybe not as severe, or as sharp or as much but I think for sure oil is down 70% on the year, it almost felt like a September 11 th attack. We were going into the weekend with the virus just about to kick off, things are bad, and then all of a sudden, we get hit with this thing on top of it. I questioned the Russian- - Saudi again, I don't want to be-- I don't really know, we don't want to hypothesize too much in the realm of extreme theories, but it did seem very strange that they hit us right as we are on our back, and maybe there are ramifications for them later on after we stabilized, I don't know. I think it's the combination of the two, that really hit it bad. Look, the last three, four weeks has been the worst selloff, basically, that we've ever had. There's 87, of course in one day and 29, but again, three episodes in the last hundred years. We're living through real bad right now. RAOUL PAL: The question is then everybody needs to get through the head, because the market's saying, it's like a version of 1987. My view is actually 1929 because of the potential for some outsize outcomes later, how are you thinking this through? Obviously, none of us have a certainty in this, but we're just trying to get the grip with what could be happening. DAN TAPIERO: I also think, and I read this at few different places, but we both remember, '07, '08 took a long time. It was months and months and hemming and hawing, and we need TARP and then we don't and all sorts of different things that they had to work through before getting a bigger package passed. This was instantaneous. In '87, you had Greenspan easing that was at that time I think that that was a very bold move and he reacted quickly. Bernanke was very slow in '08. Also, the '01, '03 post NASDAQ drop, that was a slow thing. The response has been unprecedented. 6 trillion, yeah, but probably globally, it's more like 12 to 15 trillion in liquidity. The key word is unlimited. As a gold investor and gold guy for the last 25 years, I've been waiting for the unlimited sign from the Fed. We got it from the BOJ years ago. Then we got negative rates in Europe. We got Draghi with the we'll do anything, in-- was it 11 or 12? RAOUL PAL: 12. DAN TAPIERO: 12. We'll do anything. Finally, finally, last man to drop, we got the Fed. I would say the markets and also policymakers are really on top of this. Let's not have a philosophical debate at the moment about whether it's right for them to intervene. A lot of people think, oh, well, we shouldn't let the markets clear. Well, the markets froze. A week ago, there were no credit markets, there was no trading, no bid. RAOUL PAL: And there's still problems in it. DAN TAPIERO: Right. RAOUL PAL: The Treasury markets, there's still problems. DAN TAPIERO: Right, but I would say that, that response that quickly in the face of the data that we know is bad, I think really takes the tail away from this in the immediate future. Yes, can we retest the low? Sure, but they're going to be vigilant. Unlimited means unlimited. For me, hopefully, what I'd like to see happen is for them to peg the 30-year mortgage rate at some level lower at 2% and 1%. I think 30-year mortgages are still 3.5%. They said they're going to be in their buying. Now, again, you may say, okay, well, that's only a short term thing. I think that would be a tremendous boost for most of the population here, who would either refi or even consider buying a home once things stabilized. I think they'll be in buying the credit markets, buying mortgages for months and months into the future. We're there. They're on top of it, they fit. RAOUL PAL: I think about this, Dan, and I agree. It's been amazingly quick, but we had a roadmap that we've used before, so we had some idea what to do. When I look at it, if I look at, okay, let's assume GDP has dropped maybe 20% or 25% in this quarter, if GDP has dropped this much in this quarter, that equates to let's say $1.5 trillion of GDP just got wiped out in one go. Then you take the asset market liquidations and stuff, so we're probably at 4 trillion or so there. The Fed have basically, there's no net stimulus, they basically just papered over the crack. For net stimulus to take place, you're going to need a lot more than this, but I think it will come in due course. What they've done is papered over the cracks as fast as possible, which I think was the thing. DAN TAPIERO: Yeah, well, you could go further, if you want to take that line of reasoning. You could say that real rates have risen, they were minus 80 basis points, they went to plus 50, and they've come back down negative again, that's on the five-year real rate. That's happened because inflation expectations have dropped more quickly than interest rates. That comes from the oil shock, also the wealth collapse, et cetera. You could argue that the easing that they've earned, the Fed Funds cut, hasn't even yet really flowed through. Secondarily, the strength in the dollar has definitely acted as a tightening as well.