Transcription
More people are paying attention to crypto right now than ever before. So, it's important to get your information from the sources you trust. That's why I want to give a big thanks to Bitwise for sponsoring today's episode. Bitwise manages over $10 billion across more than 30 crypto strategies, and they've been doing this since 2017. But here's what really sets them apart. They give back, too. Bitwise actually donates part of the profits from its Bitcoin and Ethereum investments to open-source developers, the people building and maintaining the networks that we rely on. So when you work with Bitwise, you're not just getting professional crypto exposure, you're helping fund the future of crypto itself. Check them out at bitwiseinvestments.com or email james@bitwiseinvestments.com and tell them Ral sent you. Thanks.
Look, I know it's boring, the YouTube cheese. Hey, hit the like and subscribe button, but it actually matters. It's going to make a difference to what guests I can bring for you to give you the best alpha in the world. So, just stop what you're doing for a second, hit the like, subscribe button, and then we'll get on with the interview.
Hey everyone, I'm Ral Pal and welcome to my show, The Journeyman, where we explore that nexus of understanding between macro crypto and the exponential age of technology. I've just come back from a trip to the Middle East to Dubai and Abu Dhabi where things are really thriving in both crypto and the exponential technology. There's so much going on it's it's difficult to get across but these nations are leading from the front and deciding that blockchain technology plus AI and all the component parts of AI are the future. And it's from a top-down mandate that spreads across these emirates which is really profoundly interesting and positive for all of us. But I was also there for Salana Breakpoint and a bunch of other events. I was there with Binance um in in Dubai and also meeting people the sovereign wealth funds and others who are out there. And the one thing I can get across to you is how bullish the setup is. I met with a lot of the key players of the industry both in the United States and around the world as well and all everybody sees is adoption as far as the I can see whether that's coming from stable coin rails whether it's coming from tokenizing real world assets coming from tokenizing equities coming from investors coming from regulation coming from liquidity coming from fiscal stimulus it seems that everything is in place but to be honest the back end of 2020 25 has been shitty. It's most made most of us question what the hell is going on? Is it all about the four-year cycle? Are we missing something? Why are equities getting the party and we're not? Why is gold getting the party and we're not?
So, I thought I'd speak to somebody or give you a presentation from somebody I found a little boring. I hear him too much. Um I think he says the same things time and time again, but he has got a long-term view and that's me, Ral Pal. It's my presentation I gave on stage at Salana in conjunction with E Expan, my asset management company. Um, and also with Bitwise. We were running the institutional panel there. But I think it frames for you very simply what it is I'm looking at, what is going on, why it's happening, why it's still about liquidity. I know it's boring. I know we want to have nice things. I know we all feel like we can't have nice things. I know it feels like. But I honestly believe that with the work that we've done and speaking to all of the players in the industry, 2026 feels like it's going to be a lot different year than 2025. We've had to put up a lot some awful P&L swings, whether we're in Bitcoin or whether you were further out the risk curve, you know, Salana, Suie, whatever. It's been bloody difficult. I get it. And you know, those of us who have been in technology, it's been a good year for technology, but not a straightforward year either. So, I'm hoping for a better year for 2026. I think it all stacks up. But let's hear about the framework and the thesis on why that's the case. If not, have a fantastic holiday season. Have a great new year. Get some rest. 26, I think, is a big one. Join me, Ral Pal, as I go on a journey of discovery through the macro, crypto, and exponential age landscapes. In the journeyman, I talk to the smartest people in the world so we can all become smarter together.
Good morning everyone. Um so should be an interesting day today where we're going to go through a whole lot of things about how to asset allocate in the space, how to think about the space and also how to think about markets and the macro overlay. And what I'm going to go through is what we use at exponential age asset management XPAM um to overlay our kind of fund of hedge fund portfolio to think about the macro and how to use it. And I know a lot of you are a little bit bored of price action right now because it does nothing but go down every day or chop around. But over time as always I say is we just need to zoom out. So let's go to it. This is the work that we do at Global Micro Investor. research service.
