RAOUL PAL: Dan Morehead, good to get you finally
back on Real Vision.
It's the first time we've sat down to chat
for a long time and you reached out recently
because of your macro views and I thought
who better to talk through macro and then
where we potentially could go with this than
you.
I'd love for you just to quickly let people
know why you're involved in macro, because
people now know you from a different space
than the world that I knew from originally.
If you could give a bit of background about
yourself, I think that'll frame everything
nicely.
DAN MOREHEAD: I started out as a fixed income
mortgage trader at Goldman in the '80s, actually
right before the '87 crash so I've seen one
of these cycles before.
Then you and I met when I was at Tiger Management,
we were trading global macro, big disruptions
around the world, trying to see things from
a very global macroeconomic standpoint, and
in 2011, I got excited about Bitcoin and had
been full on blockchain since then, and up
until recently.
Global macro really had no impact on blockchain.
The reality is the worlds are now all interdependent
and global macro is going to have a huge impact
on blockchain.
In particular, the fiscal and monetary policies
that are going to impact cryptocurrencies.
RAOUL PAL: I must admit, it was a genius move
of you to do what you did.
That was the best macro expression I've ever
seen, which is basically to say, and we've
seen lots of our friends go through the same
cycle, but you were by long way first saying
all of the macro opportunities added together
is less than this one opportunity set.
This is the macro view.
That was essentially what you did.
It was incredibly prescient of you to do that.
I just thought it was just an amazing thing
to have done and you got in at the right time
and understood it a long way before everybody
else.
DAN MOREHEAD: Thanks.
I've been fascinated by these disruptions
that come along, Russian privatization, or
Argentine farmland or Tesla Motors, every
three or four years, some little shiny object
in the forest that I pick up and try and figure
out and spend a year or two investing in it,
but I do think blockchain's literally orders
of magnitude bigger than all of those trades
and I think it's the second half of my career.
I'm really excited to stay focused on it.
RAOUL PAL: Talk to me through how you're perceiving
the situation now, let's dig into the macro
because there's a lot going on.
A lot of people are confused where we are
now and some of the probabilities of how things
play out.
Then we can dig in and chat about things as
we go.
DAN MOREHEAD: The first main thought is I'm
not an epidemiologist, so I'm going to leave
that to others, but having studied 35 years
of global economics, this thing is just bigger
than anything since World War II.
I think even I'm trying to get my head around
that.
I think a lot of economists and market participants
are still not yet appreciating how large this
thing is.
Here's just one quick thought experiment is
the least bad way to combat the virus is for
everybody on Earth to shelter in place for
two weeks.
At the end of that two weeks, we test everyone
and those who are infected get medical treatment
and the rest of us go back to work.
That is absolutely the least bad alternative.
Even that, if you take two weeks divided by
52, that's 4% of global GDP.
That is just such a huge number.
Yeah, some of us can work remotely like you
and I are, adding a little bit to GDP here
but for most people, most industries, it's
very difficult to work remotely.
The least bad outcome is 4% to global GDP.
Then the unfortunate reality is this virus
is ebbing and flowing around the world in
a very asynchronous way.
China who led us into this crisis a few months
ago, is actually starting to come out of it,
right at the same time, countries like the
US and Canada and Europe are right in the
essentially the nadir of it.
Then there are other parts of the world that
have yet to experience it, but unfortunately,
are likely to.
As this thing washes around the world at different
times, it's essentially extending the amount
of time the global supply chains are down.
RAOUL PAL: My big concern is the market wants
to believe in the old world, which is, it's
an event like 9/11.
You take the hit, there's a bit of a shock,
and we return to normal.
I look at two factors within this, one is
the rolling nature.
Countries like Brazil barely started in this
cycle, while other countries are more advanced
like South Korea, Singapore, or even Italy.
The US has really messed this up in terms
of how that works.
I worry that this rolling cycle continues
as huge and much longer than people anticipate.
It's not a threemonth event that the market's
hoping for.
I also think that it's a lot more psychological
damage that comes from this even when you
reopen the economies.
The Prime Minister of Singapore made an amazing
speech explaining that, listen, Singapore
is not going to open his borders, probably
not for a year, because I can't.
He said, look, we're going to have to take
this hit, but nobody's going to be freely
traveling, nobody's going to be congregating
in groups.
Barring a miracle, this thing's around for
a long period of time so if you don't get
a one-off GDP here, you end up with a drawn
out recession.
DAN MOREHEAD: Raoul, I think you're spot on.
It's unfortunately our central case is that
this will be drawn out for many, many months
and there is a psychological impact to it.
If you think about all other recessions, they're
created by a lack of either credit or income.
If the government provides those things, we
can all get back to work and it's all fine.
In this case, it's a psychological impact.
This is all very distressing, and it'll be
really hard to get people back to work in
a lot of the economies, the consumption of
services.
I was thinking about how tough the Fed's job
is here.
One problem is they're already so close to
zero like all other central banks when we
came into this that they really had little
to do but their last cut was 100 basis points,
I think that's impudent like hey, honey, the
Fed cut 100 basis points today, let's go to
the movies.
Like it doesn't have any impact.
They could cut rates thousand basis points
and wouldn't go to a movie theater.
I think that is going to make this last a
lot longer than people think.
China's trying to reopen and there's a great
photo of a movie theater absolutely empty
like even if they're officially open for business,
the psychological damage is going to take
months or you even suggested, potential years.
Then your point about 9/11, we actually mentioned
that in our investor letter, there's already
talk of this being a V-shaped recovery and
it's just going to be right back to business
as usual.
I think there's so many things that I have
no idea what's going to happen.
This is incredibly uncertain time.
One of the only things I really believe strongly
is it's not going to be V-shaped, that comparisons
to 9/11 are really starkly different.
In that case, every aircraft was grounded
for three days.
Then three days later, every aircraft was
in the air and commerce could restart.
This is just the effect has been slowly percolating.
The CDC knew that this was a problem in China
in late 2019.
This already, we're going into our fourth
month of this.
We're just starting to attack it.
It's going to take many, many months to really
bring this under control.
RAOUL PAL: Yeah, but I've been looking at
China because if China started this first,
then we should be able to understand what
lies ahead for us, it's worked pretty well
to use them as a roadmap.
