If Raoul Pal, CEO of Real Vision, had to choose one place to make a 5-year investment, it would be in emerging markets. “Very simple asset allocation. I’d buy bonds in case this economic growth doesn’t appear because the virus goes on longer, the vaccine takes longer to roll out, and we’ve seen shut downs in Europe and I think we’re going to get them in the U.S.. So buy bonds and buy emerging markets,” Pal told Kitco News. “If growth comes back, you’ll make a huge amount of money in emerging markets.”
The investment landscape is ever changing. Raul Powell co-founder and CEO of real vision is here to join us today to talk about the biggest macro themes of this decade and where to place your capital route. It's a pleasure speaking with you. Welcome to kick. Go. Yeah, great to be here. Thank you. Very excited to be speaking with you because I've watched real vision and we'll talk about real vision and a big fan of the show.
So, uh, thank you for coming on Kitco I know you have a macro background. I know you have an institutional background and now you're involved with real vision. Uh, you have your finger on the pulse of it. A lot of the biggest changes happening in our economy. I like to start by running through the biggest macro themes.
That are driving your investment decisions for the next five years? Yeah. Cause my, yeah, my other life is I also write the global macro investor, which is a very kind of high-end research service for the world's largest hedge funds, family offices, that kind of thing. So I spend my entire time thinking about this and speaking to people in real vision about all of this, my big themes coming up are.
Okay. Firstly is the overhang of the economic situation we're in today. What does it mean for central banks? What does it mean for the value of money? What does it mean for. Monetary and fiscal policy, as we move towards a world of central bank, digital currencies, these are some of the biggest changes we've ever seen.
So that's one thing. So that obviously brings me into the book deliciousness that I have for things like Bitcoin and gold. I'm also very interested in the technology within the blockchain space and the disruption of that and a new financial system that's emerging. And that gets me interested in the whole digital assets space, but at a simpler level.
We are at the final stages of a very big and long dollar bull market. I think the dollar may go up further. But it's long in the tooth. Now, this dollar rally, and it's been a problem for the world. It's tucked in all of the capitals of the United States. It's been a problem for many countries when the dollar turns, which it will do properly over the next couple of years, it changes the investment outlook, which has been the U S over everything and becomes everything over the U S so you'll find a huge growth in emerging markets coming forwards over the next 10 years.
If the dollar is weak, Or just not so strong buying emerging markets and going to the beach is as good as strategies you need for asset allocation anywhere. Don't forget. We're stuck in a world where there's no bond deals anymore. Credit doesn't work any longer because the federal reserve didn't allow the pricing and same with the ECB, the pricing of credit.
So you're left with equity markets at all time record valuations, or you can go and find markets that are cheaper. They have better demographics and less debt, which I find very interesting abroad. So those trends are there. The trend of technology, overall software eating the world is a trend that's not going away either.
And business model of the business model is getting destroyed by software. Finance happens to be the big one right now. So a lot going on in the world. It's very interesting. 10 years out of it. Yeah. Okay. So let's run through these. So monetary policy, a new monetary policy regimes, the dollar weakening and low yields and the rise of technology let's, uh, touch on all of them.
But first let's talk about the dollar. Now you said that the dollar is in a secular decline, and I know in a previous, uh, I know in your work you've discussed that, uh, The amount of dollars circulating in the world is not proportional to the U S percentage of GDP, uh, that, uh, occupies a world GDP. Can you explain this differential?
Why is it that, uh, the U S GDP is not, you know, 80, 90% of global currency circulation, but, uh, the U S dollar is somewhere around there. Yeah, so we, we have been in a secular bull market. I'm still not decided whether it's ended yet. But th th there's a problem. And the other central banks talk about this a lot.
If you read any of their statements is the U S is 25% of world GDP, the U S dollar accounts for 80% of all transactions on earth. So either the U S has to keep printing huge amounts of money, or everybody needs to create dollar. Credit through the Euro dollar funding markets through, um, the credit markets overall, or there's not enough dollars.
So what, what happens is when you have these economic downturns, you often get a very strong dollar. And we saw that in March because there wasn't enough dollars in the system. So the world is struggling with this dollar system. The Swift payment system is the network, which operates everybody's cross border payments.
That's a us thing. People are also geopolitically, less comfortable. China, for example, is not so comfortable even Europe's let's come to well with it. So we've got this big issue where there's really not enough of dollars for this whole global financial system to operate in. And it's hard for the U S because it needs some run, massive current account deficits and huge credit and keep injecting dollars into the market.
That feels like that's going to change over time and that the IMF have talked about this and others have as well. Mark Carney at the ECB when he was there. Is there talk about maybe creating a basket of currencies to create a global currency where the dollar is part of that basket and it's waiting will not be 80%.
