Gold and Volatility in a Brave New World (w/ Raoul Pal and Hugh Hendry)
RAOUL PAL: We've discovered you hidden in the Caribbean and got you back finally. You've made an appearance on Twitter and it was like there was no chance we weren't going to get you back on Real Vision. Hugh, how are you my friend? HUGH HENDRY: Yeah, I don't know how hidden I am, but certainly, I've had my coming out moment. RAOUL PAL: What are you thinking? You've obviously got something in your head because you've started to reappear on Twitter. I know you've had a chat with Grant recently. What are you starting to see that is capturing your imagination? HUGH HENDRY: I had to, I had to leave the business at the end of 2017 because whilst I was passionate about everything, it was becoming a joyless activity. It did feel like exiting a little bit prematurely. Like I said, I spend a lot of time just going back over everything that came to pass. I've now committed to-- the most attainable project for me, and I know it's grandiose and self-projection, but the first step is always the hardest step that I could just hide. I live this incredible, wonderful, insane, really good life and that could be enough, and I could just hide but I kept having a sense of regret and a sense that there were certain skill sets and you should pursue them. The first project that I could do was essentially just talk to camera and do the 15 years of my monthlies. Because typically, I was forming a contentious posture and I'm waiting for everyone else to come in and get it and share it and participate, and then allow me to monetize the idea. I was typically writing stuff where, again, I described myself as being a schizophrenia guy. I had voices in my head. You know those voices, those voices, we sit there and I [?] on you because you get it with your lectures and things. Give me more. Don't give me like the last six months chart, show me 60 years, show me 100 years in view, and then let's play with the moving averages. Let's do 20-month, 40-month moving averages, things that really don't cross that often. What happens when they cross and let's ask 100 questions. I had voices yelling at me. Then of course, I had a super smart intelligence team who would then go out and try and find some underlying justification, but those voices were very strong 20 years ago almost, 18 years ago when I set up the fund in 2002, beginning of 2003. I was a long short guy, but we wanted a macro fund because the world was set to step out of that territory into the wide. The voices were coming from disparate places, you were beginning to see commodity charts, and prices were no longer falling and when you vol adjusted and you put them relative to other risk assets, they were no longer losing their risk purchasing parity, if you will. Then that took three, four years, and then they were coming out of that saucer like platform and beginning to have a trend. It was, and of course, this was the emergence of China on a global stage and its footprint beginning to have influence on the pricing of these global assets and that's what the voices were picking up. I really went for it and we had just-- I put out an Instagram. I did November 2002 last night and I put it out on Instagram and the finance guys, they go to Instagram to look at bikinis, they don't go to Instagram to look at me. I think about maybe the next one, I wear a bikini. I don't know. I've got 9000 followers on Twitter, and I think I got 1400 on Instagram. RAOUL PAL: It was a finance crowd. HUGH HENDRY: I don't know why because like Elon Musk says, the broadband of video content is just so more immediate, and you can just put so much out there. It's not just what you say, it's how you say it. Then there's the backgrounds, it's what you're wearing, it's how your arms are moving, etc., and unless-- because I've still obviously to learn how to thread a Twitter. RAOUL PAL: Yes, I saw that. I thought, yeah, Hugh's learning. HUGH HENDRY: I'm sitting there, and it keeps saying too many words, I'm like, what do we do about it? If I get more, [?] so now like, okay, let's take that word out. Then someone sends me a message, dude, you got a thread, I'm like, what? My understanding is you can only put like-- it's old Instagram and essentially, you can only do a 30-second type videos so is this Instagram TV? Last night, I did October 2003 and I was just saying there was the chart set up back then and this is what I started to do. We found this little company, Amsterdam Commodities. They weren't looking for investors. They didn't want investors. They were yielding 10% and he had an earnings yield of 14, so just pretty much all of the cash flow and they made markets in the most obscure little condiment type of commodities. If you looked at it, and you try to sell it, whatever thing, and I went on to say that maybe I just started in the coffee shops in Amsterdam getting high because I tell you that stock got high and 15 years later, on the look back, it's one of the rock 'n roll stocks in Europe, one of the best performing stocks ever. I posted a chart, it went from we were buying it at 80 euro cents, and it went to 15, 16, 17 euros. Anyway, so back then was the beginning. I never believe 2000-- well, I was going to say 2008, it's complicated, isn't it? Being early in coming in, yeah, I then exited those trades way too early, I brought down all the gold thing during the year 2005-2006, because actually, the big, boring pension guys we're coming in, that's when it truly lifts the thing. If you remember, I was beginning to say, hey, look, I still believe in gold. I think gold does it. It goes to at least $3,000. This is a Greek tragedy, you really need an intervening profound deflationary shock, and I've seen back then, the Fed's got to do a Bank of Japan, it's got to go to zero. Fed was fed at 5.5% rates. I'm saying gold goes to 3000 if Fed rates go to zero. It doesn't just translate, things have to intervene. 2006, for two years, for the best part two years, we were trying to capture the deflationary event, which we succeeded in doing. Then I truly, truly messed up because I came in and I wanted to bear a grudge that we bailed out speculators, we bailed out all the filthy people who didn't see it, who were irresponsible, who lost clients huge amount of their wealth, shrug their shoulders and went back to doing the same thing. It's not for me to be the moral guardian of the universe and then being fuzzy like that, of course, I missed China spending what, 20% of GDP, China saving the world, China just saying here's the Marshall Plan. This is how we come out. We're going to save globally, the world and that huge rip. Of course, gold flips between being a zero coupon bond and just being a high beta equity, an overdrawn, popular fine if you-- it's a fine but it's [?], and of course they became fine in October of 2008. You're like, oh, and having to liquidate. Then they missed, of course, the march to the 2000 high. I still think that the-- who knows what the numbers are but given that I've been painting the donkey's asset 3000, I still see that contextually now, everything I'm seeing feels like it's the third act that's unfolding, it's the third act. RAOUL PAL: Gold is the thing that is-- the glitter of gold is the thing that's got your attention right now because all roads lead to it for the moment for you? HUGH HENDRY: Well, again, I have only in the last two months, two