Widely-followed macro investor Raoul Pal is showing large investors the way to go. The former Goldman Sachs fund manager made a high-profile hard pivot into Bitcoin earlier this month, shifting a quarter of his net worth into the world’s largest cryptocurrency.

The Covid-19 pandemic has exposed severe flaws in the world’s financial systems, he said, predicting that the economic stop needed to contain the virus would cause “the largest insolvency event in history”.

And yet. Equity markets have bounced back to pre-crash levels inside a couple of weeks.

This is happening even as the world faces unprecedented demand destruction, supply chain bottlenecks, a mass oil oversupply and crude price war, a lingering global pandemic, the threat of country-level debt downgrades and historically high unemployment.

Bank of England policymaker Jan Vlieghe warned in April of the worst economic shock in several hundred years hitting the UK: “It seems we are experiencing an economic contraction that is faster and deeper than anything we have seen in the past century, or possibly several centuries,” he said.

None of this appears to be priced in to equity markets, that are floating upwards on a sea of undue optimism.

Why? Well, with interest rates near zero, traditional investors seeking any kind of returns find they have cash on hand and nowhere else to put it, other than straight back into a stock market that badly burned them in March.

Investors are hoping for a V-shaped recovery and a quick bounce back to normal. They may even miss out on a U-shaped recovery, where asset prices crater for a significant length of time. Pal believes the world is facing an L-shaped recovery. Flatlining. A world of pain.

Pal’s 120-page April report The Unfolding is targeted at institutional investors. It is used to advise some of the world’s largest hedge funds, asset managers, sovereign wealth funds and family offices.

“This is my roadmap for what lies ahead,” writes Pal. “I personally hope that my deductions do not play out as I suspect, as this path is very ugly.”

Only gold and Bitcoin make sense

“When I look ahead, all I see is the potential failure of our system of money and our current financial architecture. I doubt it will go out in one big boom, rather a long, slow bleed,” he writes.

In this kind of environment “the only answers that make any sense are gold and Bitcoin. Gold is the protection of our assets. Bitcoin is the call option on the future system.”

Gold prices have this week returned to 10-year highs this week north of $1,700 per ounce.

And what we can say is true is that charts all tell a certain story about the world economy which is not being played out in asset prices. From purchasing manager’s indexes, to near-zero bond yields, retail sales, car sales and industrial production. In China, Hong Kong, the UK, the US, Italy, Japan. Everywhere. Everything has plummeted by unprecedented amounts. This is the bursting of the ‘everything bubble’, says Pal.

In response to the wholesale economic stop caused by the coronavirus pandemic, central banks in the US, UK and across Europe have created money out of thin air and used it to shore up failing businesses and inflate plunging asset prices. With protection of this kind it is no wonder that equity investors keep shoving money into stocks and shares. “We have seen some of the largest global stimulus in all recorded history, both from governments and central banks. In the past that has always worked.”

In the US we have seen a $2.2trn economic rescue package which is just the beginning. It includes hundreds of billions in small business loans, a reservoir of cash which has run out in a matter of weeks. Helicopter payments of $1,200 to every adult and $500 to every child.

Now the world is matching the six-month rally after 1929’s financial crash crisis, Pal says.

Light relief

The relief rally in equities now portends a total dislocation with reality. We need only look back a little more than 10 years to the great financial crisis. The words of philosopher George Satayana should be ringing in our ears: “Those who cannot remember the past are condemned to repeat it”.

Between 2007 to 2009, the year of Bitcoin’s creation, there were three so-called relief rallies of between 9% and 19% on the S&P 500. Then followed a cratering of investor sentiment as prices eventually sunk to lows not seen since 1995.

But the smart money is betting on an even greater crash in stocks and shares by mid-August than we saw in late March. One hedge fund manager we have spoken to is building up a massive short position in the Dow Jones Industrial Index, betting on the fact that when Q2 2020 earnings hit the mat, investors will flee.

With the halving approaching around 12 May, we are seeing the Bitcoin investment thesis play out in real time. It’s a case of real scarcity versus the total opposite.

But this is a bubble that cannot be sustained. Eventually, the veil will be lifted and, as Raoul Pal says, it’s going to get very, very ugly.

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