>> The whole game that we're playing at the top level of crypto itself is this debasement of currency, the 8% annualized growth rate of total liquidity, which is the debasement of currency that becomes our hurdle rate for investing. And on top of that, we then built the crypto rails to do all the other things that we can do with it. But this was where we all started and is still the main driver of what we do today. So I use something called the everything code. I think most of you will be familiar with the everything code right now. Um, and it's it's my understanding of how this all fits together from a very big picture to how it fits together um into the business cycle to asset allocation where we are all of that. And this has been very very helpful for me. I based it upon the magic formula which is GDP growth equals population growth, productivity growth and debt growth. So that's how we understand what drives economies. Once we understand that, we can understand the messes we're starting to get into. Trend rate of GDP has been declining for decades now, for 50 years. Basically, as the population starts aging out, trend rate has been going down. The population is aging and you can see from the chart here, it's the same trend. Older populations tend to produce less growth. Productivity. older people are less productive. So we have a decline in productivity over time as well. So this is driving this slower economy across the whole western world whether it's Europe, the US or elsewhere. Then we start to see debt growth. Debt growth is the big problem that we've been facing for decades now. It blew up in 2008. So total debt to GDP in the US has been roughly stable, but that hides the story of what's really been going on. The private sector's been deleveraging over time. So they've been taking on less debts and that's been a good thing, but that is entirely offset by the government that's been increasing its debt. And so this debt burden is the real issue that we're facing today. That is all driven by demographics. So I said we're going to zoom out. This is the really important story of why this is happening and why it matters to us. and it'll come down to how it makes us as allocate into crypto as a sector. So that's the birth rate of the total population. The trend growth has been declining forever after the baby boomers came into the labor force. They've been slowly aging out. That whole trend rate has been also prevalent in the labor force participation rate, which is the working labor force in the United States. And we've seen the working labor force has been declining and follows exactly the birth deaths rate. So what we've got is ahead of us out to 2040 nothing but an aging population. So that if you think about it means slow growth for economies, difficulty raising taxes, more expenditure for governments and this is the mess that we're facing. This chart is the most important chart in all of macro and most people don't understand it yet. Uh, and I keep bringing it up saying I know when people don't get it because it's not been copied and sent on Twitter all day. This is the labor force participation rate and against it is government debt as a percentage of GDP inverted. Basically, all debt has been accumulated to offset the working age population decline. So, they're trying to bolster growth by adding debts. And right now, they kind of have broken from 2008 onwards, they've broken debt growth. debt growth is now just servicing of old debts and interest payments keep accumulating. So this is the whole game we're in. This is why it's happening. Why we've got this indebted world is not because of government overspend based on whatever political party you like or don't like. It's none of that. It's just because we've got an old population. And that's the same in Japan, which has an older population, so they have more debt. Europe has older population, so they have even more debt. And the US has a slightly younger population, but it's exactly all the same process. And you got these mega trends. So the labor force participation rate just continues in this nice secular downtrend and government debt to GDP keeps going up. When you look at it in a log channel like this, you can kind of project where we're going to go, which is what Japan did. If we continue as we go now, we will end up by the let's say 2030 at 160% of GDP and debt. So it just keeps going and you can't really stop it because we've got this aging population. So, how do we get GDP growth up? Well, that's a story for another day. The story of AI and robots replacing the demographics. But right now, we're in this everything code cycle. And that is the cycle of using liquidity to offset debt. So, basically what they're doing is printing money to pay the debt. That's like using a credit card to pay a credit card. That's the whole game we're in. This is the debasement of currency. This is the game why the rich get richer because they own assets. the poor don't because they have incomes. Incomes only grow with GDP and assets go up by the rate of debasement which is at least 8% a year plus maybe an inflation rate. So that's the whole game that is being played at every government level right now and we're seeing it again um yesterday as the Federal Reserve go back to using the balance sheet again. It's all the same story. We've got 10 trillion dollars of debt to roll in the US alone in the next 12 months. So, and I'll come on to the business cycle and how that all interacts. But this is the story. This is what drives number go up and drives adoption of the industry that we all know and love. Or maybe not right now because it keeps chopping around too much, but generally we do. And here's another way of looking at it is here's the interest payments. The interest payments are what are getting monetized. And so total liquidity just follows the interest payments. So that chart tells you we've got around seven or eight trillion dollars uh that we need to print just to cover the interest payments over the next 12 months into the end of 2026 when things calm down a little bit for a while. And this is the reason why the Fed are trying to get rates down or or the Treasury are begging the Fed to get rates down because they need to get rates down to the level of GDP growth which is let's say right now it's about 3% 2 and a half% trend rate. They're going to have to get rates down to that because if not that number keeps compounding because GDP is the activity by which you pay the debts and the interest payments.