months ago, I re-subscribed to the Financial Times as an example of just not being engaged. I have to say the best part Financial Times on the internet is the comments section on the big pieces, and I'm not sitting for Bloomberg and I used to have this thing called Chart Porn and I could load to any index in the world or my own CDs and it would be set up with my specifications. I would say I want to look at this for 20 seconds and I put 2000 charts on that thing, and they would just repeat, and repeat. I just thought that was my meditation. I've not had that and yet the damn voices, waking up in the middle of the night. Did you hear that? We got rats in the wall, what's going on? Of course, gold, we talked about-- gold flared from 2009 and to the end of 2012. You know these days are better than me. Then, of course, just had a stinking bear market and had a good healthy bear market, had a bear market of duration. It lasted a long time. It lasted long for a buy. The second, and the most interesting part of the bear market was it just didn't do anything, it went sideways. RAOUL PAL: Yeah, that was a big tell for me that the market's-- HUGH HENDRY: Yeah, that's the rehabilitation. Then the second big tail was, again, once you put those- - I was going to say it just for football, but in the QE world that we may be coming out of, but the QE world of 2008 to 2019, it's almost like all of vol converged something very low, like a 12-month vol of 8% to 10%. Then you think you've got to do vol adjustment on a gold versus S&P chart and again, you could see that it was just slowly no longer like we were doing back in 2002, no longer losing risk purchasing power, if you will, to other risk assets. Then you did actually see delta on one direction, this thing started to go up. This is all before the V, the virus. That's the weird way that things work. That's how the John the Baptist view, the heretics. Something's actually happening we're just not cognizant of and it's just the crazy people that are seeing and so that's where we were. Of course, then the virus came, and so in terms of just catalytic reaction, just the way they come in, so hard, and so, so big. Then of course, as it's unfolding, again, it feels like you're reading from the pages of Enron, and how the government is just everywhere and everything, and we know how that ends. Yeah, that's why I'm using initially just a forum to-- like a master class, I'm telling my journey and I'm finding that cathartic starting at the beginning and I'm finding-- because people are writing to me saying, so do you think we're now-- this is the-- we should be buying agricultural futures and other commodities now? Kind of. No, but gold is really not a commodity. I think, like I said with the monetary authorities are doing this. The plumbing is at the level of the dollar, the that's the intervention. They intervene because they believe that that will have a beneficial impact on the economy. Is that true? Probably. Will it help the stock market? Kind of. What does it mean for gold? It just means definite things, take out all those subjective adjectives you can use and just start saying words like for sure, absolutely, definitely. This thing is your rocket fuel for the risk asset, which is gold. RAOUL PAL: If you think about all of the voices in the gold world that have been around forever, the thing they all feared is now playing out in front of our eyes. HUGH HENDRY: When you say they feared, what do you mean? RAOUL PAL: They feared that, and correctly, so I think all of us had the fear, particularly in the macro community, we just didn't always say gold was the choice at all times, but what we saw is, we knew we had a massive debt problem and it hadn't gone away. HUGH HENDRY: It got bigger. RAOUL PAL: It got bigger. We knew that interest rates were going to, again, go down to zero probably in time and that would leave a real problem, which we're about to face now, where we're about to have deflation. The market's not figured this out yet, but headline CPI is going to be negative 3%, 4%, 5%, and real rates are going to go through the roof and the Fed are going to shit themselves. The only answer that they have is more. If you have ever been attracted to gold, the only one thing you haven't got is a dollar bear market, but I've been writing about this for a couple of years that the dollar and gold can go up together for a while. Then eventually, because in a debt deflation, dollars is what everybody needs, gold is what everybody wants, or the other way around maybe, everybody needs gold, everyone wants dollars. HUGH HENDRY: Again, it's the convexity of gold because it becomes the zero coupon Treasury. It's the global Treasury zero coupon bond. RAOUL PAL: Well, also in a world where risk parity has no-- there is no portfolio effect of owning bonds any longer, why would you not own gold instead? Dan Tapiero I think raised this point, he's like, I don't understand why risk parity these days wouldn't be own equities and own gold, because it has some convexity that adds to a portfolio the bonds just don't have any longer. HUGH HENDRY: Yeah, so my take on that, of course, remember I said to you, gold is like [?]. One minute, you've run in it, but the next minute, it really doesn't like you. I say to you that one minute, it's profoundly short volatility. The other moment is deeply convex, like a zero coupon bond. My take on it really would be that you want to marry a gold position with a long vol position, which is easier said than done. It may be becoming easier to own volatility. I say maybe. I really don't know. It depends on what happens next. We've said a lot about gold, but I have to say-- so gold was my fascination in 2002 and I aired somewhat- - we thought I aired in after 2008, because I won in 2008 and being up 31% 32%, I could just put the buy, and I can just owned 100% long gold at that point, with vol at 60, 70. I did. I want to say I think that it's obsessed me and it's another thing which motivated those tweets and the reappearance of my public persona was these very, very rare events when volatility goes up with stock prices. As far as I believe, or I can say, it's only happened in Weimar. The really weird stock market places like Venezuela and-- RAOUL PAL: It did happen in '99, right? HUGH HENDRY: I don't know if it did. I know for sure it happened in the-- RAOUL PAL: I remember taking 100 vol equities in '99 in the blow off, and it was extraordinary. That's the only other time I've seen it. HUGH HENDRY: Tell me more because that-- I don't recognize that data point. You're saying 1999, you're saying in the midst of the tech bubble, as we were just approaching the final surge, yield curve going up. RAOUL PAL: Yeah. We saw those, some of the tech names trading 100 vol, which was extraordinary. That's fine because it was in a bear market. HUGH HENDRY: Yeah, you're right because the 1998 to the finale was punctured with 50%, 60% peak to trough corrections in those positions, which gave. What I want to say is they were rising with a high level of volatility, and so when they had-- and that if you go that normalized, volatility was an average of-- the vol went to 120 when they halved ad then it reverted when they went back up. What I want to say to you is that actual surges in stock price is higher-- because I spent a lot of money researching as a newt, maybe other people watching this could come back and