Now, obviously they lied about that the numbers
and et cetera.
That's irrelevant for now.
What's interesting is they've forced people
back to work.
We've seen factories start up again, we've
seen pollution go back up.
Problem is one, who do you think they'll sell
those goods to?
You're creating I think a default cycle not
only in China but around the world.
I think there's a solvency crisis that we
have no parallel for that is coming.
Additionally, if I look at simple stuff, like
really fascinating, TomTom produces traffic
data for any city in the world.
You look at the traffic data for Beijing,
it's almost at normal during the weekdays
as people get to work, weekends down 80%.
People aren't going anywhere.
I just spoke to somebody who was in Beijing,
and they're talking about restaurants.
Yeah, restaurants are open, the problem is
there's only 10 tables and you're only allowed
three people in a table and there has to be
social distancing.
In a restaurant business, which is low margin
business, you basically, you're compounding
negative returns.
It's that destruction of cash flow that really
worries me in this that we end up with a default
cycle.
As you rightly said, the governments have
started to try and inject money to repair
balance sheets, i.e. at household level.
The problem is they're not offsetting people's
wages so you're basically just giving them
subsistence living.
That doesn't drive consumption, it's not stimulus.
It's just trying to paper over some of the
cracks.
DAN MOREHEAD: I agree.
I think it's unfortunately true that in past
recessions, fiscal or monetary stimulus always
could cure the problem.
I really think they have very, very little
efficacy here, unfortunately, because even
if you replace the lost income, nobody wants
to go to a restaurant, or nobody wants to
go to a movie theater.
I do think China and other countries like
Korea and Taiwan are really good case studies
of how to combat the virus.
I think it's very important to note that China
basically walled off 60 million citizens in
Wuhan on January 23rd when they had only 17
deaths, and most other countries have taken
less drastic measures way later in the cycle
and so I think we'll end up with a larger
economic hit and China is going to endure.
RAOUL PAL: What's your view of the US situation?
Because that's the one that seems quite concerning
and I think it's the one which will drive
potentially monetary policy and a whole bunch
of other stuff, fiscal stimulus.
What's your view of the US situation and how
that's going to evolve?
DAN MOREHEAD: I would say I don't have any
deeper insights than the experts on it.
I'm not the guy to say it, but from an economic
standpoint, it seems like this is going to
be a really big hit.
The call now from Goldman Sachs is the 34%
annual rate fall in GDP.
That's just the number you and I've obviously
never seen, will leave GDP 6.2% lower than
it was.
Honestly, I think that's highly likely, if
not more.
Again, if you go back to just the, if we all
just didn't work for two weeks, and then we
all went right back to work doing 100% of
what we used to, that's a 4% hit to trend
GDP.
If trend was 2%, that's minus two.
I think we have to keep in mind that the US
is not even really into the worst part of
this problem and so it's going to be many,
many months until it's worked out.
RAOUL PAL: What is the role you think that
the government and central banks are going
to play in this on a global level?
What are they going to do?
Because that's the next phase, is looking
forwards and is trying to understand what
they do, and whether they can address any
of this and how excessive monetary and fiscal
policy becomes.
DAN MOREHEAD: Well, yeah, they certainly can
be helpful, and I'm encouraged that they have
been engaged very quickly.
This is a totally different thing we're fighting.
We're fighting an invisible virus rather than
a lack of income or lack of credit.
The coordination that we're used to where
the Finance Minister and the central bank
governor of all the countries who are used
to working together and used to using monetary
and fiscal policy tools, to combat these things
that are very well studied, very well known
what to do with a lack of income or a lack
of credit.
That's not the issue here.
The issue is a medical one, a science one
and so we are at war.
I think it's a good analog.
In physical wars, you have the general give
the press briefings and talk about the issues
in the war.
In this, it should be the scientists that
are telling us what the issues are and what
are tradeoffs are, scientists and economists
because it obviously is a tradeoff with the
economy, but those groups are not really used
to coordinating.
In the United States, good example of three
or four different health organizations that
each have some remit here and coordinating
between them is difficult.
They're not used to coordinating with the
Fed and with the Treasury and so it's very
unprecedented policy challenge.
Unfortunately, I think the fiscal and monetary
stimulus are going to have less impact than
people would hope.
In the last crisis, the US was able to cut
437 basis points.
Here, we only had 150 basis points of ammo
left.
Then globally, the world was able to cut 298
basis points in the 2008-2009 recession.
Here, we're only going to get 55 basis points
on average of global rate cuts.
We're seeing one fifth of the monetary stimulus
we had in the last recession.
This is much bigger recession, so if we wanted
monetary policy to be effective, we would
want much more of it.
Unfortunately, the one policy lever, monetary
policy is really tapped out.
Then the fiscal policy, we've seen a 10% of
GDP stimulus signed days before a new stimulus
plan has been talked about.
These are just numbers that are literally
off the charts.
I think it's almost certain that the United
States is going to exit this crisis with more
debt than after the battle against the Great
Depression and World War II.
That's just an amazing place to be.
We entered it with a very large structural
fiscal deficit, the US was spending 31% more
than it was taking in even with record employment,
record stock prices, record real estate prices.
Essentially, just creating a ton of money,
increases the quantity of money.
That's the whole objective of quantitative
easing, is to increase the quantity of paper
money.
It's already having its intended effects,
a very clear policy goal was to raise the
level of stock prices relative to where they
would have been otherwise.
That is obviously working, but it's like hydrostatic
pressure is going to raise the level of all
assets that are not quantitatively usable.
It's going to raise the level of real estate.
It's going to raise the level of gold and
cryptocurrencies and dozens of other things.
RAOUL PAL: Using your macro viewpoints, if
you weren't in the crypto world, what would
you be doing now?
How do you see this evolving in market terms?
DAN MOREHEAD: That's a great question.
Since I hung up my global macro cleats seven
years ago, I really don't want to get over
my skis here.
The only thing I would say is relative to
what everyone else is talking about, I think
it's going to be a much bigger and longer
recession than other people are talking about.
All things being equal, I think it's probably
negative for equities.
Then I think in the end, you're going to see
a divergence.