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So, what we realize within this is the cyclicality of all of this. And this was an important thing when I suddenly realized that the business cycle had gone from variable lengths. My job as a macro strategist and an investor was to figure out when the business cycle was going to peak and trough and it was not it's not an easy game because some years we had you know some periods you had like sevenyear business cycles other time we had four year it was moving around the place and then suddenly everything changed it suddenly became perfectly four-year cyclical starting in 2008 and it was all to do I found out after a bit of work to do with the debt maturity so 2008 we had a debt jubilee they forgave all the interest payments on all the debts in all the major economies in the world. And when they did that, they restructured all of their debts. So, I'm just going to grab some water. They restructured all of their debts and they restructured them in the 3 to 5 year sector. So, as they did that, they created this debt refinancing cycle where every few years they have to refinance all the debt which requires liquidity and liquidity drives the economic system. So, it's no magic that the Bitcoin hing happened to be a four-year cycle. It was just matching the economic cycle. So, the NASDAQ, if you look at year-on-year rates of change and stuff, it's all the same cycle. It's the same cycle for every single asset, which I'll show you later. We had this perfect four-year cycle, and this is where everybody's scratching their heads right now is what the hell's going on? Has the cycle finished? That's the big question everyone debates all day. And for me, you can see what's happened here. There used to be this perfect four-year cycle, and suddenly it's changed. Well, what happened here is we've added an extra year. In 2022, at the beginning of 22, rates were still at zero and they extended the debt maturity by a year to 5 years. So, we've got an extra year in the equation. So all of the debts that need to get rolled need to get rolled in 2026 and not 2025. So that's why we've had less liquidity than we've expected at this point. You know, the banana zone point in the cycle has had less liquidity. I only really found this out over the summer when I redid the maths on all of this and realized, okay, wow, they they've actually changed the structure of liquidity here. So when we change it to the new 5.4 year where the debt maturity is, this is what we're going to get. So again, it gives you an idea that we're probably likely to peak out uh towards the end of 2026 in terms of liquidity as opposed to this year. So probabilistically speaking, which is how I think about the world, we've got further to go and we've got the big liquidity burst to come. You can see the changes coming. They're changing things like the SLR, the supplementary leverage ratio that allows them to sell more treasuries to banks. We're seeing the Fed cutting rates. We're seeing changes in the money market. We're seeing the government ramping up fiscal stimulus. All of this is telling you that the big cycle still remains ahead. And I know most of us are impatient in crypto because we want things to go up quickly. But that's not how the world works. It's all based on the macroeconomy. And you just have to have patience because we've had this very choppy business cycle because there's been no real liquidity yet. Liquidity has been relatively slow. But what people didn't really realize and I think we pioneered the work on this is Bitcoin is a very macro asset. It's very understandable and easy to understand once you put it in a macro framework. It's not magic internet money that just is uncorrelated to anything else. It's actually super correlated. So you get this mega trend which is the secular adoption trend driven by metaf's law in Bitcoin and it goes up and down which we all know and on a log chart doesn't look scary. In the real world, it goes down a lot and then goes up even more. But when you drend that, it's actually the business cycle. So it is just driven by the business cycle. The reason it doesn't look you have to drend it is because Bitcoin has all of the price spikes to the upside. So the skewess to the upside changes that. But when you drend it, you've got exactly it. And what the uh Bitcoin is pricing right right now is a gap that is not normal. It's pricing a business cycle that's going to recession. And I'll show you that that's not the case. So we're getting into the zone where things get very interesting where the alligator jaws start closing. But just to show the importance of the business cycle and why ISM matters, it matters for every asset class. Everything on a year-on-year basis is the business cycle. People don't really understand this stuff. Once you understand this, it makes it much easier to understand how markets move, when they move, what they do. It's even easier when you know that we've got a predictable business cycle based on debt maturity. So, if you've got that, you know what drives assets. Some lead, some lag. So, crypto and technology lead. They actually follow liquidity. Other things like small caps and cyclical stocks, well, they fit with this. So