land any of their observations if they can, but I am pretty sure that the only time since 1987, the crash of '87, the only time-- and maybe still in the time of the stock index that the stock index went higher and vol surged higher at the same time was when, what's he called, the Japanese Prime Minister, Abe. Because he'd been Prime Minister like a long time ago and was discredited being too nationalistic with the whole Second World War and stuff. Then he got reinvented, they came back with this 3Rs if you remember. The Nikkei just went boom, and vol went boom at the same time. Now, for sure, there was some special factors because Japan being first into zero interest rates had been the first financial society to weaponize vol into a fixed income security. This old [?], I want to say, instruments got caught by, everything went wrong at the same time but even over and above that, there was this remarkable moment. We've been looking at a trade and we just-- we then put the treat on in 2013. Just saying, okay, so it's happened and let's not see the unthinkable and there's no rule of nature that says vol can go up with stock prices surging higher, it's just that it's really never happened. The only point being that Japanese experience. The genie's out of the bottle, and we saw it with this-- and it was the most insane, I'm going to try and flesh out the position we are doing and try and put it on Twitter maybe today or tomorrow, but if we had-- you do the skew, puts are always-- we had out of the money puts, and always like two times more expensive, they get holes on the indices, but you-- and why? Why? Just because of the observational data that equity vol surges when prices fall so the puts are more expensive. If that world changes, and you can sell those out of the money puts, you can buy so much calls, but then of course, you had to structure it whereby you couldn't make it to being wrong. That hence the complexity. Then there was it required a lot of carry and so we had to engineer, and we had to trade to create the carry but if stock prices had moved 20% quickly, we had-- gold is fantastic, but this position, rock and roll. This is the position that really Chris Cole from Artemis, the volatility trading platform, that he had written up. If you want, my favorite ever independent thought piece on the stock market was Volatility at World's End by Chris Cole. That's what I wasted a year trading that early because, of course Japan was in the midst of the vol regime of 2008 to last year, and of course vol just went down and so that trade. It was a negative carry trade that just did nothing. What if in this world, like you say, with the deflation that's coming and therefore you know what the policy action is, does that mean that volatility just continues to just be subdued or does this mean that we move into the new world, the new post-virus world, is a world where just possibly volatility may lose the prejudice of people's expectations? RAOUL PAL: Does that mean that you're suggesting that in this environment, there could be a surprise and the fact that the equity market goes higher and not lower? Because it ends you're owning an asset that maybe has some value perceived against the debasement of the currency for example. HUGH HENDRY: Yeah, yeah. That's really hard. During that Japanese period, let's link two things that I said. That Japanese period, I became obsessed by a book and I want to share way too much information with you. My wife bought me a T-shirt saying, I think my husband loves me, but for sure he loves [?] even more. It said something like that. She went back to London with the kids. I could go to-- be close to the beach, etc. I think there was one February morning, it's dark, and she was really quite [?]. She decided to throw out my library. My book collection. I paid for it-- I'm sure the audience knows the pain that we're talking, but my wife's wonderful, and I had coming, but I lost it. She threw everything away. I went to the charity shop. Where are-- you name it. 200-year-old tracks on gold, everything. Then I said to you, part of my reengagement was the internet subscription to the Financial Times. I was reading the commentary on Gavin Davis had a-- he has a piece of weekly and I was reading the commentary, and someone just said he goes, you just got to watch this YouTube video. It's based on a Japanese book. The Japanese book was the Princes of the Yen. Are you familiar with that? RAOUL PAL: Oh no, I'm writing it down now. HUGH HENDRY: The Princes of the Yen and I think it's by Richard W-E-I-N-E-R [Werner], something of that nature. Anyway, I read that book back and forward upside down, from the middle to the ends, in reverse. It's such a profound in place, clearly I wasn't alone. Some dudes have made a one and a half hour, video montage. It's amazing. I'm like, you don't even have to read the book, just download on YouTube, the Princes of the Yen. Back to your question, and yeah, and I was maybe just playing data traffic and stuff. I said, hey, look, if you're one of those types that says, we go back to the all-time highs in the S&P, so that would be what, 3200, 3250. Blah. I'm like, okay, you're a hero, but actually a world where that's the default position is a world where you're not going to 3200, you're going to 2x, 3x, so you're going to 10,000 on the S&P. Now, easier, actually complicated to write that given the constraints of Twitter, but that aside, let's return to planet Earth, because what's missing from that? We know that they can see that this is deflationary. They've announced I think globally $8 trillion in fiscal spending, 10% of GDP. We know that actually, that's the tip of the iceberg and that the monetary module behind that is probably 4x or 5x. That's a really, really big number. You print a lot of money, and that money bids up assets, like gold, is where we lead to, and that's where I can see 10,000 on the S&P, but it's like, hold on, hold on, hold on, hold on. Because actually, you always require exuberance, you need a monetary mechanism. That's why gold actually failed in 2000, because when we had that move from 2009 to the end of 2012, Niall Ferguson was out there saying the [?] was going to be Weimar. Why was it not Weimar? It wasn't Weimar because the money that was printed had no velocity. That's still the obstacle. Back when Japan in the Princes of the Yen, remember they really changed the monetary window in Japan and [?] was just telling the banks, expand your balance sheet, expand your balance sheet, expand your balance sheet. If you're not expanding by 15%, we're going to do a bank review and I'm afraid you're not going to make it. We're going to insist that some of you lose your job, so these guys were bumped upon. If you watch the video, because we think that-- I click on that, it was property prices went crazy and normal people who've worked were very fearful because they're having to take 100- year, 150-year mortgages. From on the ground and from the intel from the banks, I couldn't believe it. People ended up owning two houses, three houses, four houses because the banks just had to lend the money. I think you had 15% per annum. That is to say bank loans were doubling. RAOUL PAL: Which period was this? HUGH HENDRY: '86, Nikkei to 40,000. That's the piece, like I said, it's one thing to do on a 90-word tweet, whatever. Yeah, S&P to 10,000 there's a lot more detail. Actually, you