Managing Editor’s note: We’ve invited Raoul Pal to write to you today to give you some insight on what he sees in the economy right now and what might be coming next. He is a former hedge fund manager, Goldman Sachs alum and writer of elite macroeconomic and investment research service The Global Macro Investor. Raoul advises many of the world’s biggest hedge funds, sovereign wealth funds, pension funds and family investment offices. We are pleased to have him speak at our October Irrational Economics Summit; be sure you don’t miss him.
By Raoul Pal, co-founder & CEO of Real Vision TV
I’ve been in this financial industry game for 26 years now. Believe me, I’ve seen a lot of crazy markets… but nothing compares to the conditions we’re seeing now. “Irrational” doesn’t even begin to describe it.
But here’s the thing. As scary as this market is right now… it’s still totally “predictable.” That’s because, just like Harry, I believe that the natural ebb and flow of the business and economic cycle, the booms and busts, are natural and vital for long-term economic health.
Economies instinctively trend up, they trend down, and this consistency provides an almost static view of the markets. It’s like an economic snapshot and once you understand it’s cyclical, you know basically what to expect moving forward.
After years of skin in the game, I learned to reject theoretical economics and develop my own simple yet effective probability framework to predicting the global economy. It’s simple, with no complex theoretical models or spreadsheets.
This business cycle – the expansion and contraction of economic activity over time, is what drives the global economy and asset prices. That’s why I follow this cycle as closely as possible. To do so, I use the monthly Institute of Supply Management’s Survey (ISM) as my guide…
Watch a sneak peek into my simple and effective probability framework now.
Real Vision is the only video-on-demand channel for finance, offering exclusive trade ideas and financial insights from the world’s most successful investors.
And that survey data clearly shows that our economy peaked in 2011 and since then, we’ve been flirting with about 0% to 1% actual GDP growth. That’s practically dead in the water!
Since we’re in the contraction phase now, I agree with Harry that we’re due for an official recession to start sometime this year. It may start in the U.S., but of course, it will likely go global over time.
All of this is natural and fine.
What’s NOT fine is the central bank interference over the past several years. They’ve been trying to smooth down the business cycle and suppress volatility.
It may work in the short term, but it only creates hyper-volatility later. I believe that suppressing small problems now only creates larger economic imbalances down the road. (As you can imagine, Harry and I can talk about this stuff for hours!)
Adding to this looming problem is the fact that the meddling has gone on for so long now that these massive imbalances are an integral part of the system.
The flaws are now built-in, so taking the painful step that allows the chips to fall where they may is going to be unpleasant. Finding someone to make that move may be impossible! Nobody really wants to wipe out the banking system, but some things are unavoidable.
See, the business cycle is weakening and so the likelihood for the markets to encounter some sort of accident is quite high (and getting riskier by the day, especially now that markets have made all-time highs).
The banking system is just one of dozens of dominoes tilting precariously. Something rotten is lurking in the shadows of the world’s largest banks. Banks in Italy, Germany, and Switzerland are all in a freefall. This has already spilled over into the U.S. banking system, highlighting many weak banks that probably won’t survive a hard hit – like the one that may be coming.
Then there’s China and its debt problems… the Japanese debt (and demographic) problem… and Europe – it’s all around just a hot mess. Not to mention dozens of other issues out there waiting to cause problems.
I don’t know which one of these dominoes will be the catalyst for the collapse. Neither does Harry. Or anyone else for that matter. But there’s nothing more important now than setting yourself up to survive and even thrive during the storm ahead.
That’s why I’m looking forward to the Irrational Economic Summit this October in Palm Beach.
I’ll be there with about a dozen other esteemed panelists, and we’ve got plans for you. Strategies. Insights. The down and dirty. We don’t plan on just talking. We plan to help you take action. I hope you will join us.
In the meantime, don’t forget to watch my business cycle model where I turn the study of economics on its head and explain how to effectively forecast markets with a good level of probability, only on realvisiontv.com.
About Raoul Pal:
Raoul Pal is the co-founder and CEO of Real Vision TV. Real Vision is the the only video-on-demand channel for finance that gives you access to the world’s smartest and most successful investors, all in one place. Diverse expert opinions and insights from financial giants including Kyle Bass, John Burbank and Hugh Hendry, means you’ll be able to get exclusive trade ideas and learn how to think smarter, protect your money and invest more profitably.
Raoul Pal is also the writer of elite macroeconomic and investment research service The Global Macro Investor, which is read by many of the worlds largest hedge funds, sovereign wealth funds and family investment offices. He is also a Goldman Sachs alum and former fund manager of GLG Partners Global Macro Hedge Fund.