Anthony Pompliano hosts “Off The Chain“, a podcast featuring interviews from the world of crypto currency. Lately he’s been branching out a bit to include interviews with a variety of personalities related to the business world and finance industry. This week Pomp invited Raoul Pal on the show to discuss his background and experience. They also covered some big risks that Raoul anticipates coming and what problems and opportunity these events might create.
Raoul Pal is a former hedge fund manager who retired in his mid 30’s. While employed he worked at GLG Partners and Goldman Sachs. He would go on to form Real Vision, a financial media company focused on in-depth analysis and interviews. In a Tech Crunch interview in 2017, Pal explains how most traditional media outlets rely on advertising revenue for survival, Real Vision features a subscription model.
He goes on to explain, “In a highly competitive digital world, the pressure ‘to get clicks’ has a massive impact on the tone, direction and quality of the editorial content itself. Real Vision’s subscriber model means there is no need to sensationalize, no dumbing down of ideas, no incessant ‘breaking news’ headlines, no clickbait soundbites and no cutting things short for commercial breaks.”
Raoul begins by explaining how he got into the world of finance and hedge fund money management. He began his career in 1990 during a recession where he struggled to get a job at an investment bank, partly because of his “shitty degree”, as he puts it. His first job was at Dow Jones, an information provider, where he was helping customers understand the companies technical analysis product. So Raoul begins to educate himself on technical analysis in financial markets. From there he talked his way into an arm of HSBC where he got into derivatives and quickly rose through the ranks.
From there he went to Goldman Sachs where he found himself in great position to see the Asian financial crisis. Next, Raoul decided he wanted to trade with a recession brewing in the U.S. so he went to GLG Partners in New York and eventually retired to Spain after presumably making some timely moves during the 2000 – 2003 recession. Pal decided his unique experiences in the hedge fund industry provided him with insight where he could begin writing research to sell back to the industry. During his hedge fund days he was able to witness the titans of the industry make trades and run their money, the likes of Paul Tudor Jones, Stanley Druckenmiller and Louis Bacon. He was able to see how they made trades during the Asian Crisis, which he describes as a “phenomenal” and “fascinating” time, because he was able to see how these giant hedge fund managers were able to form their macro-economic view and form trades around their consensus.
One of the big takeaways for Raoul from his hedge fund experience managing money and watching the most successful managers in the world work is that the really big money is made at cycle turning points. He goes on to explain that the most money of all is to be made in the down cycle. He says that while up cycles can take 10 years, the down cycles are 18 months. The compressed returns that are potentially available in those down cycles are “truly extraordinary”, he describes.
Something that jumped out at me while listening to the interview was when Pomp repeated a classic money management adage where the greatest investors are known for cutting their losing positions quickly and letting their winning positions run as long as possible. This has been standard advice for any trader or investor for as long as I can remember, and I’ve never heard anyone really disagree with the point, ever really. This was the first time I’ve heard someone jump in and say, “I disagree”, which is exactly what Raoul said. He cites, in his opinion, one of the greatest macro traders of all time, Nicholas Roditi, who he says had, “enormous stomach for risk.” Pal explains why this is so critical and I found it fascinating, he said that Roditi had a “better understanding in his head of the outcomes” so he could suffer large draw-downs and maintain his position. I believe what Raoul is describing is someone who can stay emotionally detached from initial losses while maintaining or even doubling-up a position while it goes against you. By knowing the risk-reward all the while, and having a better understanding than most of the eventual outcome you will be able to maintain your position until the outcome is realized.
Raoul discusses his current personal portfolio which includes bonds, dollars, gold and bitcoin. This is definitely not a typical money manager discussing his allocation to large-cap tech stocks and consumer cyclical stocks and that’s one of the reasons why I find it such an interesting discussion. They joke about his allocation sounding a bit “defensive” at the moment, but Pal doesn’t look at it that way. Pal explains how you can make actually make huge profits in bonds. Where most people think bonds are low risk and low reward, he would disagree, and goes on to explain the greatest trade he ever saw back in 2001.