can sit there and just be right with your thesis and see gold is the out, it is the world's zero coupon Treasury. It's beyond sovereign risk, it's a global thing and it's the greatest convexity you have to this world of deflation. Gold is going up. I think you've got enough evidence. I think everything's on your side there. For me, I am just so intrigued by how much more money you can make if we are talking about a world where the vol regime is going to shift and change and really become funky, because we're not prepared for that. A real example-- and I didn't just disappear, I was-- because I want to think I'm a smart guy. I actually concocted my personal trade for volatility at the end of the world and I'm living-- I was like the Truman Show. I am speaking to-- I am sitting inside a gold box. I like to think of not just owning a security like Lego. Think of actually being that security. Like, I'm Hugh. RAOUL PAL: The reason I'm here is exactly the same. It wasn't a coincidence. I bought a place on a small island in the middle of nowhere. HUGH HENDRY: Hey, are we going to start singing away, says, hey, you and I, we see things differently. You and I, we're going to live forever. Is that where we are? RAOUL PAL: I doubt it. You and I know we [?] that as well. HUGH HENDRY: For me, like you so following in your footsteps, you play a view on this. For me, last year, I borrowed 5 million euros, 20 years fixed like 2% and 2% was the wrong figure. It should have 1.3%, but I was like, whatever, hit me, hit me, hit me. Let me just say that again, I borrowed 5 million euros to buy a property in St. Barts, to buy a pilot like to, believe me, it's a much bigger investment and a French bank was willing to lend me at fixed. That's very reminiscent. That is assuming your world, that's a world where gold is going to go to 3000, it's going to go to 3000 because it's going to be difficult but there's enough financial lubrication that it won't be the 1930s, but it is going to be a world of zero interest rates for a long time. I just don't think that the banks are as smart as that. I think they've got that wrong. I think they've got that wrong like their German cousins after the First World War. Germany was devastated clearly after the First World War, so was Japan after the Second World War. Yet, within 15 years, Japan was cut very quickly, [?] was like approaching the income levels of the West, maybe 15 to like 20 years, 20, 25 years. It was there. The fact that you're decimated, that I hate that word decimated, you're destroyed by war, financially, your central bank tells you, your banks are bankrupt because they own worthless pieces of paper. Actually, as a central bank, you can say, okay, give me that worthless thing and I'll give you $100 million for it. They're like that is not much. Thank you very much. They're like, you give me 20% of Hitachi or Toshiba or Sony or whatever. Presently, it's worthless, but give it to me and I'll give you this worthless piece of paper called the yen, and Japan reemerged. The same dynamic was happening in the German economy after the First World War. Then like, no, you could come in, you have to be wise, you have to buy the right asset. You've been graded. You've reached this buy, like buy something tangible and real that throws off cash. You've got a lot of data, it throws off cash in good times or bad times. I don't like cosmetics, people get depressed and they have to look really good in depressions and they have to look spectacular when life's great, I don't know, but it throws off cash. Then you sit down, and you say to the bank, hey, hit me, hit me, and the bank's lending you 5 million, 10 million, 15 million, 20 million for 20 years fixed because it sees a world where interest rates are just-- they're anchored and they're never-- if anything, they're going bore. I want to be the other side of that. Here in St. Barts, I developed-- I'm going to share some of the properties and the projects that we have, but we do Uber luxury, the Uber creditor states. They're the guys who the princes of the world, who own the world come in and there's no point having a private island. If you're going to have a private island, no one can see just how amazing your intellect, how amazing your courage is. You got to come here on New Year's Eve is the greatest concentration of the most grotesque giant super yachts in the world, and it's like a caravan park. I've been on these things. I'm like, I could pay me to stay on these things. I get on very, very-- and again a bit like gold, they don't want any more construction on this beautiful island. They're making-- each year, they change the civil code, or the code of [?] and they make it harder and harder to build, to develop. My first project, we did 550 square meters of internal space on an acre of land. If I did that project today, I would get about 300 square meters. This thing that was unique. That's a scarcity value, one of a kind, if anything is diminishing, in terms of the supply is diminishing, and then a new currency risk, this is a euro asset. I'm funding in euros and funding it-- the next deal, oh, my bank-- so the bank calls me, I can't really say it, but I feel like I'm having good vibe. The bank boards, and I'm just thinking like the French government, they want to help, like they want to help me. RAOUL PAL: They want to give you a break on your mortgage? HUGH HENDRY: They want six months break and like, what do you think? I'm like, yeah, why not? [?] Then I got an email. It's like from, again, from our friends in the government. They're willing to make a loan. They will lend you 20% of whatever your average loan balance was last year. No capital repayments, an interest rate of 0.25% and probably with the right to extend maturity. Is that something you'd be interested in? I was like, yeah, that's something I'd be interested in. I get to live when we have a hurricane, when we have a virus, I get to live in these [?] policies. Know that these are commercial projects. This is not my real life. I get to own these exclusive rare assets, I think funded at the wrong rate. Then the ownership cost to me is zero because this is the longest holiday [?] season in the world. We get 26 weeks a year, and so the clients pay for the financial servicing of the property. RAOUL PAL: There's no additional yield above it because it's financed but it's free carry essentially, including maintenance. HUGH HENDRY: The first few trades and the post of carry was insane. Before the virus, we bid away the post of carry and we've gone to break even in everything. Maintenance, everything. I think the virus is going to-- the virus and if I get assistance from my friends in the French government with additional loan facilities, I could sit it, because my dream is-- I think I put something out saying, I'd like to do a property fund here. Very hard to do but my idea is, I want like very long, very patient money. I want to be the central bank of this tiny little island, so that when there's a liquidity issue, and someone's got to sell something, and they go to sell something at the wrong price, I make the price and I create the market. I'm still thinking about it, but there's just a chance that the virus changes. We might be able to restore post of carry back into that trade. That's my thing. That thing billows out insanely in a world where the Dow or the S&P goes to 4000, 5000, 6000, 7000. That's not a world which is healthy. That's not a world where where ordinary people feel happy. That's the world that you understand, that [?]