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Summary List Placement

Raoul Pal, the former hedge-fund manager who founded Real Vision, has never been one to sugarcoat his perspectives.

In fact, if you take a stroll down memory lane, at the beginning of the coronavirus-induced fallout, Pal was early in his appraisal, saying “the whole world’s f—ed.”

One stock bear market, a double-digit unemployment reading, and a 30%-plus annualized drop in GDP later, and it doesn’t seem like a stretch to say his evaluation was sufficient. 

To bring you up to speed, Pal retired at 36 after quitting jobs at Goldman Sachs and GLG Partners. He lives comfortably on a 140-person island in the Cayman Islands and spends his days writing market research, which comes with a hefty price tag of $40,000 per year.

Although the landscape is much calmer than it was at the beginning of the unwind, it’s safe to say that Pal’s apprehensiveness has persisted.

“I’m extremely concerned by the potential for this to unravel rather fast, because, as you know, everybody’s one side of the boat — and that side is V-shaped recovery and growth,” he said in a recent Real Vision webinar. “When large parts of the market, including the truthfulness of the bond market, is whispering at you ‘ Hey, that’s not right; they’re all going bust.”  

Underpinning Pal’s thesis is something he refers to as: “The Unfolding” — a framework he leans on to make sense of the fallout and gauge the overall environment. It all comes down to three phases: liquidation, hope, and insolvency. In theory, Pal expects the phases to play out consecutively, and says they already have to an extent.

Here’s how he denotes each:

Liquidation: The Federal Reserve and global central banks step in to provide “massive liquidity” into paralyzed markets. Then, fiscal stimulus comes in to “paper over the cracks.” According to Pal, this phase has already occurred.

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Hope: Pal says this phase is “very typical in extended bear markets or recessions.” In a nutshell, it’s a time period where investors prematurely declare victory and sentiment shifts to a more sanguine outlook. Pal provides examples of the 1929, 2001, and 2008 market crashes to bolster his thesis. In each scenario, investors experienced a brief reprieve before enduring a deeper drawdown.

Given the stock market’s torrid recovery from multiyear lows back within shouting distance of record highs, Pal sees equities currently being set up in the same manner.

Insolvency: This is where the rubber meets the road, and when markets have to face the underlying economic reality associated with pandemic, which has caused a contraction in global growth.

To him, time is a crucial component of the equation that “really worries him.” The longer it takes for the global economy to recover, the worse. Business start closing, more workers are laid off, and that effect snowballs creating structural problems within the entire economy. 

In Pal’s mind, the transition from the hope phase to the insolvency phase is playing out as we speak — and the repercussions will be widespread.

Trouble …read more

Source:: Business Insider


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