There's always this knee jerk reaction in
a crisis.
Things like the dollar and treasuries always
go up, flight to safety, potentially repatriation
of assets.
Developed countries selling emerging market
assets to bring them back to their country.
They trade weighted dollars up about 5%, I
think.
I would have to say, I think in the long run,
all of the essentially the easing of the quantity
of money in countries like the United States
relative to some of the other countries on
Earth, is probably negative for the dollar.
Again, I haven't looked at the global macro
markets very closely for a long time.
That's just a hunch, not something I put some
money on.
RAOUL PAL: I'm more fearful because if we
go through a solvency event, the largest financial
position on earth is the $13 trillion short
position held by foreign corporations in US
dollars.
I worry that as global cash flow goes negative,
the chance of servicing that debt becomes
almost zero.
You have to go through a default cycle in
generally emerging markets.
That makes me fear that we get a much stronger
dollar.
My view for a long time has been this cycle
breaks not from the weak dollar but from the
strong dollar and eventually forces the other
central banks who have been talking about
this already, that the dollar standard is
not something that is manageable any longer.
It's broken.
Triffin's dilemma is at play and as a reserve
currency, there's not enough dollars abroad
to deal with this.
That's what I'm fearing, and I pick up a lot
from the central banks, Mark Carney was the
first one to make it clear that he'd love
to move the Bank of England away from this
dollar standard.
The first step is towards a digital currency
world.
I don't know what your view is.
Okay, we know this is screwed, my view is
this is probably going to be the biggest insolvency
event of all history.
That's going to take a strain on the financial
system and possibly force the dollar up.
I don't know what your views on that is, and
then where does this go?
DAN MOREHEAD: Yeah, I love that US Treasury
Secretary Connolly in the '70s said the dollar
might be our currency, but it's your problem
to Europe.
It's a fact of the world that the dollar is
the reserve currency right now.
That's changed every 80 or hundred years over
the last six centuries.
It used to be the Portuguese escudo and the
Spanish real, and now it's the-- then the
pound, and now, the dollar.
There really isn't another candidate in the
fiat currency world.
I do think in the long run, and this is decades,
cryptocurrencies will become reserve currencies.
Whether it's Bitcoin or Ethereum, Ripple,
whatever, ultimately, some of those will be
reserved currencies, but government's very
slow to change and so I think that's a 10
to 20-year very slow progression, but that
would be the answer.
I actually thought the original construction
of the Libra project that Facebook created
was genius is to use a basket of four currencies.
You're creating like a virtual SDR.
The SDR is a great concept, but you couldn't
actually transact in it.
Creating a basket of currency where the Libra
does it or somebody else does it, somebody
will ultimately do it.
That could easily become a reserve currency.
It would be essentially like-- yeah?
RAOUL PAL: I love the fact that the dollar
was part of the basket.
Therefore, the basket itself should only move
up and down with let's say, global money supply.
It becomes a true stable coin in our terms
of the different world.
That's an extraordinarily powerful thing.
I think most people didn't understand what
Libra was, until it came out.
It looked at it was like, oh my God, this
is game changing.
DAN MOREHEAD: I agree.
I thought it was beautifully designed.
I thought they did an amazing job designing
it and there was so much fuss about the rollout
and that all the lightning rod attention to
Facebook, the brand, but the product they
designed was genius.
Hopefully, they'll get theirs out but if they
don't, someone will do something very, very
similar to it.
That's essentially what everyone on earth
wants, is a currency that's tied to, if they're
European, it's tied to the euro.
If they're Japanese, it's tied to the Japanese
yen.
If they're in the United Kingdom, it's tied
to the pound, and US tied to that.
It's not too volatile relative to their own
currency.
If they're in some other country or region,
it's not very volatile.
I think it's the best of both worlds.
It's not pegged to one single currency, but
there's not crazy volatility, like Bitcoin
or Eth would be.
Ultimately, someone is going to do that.
Then central banks will start using it.
Again, it's going to take decades, but central
banks will start using that, it's the only
way I see to get away from the dollar hegemony
that people are always griping about.
RAOUL PAL: I'm a little more bullish on the
time horizon because I think this event is
bigger than people could understand.
If there is an event that breaks the system,
or at least forces people to adopt different
things, and they would have adopted at this
stage, I think this would be it and again
hearing Benoît Cœuré of the ECB, and Mark
Carney and a bunch of others talking about
digital currencies, it feels like they want
to move towards this basket idea.
Now, whether it's done with Libra without
Libra or something, I think they've all spoken
about how the dollar standard just doesn't
work for them anymore.
I'm not so sure that that might be the surprise
outcome of this which will massively help
all the cryptocurrency world and everything
else because then, the world is digital off
ramps and digital on ramps.
DAN MOREHEAD: Yeah, you're right.
I think that one of the important things to
do in this distressing time is think about
the silver linings and the things that are
positive about this massive disruption in--
like you and I working from home remotely
might be part of it.
The whole world might change how they actually
do business.
There's a lot of good things that could come
up.
You're right, really focusing on our monetary
system, we might end up with blockchain being
accelerated by it.
I've seen great examples.
We're invested in a company that helps people
move money using physical fiat money, bills
and coins, converting it into bitcoin and
being able to send it to their family wherever
they live, either domestically or often in
a remittance payment.
They're seeing record volumes because the
fiat systems are grinding to a halt, where
you can still go to the safe way, pump $400
in the machine and have it pop out the other
end.
I think you're going to see some use cases
where blockchain really comes with its own
in this crisis.
RAOUL PAL: How are you seeing the space evolve
and things must be accelerating.
I've always thought of it as it's like a hive
mind of people developing an entirely new
architecture.
It's not just a financial architectures or
ownership architectures or trust architecture,
it's a number of things.
It feels like there's a hive mind of some
of the smartest people I know, are all focused
on it.
It's a huge group of people.
What are you seeing that's surfacing now out
of this that's getting your interest?
DAN MOREHEAD: The way I'd see it is in our
seven years of investing, we've seen a bunch
of different eras.
The first year was all about just exchanges
and custodians, and really basic ways to buy
bitcoin and then ultimately ripple and Eth
and other things and store it.
That was our first year to these investments.
