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YF Uncut: Breaking down AI with Real Vision Group CEO Raoul Pal

Yahoo Finance’s Jared Blikre sits down with Real Vision Group CEO & Co-Founder, Raoul Pal, as they discuss the stock market, artificial intelligence, and crypto.

Video transcript

[MUSIC PLAYING]

JARED BLIKRE: Hello, and welcome to "Yahoo Finance Uncut." I am your host, Jared Blikre. And today, I have a very special guest with me, Raoul Pal. He is the founder and CEO of the Real Vision Group. And he is here with us today because he is-- we have a market that has been confounding investors for quite a long time here. And ever since the pandemic, we've had the vicissitudes guiding us up and down. And we are here to make some sense of this.

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Now, Raoul, by way of background, founded Real Vision. He has conversations with some of the leading minds in finance on a daily basis. They have market reports, both in video and text form. And without further ado, let's say hi here. Raoul, thank you for joining us here today. Really excited to see you here and to talk with you.

RAOUL PAL: It's great to be back. I haven't been on Yahoo Finance for a while, so I'm really looking forward to this.

JARED BLIKRE: Yes. And let's get down to business. Just for our viewers' sake, I'm going to say this is taped. So you might be watching this a couple of weeks into the future. But we've had some really interesting developments. Last week, we had a big Fed meeting, and we had that nonfarm payrolls number that came in a bit hot. And we've seen markets kind of surge on the news, but then retreat a bit.

And all of this is in the context of a really strong market in 2023, kind of the reverse that we saw of 2022. Back then, we saw the Dow leading. The NASDAQ this year, we're seeing the NASDAQ leading the Dow. We have the NASDAQ climbing nearly 20% off of its lows. And we know what that means. We're going to get some headlines potentially that might mean something to some investors. Raoul, can you just break this down for us? How are you seeing the markets right now?

RAOUL PAL: So I'm a macro guy. So I look at where we are in the macroeconomic cycle and what the markets are forecasting. One thing I note is how utterly negative the market became. Sentiment was an incredible washout. By October, it was, by measurable standards, probably the worst sentiment we'd had in 50 years, which is extraordinary because the market really hadn't gone down a great deal. You know, it was 25%, 30%, 38% for the NASDAQ.

But when I look at the forward-looking indicators for the business cycle, they're all looking for a big recession that's coming or certainly a short sharp recession. But many of the indicators are starting to look up, and we're starting to see liquidity come back into the markets. It started with in China, but it's coming elsewhere too. And I think the markets are picking that up.

And that's what we're seeing, which is this rally that is the most hated rally I've seen in a while. People are like, it's got to go down. Earnings need to get marked down. And my thought process, this is actually closer to 2018-19, when the Fed eventually stopped raising rates and the market took off. And it didn't really look back for the whole next year and a half until COVID.

So that's-- I'm actually very constructive on markets overall. And I think I'm very comfortable in the fact that most people are very negative. I understand, however, that there's risks to my view. Something could mean that the economy is weaker for longer or liquidity doesn't come back, and that's a risk there. But the balance of probabilities are, to me, that things are probably stronger than expected.

JARED BLIKRE: And I've noticed that a lot of macro indicators have kind of bucked historical trends over the last few years, I think, just in response to the rapidity of the monetary and fiscal responses that we've seen with respect to the pandemic. In other words, adding huge amounts of liquidity and then suddenly taking it away vis-a-vis QT, a number of 75 basis point rate increases by the Federal Reserve. I'm just wondering, do you see the structure of the market being particularly jittery and fast-tracked compared to historical norms?

RAOUL PAL: Look, I think that's probably the case. I think the market has learnt something new. And something new is that there is a form of stimulus, which is quantitative easing, that in a low rate environment tends to get used. Now, rates are up much higher now. So maybe rates have to come down further first. The market is still yet trying to decide where we are with the interest rate cycle. Was the rise in rates an aberration and inflation is still subdued at underlying level? Or has something structurally changed?

And these big questions are the kind of things the markets are grappling with. They don't really know. But markets themselves have become much more forward-looking in terms of stimulus. So I think this is why things pick up much faster and fall much faster, depending on the rate of change of what's happening with stimulus. So it is a very interesting junction. My hypothesis is that inflation itself probably ends up negative by late summer this year. And again, we'll be looking at some sort of stimulus cycle. So let's see.

