How Markets Have Underestimated the Impact of Corona (w/ Raoul Pal & Dan Morehead)
RAOUL PAL: Dan Morehead, good to get you finally back on Real Vision. It's the first time we've sat down to chat for a long time and you reached out recently because of your macro views and I thought who better to talk through macro and then where we potentially could go with this than you. I'd love for you just to quickly let people know why you're involved in macro, because people now know you from a different space than the world that I knew from originally. If you could give a bit of background about yourself, I think that'll frame everything nicely. DAN MOREHEAD: I started out as a fixed income mortgage trader at Goldman in the '80s, actually right before the '87 crash so I've seen one of these cycles before. Then you and I met when I was at Tiger Management, we were trading global macro, big disruptions around the world, trying to see things from a very global macroeconomic standpoint, and in 2011, I got excited about Bitcoin and had been full on blockchain since then, and up until recently. Global macro really had no impact on blockchain. The reality is the worlds are now all interdependent and global macro is going to have a huge impact on blockchain. In particular, the fiscal and monetary policies that are going to impact cryptocurrencies. RAOUL PAL: I must admit, it was a genius move of you to do what you did. That was the best macro expression I've ever seen, which is basically to say, and we've seen lots of our friends go through the same cycle, but you were by long way first saying all of the macro opportunities added together is less than this one opportunity set. This is the macro view. That was essentially what you did. It was incredibly prescient of you to do that. I just thought it was just an amazing thing to have done and you got in at the right time and understood it a long way before everybody else. DAN MOREHEAD: Thanks. I've been fascinated by these disruptions that come along, Russian privatization, or Argentine farmland or Tesla Motors, every three or four years, some little shiny object in the forest that I pick up and try and figure out and spend a year or two investing in it, but I do think blockchain's literally orders of magnitude bigger than all of those trades and I think it's the second half of my career. I'm really excited to stay focused on it. RAOUL PAL: Talk to me through how you're perceiving the situation now, let's dig into the macro because there's a lot going on. A lot of people are confused where we are now and some of the probabilities of how things play out. Then we can dig in and chat about things as we go. DAN MOREHEAD: The first main thought is I'm not an epidemiologist, so I'm going to leave that to others, but having studied 35 years of global economics, this thing is just bigger than anything since World War II. I think even I'm trying to get my head around that. I think a lot of economists and market participants are still not yet appreciating how large this thing is. Here's just one quick thought experiment is the least bad way to combat the virus is for everybody on Earth to shelter in place for two weeks. At the end of that two weeks, we test everyone and those who are infected get medical treatment and the rest of us go back to work. That is absolutely the least bad alternative. Even that, if you take two weeks divided by 52, that's 4% of global GDP. That is just such a huge number. Yeah, some of us can work remotely like you and I are, adding a little bit to GDP here but for most people, most industries, it's very difficult to work remotely. The least bad outcome is 4% to global GDP. Then the unfortunate reality is this virus is ebbing and flowing around the world in a very asynchronous way. China who led us into this crisis a few months ago, is actually starting to come out of it, right at the same time, countries like the US and Canada and Europe are right in the essentially the nadir of it. Then there are other parts of the world that have yet to experience it, but unfortunately, are likely to. As this thing washes around the world at different times, it's essentially extending the amount of time the global supply chains are down. RAOUL PAL: My big concern is the market wants to believe in the old world, which is, it's an event like 9/11. You take the hit, there's a bit of a shock, and we return to normal. I look at two factors within this, one is the rolling nature. Countries like Brazil barely started in this cycle, while other countries are more advanced like South Korea, Singapore, or even Italy. The US has really messed this up in terms of how that works. I worry that this rolling cycle continues as huge and much longer than people anticipate. It's not a threemonth event that the market's hoping for. I also think that it's a lot more psychological damage that comes from this even when you reopen the economies. The Prime Minister of Singapore made an amazing speech explaining that, listen, Singapore is not going to open his borders, probably not for a year, because I can't. He said, look, we're going to have to take this hit, but nobody's going to be freely traveling, nobody's going to be congregating in groups. Barring a miracle, this thing's around for a long period of time so if you don't get a one-off GDP here, you end up with a drawn out recession. DAN MOREHEAD: Raoul, I think you're spot on. It's unfortunately our central case is that this will be drawn out for many, many months and there is a psychological impact to it. If you think about all other recessions, they're created by a lack of either credit or income. If the government provides those things, we can all get back to work and it's all fine. In this case, it's a psychological impact. This is all very distressing, and it'll be really hard to get people back to work in a lot of the economies, the consumption of services. I was thinking about how tough the Fed's job is here. One problem is they're already so close to zero like all other central banks when we came into this that they really had little to do but their last cut was 100 basis points, I think that's impudent like hey, honey, the Fed cut 100 basis points today, let's go to the movies. Like it doesn't have any impact. They could cut rates thousand basis points and wouldn't go to a movie theater. I think that is going to make this last a lot longer than people think. China's trying to reopen and there's a great photo of a movie theater absolutely empty like even if they're officially open for business, the psychological damage is going to take months or you even suggested, potential years. Then your point about 9/11, we actually mentioned that in our investor letter, there's already talk of this being a V-shaped recovery and it's just going to be right back to business as usual. I think there's so many things that I have no idea what's going to happen. This is incredibly uncertain time. One of the only things I really believe strongly is it's not going to be V-shaped, that comparisons to 9/11 are really starkly different. In that case, every aircraft was grounded for three days. Then three days later, every aircraft was in the air and commerce could restart. This is just the effect has been slowly percolating. The CDC knew that this was a problem in China in late 2019. This already, we're going into our fourth month of this. We're just starting to attack it. It's going to take many, many months to really bring this under control.