Then the next level is using cryptocurrency
and in most cases, Bitcoin originally, to
do some cross border money movement thing.
We're invested in probably 12 or 15 companies
around the world that help people move money
across borders.
That's the thing is really coming into its
own right now.
It's really been effective.
If you think about it, the average cost of
remittances right now for the hundreds of
millions of people that migrate to earn money
for their families is 9%.
You and I are in the financial markets, none
of our base points, whatever.
It's just a number.
That's a month's wages, the migrant spends
an entire month working for their remittance
company, and their family only gets 11 months
wages.
The companies that are doing it with blockchain,
essentially are the interregnum solution,
like ultimately, people will just have blockchain
on their phone and they won't need a company
in the middle.
For the next 10 or 15 years, they're going
to use these companies that charge say 2%
or 3%.
They're seeing very, very strong growth.
A great example of that would be 5% of US
to Mexico remittance is going over Bitcoin
right now.
That's pretty wild, like it's a real use case.
That's helping humans and saving the money,
get more money back to their family.
That's what's really happening right now.
Then the companies we're funding our the next
level of that, they're doing non-financial
use cases, they're doing scaling solutions.
The two biggest blockchains, Bitcoin and Eth,
can only do seven or 10 transactions per second.
In order to compete with credit cards, we
have to do 15,000 transactions per second.
If we want all the promise of micro labor,
micro payments, we have to do orders of magnitude
more than that.
We're investing in a lot of projects that
help scalability.
Then as you and I know, there's a lot of plumbing
to trading, order routing, order management
type systems.
Some of our most recent investments are in
companies like AMBER and Tagomi that help
traders trade these things and since we've
essentially been there first at doing all
these different things, we've had to prototype
everything ourselves and so we had to build
all our order routing and stuff.
It's really hard.
There's hundreds of exchanges that trade cryptocurrencies
and then all these different regulatory environments
where it's really hard to move money around.
There's thousands of tokens you could possibly
trade.
It's a very complicated business and there's
huge need for companies to help traders do
that.
There's journalists in this space, like the
block that we're invested in.
There's just a whole lot of different ways.
We're essentially creating a new financial
system built on blockchain.
You need one of everything you have in the
existing system.
RAOUL PAL: How about custody?
Because custody is one of the things that
worries me in a solvency crisis as you and
I've gone through many times is who owns all
the shit in the end is one of the hardest
questions to solve.
How is the space working on this issue?
Because trusted ownership is one of the great
things about blockchain.
Who's doing that for the securities industry
and all of the assets that we all own in this?
DAN MOREHEAD: In crypto, you're essentially
custody-ing a password.
You're really just trying to keep custody
of the private key that can move the cryptocurrency
itself.
The custodians in the industry, like Fidelity
or Coinbase, or Bakkt or BitGo, the hugely
important thing about them is they employ
no leverage.
In the fiat system, you have Lehman Brothers
or whomever that are employing 40 to 1 leverage
across their balance sheet so when something
bad happens, problems have nothing to do with
the assets they're trying to custody, essentially
just wiped through everything on their balance
sheet.
I think the hugely different scenario here
is blockchain custodians aren't levered so
there's no systemic risk.
Then they're normally essentially isolated
from the financial markets.
There was a time when the biggest custodians
of space, which at Mt. Gox, which at the time
had 85% of market cap, they went under, essentially,
without a ripple, the price of bitcoin was
up a week later, there's no federal bailout
of MT.
Gox.
It's because they're unlevered and not backstopped
by the government that essentially keeps them
safer.
RAOUL PAL: What about the transition of the
existing securities onto blockchain?
What are the DTCC and people like that doing?
I don't know what tZERO are doing.
How does that evolve?
Because we're going to have a need for that
because we can't have another Lehman event
and in a big solvency event that's potentially
going on now, we're going to run into problems
again.
It feels like it's going to be the time and
a place for blockchain to start doing that
part of the custody.
DAN MOREHEAD: It is, and one of the lines
I love using about blockchain is that when
a technology is massively disruptive, they
call it a category killer.
Blockchain's a serial killer.
It's going to go through dozens of different
industries, including securities, transactions
and settlement.
The hugely important part of that tagline
is it's going to do it serially.
It's not going to do everything overnight.
We go through these manic waves in blockchain
where in 2013 or 2017, everyone's thinking
oh, blockchain is going to change the world
overnight.
Then we go on these depressive waves where
oh, it's a failure, it didn't do anything.
The reality is somewhere in between, and it's
going to do different industries at different
times, I have been of the belief for a long
time that the Wall Street bit of blockchain,
it definitely can happen, but it's like a
decade from now.
The reason is, it's just so complicated, and
it actually works pretty well like you and
I've been in Wall Street for a long time,
you can bitch and moan about DTCC or whatever,
but they process 100 million transactions
a day with an incredibly low fail rate at
incredibly low prices.
Like all these-- TD Ameritrade, they're going
to free trading, what's the problem with free
in two plus two, it's just not that big.
It's not broken.
Whereas like if you're a migrant and you spend
the entire month of January working for your
remittance company, that's broken.
I think it will transition to blockchain,
but I think it's going to take a decade.
There are some really exciting projects people
are trying to do in this space but as a firm,
we've essentially passed on all the centralized
Wall Street back office blockchain projects.
RAOUL PAL: There's several big ecosystems
out there between Bitcoin, Ethereum, Ripple,
EOS, how do you see the evolution of those
and how do they all play together?
I'm incredibly concerned how tribal it all
is right now, but I know in a pragmatic world
that there's a space for everybody.
What's your view on all of that?
DAN MOREHEAD: Yeah, it's a fascinating question.
I'm sure there's some great movies made about
this someday.
I would say there isn't a space for everybody
but there isn't a one take-off.
That's a really frustrating lukewarm water
answer to your question, is that we have 2000
tokens right now, I don't think we're going
to have 2000 and I don't think we're going
to have just one.
There is a bit of an almost religious fervor
in this space where the disciples of one group
will be really, really excited about the other
group.
The punchline of this call long, I think there's
going to be single digit number of very important
blockchains.