JARED BLIKRE: That's really interesting. So let's kind of backtrack a little bit. We're talking about a Federal Reserve where Chair Powell has bent over backwards trying to hammer the-- hammer home that he's going to hike. He's going to keep rates longer. And yet, at the last FOMC conference-- press conference in particular, we saw a very bullish response to his rhetoric. He didn't really push back on financial conditions. We can get into the weeds there. But do you think the market-- do you think Powell-- do you think-- there is a disconnect, at least for me, between what the market is seeing and what Powell is saying. And I'm wondering how you think that gets resolved.

RAOUL PAL: So I think it's rate of change that matters the most. And the Fed is signaling, you know what, we're pretty close to an end. You know, 25 after the 50s is already a rate of change, decrease of 50%. And soon, we're going to get a pause and wait and see, which was exactly what happened in 2018, end of December 2018. It's the rate of change of the rate increases that really matters because the rates of change are like you're holding the beach ball underwater. You take your hand off the beach ball, and it pops up.

And, you know, stimulus is whether you get a gust of wind beneath it. So I think that regardless of what Powell says, even if he keeps rates higher for longer, I don't think it's the level of rates that's the biggest problem. It's the rate of change of people having to deal with it that's the problem. And I think that's what caught the market by surprise because this was the fastest change of rates in all history.

JARED BLIKRE: Yes. And do you see that continuing into the future? And where I come from, I'm a student of market microstructure. And I look at the lower liquidity-- there's been low liquidity in the market. You can look at the order book on the futures markets, the E-minis, you can look at the order book on some of the major ETFs, like SPY and the rest, and it's not where it used to be a few years ago. I'm just wondering if this rate of change that is increasing is kind of the new norm, if you see things that way?

RAOUL PAL: The rate of change to the new norm possibly, but it's so difficult to tell because we've gone through this pandemic. Is this all a whipsaw? You know, when I've put log charts of 10-year yields up since 1980, we get this huge spike down in the pandemic and then a-- and then a huge counteracting spike up. And it's like, well, maybe it's just a whipsaw. And I think it's really difficult to know. Liquidity is certainly not there. But liquidity in the markets is a function of financial liquidity, and financial liquidity is highly restricted.

So I think that's somewhat of a problem for people to try and figure out, OK, what have we got? There's a lot of-- and I hate using the expression cash on the sidelines, but there's a lot of people out of the market. And so it tends to get a bit squeezy. The other thing that's changing in the structure of markets that you alluded to is the sheer amount of option activity. I mean, we've never seen anything like that before. And option activity has a tendency to exaggerate moves.

JARED BLIKRE: Yes, that's a really interesting phenomenon. And maybe we can just explore that and take a bigger picture of view because the pandemic has definitely changed the mix of trading, at least from what I see. And it's really about the retail trader and certain tendencies that evolve there. And that may have spread to what we now see in the options market, and that is a huge percentage of options are just-- those bets are placed a day before expiration. So they have this zero days till expiration trend that we now see that is also affecting the underlying securities.

And we saw this play out in a number of ways. GameStop, you know, that was a very retail phenomenon. But then we saw call buying in some of the mega caps really influence the underlying-- the S&P 500 itself was affected by this phenomenon. So I'm just wondering how you're seeing some of these changes and what you think of them in the market.

RAOUL PAL: So I think this is a societal change that has happened. There is a generation of young people that basically got left behind by the financial system. They left university with high debts, which they couldn't afford. They couldn't afford a house. And real wages have not gone up for 30, 40, 50 years now. So there's a group of disenfranchised people who are looking at the baby boomers and other generations above them saying, well, we didn't have the same-- we have different disadvantages than you had. Don't forget, the average 30-year-old baby boomer had equity PE ratios of 8, bond yields of 17%--

JARED BLIKRE: Give me nostalgia here.

RAOUL PAL: Yeah, and cheap property markets, right, as a percentage of household income. You go to a 30-year-old millennial now, it's the opposite. So their expected future return is much lower. So what you started to see was speculation. It's the YOLO idea, which is, I'm going to take more risk because there is no way out. So I'm happy to spend 1,000 bucks on buying call options because if I strike it rich, it's a lottery ticket. And it really is an actual economic reason why this has happened. And you've also based communities around this whole idea of risk taking.