here's the Russell 2000 which is essentially small caps basically the same. If we go forwards to crude oil same. If we go through to industrial metals the same. Everything literally everything in the entire investing world is driven by this cycle. Even things like the ETH Bitcoin cross. So think of this as alts. Alts are driven by the business cycle. So, with the business cycle currently low, we haven't had alt season. And everyone's like, I can't believe they've robbed us of alt season. It's never going to happen. There's too many tokens. We can't have nice things. And all of that we hear all day. It's not. It's just the economy is stupid. Because what happens is when earnings go up, when the business cycle is strong, you have more earnings and you invest those earnings further out the risk curve. It's just really basic stuff. It happens for exactly the same as small caps, exactly the same with junk bonds, credit, they all operate in exactly the same way. And the business cycle has been subdued. Listen to Scott Bessant. He's telling you all day, as is Trump, is we're going to have a banner year next year. Why? Because they're going to jam the market with liquidity and they're going to jam fiscal stimulus through as well. You know, if you think about it, the US is a service-based economy. They're going to get rid of tax on tips. That's a huge boost to people. There's like a $1.5 trillion dollars that will flow into the banking system just from that stuff alone, from the big beautiful bill. Then we've got the changes to the SLR that allows maybe three or four trillion dollars of credit creation from the banking system. We've got enormous amounts of this stuff lining up. Why? Because they want to win the election. You know, the good thing is for once we've actually got a macro hedge fund manager running the Treasury, so I know how he thinks. He was a long-term global macro investor subscriber. I've known him for 20 years and we understand he understands the game which is jam the business cycle going into the elections. So we've got that we've got the debt to roll. It's kind of stacking up and it tells you your beloved or our beloved alt season is still to come. Bitcoin dominance the same thing. It's driven by the same thing. It's much like when the economy is slow people tend to be in treasuries. When the economy picks up they go further out the risk curve in different types of credit. It's all the same cycle. So, it's a very macro asset. And here's the chart of the ISM versus um Bitcoin. And you can see the peaks and troughs correlate well. So, are we at a top, which is the thing that people bleet on all day on Twitter with the top of the cycle? We can't be because we're not topping in the ISM. In fact, we've not even gone above 50 yet. So, we've not had economic expansion. Main Street has been struggling. They need rates to come lower. They need fiscal stimulus. And that's all to come. So probabilistically speaking, the business cycle lies ahead of us and it should be quite rapid. So when we start looking at forecasting models of the business cycle, here's the interest rate model. Uh that suggests to us that the economy strengthens fast uh and quite dramatically in the next 6 to9 months. So that's good for old coin season, that's good for crypto, that's good for all risk assets. Another way of looking at it is central banks. The number of them who are easing that leads the business cycle obviously because they're cutting interest rates. So that tells us we've got a strong cycle still ahead of us. The one for us that matters the most is our financial conditions index. That's driven by um that's driven by rates, the dollar and commodity prices. And this chart has been very very useful in predicting where everything goes. And it tells us in nine months time the ISM should be at 57. And we don't think the um financial conditions index is done yet. Another leg lower in the dollar, another leg lower in rates and what we get is an extension of the cycle out further than 9 months. So again, this is a very good indicator. But we can add to this by thinking about liquidity in Bitcoin. Why does all this matter? Well, because the correlation of the two things of total liquidity and Bitcoin are extremely high. In fact, the correlation is 90%. Statistically, that is absurdly highly correlated. When you look at the NASDAQ, it is even more absurdly highly correlated. It's 97 a half% correlated with money printing. So, money printing is the story that drives this. And then network adoption is what drives the outperformance. So if you think about the hurdle rate being 8%, everything above that is driven by network adoption of the technology. Liquidity, where are we now? Well, yearon-year liquidity is not very impressive. This kind of slow grind higher has been what we've lived through in crypto from the bottom. It's kind of stop start. Um, you know, things don't really get going. Some things get a narrative traction then fall off again. It's because liquidity is not flowing through the system. We've had broken plumbing and we've had no need to do it yet because we don't have to roll the debt until 2026. When we look at financial conditions, our lead indicator, and put them against total liquidity, well, we've