Each one's going to have its own use case,
and it's already starting to shape up where
you're seeing Bitcoin, not really changed
very much, but being really good at storing
wealth and so people like to call it digital
golden, and I'm fine with that.
You see Ethereum be really dynamic and you've
already got an Ethereum 2.0 and it's really
changing, really ambitious and then you have
the next generation of things like Polka Dot
that are coming that are doing very ambitious
things.
Then Ripple's taken an enterprise SAS version
of this and trying to work with all the banks
and work with all the regulators to essentially
replace Swift.
They probably don't like it when I say it
like that, but I think it's easy shorthand
for what they're trying to do.
I think there's space for eight or 10 of those
use cases in the long, long run.
The main point is, we're not going to have
hundreds and hundreds of very similar "all
coins".
RAOUL PAL: What is your view of tokenization?
My particular view is that what we know of
equities and fixed income won't exist within
x period of time, whatever that period of
time is, because tokenization can do a whole
lot of things that currently equities can't
do, or fixed income can't do.
You can isolate-- I always use a great example,
like a company like Exxon, maybe you want
to buy their upstream and I want to buy their
new green energy business and somebody else
wants to have an investment in some of their
assets, in their physical buildings.
The idea of a corporation, which is to turn
a company into a physical person by legal
rights, I don't think has to exist in this
world.
I think that there's a huge change coming
on what can be tokenized.
We've seen it with people, obviously sports
stars have started to tokenize themselves.
There's a number of things.
I just think the securities markets that we
know of old, if we go into the future 20 years,
will not look anything like the securities
markets that exist today and have existed
for the last hundred years or so, 200 years.
DAN MOREHEAD: The things that don't work very
well now, like say, music world rights, well,
blockchain can add a ton.
That's a great example of where like there's
millions and millions of transactions happening
every day.
Each one's worth a fraction of a penny.
There are often dozens of different people
who own a piece of that work that's being
streamed somewhere.
Then you have a whole industry of these middlemen,
accountants, agents, whatever that are processing
payments.
They call it Hollywood accounting for a reason,
like the money always seems to get lost, and
the artist ends up with a very small fraction
of it.
The blockchain could do an amazing fix to
those broken systems like that.
I think those are going to be really, really
important.
Replacing existing IBM shares or whatever,
I'm less bullish on-- again, going back to
DTCC does a great job, it's almost free.
It takes only a day or two, so it's not really
broken.
I started my career as a CMO trader so you're
slicing up cash flows, like you were talking
about on upstream versus downstream.
There are some uses for that.
There are some people that want that, but
I'm not sure it's a big enough use case.
There was a huge push to do securitized illiquid
market assets like real estate a couple years
ago.
We invest in a couple projects and looked
at a ton of projects.
There was a lot of talk about if you invest
in commercial real estate, it's really illiquid
and if you tokenize it, it'll be completely
different.
Some people did some projects and you realize,
oops, maybe not everybody wants to buy a fraction
of a building in South Carolina.
Just because it's a token doesn't mean there's
going to be 1000 people lining up under a
Buttonwood tree somewhere to start trading
it.
That would be my only caution is that just
because it's a token doesn't mean there's
going to be 1000 people that are excited about
trading it.
RAOUL PAL: No, there's no liquidity and it's
very early days.
I'm just conceptually interested in where
this could lead to because if this is, essentially
an invention and a revolution all combined,
well, then most of us will not be able to
forecast the probabilities of the outcomes.
The outcome is going to be very different
than we think with something so life changing
as this, much like the internet, we had no
idea where that was going to go.
DAN MOREHEAD: The one thing I would say on
securitizing actual normal physical assets
is it might not change your and my life because
we have accounts in the United States and
trade those things.
If you're one of the 6 billion people that's
not involved in it, securitizing it would
be great.
Like if you think back to the dot-com boom,
if you want to buy a share of pets.com, you
actually had to be an American citizen, even
like a wealthy German would have a hard time
figuring out how to get a hold of some pets.com
stock.
Here, anybody with a smartphone can buy a
tokenized security.
It will massively open up the access across
borders for securitized assets, even IBM shares,
somebody in Indonesia with a smartphone could
be able to buy a tokenized version of that.
RAOUL PAL: Looping back to the macro scene
where we are right now, people are confused
why Bitcoin's not done so well, because I
think they're thinking of it as a hedge to
traditional markets and I say slightly different
now, serve as a call option in the future
on a future system but how do you perceive
it?
What do you think about the price action of
Bitcoin and how this might evolve over this,
call it next 24 months?
DAN MOREHEAD: That's a great question.
Obviously, that's what we spend our time trying
to figure out.
The one thing I would say is, I don't think
I would have called it a hedge to the global
macro.
What I would have said is it's uncorrelated
with global macro.
That is, I think its strongest advantage is
over long periods of time, it has very little
correlation to everything else to gold, oil,
S&P 500.
In the down spikes, there've been five down
spikes since Bitcoin really became tradable.
In each of those, it spent an average of eight
weeks correlated to-- with 0.5 positive correlation
to the S&P.
When the markets gapped straight down, Bitcoin
does gap straight down with it, but over a
period of weeks, that correlation starts to
break down.
It starts to trade on its own based on its
own fundamentals.
When this crisis started, we actually reduced
risk in our hedge funds, but we've already
covered that back and are now fully long in
our discretionary funds.
Because as the dust settles, the correlations
are going to break down again, like they have
historically, and it'll be able to trade on
its own.
Then when people see oh, Bitcoin and other
blockchains are actually quite useful when
a bunch of these other systems are starting
to get hampered by all the restrictions in
the physical world.
People will start realizing the fundamentals
are not only affected by this crisis.
They're actually quite positive for blockchain
itself.
Our forecast is Bitcoin's probably going to
do very well, but it's over the next 12 months,
not the next 12 hours.
We send our investor a letter couple weeks
goes, we think it's going to take two or three
months for institutional investors to basically
just triage the damage to their existing portfolio
assets, just trying to figure out what the
heck has happened.
Then it's going to take three to six months
to really look at new opportunities like distressed
debt.
There was 10 years of no distress at all and
now, there's going to be all kinds of amazing
opportunities.
There's going to be things like gold and cryptocurrencies.
