On April 1st, Maggie Lake asks Real Vision co-founder and CEO Raoul Pal what his macro thesis is. His response may surprise:
“Interest rate rises are self-limiting because everybody’s too indebted and the aging population and that trend of bond yield, I call that the chart of truth, where bond yields go down over time, holds.”
With the Fed and other central banks tightening many see a recession flashing. Like many of us, he believes the Fed is in a tight box, and that hawkish talk will fade as the economy enters recession.
Pal on Recession Flashing and Why it Feels like 2006
Raoul continues to portend that demographics, not other factors, drive commodity prices most. He believes we are heading towards a recession. And that when it comes to his critical forward-looking indicators,
“Most of them are weakening. Showing weakening growth. I don’t have many things that give me a recession yet. It kind of feels like 2006, where the yield curve remained inverted for a period of time before the actual bad news comes.”
Key Indicators Pointing to Recession
Raoul points to inventories to new orders, ISM, shipping, and freight which have gone to recessionary levels. He also talks about critical levels that may force the Fed to stop tightening.
With the U.S. Dollar Index still hovering near 100, Raoul believes if the ISM drops to “somewhere close to 50” by the summer, the Fed may pause on raising rates. If the Fed pauses on rate hikes, it could finally lead to a reversal in the dollar’s value. A falling dollar could finally supercharge the precious and base metal markets while making exports significantly less expensive for struggling US firms.
Finally, Raoul Pal talks about similarities between today and the 1970s with the oil embargo and a potentially threatening economic collapse. Like us, he cites the aging population and massive debt loads as highly deflationary. In a total contrarian stance, Pal thinks that inflation or the CPI will return to the 1-3% range before long.