. RAOUL PAL: That's just been [?] in that period. Do you know Brent Johnson? HUGH HENDRY: I know the name, yeah. RAOUL PAL: Well, he's on Twitter a lot and he's been on Real Vision a lot. He's a good friend of mine and Grant's and stuff. He has the dollar milkshake theory and his theory is a rising dollar and rising equities based on bad things, not good things. I have some sympathy for that view. I also think that what's interesting is regardless of what the equity market does, gold or your Caribbean gold bugs works as well because in a world that, let's say goes towards where I think it's going to go, which is a longer drawn out depression of some sort, i.e. we have a big GDP fall and it stays low for longer, like we've seen in Italy, in Greece, in Spain. HUGH HENDRY: I want to call it the gilded depression. Because it's a world where you get Universal Credit. It's a world of 20% unemployment, but the state is paying you to be unemployed, or it's different. Do you think it's different? RAOUL PAL: No, it's possible, but I don't think they'll pay you enough. Therefore, cash flow globally falls, which I think leads to the big insolvency. HUGH HENDRY: Can we just stick on that narrow point for a second because that's really of the moment in the sense that the initial intervention by the US Treasury where you made available, I want to see like $650 billion for small enterprises. Then you had $1200 checks to the individuals, to the workers. Of course, you were ready for the surge in unemployment claims so you're paying the unemployment insurance, as I'm sure you've read, the small enterprises are returning the loans, because they're saying, well, 80% of it has to be spent on paying salary. If we fail to spend that, then you want the money back immediately. We don't know for two factors, just because there's going to be social distancing. We don't know how willing people are going to be, but secondly, I can't get damn stuff. Everyone's, they're happy sitting at home because the unemployment check for now is better than cleaning the dishes. That's a messed up situation. RAOUL PAL: Yeah, but also in the end, to paper over a debt crisis or a solvency problem with more debt is not the answer. You're the flip side of that. You're able to service debt and therefore to take on more debt is great. I remember my old boss Noam Goldman back in 2008 borrowing a shit ton of money because he knew he could. Now, nobody else wants that debt. My brother-in-law who owns a restaurant in Asheville, North Carolina, sure, you can give him, he is a great chef, he has a good restaurant, but to give him more debt terrifies him. Because the debt is the issue. There is the velocity of money issue. Again, it's a reason why some vol in property goes up, but other stuff still falls. I still worry that there is a solvency event and maybe somewhat from the gilded box, you don't see it as much as it would be. HUGH HENDRY: For sure. I was listening to you intently and I felt you were prejudicial, prejudicial in the way that we've all felt ourselves be prejudicial in our understanding of macro and crisis. What was the what's the amazing book? Panics, Manias and-- RAOUL PAL: Crashes. The Kindleberger. HUGH HENDRY: Kindleberger, yeah. You can be a global macro manager student want to be without being able to recite a chapter [?]. We lived in a world where actually it doesn't, the linkages and the causality haven't happened and we know it's been replaced, God forbid, but we live in a world just now where the dominant ideology is, what is it called? Modern monetary theory, is it MMT, or is it sometimes called? Because it's so-- I'm a little bit out of it, does the MMT or what have you. I keep calling it PMT, but I'm thinking of something else. I want to say, because you're saying the solvency event. It's not right. It's not proper that you can just spend your way out of the crisis like we did out of Lehman from 2000. It's just not right. RAOUL PAL: No, I don't argue that at all. Because I actually do think MMT is much like the new deal was, I think it's doable but what happens to the currency markets and the price of gold in that, okay, that's great. That's a great macro equation for us to all play. Can a massive fiscal stimulus that actually rebuilds and does create some productive use of assets, new assets, let's say? Yeah, I think that could work. What I'm saying is paying somebody 20% less than their income to give them a subsidence living destroys cash flow for companies that are already in debt. My fear is that playing out with a very little time, basically, everyone blew through all of our savings in one month, including every small business. HUGH HENDRY: Take me to the edge, push me over the edge because you said solvency, describe the solvency issue that says I'm coming in and I'm cleaning the shithouse. How does it end? Because I don't see-- I'm not smart enough yet. I'm listening. RAOUL PAL: The solvency event for me is-- I used the restaurant because it's the easiest one for us all to understand, because we go into them all the time. If you go to China right now, or Singapore, there's social distancing in restaurants. They've reopened, hurrah, equity market rallies. There's been some subsidies for people to keep them afloat. Most of that is in the form of new debt. There is some cash and out. You open your restaurants and here, the magic happens is you can only have half or less the number of customers. The moment you open your doors, you have to pay staff. The moment you open your doors, you stop puking money. If you furlough your staff, and negotiate with your landlord to not pay rent, you can hold in the deep freeze for a period of time. You reopen, you're fucked in a couple of months. That has a knock on effect. Everybody gets tipped out of jobs because you're going to downsize the number of restaurants. That's okay. That's how the cycle works. The problem is that happens at scale because of the unemployment and you've got unemployment benefit of which people are starting to save, I think you'll likely see the saving rate rise because of the issues that the behavioral and emotional issues people have faced from this, they're not going to go back and open the bullions. HUGH HENDRY: I don't think they will not have the means to save. They won't be earning enough to save. RAOUL PAL: Okay, fine, fair enough, but the chances of consumption going back to the same level is unlikely for an extended period. HUGH HENDRY: Okay, but then can I say to you, okay, I truly get that. I can see that happening. Yeah, I'm like the new Chancellor of the Exchequer, disguising crud in the UK. He's like, what's the problem? No problem. I was just fed. Like, how much do you need? No problem. This guy's the most popular politician ever. He looks really nice. He always smiles. What's the problem? No problem. Okay, so I'm going to roleplay that, and you just leave me, my smile. Oh, my God. Oh, my God. I'm back being-- what's he called, the UK Chancellor? You name it. I don't know. Sunny, he had sunny disposition, he says, okay, the problem here is you open, and you hemorrhage. Don't open, just furlough. Then you say, yeah, but like okay, so these are [?] say we're talking about the restaurant and the more skilled elements of that, and they sit there on