The story goes like this, a guy working for a large hedge fund in London thinks rates need to go much lower and most people are not expecting rates to go as low. Even though the Fed cut rates, this trader, who remains nameless, still thinks rates need to go much lower because of an approaching recession. He goes ‘limit long’ Eurodollar futures betting that rates will be cut significantly. Once the trader puts on his trade he retires to his house for a few very good reasons. Reason one being he uses his entire book of funds for the trade so he had nothing left to trade. Reason two being so that he could not be talked out of his trade by anyone surrounding him at the office. So rates begin to creep up and there’s glimmers of hope that the economy would stave off the dreaded recession and the trader gets summoned back to the office by his boss. At the office the boss explains there are some losses on this position, what do you want to do now? The trader replies, “double-up”, meaning commit more funds to the trade even though it’s going against him at the moment. The boss demands a reason for his wish of throwing even more funds at a losing trade and the trader replies, “my case is still valid.” The boss agrees knowing that this trader has absolute clarity on the position he’s taken and agrees to double-up on the trade. By the end of the year the trader returns to the office to close out the trade and retires from his monster profits. One trade pocketing somewhere around $200 million.
Although Raoul won’t get into the specifics and won’t name the trader, his example is pertinent to the conversation because he’s explaining the enormous potential in bonds and macro trades and they are not what people first imagine when you think of holding bonds in a portfolio. Raoul explains that we just had an identical cycle matching the great eurodollar trade he describes from 2001. He capitalized from this exact set-up over the last year, I know this to be true because I watched him talk about his trade the entire time. I can’t imagine what he personally pocketed when he recently closed out some of his position when the 10 year treasury approached 1% but I’m sure he did quite well with it.
Pomp and Raoul discuss the current environment with the Corona virus and the unknowns surrounding a potential global shutdown. Pomp explains why he believes Pal to be a “crisis chaser” and Raoul describes it’s really just anticipation of panic and positioning ahead of the panic. The discussion on Corona virus is pretty terrifying but it’s important to understand the possibilities of something like this as it’s totally unprecedented.
Pomp asks Raoul what people can do to weather this storm that’s approaching and they begin to discuss job losses and medical expenses arising. Most households can prepare by having cash on hand to take advantage of the situation. “Whatever you do, just have some cash on hand,” is what Raoul repeats, “and if I’m wrong, what have you lost? Nothing. But what are you, you’re more prepared.” Another interesting thing I picked up from the interview is where Raoul is giving advice to older people nearing retirement and relying on their pensions, he says people have too much equity, too much credit and not enough bonds. Because they have been taught to think bond yields of 1% “aren’t worth it”. He says, “well this is where you learn that bonds are the greatest thing on earth.” He goes on to say bond yields are going to 0% everywhere and probably negative. It’s incredible to think about this but Pal says if stocks are down 50% and all kinds of assets are blowing up he’d pay 2% all day long to, “get his money back.” He says it’s the value of getting your money back which is so important.
Something Raoul explains is that bonds are a “call-option.” Meaning that the Fed is not going to raise rates so bonds can’t go against you in price terms, say that the rates rise and your bonds fall in value, he’s saying that won’t happen. He goes on to say that if “all hell breaks loose, you’ll get your money back in bonds, but if all hell breaks loose and the bond price rallies, which it will do, you’ll make a shit-ton.” He explains why billionaire fund managers like Stanley Druckenmiller make all their money in bonds because of the skewed risk and reward. Pal then discusses that equities move up and down based on human behavior without an “anchor”, where euro dollar futures are anchored to interest rates which simplifies the task of playing a macro view.
Watch the entire interview below and check out Real Vision, they offer a variety of interviews and market commentary where they focus on creating great financial content and educate investors on the latest market news. Also check out Off The Chain podcast where Anthony Pompliano continues to expand his coverage in the world of markets, finance and of course all things crypto.