And also, they don't mind celebrating their losses either. It's a whole different mentality. And there's a lot of older people in the markets saying, well, this is rampant speculation. They shouldn't do it like this. But they choose to. And it's a similar attitude you see in crypto markets as well. It's certainly a feeling that there's no way to get ahead unless you speculate. Now, is that going to pay off for people? Usually not. But I think to understand why it's happened and the opportunity set that many of these young people have, I think, is really important.

JARED BLIKRE: I couldn't agree more. And I look at what's happened to what I see as the average account over the last year and a half, meme stocks, those peaked early on in 2021. I think that the overall tech market peaked later in the year around November or so. And so many traders have been wiped out who started their endeavors, who started their trading careers over the pandemic.

I think it's unfortunate because that's going to live with them and that psychology for a long period of time. I'm just wondering what you would say to retail traders who are newish to the market, who've been beaten up, but still have hopes that they can trade for another day, trade to see another day? What would you say to them?

RAOUL PAL: I think everybody in markets learns lessons. And you don't become an investor until you've learned the lessons. And usually, the lesson is to not be a trader because it's hard. And I understand the reason why they'd rather buy lottery tickets than invest because the S&P maybe over the long run gives 8% returns. Well, 8% returns from their savings just isn't enough to move the dial.

So I understand it. But there are ways or markets to look at. You're better to look at markets that have better potential risk rewards over a longer term. So eye things with a secular tailwind, whether that's cryptocurrencies or economies like India or even technology. And then don't use leverage, but just accumulate those things. And they will move a lot more over time.

You know, for example, going back to that 2018-19 example, when the Fed paused last time, so the S&P was up about 10%. The NASDAQ was up about 14%. So that's a significant outperformance. The long growthy end of technology was up about 24%. And crypto was up 100%. So you can choose to back a horse where you don't have to use leverage that acts like leverage.

I saw somebody recently did some research. And again, these are not recommendations, but Tesla basically trades like a 20x leveraged S&P. OK, that's interesting. If your view is that Tesla is not going to go to zero, then you get a lot of upside if you think the markets may be in a bull market for a period of time. And there are other stocks that act like that.

So as opposed to taking leverage and short-term bets to hope to win with a lottery ticket, maybe construct a portfolio. And that might make a real difference to you over time because you can stay in the game that way. Because as you alluded to, the problem is, if you trade options, you're out of the game. You've lost your premium. You're out of the game. You're not-- you can miss out on moves. But if you can actually invest in the underlying, hold it and find the right bets, OK. And that requires a bit of homework.

JARED BLIKRE: I got to address the elephant or dog in the room. You have a little furry friend sitting to your left there who just entered. Name and breed please.

RAOUL PAL: Well, there's two of them. They're two sisters. They're old grumpy sisters now. They're about 12 years old. They are Cayman Mutts. So I think they're a mix between Ridgebacks and Labradors. And that one who just came in is Zazu, and the other one is Nala, named after "The Lion King."

JARED BLIKRE: Well, I've seen some very large Ridgebacks in my day.

RAOUL PAL: I've had a couple of Ridgebacks. Amazing dogs.

JARED BLIKRE: Yes, they are. So back to the discussion here, you were talking about Tesla being a 20x levered bet on the-- so a high beta with respect to the S&P 500. I've noticed crypto, specifically Bitcoin, behaving the same way. I watch it around key Fed decisions, some of the big economic reports, and it's right there with it. I'm wondering, given the FTX fallout-- and this is a loaded question because there's a ton of background to get into here-- do you see Bitcoin and crypto as another way of attacking these trends?

RAOUL PAL: Yes, I do. And again, it's all about how you take risk and what kind of risks you want to take. But I do. And I'm very much involved with that market because I think technology adoption is driven by something called Metcalfe's Law. So it's driven by a different way of valuing things, which is the number of people on the network and the number of connections or activity on that network.

JARED BLIKRE: Yes.

RAOUL PAL: So it's like a mobile phone network and the internet itself. But unlike anything else, you can actually own a part of the network, which is what crypto does. So it actually, once there's liquidity-- it's actually driven by the Fed liquidity cycle as well. It's in a secular bull market. So a log trend, long-term log trend of Bitcoin just goes up. But it's got these wild swings, and those are driven by the Fed liquidity cycle. So when global M2 is falling, crypto falls. When global M2 is rising, crypto rises. Same with technology stocks. So it's exactly the same thesis what drives these things in the cyclical sense.