I think it is going to take six to nine months
for the markets really to get going, but I
think everything-- we've taken a super sober
look at this and there's some really big economic
impacts, but the only conclusion we can come
to for cryptocurrency is that in the say six
to nine-month timeframe is going to be very
positive.
RAOUL PAL: One of the things that that correlation
that picks up to the S&P is simply liquidity.
It's everything gets correlated, has a correlation
to one an illiquidity event, and that's okay.
As you say, then decouples very quickly, then
it has zero correlation, which is extraordinarily
powerful as an asset that has, yeah, it's
not a huge asset, still whatever, 200 billion
or just under, but it is very powerful to
have an uncorrelated asset in this world.
Everybody I speak to is definitely becoming
interested, the family offices.
I don't know a family office, really, that
doesn't have a bit of it now.
DAN MOREHEAD: We've taken that thought process
one step lower in our analysis and within
blockchain, we have very similar phenomenon
going on, is that in the immediate down spike,
everything becomes highly correlated, and
Bitcoin typically outperforms, and so it has
outperformed everything else in these stressed
markets.
One of our first moves was to increase, basically
double our Bitcoin exposure at the expense
of the smaller non-Bitcoin assets.
Then we also increased our systematic trading,
which does well in very stressed markets.
Another view we hold in crypto is that Bitcoin
is going to outperform, again, for a period
of say, three, four or five weeks, that order
of magnitude, not months or years.
Then over time, we'll reduce that and get
back to our normal allocation.
The other thing to think about is, this is
actually the best time to invest after a crisis.
If you look at the returns for venture, for
the years, the decade coming up to the last
crisis, so 1999 to 2008, the average return
of venture funds was 6.28%.
These are numbers from Cambridge Associates,
one of the most respected advisors out there.
Then in the years 2009 to 2015, the returns
tripled to 18.21.
That is our strong view, is that over the
next two or three years, there's going to
be some great opportunities to buy things
at much cheaper valuations.
Then we were seeing a year or two ago when
everything was at record highs, the whole
world was perfect.
RAOUL PAL: That's total sense.
Again, this is still early phase so the ability
to be able to pick up cheaper investments
in the space, if you're right about the macro
view about where this is going, and obviously,
I agree with it, we don't get many of these
opportunities in our lifetimes is my view.
I've not seen risk rewards like this, ever.
DAN MOREHEAD: That's why I'm all in, is that
like you say, this is a call option on the
future payment rail of the world and yeah,
it could go to zero, but it could go up 10x,
you just don't see those trades in a generation.
RAOUL PAL: What do you think is going to happen
to all these central bank balance sheets at
the end of this?
Because if this goes on a bit, they're going
to have to do extraordinary amounts.
That obviously should help Bitcoin in the
end.
What's your view on that whole situation?
DAN MOREHEAD: I lived in Japan, I was trading
interest rates, Nikkei, back in the early
'90s.
They had overnight rates at 6%.
Then they had what they call the Japanese
recession, which was sub 3% growth, and then
oops, it's a real one.
They invented zero interest rate policies,
or they called it the lost decade.
That was 25 years ago like, rates I think
are going to be zero for the rest of our careers.
With that, with no more monetary policy as
a lever, then you have to start extending
what assets you'll put on your balance sheet
and how much money stocks to create.
We've seen the first fiscal stimulus package
the US Congress passed was $8 billion.
That was about three weeks ago.
Now, we're at 2 trillion.
There's a great line attributed to Senator
Everett Dirksen, a billion here, a billion
there, pretty soon you're starting to talk
about real money.
It's trillion here, it's trillion there, it
just has to have an impact.
We're already seeing it, the intended impact's
already helping the S&P be a lot higher than
it would absent that stimulus package.
Real estate doesn't have any real time pricing.
It's hard to see where that is, but it's obviously
higher than it would be had the $2 trillion
not been allocated.
I think you're going to see it in all other
assets.
Cryptocurrency just being one of them.
RAOUL PAL: Gold is the other one that people
focus on as well, but it's traditionally done
well in these markets when the value of money
broadly falls because there's excessive amounts
of it.
DAN MOREHEAD: Crypto is a lot from its low
on the 12th or 13th , it's already up 40%
or whatever.
You are seeing the impact start, but I think
over the next 12 months, you're going to see
it more fully get priced in.
RAOUL PAL: I'm personally accumulating as
much crypto, Bitcoin as I can right now, just
because I too believe that within this, the
hard money elements of Bitcoin, even discounting
for the volatility, but looking at the risk
reward makes it an extraordinary opportunity
that I have literally never seen before.
As you know, I've been involved in this space
on and off since about 2012.
I just don't see any other outcome.
I've never-- even for gold as well.
I think, look, gold can go up three to 5x,
Bitcoin can go up 50 to 100x over the next
five years.
You don't see a whole asset class go up 100x,
but you've seen it, because you've been involved
from the beginning, I guess.
Also, how do you deal with the volatility?
When you first got into this, you're not used
to taking 90% drawdowns but now you are.
Talk to me a bit about that.
DAN MOREHEAD: Oh, yeah, I know, it's hard.
The market's super crazy.
It goes up 1,000% and down 90%.
It's already done two huge round trips since
2013 when we lost your fund and a couple big
ones in the year two prior to that, when I
was studying it.
What I try and tell our investors, I try and
tell myself is, even though this-- it's basically
a venture with a real time price feed.
You're investing in a very early stage project
but there are tokens that trade on little
apps every two seconds.
What I like to tell people is although our
Bitcoin fund offers daily liquidity, you should
invest with a five to 10-year horizon and
try not to look at it.
It is true that for anyone that's ever bought
a Bitcoin and held it for four years, they've
all made money.
If you can do that, that's great.
Unfortunately, human nature is very procyclical.
Unlike many others, when it's going up, it
feels great and you feel so smart and you
feel like you don't have enough and then when
it's down 80%, you're super bummed and you're
trying to rationalize why you ever did this
stupid idea anyway.
I might only suggest to people try and think
about it in a five to 10-year time period
and only put in as much as you can afford
to lose, because there is a chance that all
goes to zero, but there is a chance that goes
up 10 or 20x so try and stay focused on the
super long term.