It probably won't be 25% either, but let's call it 45% of the basket. So the dollars impact on world trade goes down. It's too hard for countries like South Africa, Brazil, et cetera, to deal with the dollar going up and down and it affecting their exports all the time that needs to change. A lot of the economy is in, is ingrained, uh, deeply in the U S dollar oil is traded in dollar terms.
A lot of. Some currencies around the world are pegged to the dollar. You know, how, how could the dollar evolve into a non sort of global default defacto currency? What could possibly take its place? Wow. Well, what I think is taking its place is there is nothing to take its place. But if you create a basket of comments, this is what Facebook talks about with their Libra idea that the global regulators immediately said, no, no, no, no, don't do this because it's too powerful.
An idea which was to create a basket, a trading basket. So let's say your South Africa and I'm China, we can trade with each other using global currency that has dollars in it. It has RMB and it has another bunch of currencies. Now, if the dollar was in that basket, Then it's denominator is probably money supply of all of the currencies in it and not us dollars.
So it becomes much more stable. Now the U S doesn't mind that because it stabilizes trade for the U S too, as long as the U S doesn't lose reserve status overall. This way it's kind of in shrine that it has, let's say 45% of reserve status. So it's not too much, not too little. When you're looking at monetary policy and global growth, the U S federal reserve is not the only central bank that has an accommodated monetary policy.
Everybody seems to be on a race to the bottom. And so when you're looking at the differentials here who has more of an economy, accommodated policy, and where would you allocate your capital if you had to decide between domestic equities. Or foreign emerging equities. Well, I mean, this is the big question.
I mean, because it's a rolling process is the European stimulates. So then the UK stimulates and then Japan stimulates and then the us stimulates and then it moves around, which is why a lot of these currencies have actually been in quite a big range over time. They actually haven't moved a lot and maybe that's the status quo.
Maybe we're the bottom end of the range and the dollar rallies a bit from here because maybe the Europeans have more to do right now. So it's not really clear where the opportunity lies, but let's assume for a second that we're not going to go into a dollar secular bear market or a bull market. Maybe it's like Japan, where the currency trades in a sideways range for a long time.
Well, if that stability is there, then emerging markets do extremely well. Because all they need is the dollar to stop going up and they start to outperform. And we've seen that recently as the dollar's weakened over the last, you know, six months emerging markets and will resonant. Yeah. Emerging markets.
I know you like the EMM space. Can you give us a rundown on how to invest the, in the em space? Well, first of all, the EMS space is very broad. It encompasses a lot of different regions, a lot of different jurisdictions. Do you have a preferred jurisdiction? First of all, I did. I constructed a framework of the world based around debt and demographics.
So I put up a map of the world, took it every country with aging demographics, which is the whole Western world. Plus China. I then took out every country with high debts. And what you're left with really is a world around the Indian ocean. With India at the center of it up as far North, as around which, uh, across, as far as Morocco and down, as far as Singapore, Malaysia, Indonesia, these countries look nothing like the world that we live in, in the West, they are much cheaper.
They have populations under the age of 30. They have all the natural resources that they need to have the intellectual brain power. And they'd been trading with each other. For millennia, I call it the monsoon region because it's the monsoon Tradewinds that always grew those regions. And India's really at the center of that.
So I very bullish India over time. I think there's some huge structural changes in India, but the whole region, even the middle East, we're seeing big changes. If you look at the emerging markets, uh, indices, let's just take the, um, let's just take one of the ETFs, for example, VM, I shares emerging markets ETF.
And if you compared that with the S and P 500, so the S and P was up about 11, 13% year to date. And the emerging markets ETF is up about 11%. So, you know, slight underperformance, not by much, uh, on par. Why do you think the EMS base hasn't outperformed the domestic space this year? Because. Yeah, the dollar and many of these markets have also had to deal big emerging markets like Brazil, with large outbreaks of COVID slow economic growth.
What you really want is once we start getting through this economic downside, then we'll see who really performs. And, you know, if we think about it, I mean, crazy though, it is countries like South Korea, which are very advanced countries and Taiwan are all in the emerging market indices. Now they dealt with the virus and economic impacts extremely well.
So they will do well coming out the other side as well. So, um, I think it's early. I'm not bullish emerging markets right now. It's not my trade yet, but if you say, what can I set and forgetting my 401k for 10 years, this will be one of the opportunities. W what about, uh, what about frontier markets? Do you like frontier markets like Africa?