now got a lead, a three-month lead, and it tells us liquidity is about to explode. And we know that because Scott Besson's telling us that. They're telling us they're going to add liquidity to the system. We know that because they have to because the plumbing in the financial markets is is breaking as well. So, we've got that to come. And then when we overlay ISM, we've got this perfect dominoes of the economy. We've got a high lead indicator financial conditions leads by 9 months. Then we've got total liquidity where Bitcoin and NASDAQ live. And then we've got the ISM where oil and commodities and cyclical things all live in. So we can understand how the market works over time and assa allocate accordingly. The other thing is part of that financial conditions is the dollar. Here's the dollar last time Trump was in versus this time it's scarily the same. It would suggest that we probably have another leg lower in the dollar which would give us another leg in financial conditions which means that the cycle extends to the end of 2026 which is why I keep saying it's a longer cycle than people expect. Global M2 is doing roughly the same thing. We had that chop periods last time around with Trump and again we get the accelerated part as we go. So that feels like that's coming as well. But we've had a weird world in crypto in the last 5 months, four months is where we've diverged from everybody and we feel now we can't have nice things. It's all over. Everybody hates us. It's a terrible world out there. And it's because of stuff like the global M2 chart. That was a chart I was showing for a long time. I said, "Listen, it's not going to be perfect." And then it started diverging wildly. What happened here was because of the lack of liquidity in the system, the treasury began to increase its general account. There was no offset with a reverse repo and crypto being the furthest ass on the risk curve got hit. NASDAQ didn't get hit because everybody was underweight NASDAQ going into uh the last quarter of the year, but crypto got hit. Um, and liquidity is still problematic, which is why the Fed started using the balance sheet again. And that's why we've struggled. It's not been easy because there's not been enough liquidity around in the system. Globe M2 against NASDAQ's worked fine. And the reason being again is because asset allocators were underweight NASDAQ. It had been a good performer all year and they've had to chase their benchmarks. So, we've seen this kind of stuff. Even though we've had kind of fear and greed in technology stocks extremely on the fear side, people have had to chase the market. They didn't do it in crypto because they're not benchmarked against it. But it's still working. But NASDAQ against Bitcoin hasn't. This alligator jaw has opened up. And the alligator jaws I think will close because of where when liquidity comes in, crypto is the most liquidity sensitive. Um against gold. Gold actually leads by 183 days. Gold lives in financial conditions world. And again, we've diverged from the gold chart. Same thing, the alligator jaws. Same thing driven by the same issue, which is there's not enough liquidity in the system to flow all the way out to crypto. And we're all stuck there watching the market flapping around while other people are having a party. And it's slightly irritating, but it is what it is. And patience is the game. We're playing a macro game here. We're not playing, you know, hourly charts. We're playing a game of cycles. We're playing a 5year cycle, not a fouryear cycle. Thing these things take time and patience is the important thing if you want to capture the returns. Bitcoin against the 201517 cycle has been mapping really well. Alligator jaws again, same reason. Bitcoin against 2020 2021, alligator jaws, same reason. So we've got this consistency across all of the things to show we've had a dislocation. And the question we ask ourselves as investors is is this dislocation persistent or temporary? And from the work that I've done and showed you, it's most likely to be temporary. If not, then suddenly the 90% correlation to global liquidity is gone for no apparent reason. And that doesn't normally happen. Um, another alligator jaws against a different period. Just all of these things, we see it even with the economic surprises index. We get this excess fear gap that's happened in Bitcoin. If you remember, Bitcoin is pricing in an ISM of 46, which is a recession. Yes, we'll have slow growth from the government shutdown and other stuff. We're highly unlikely to have a recession because all the forward-looking indicators suggest the business cycle is going to get get a lot stronger. So, we've become pessimistic after the wash out in October that that it's never going to come back. And I think generally that's going to wrong foot people because of the macro work that we do. financial conditions. Same thing, excess fear gap or alligator jaws. We saw that with the fear and greed index getting down to 10. It was the worst reading in the history of crypto. And that was after a 30% sell-off. And I keep saying with my don't this up thesis, 30% sell-offs are normal. But yet we just cowed in fear when it happened. It's like really guys, we've seen this before. Um, so