Then we've seen in our own inflows massive
pro cyclicality, huge fractions of inflows
coming at the highs and very, very little
comes in like right now when the market's
way down.
If you're an investor and you have the emotional
and financial resources to invest, you want
to invest at the lows, and then potentially
scale out at the highs rather than having
the FOMO devil whispering when it's at 20,000
and getting in.
RAOUL PAL: You must have a wry smile in your
face when you see one by one of our old friends,
the old macro guys all coming across to you,
whether it's John Burbank, whether it's even
Dan Tapiero, whether it's Alan Howard, whether
Jim Palazzo, you name it, one after the other
is basically crossing the Rubicon and going
into this new world.
You were the leader in that by a long way,
so I'll give you credit for all of that, but
it must make you laugh a bit.
DAN MOREHEAD: Oh, it's great.
No, it's great.
It's all the old same friends of mine, like
Mike Novogratz and Ivan Palin and after 35
years, we're still doing it.
It's hysterical.
I think it's because our job has always been
look for big global disruptions.
Man, this is disrupting global payments, remittance,
gold, and it's disrupting money and money
is a $100 trillion market, now $102 trillion.
It's not surprising there's a bunch of global
macro investors that are the ones that really,
really are embracing this.
RAOUL PAL: Disrupting money.
That's a great, I've not really thought of
it that way, but it is disrupting money and
the whole system of it.
DAN MOREHEAD: There's a lot of people even
get religious about money, because money is
one of the only other faith based systems
on earth.
There's nothing intrinsic behind the US dollar,
it's just a piece of paper.
People get super fired up, the dollar is great,
and we don't need another currency and all
that.
They forget there's 200 currencies on earth
already, like, why not have 201?
Bitcoin's just one more currency.
There's already 200.
The US dollars one of the least bad paper
currencies out there, but 6 billion people
live in countries with terrible currencies.
Bitcoin or Eth or Ripple or whatever, if they
switch their entire economy to Bitcoin, it'd
be way better.
That's why people should just keep it all
in perspective, there's already 200 currencies.
This is just like 201 through 210.
RAOUL PAL: Just want to ask you one question,
because I don't really understand it.
What is the value of stable coins apart from
transaction across platforms?
Why the focus on these stable coins right
now because they're basically US dollars,
but in digital format?
DAN MOREHEAD: There are a couple advantages,
all tokens, including stable coins have these
two principal advantages, they're borderless.
Venmo is great, but I can't Venmo somebody
from here to Indonesia, but I can send Bitcoin
to somebody no matter what country they're
in.
That's awesome.
They're essentially real time or instantaneous.
Even the United States, which is one of the
most sophisticated countries on earth, it
takes three hours to send a Fedwire.
If the most sophisticated bank on earth wants
to send money across Wall Street to another
very sophisticated bank, it takes three hours,
whereas with a phone, you can scan Bitcoin
in one second, and it'll be there.
Those are the two principal advantages that
will help even a dollar-backed stable coin
or any national currency back stable coin,
just much faster, much quicker, and it's borderless.
If you had one that was in global use for
commerce, it'd just be a lot easier, like
a global Venmo, you'd be able to get on a
bus.
RAOUL PAL: That's what Libra is, if they get
off the ground.
DAN MOREHEAD: Yeah, that's the goal essentially
and that's what the Chinese version of this
is, is to try and make a digitally native
currency that is easy to transact instantaneous,
essentially free.
It cost 35 bucks to do international wire.
Like think about that, like if I wanted to
send money to you, it would cost $35 back
in the old days before the ban on international
travel, it'd be quicker for me to go to the
airport with a brick of cash and fly to the
Caymans than it would be to wire it to you
because it takes a couple of days.
Even stable coins have huge advantages over
our existing system.
RAOUL PAL: I hadn't thought of it that way,
but yeah, it's ridiculous.
It's ridiculous that physically, you can move
the cash faster than the system can actually
process it.
DAN MOREHEAD: Yeah, yeah.
It really is, and the first time Roger Ver
actually showed me how to use Bitcoin and
he scanned it on my phone, and it popped up
literally one second later, I was like, oh,
wow, this is going to be big.
It's way better than flying to the Cayman
with a suitcase of cash.
Although, should you extend an invitation,
I would be much more than pleased to come
join you down there.
RAOUL PAL: You can bring a suitcase of cash
as well, it's fine.
Look, Dan, thank you very much for your time.
I think it was really interesting to hear
your perspective.
What I'm going to do now if you've just got
a few minutes, I'm going to ask you some fixed
questions that we asked a few people and they're
just standard questions that people get to
know you with.
If there's one person living or dead, who
would you want to interview more than anybody?
If so, who and why?
DAN MOREHEAD: I'm actually taking an online
course on Beethoven right now.
It's through Stanford.
It's like adult ed type class, it was supposed
to be physical.
When this whole thing started, and everyone's
starting to get in shelter in place, the professor
was way ahead of everybody and sending out
a note saying, hey, these are super trying
times, but if the composer could suffer the
most devastating loss any musician could ever
have in deafness and still created best works,
we can at least do a Zoom class.
I'm studying Beethoven, it is a super-fast
thing so I'd love to interview him if I could.
RAOUL PAL: What is the book or books that
have changed how you view the world, and how
so?
Also, what are you reading right now?
DAN MOREHEAD: I decided with this, hopefully
rare opportunity to have months of a different
lifestyle.
I'm rereading War and Peace, which is about
a scourge that swept over the world called
Napoleon.
It seemed apropos to our war that we're at
with this little virus that we're battling.
RAOUL PAL: Are you struggling through it,
or you find it relatively easy?
Because it's notoriously difficult to read
things so long.
DAN MOREHEAD: Yeah, I have learned from past
attempts and I have a printout of all the
principal characters and all the patronymics
and nicknames and everything.
I refer to that like, every 10 seconds, and
it's still super confusing to remember who
everybody is, but I'm endeavoring to just
get some momentum and make sure I just plow
through it.
RAOUL PAL: As an individual and a leader in
your field, how do you stay engaged and relevant
in a world that's moving so quickly?
DAN MOREHEAD: Well, so these days, actually,
there is potential for like over stimulus,
like there's so much information and it's
also important, and a lot of it's hugely distressing.