A lot of African nations, like Ethiopia, for example, this year at batch actually performed very well. If you look at just their GDP growth. Yes. I mean, ETF has got some, um, um, issues, but I've been very bullishly period for a long time. The world's garment trade, the textile industry is moving to Ethiopia as the lowest cost producer.
Uh, it's also very close to the Suez canal, the shipping routes, um, and also has gross cotton as well. So Ethiopia, um, is very interesting. Western Africa is extremely vibrant. A very interesting region. Uh, I love North Africa, Morocco, particularly, and I'm super interested in Iran because I think it will reopen to Americans, but foreigners completely Iran.
Iran is the cheapest market in the world. How would you play these markets then? Well, when you start playing those, you have to really look for private funds because any of these kinds of Africa, ETFs, they're all South Africa, so that doesn't help Nigeria. There is an ETF in Nigeria, I think, in the UK. So Nigeria is tradable, um, but that's very much an oil led economy, even though there's a lot going on there, there's a whole digitalization going on there.
So there are private funds. And I think they're interesting for those people. You know, high net worth people who can get access to private funds. I think the kind of VC space in Africa is, is extremely exciting. There are some funds invest in public companies in Africa, uh, where most of us can't really open accounts, Iran, there's at least two or three funds based in London and Switzerland that do investments in Iran.
And that's been. One of the best performing markets in the world for some time now. And it's still extremely cheap. Uh, Morocco, I think you can do directly and there's funds listed in London. So there are ways of doing these, but frontiers are always harder, but that's why you get the reward as well.
Wields and technology are the last two themes that you brought up with me. Now, I almost look at them as a pair trade. You know, you're short bonds, new law technology, and you'll make a lot of money. Do you agree with that? I just think. People are treating tech stocks, you know, these SAS business models with 70 or 80% margins that generate cash and have no debt as like perpetual bonds.
The ability for these people to generate this money for ongoing is huge. So it's very defensive in a portfolio, but there's growth as well. So it's really interesting. Um, bonds. I still like bonds. I still think bond deals probably in the U S go negative. So I think there's another trade to be had from bonds, but it's a trade as opposed to a great investment, um, take companies.
The problem is they're super expensive, but in this world with zero interest rates, everywhere or negative rates, How do you value the cash flows of these businesses? It's very, very difficult to different world for us. So that's why I understand that VC investing has become very popular because you get in at least earlier on better evaluations, feel about these valuations and criticism I've gotten regularly on the show is that tech is overvalued.
Uh, do you agree with disagree looking at certain stocks? It seems like it seems to me like the valuations are justified. I'm just picking something that I know Fiverr, for example, it's the online service, uh, uh, company and, you know, they've, their stock went up about it. That 10 times from 25 bucks to over 200 bucks this year.
Incredible growth. Now, when we'll look at it and say, okay, well, that's probably just overvalued, but if you think about it in, during the pandemic, during the lockdown, a lot of people went online to sell their services. Their user growth has increased. So, you know, if you look at, I guess if you pick a few, uh, tech sub-sectors that you're following, do you think that the valuations are justified?
The honest answer is, I don't know. So I, I don't really, I don't really invest because I can't figure it out because yes, traditional metrics, they look overvalued by the metrics that you're talking about. Metcalf's law, which is what drives technology adoption that, that undervalued Cathy wood from arc investors argued.
These things is stop trying to measure them by the same way. You'd measure general electric. These things are vastly different because as you pile on new users, your margins explode, um, and more adoption just brings more cashflow. So it's, you're right. It's somewhere between the two. And the answer for me is I don't really know.
What it does tell you it's a great time to build a business. Yes, it does. Yeah. Well, before we move on to the second segment and talk about real vision, I want to get a sense of, uh, putting everything together and what you like the most. If you were to allocate, let's say a majority of her portfolio. Well, I know what you're heavily invested in.
We'll talk about that in a minute, but if you were to start from a clean blank slate, excluding crypto, excluding crypto Rao. Not including crypto, what would you be placing your money in right now, I would do a blend of two things. Very simplest allocation. I'd buy bonds in case this economic growth doesn't appear because the virus goes on longer.
The vaccine takes longer to roll out and we've seen shutdowns in Europe. I think we're going to get them in the U S so bygones. I buy emerging markets and you run that because if growth comes back, you'll make a huge amount of money in emerging markets. But the central bank won't allow bond deals arise.
So you've got to kind of balance portfolio from doing something like that. Um, you know, you could throw a bit of gold into it, um, and you've, that's a nice portfolio construct. You're not overpaying for growth. Like you are potentially in the tech stocks, you've got something that feels like it's going to protect you, give you some upside.
And also, you know, with the central banks printing of money, it'll protect you within that too. So something like that is a very simple portfolio that probably sets you up for at least the next five years. .