unemployment or Universal Credit. That's all problem solving. I see the problem with that scenario, Universal Credit is too low. I'm going to double it. Okay, what's your problem now? Okay, so you said, well, how are you going to fund that? No problem. Are you serious? I'm sovereign. UK, my government debt to GDP is 100. I look at Japan. Those crazy guys are like, what are they? They're like 220. RAOUL PAL: This is beautiful. It's just where constructing a macro theory framework or portfolio, you have these two things. You have an insolvency event, or you have a massive transfer in some way, shape or form onto the central bank balance sheet, the government and then the central bank. In both those equations, there are certain bets you can construct that have high probability outcomes, which is where it gets interesting, where it doesn't matter what happens, we just know it's going to be extreme. Therefore, go back to the beginning of our conversation. The probability of gold rising strongly and further than most people expect is extremely high. It's as good a quality macro bet as I can think of. It is also intuitively what drives me, and I don't think you've gone down the rabbit hole yet, to Bitcoin, which is another one for me that I find. You'll get there, I promise you, and you'll end up-- HUGH HENDRY: I see you're still 27% down on your Bitcoin, eulogize it when you're making money but anyway. RAOUL PAL: I'll do that. HUGH HENDRY: Eulogize it when I can explain it but anyway, forgive me. That was mean, I didn't mean to be mean. RAOUL PAL: That's alright, because I already made 10x the first time around, [?] 2000. I sold out early, but to 20,000. HUGH HENDRY: I do. That thing made my life misery because I was doing a presentation and I thought it was like just clients and they were newspaper hawks. I just speak, I shoot from the hip and I was talking about, I think I said this in 2011 or something. I was talking about 2012, 2013, I was talking about a world, everything goes up. Someone said, what about Bitcoin? Bitcoin goes to like a million bucks. I just meant that a metaphor. Like it goes up a lot. I own my grave, it's going to say, here's the guy that said Bitcoin's going to-- and maybe it will. Maybe it will. I got such a hard time and as you know, it went from I don't know, 600. No, it went from 300 to 1800 or more. RAOUL PAL: No, it went from 180 to 20,000 in one run. HUGH HENDRY: My comment I think was about 600, 650. I said it's going to go to a million, but it's going to go up a lot. That's it. RAOUL PAL: I'm interested again to just think through this. Because we've got two potential outcomes, and neither of us claim to know which one outcome is going to happen. I have a hunch on one, you may have a hunch on another, whatever way. We've got this theory about gold. What else do we construct around it? You've got an interesting idea that potentially in one of these scenarios, the equity market goes up a lot, and of which, the upside in so wildly out of the money calls in the S&P. I'm particularly interested in S&P because there is clearly an indexation effect going on. You're playing that. There's clearly a situation where smaller businesses will fail versus large businesses, there's a land grab going on. HUGH HENDRY: You get all of that, yeah. RAOUL PAL: You get all of that with that call option. That's the things, it's a very interesting bet. I also think that-- HUGH HENDRY: I see, you've got to remember, that's is negative carry, you got to fund it. I hadn't managed professionally money for a long time. What I did like was, why not fund it? Because you can buy 5000 2021 calls on the S&P for nothing, obviously. Nothing, a hedge fund is like 25 basis points that as soon as you trade it, it's going to be marked to zero and so you're going to lose 25 basis points on one position on one trading day, for just that small position. Then you're going to have to repeat it every whatever but given from what you said and the impetus of the monetary response and the dollar monetary response, sell volatility on the dollar across or sell volatility in fixed income. Because we know that those-- because the two things about modern monetary theory is actually you can keep expanding the franchise of the central bank's balance sheet. You can do that to infinity, unless you lose control of the currency, and/or typically at the same time, your yield curve steepens. If those two events don't happen, like back to my point of like, oh, let's just double Universal Credit. I can just keep kicking this into touch. Because maybe when we get to Japanese level, like with all of the spending which is baked in by the US Treasury and with the slowdown in GDP, or to be talking about us debt to GDP in five years' time, I think it's going to be like 120% of GDP, so hundred percentage points less than Japan. That's why I keep coming back to gilded depression. RAOUL PAL: I don't disagree with that. Here comes another output that I think is interesting. My preference is on the deflationary event. Okay, fine. HUGH HENDRY: That's your gold position. RAOUL PAL: Well, yes, but I think gold works in both, but we've got equity side of the equation that we've talked about, which is an interesting bet that's not priced in. The other side is not priced in is the opposite that which is the negative rate bet in fixed income, it's actually really cheap to construct options strategies around it. I'd be looking at like, on 5-year futures, you can do it on Eurodollars, whatever, you can do these butterflies that pay out 20, 30 times your money if they have to bring interest rates. In the situation where they're going to do massive monetary printing, we also know they're going to try and keep interest rates as low as possible, so it didn't cost them anything. They're not stupid. Therefore, the probability in both scenarios of negative interest rates or zero, pinned at zero to negative I think is a tale that's not priced. That's interesting, cost you virtually nothing there as well. HUGH HENDRY: I agree with that. Essentially, we've got a triangle, we've got equity, and it could go anywhere. It's just as crazy. It's a funky reggae party to call. Uncle Bob Marley, but it's underpinned, if you will, at the base of it is, is fixed income and the currency and that's MMT. We know that the impulse has-- like they will go to all lengths to ensure stability at the core of the pyramid. If going to all means taking those rates negative to stop the yield curve changing-- RAOUL PAL: Only dollar getting too strong, which is why-- HUGH HENDRY: Only dollar getting too strong. Then that's why you need-- I think that's genius. If you can put those trades on, you have that and at the same time, you can do my trade and buy those deep out of the money by selling like move vol. RAOUL PAL: Yeah, we need to solve that part is where can you safely sell something to pay for both of those very cheap bets, because gold is your core position. I'm not yet sure what carry you can take to pay for it. Because the uncertainty of the outcomes made carry unattractive to me. HUGH HENDRY: Yeah, yeah, for sure, again buttons. That's why presently, I'm sitting-- maybe the economy's going to change-- the economy and whatever. For sure. RAOUL PAL: Property is a potential carry. HUGH HENDRY: Well, that's my trade. Because as I said to you, I don't like the pricing that I'm confronted for just now in my tiny little bubble