just go back to this chart. This is the chart the last time we had the government shutdown and we're following pretty much that path as well. Again, we're starting to have a slight gap here, but chances are once we get through year-end funding for the banking system and the SLR kicks in and everything else kicks in, then we just start this trajectory higher and we should just have a strong up year. Obviously, we will have corrections on route and overall when we think about this as an asset allocation, crypto becomes the super massive black hole. It becomes the most powerful asset we've ever had, the greatest performing asset of all time. And everyone thinks they're too late. But remember, we're driven by this debasement of currency. As Lyn Olden says, nothing stops this train. Nothing can stop it until the AI and the robots replace population growth. So, it's an ongoing persistent secular theme that persistently drives markets, which is why markets endlessly go higher. NASDAQ is one of the few assets that's outperformed this debasement. It's outperformed it by 12.6% a year. So, it's been a great asset to own because tomorrow is more digital than today. So, technology outperforms. It tends to be network adoption models as we adopt new technologies like we did with AI. So, it does well. Bitcoin on the other hand has outperformed it by 89% a year. So that's a staggering difference in performance when we look at and you can't see this table very well but here's a table of from XPAM showing all of the assets and on the left are in orange the annualized returns none of those beat the debasement rate owning those assets makes you actually poorer only up here is you've got US large caps roughly in line with debasement plus inflation NASDAQ outperforms then you've got three crypto there with Salana at the top since it since it came out at 166% annualized returns. That's the power of this thing. Not only does it avoid debasement, but you can get rich as well if you've got patience. So, why bother even owning the NASDAQ when it's down 99.92% versus crypto? Over time, everything underperforms this super massive black hole because this is a network adoption model on a global scale. So for me it becomes the greatest macro trade of all time. This is why I care so much about this space because we can make a lot of money in it. Um, and it's an enabling technology for all sorts of things including helping people around the world participate in the financial system in ways they couldn't have done. So it's a super massive black hole that becomes the greatest macro trade of all time. And here's the big trade. This is why I'm in the space from an investment perspective, not from the ideological ideological perspectives which I also share, but from from this perspective. Um, the charts a bit screwy here, but basically we've got about $800 trillion of assets out there in the world. Gold is at 30 trillion. Globe M2 80 trillion and Bitcoin, the whole of digital assets is like 3.5 trillion. Okay, so it's nothing yet. But when you use the trend rate of adoption, i.e. the market cap of crypto overall, it is in a secular log regression channel and you can forward project out where it's going to go. And it tells us by around 2032, 2034, this is a hundred trillion asset. A hundred trillion asset means we're going to create $97 trillion of new wealth, which will be the largest wealth creation in all of economic history in the shortest period of time. To put it this way, it'll create more wealth than all of the Middle East, every Russian billionaire, every US tech billionaire, every finance billionaire, every real estate billionaire on Earth. That's what's here. This is what the game is. Discount me 50%. It's still 47 trillion. So, we're only 3% of the way there or 6% of the way there if you've h haveved my my forecast. So, that's the game. That's why at XPAM we allocate to the world's best hedge funds in the space to capture this trend, this overall trend. That's all we're trying to do is not up this one trend, which is the greatest macro trade of all time. The final part is what everybody cares about is the banana zone. Does it happen? And look, that liquidity drain that happened in July onwards has been miserable. But the the thing remains the same. We've still not had the last phase. The last phase is the debt refinance uh the refi cycle phase and that is 2026. So yeah, not everything works out perfectly. It's not all clockwork. It doesn't follow M2 tick for tick every time. It won't follow everything that you think it will. But overall, when you zoom out, when you look at the big picture, you come all the way through, the opportunities for outsiz returns, even risk adjusted in this space are bar none. And it's the best thing that we've ever seen as an asset class. So hopefully that's helped settle an understanding of why we allocate to this space, why we care about this space, and the opportunity set. And then I think we've got Pierre coming on from XPAM now our chief uh commercial officer to talk about how to think about allocating the space. You know, what what are the options available? How do you how do you actually capture that trend? So Pierre, over to you.
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