The one thing I am actually trying to do is
essentially limit my intake of just general
news like normal news to only a couple periods
per day.
One of the things I did to get some space
to actually think without all this white noise
just like reverberating is I did just block
out like three days to write our investor
letter a week or two ago, where I essentially
tried to not read or talk to or get involved
with anybody else, and just actually be able
to think.
That'd be my only advice for everyone these
days, is there's so much stimulation.
A lot of it's really distressing.
Obviously, we're all worried about our own
physical and mental health, our kids, our
community is to try and block out time, big
chunks of time, four hours, six hours or whatever,
where you can just think and not like-- basically
stop the input of stimulus and potentially
just create a space for your brain to stop
throbbing from all this input of data, and
to see if you can process what you already
have in your head.
RAOUL PAL: Yeah, I found that really hard
for the first week of shelter in place because
my wife's not here, so I'm on my own at the
moment.
She comes this weekend because she, I think
she had COIVD and she's in Grand Cayman.
I'm here, and just spend everything on my
Bloomberg, Twitter, email, new sites, and
after a while, I'm like to stop.
You have to carve up your day differently
and change because it's just overwhelming.
DAN MOREHEAD: Yeah, the other thing I'm trying
to do is put some structure you know back
into life because in the normal world, our
lives are probably overly structured.
In this new world where, like everything that
you had plans being canceled, you can easily
have it drift.
I'm trying to have a very structured day where
I do the same things at the same times to
try and get that rhythm back.
I think humans and all animals have their
own circadian rhythms that need to stay in
tune.
RAOUL PAL: Some of our guests can tie their
success to one key breakthrough.
Did you experience a tipping point in your
career?
DAN MOREHEAD: I'd say my experience at Tiger
management was just a huge transformative
thing for me because I came in having run
a hedge fund before Tiger, which I think was
unique at the time.
I learned a few things on my own experiment
with successes and failures but getting to
work with Julian Robertson and 40 other really
smart nice people is such a boost to my career.
I've learned a ton from the lessons that all
these peers of mine gave me.
RAOUL PAL: By the way, did Julian ever get
involved in Bitcoin?
DAN MOREHEAD: He has.
He's a very forward thinking man.
Many years ago, four or five years ago, he
invested in our funds and then, coincidentally,
my son actually goes to the school Julian
went to in the '50s and so I've seen him there
and he's up on stuff.
RAOUL PAL: Good man.
Can you identify a failure that had the most
significant impacts on your career, and what
did you do to overcome it?
DAN MOREHEAD: Oh actually, it's a good story.
It's quite germane to our current environment.
I started out as an asset-backed securities
trader at Goldman in the '80s.
The Wall Street stock market crash happened
and like Solomon cut their entire mini department
and everyone's cutting, and cutting, and cutting.
They said they had to cut the department by
like 20% or some and they were going to thinking
about laying me off and I was like, what?
That's outrageous, because I've just been
sitting there, but I really hadn't been learning.
I was just sitting around playing liars poker
with the other guys on the desk and new channel.
I really wasn't stressed I might-- I wasn't
stretching myself, I wasn't really doing anything,
so I quickly grabbed the phone, and I was
looking for that headliners number for the
job that offered me like six times or whatever
I was making.
I went and switched, I went to Bankers Trust
and it was awesome because having gotten thrown
out of a really comfy situation and it just
kicked me into gear.
I realized I should just like put myself out
there, just go for it.
Since then, I've been just like put my whole
heart and soul into everything I'm doing.
Especially with blockchain, it's the same.
I think we're going to make a lot of money
in this business but like I'm passionate,
we're actually changing the world.
20 years from now, we're going to look back
and blockchain is going to have improved a
ton of people's lives.
It was basically getting kicked out of my
comfy gig forced me to actually get engaged
and get going.
That'd be my advice for graduates that are
potentially going to have their jobs pulled
from now, is dislocation might be the best
thing that ever happened to you, and just
embrace it and be open to it.
My son showed me this great clip from The
Rock about him getting cut from the NFL and
that was the best thing that ever happened
to him.
That would be the spirit I would be looking
at this.
RAOUL PAL: Absolutely.
Last two questions, who's a person you admire
and why?
DAN MOREHEAD: Oh, there's a lot of people,
but the one that's relevant to this conversation
is, and I know it sounds trite, but it's actually
super earnest thought, Satoshi Nakamoto.
The reason I say it is, I'm just not aware
of anyone else has ever contributed something
of such incredible value to the world, blockchain's
200 billion, as you say, and not taking anything
for themselves.
It's amazing that the open source code was
just contributed to the world, it wasn't patented,
and even the million bitcoins that Satoshi
owns, he or she or whatever, hasn't sold or
done anything with them in many, many years.
I think that's inspirational.
Again, if it's true the blockchain actually
improves people's lives and I think it's going
to have a huge impact on people.
It's just really cool that Satoshi essentially
gifted that to humanity and I think it's great.
RAOUL PAL: Final question.
What view do you hold that's most controversial
in your professional life?
DAN MOREHEAD: I would say my views right now
are not like eight sigma outside consensus,
but the views that I expressed earlier that
it's actually a great time to invest in venture
might sound self-serving or might sound like
a knee jerk reaction, but I hold it very sincerely.
That's when I think most people probably wouldn't
vote with their checkbooks to agree with me
on.
That would be the one I would say is the most
controversial, relative to the professional
community.
RAOUL PAL: Dan, listen, thank you ever so
much.
It was really good, thoroughly enjoyable,
and lots of people to get their teeth into
as well.
I think it was really great to tie up your
macro experience and your understanding now,
you've let back into macro world just try
and make sense of what this all means because
you have the intuition that this is going
to mean a lot for your current life in terms
of the assets that you look at, and I think
that's fascinating.
DAN MOREHEAD: Well, Raoul, thanks so much.
It's been a pleasure being with you in these
trying times.
RAOUL PAL: Yeah, absolutely.
Take care of yourself and look after your
family as well.
JUSTINE: If you're ready to go beyond the
interview, make sure you visit realvision.com
where you can try real vision plus for 30
days for just $1.
We'll see you next time right here on Real
Vision