universe because my convex trades are flat carry. They're zero carry. Whereas when I started, I was getting around to put the trades on. If I get a reversal, short term reversal in prices, maybe I can get a positive carry convex trade. That's always that's we're seeking. Wat we've just discussed, what we've outlined as a possible portfolio structure is a desire-- gold doesn't give us carry, and we're talking about just being delta one long there, whereas we're saying why not have it-- I look at these out of the money like 5000 stripe S&Ps, we don't want to sell because you could sell for 1500 S&P put, and my God, you could buy so much convexity, but you'd never make the journey. Then I'm coming in, I'm saying let's sell vol on fixed income and on the dollar crosses because we know that the medicine men are going to-- it's not going to be a market rate, that's going to be a rate determined by bureaucrats. We put that together. The question, the question is always don't tell me what happens. Don't tell me that we're traveling from A to B and don't eulogize about point B. Just tell me about every twist and turn in the journey from A to B. What are the secret risks that we are underwriting in that trade, which could flare at inopportune moments? RAOUL PAL: We don't mind losing the premium on the fixed income or the equity bet. On the gold bet, that is the core base of the bet that we think in all outcomes, this is superior trade. The probability of losing money is relatively low. HUGH HENDRY: The probability of losing money on the gold trade in terms of the vantage point of the destination is like, you're just going to make money. However, like I said, there's going to be moments when gold is not a zero coupon fixed income deflationary trade, but it's a fine and the stock market wants to go down because the geniuses that manage your money have recognized that actually, it's not that bullish, the confinement is over. It's not that bullish as businesses open up and actually have to stop again, and the stock market heads down. RAOUL PAL: Got an idea. What about your old trade? What about to buy gold versus the stock market? Because we already own the upside, but we know that gold is cheap compared to the market. We do the relative trade in long gold, short S&P or make it even easier for yourself, maybe the Russell 2000 so it's less concentrated in the big names. Then you own those two wing bets, and maybe that covers that. HUGH HENDRY: It does, it covers that. Then what happens is-- the wing that you're then exposed to is my notion of the German bank or my French bank lending money today, but the German bank was on the recovery mode back in 1918, 1919. Then we have the Treaty of Versailles and we have this reparations demand for gold, the victorious financial, this is after you're going to be our slaves forever, and you're going to transfer 20% of your GDP every year to us. The Germans have got no choice but to debase their currency and then debasing their currency, you get the Weimar asset price inflation. I don't want to be short the S&P and long gold in a world where the S&P might be going to 5000, 6000, 7000. RAOUL PAL: You already got the call and gold's going to go up in that situation. HUGH HENDRY: You've got the call, true. Yeah, no, true. You've got the call. RAOUL PAL: You've got the call and you're long gold. HUGH HENDRY: Okay. Yeah. What you're saying is actually the one risk and the one of the biggest risks in the trade is the principal delta one position, this Frankenstein, it's either zero coupon or fine. You're trying to dampen that flare. RAOUL PAL: Yeah, to give you a better chance of letting this play out. Because as you and I know, it's very easy to be right in a long term view, it's fucking hard to do it and hold on to the trade in the middle. HUGH HENDRY: I still think, but I would maybe suggest like just don't supersize the delta one old position or just own it, but not supersized. I think that the convexity from your negative interest rate derivatives, I think they will flare, they will produce a P&L at the moment when gold becomes like a fine. RAOUL PAL: They should do. They should do. Yeah. Because the problem is negative rates goes up massively in a falling stock market. We know that, because that's the reaction function the central banks that's well understood. Yeah, that makes sense. HUGH HENDRY: What we're demonstrating to old geezers is that in managing and thinking about taking risk on behalf of clients and other people, it is not just the question of how much we're going to make, how much do we need to make? It's a question of safe passage. It's, I got to be able to sell this view. It's like being an art. For sure, I'm a piste artist, but I like to think of my artistic endeavors, but I stopped with it. We started this conversation with a blind canvas, and we squiggle there. Now, what we're doing is we're trying to convince a group of wealthy patrons to participate and sponsor our view, or our multiple views of scenarios which may play out. We're going to sit down, we're going to curate, and we're going to take good care of that beautiful painting that's going to [?] all of our friends. RAOUL PAL: I think it'll be fascinating to be able to watch this is how that portfolio construction thing is not straightforward. It takes a long time. You and I, yes, we've thrown together some ideas here but there's a whole lot of testing that needs to be done on something like that, because you're trying to construct a long term view that needs to be robust enough to be able to hold the position. That takes a lot of analysis and time and thought and kicking the tires and saying, what if I'm wrong and where am I wrong? Because it's always a [?]. HUGH HENDRY: The majority of your time is spent on that. Awaiting 30% coming up with smart ideas like smart people dime a dozen or something but being able to program it into machine that can actually give you safe passage, managing other people's money and the type of person that chooses to manage other people's money is a traumatic experience or it can be. You persuade yourself that you're having near death situations, which is ridiculous. It's like, you wake up and oh, shit, I'm going to die today. They're going to kill me today. It's ridiculous. Of course, it's part of what creates the drive [?]. RAOUL PAL: It's what you get paid for. You have to feel sick on behalf of the customer. HUGH HENDRY: Yeah, exactly. For sure I can't bitch about it. When you stop and you're no longer I guess flooded over that chemical reaction, and you get time to reflect, go into a funny space and a time of reflection. I went through that. I was thinking to Grant the other day, I think I went from being a so-so hedge fund manager to being a really good villa manager. When it came to the New Year's Eve parties on the island here, I think I was receiving the invitation for villa managers and not for rock star as I thought. After two years I guess, your ego fear is that you're becoming irrelevant. RAOUL PAL: Yeah, it's a weird life. When I left managing the macro fund and moved to Spain, you suddenly lose a lot of what your identity originally was. It's good because you can rediscover yourself, but you realize that part of you is driven by that adrenaline, that dopamine function is so strong within us because it's always known. HUGH HENDRY: It is. Because I spent a lot of time talking yellow, if you will. My favorite metaphor has been that the glass jam jar, it was beautiful glass jam jars. As soon as you wake up in the morning, it's filling with sand and the sand is all-- and all that noise are just the unsatisfying things in our daily life. The challenge is to get to the end of the day with little pebbles of dopamine and that dopamine, like you say, it can come from just hitting it out of the boundary with the trade, which you've long reflected on. It sat in the portfolio and you've had that moment where the moment has passed, and you've been able to monetize it. Wow. Of course, that's shallow and superficial. You can get the dopamine release from someone, like holding a door and smiling. It's remarkable, those tiny little things are just as powerful. They take up the same space in the jam jar. If you get to the end of the day and there are no pebbles in your jam jar, you're beginning to lose your vibration as a person and therefore, you're not resonating happiness. You're not resonating. You're just not an interesting person. I fear that that's what I was at and so I was overcompensating with suffering, I'm still the world's worst-- I don't stand up suffer which is just not sexy, but I'm getting so like, the mind is still overactive but I feel like this year, I've felt like I want to just participate again, and be subject to the joy of having a random. RAOUL PAL: You've got a formidable intellect and you have to use it, you can't not. Especially when-- I always refer to it as the beautiful puzzle, which is what we do in the macro world. When you end up in a situation like we're in now, you can't not use it. That puzzle needs to be solved and you need to be part of that conversation. HUGH HENDRY: My wife keeps saying shut up. I've been an analyst all my life. We deal with data and my success if, whatever, whatever success that I have enjoyed, has been not cocking a snip. Not showing disrespect, but showing a respectful, a fear of experts. Express it just consistently, always wrong. My hedge fund career, I put myself a great distance from experts, an expert from all walks of typically from investment banks and going to industrial experts. I made it, I tried to make as hard as possible for them to reach me. Then I saw opportunities where there was a disconnect, because clearly there was an expert. Again, let's use that word, [?], who was putting this message into a marketplace, which was resonating with the community, and it was coming back to you all the time, but it wasn't there on the chart, so it was like a bullish resonance from the community of people would be talking about it, but then you look at the instrument, it'd be trending lower or vice versa. Experts for me have all been a source of like, they hit me. Because I go, really? I want to ask you questions and when I press you and then I've typically found opportunities, and here we are. It's not our financial portfolios, but it's our life. Lives that are presently being largely controlled by experts. I keep saying, I always want to say I failed, but it's like someone was recommending that book by the female poker player. I can't remember her name. I'm just making the point that sometimes you sit there with the best, like what seems statistically, like it's the best hand and you still lose. There's still an unknown quantity of luck, but just batshit can just get in the way. The measure of great traders is not to believe that I'm a moron because I thought they were very strong hand, and I did make money like, even with the best hand, you're not guaranteed like shit can happen and the lucky guy next door, he was. If you lose that discipline, when you come back and you have those three cards again and you don't play it, because, oh, but the last time, it didn't work, that's when you've lost. RAOUL PAL: Because it's like the reality is sometimes you see an 80% probability, I think this gold thing is something like a 70% or 80% probability, I would say in my mind, there's a 30% chance of being wrong. That's a pretty big chance of being wrong. HUGH HENDRY: I was wrong the last time, who cares? That probability goes in the book. RAOUL PAL: You do it again, you do it again, and do it again and over time, you'll win. Hugh, look as ever, amazing to sit down and have a chat. It's been too long. I'm going to get you back on a few times because I'd love just thinking through things with you because you're a unique thinker, and I think with the benefit of distance, you gain great insight. I honestly think it's one of the reasons I love being here in Little Cayman, I write GMI from here. I lived mainly in Grand Cayman. It's because I'm away from the noise. The noise is the hardest part of this game. The best part is thinking, and the more time you get to think, and that's why I just knew you'd have some fresh perspectives that I just wanted to hear. HUGH HENDRY: Well, if I could just ask for a little commercial plug myself because I don't want to manage other people's money, and I am too damn lazy to do what you do. That piece that you put out all the time, I only have respect for the effort. That's a tough, tough gig. My thing was always son of a truck driver, it's like, give me your best shot, give me your best trade. What we're doing is peer to peer trade review. What I'm thinking about is I want to do a form of consultancy, very confidential self-consultancy, where as a CIO and CIOs are getting younger and younger. You can pitch me your best trade confidentially. Say, what do you think? Do you think I've got enough information? How would you do it? I don't want to manage your portfolio. The thing is, I'm probably the only person, and no one else in your organization that's going to say, your clients are not going to say-- they're going to say, yeah, whatever. You need one- - I'm not to say I'm always a Doubting Thomas, but you need-- day goes by, there used to be this legendary macro conference, where people like Alan Howard to stand up with their best, they pitch their best trade. RAOUL PAL: Rob Nichols. HUGH HENDRY: Yeah, there you go. Steve, Steve's-- you pitch the bet. Why would you do that? You do it because A, you've got it so you're front running. B, you do it because it's the only, with the people you're surrounded with, these people were superposed, the other guys are going to say, yeah, you missed it. Look at this spot, like we've just done. I'm thinking I'd like to monetize and out of that. RAOUL PAL: I do some of that macro consulting for people. I think it's particularly in the macro world like now, it actually didn't matter three years ago, we were irrelevant. You went exactly at the right time out of the market because we were just irrelevant. Yes, we saw the flare up in 2015 got interesting, then it died back down again. It's a macro world. I think it's a very interesting thing because 30 years of experience are worth a lot to somebody else. HUGH HENDRY: I agree. Well, listen, time is precious, and I've taken up a lot of your time so I'm going to let you go, and I want to say hi to the community. Nice to be here and having this conversation. Instagram, hughendryofficial on Instagram. Come on, get over your prejudice. Have some fun. RAOUL PAL: Want to see you in a bikini. We've talked about this. HUGH HENDRY: It's coming. It's coming. In my bikini is coming. Thank you very much. RAOUL PAL: Hugh, fabulous. Thanks. 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