And much like technology, there's a secular tailwind. And we've seen that rise of technology is something I've been talking about. I call it the exponential age, which is the nexus of a whole group of technologies, from crypto to AI to robotics to EV to distributed computing to Internet of Things to many, many of these things all are happening together at the same time.

And people are like, well, Raoul, you're talking nonsense here. We don't see any of this stuff. And then ChatGPT comes on, and everyone goes, oh my god. That was the fastest adoption of-- the fastest adoption of technology in all history was cryptocurrency. This went from 0 to 11 million users in 20 days. We've never seen anything like it. And that's without Google just launching their new platform. They're going to roll out 20 new AI models.

JARED BLIKRE: And this is ChatGPT 3.5. I'm hearing that 4, version 4, which blows it out of the water, is going to be released in just a few weeks. And just to build on what you were saying, I believe Sundar Pichai issued a code red, saying that we have to attack this. And that's-- you know, we're seeing tremendous release freneticism, frenetic activity, with respect to AI right now. I had some more stuff on crypto. We can circle back to it. But--

RAOUL PAL: Yeah, we'll come back, except I want to give you something about--

JARED BLIKRE: Yeah, go ahead.

RAOUL PAL: --about AI that I think is-- I've been thinking a lot about this. And I've been waiting for this moment to happen. I've been following it. Emad Mostaque, who started Stability AI, is an old friend of mine, ex macro guy as well. I think this is a global shock and probably deflationary shock, one of the largest ones we've ever lived through. I think it may be a bigger order of magnitude than China joining the WTO.

I can't express how powerful what is happening is. And we're all struggling to get our heads around with what this is. And we kind of think of it like a Google search engine that's a bit better. But when you actually dig in, it's a whole new world. And the number of applications that they've built on, if you think of Metcalfe's Law again, you've got these models. You can build the Microsoft, Google, OpenAI-- Stability AI, other businesses on top.

There's thousands of these launching. And so the number of applications is going to go exponential. And I don't think we're yet ready to deal with this, what that means. I mean, you know, even at Real Vision, we're talking about, how do we use AI in video editing? How do we use AI in transcripts? How do we use AI in marketing? How do we use-- I mean, it's everywhere. And products are already rolled out.

JARED BLIKRE: Well, it's almost impossible for me to think of one area where it's not even directly applicable. I'm not even talking about secondarily. I'm talking about directly applicable. And not just ChatGPT, I'm talking artificial intelligence as a whole. We might not have the right interfaces and models yet, but you talk about music, visual arts. The very program that we are right now, we're probably going to have virtual directors. We're going to have talent, maybe a producer or two, and-- whereas we would have had 15 before. Already, the barriers to entry have come down so low in so many different industries, including media, what we're talking about here today.

So from an investing standpoint, the greatest deflationary shock of our lifetime. Of course, we want to be involved in those companies, if we want to take part in this, that are leading the way. And it's-- I see it becoming the Wild West, which is fine because that's what happens with new technologies. You look at the railroads of the 1800s, then the car companies, then the transistor and radio companies in the 1920s, all happening all over again. And I'm just wondering how you're thinking about investing in this?

RAOUL PAL: I think you're right. And Emad Mostaque from Stability AI just tweeted out something that said, I think this is going to be the biggest bubble of all time, the dot-AI bubble. And I think that's what you're alluding to, right? This is what happens when you get such a fundamental breakthrough in technology that everybody has to use it. It will lead to probably a huge bubble. OK, but this is super early stage. You can barely invest in this stuff. You know, yes, you want to own stuff like semiconductors and Nvidia and all of that stuff. You need to process this stuff.

But really, for the average person right now, the easiest two ways are Microsoft and Google because we're valuing them as-- we're really valuing them as advertising businesses. And they're about to be valued again as step-change technology businesses. And again, they've got massive networks, and you're going to create a whole bunch more network activity amongst these two. So I think, you know, if there's ever a reason for the major technology stocks to really have another leg higher, it's on this. And I think it's pervasive and long-lasting.

I mean, Microsoft is pivoting their entire business model to add this in, as is Google. And these are just some of the things that they have. I mean, don't forget, Google's got robotics. Google's got EV. Google's got self-driving. Google's got-- they've got-- they've got quantum computing. All in their Google X Labs, which we don't even know about. It's all behind the curtain. So as these technologies get to adoption, they can launch them. It's kind of like, OK, yeah, these guys should do really well. And then later, we'll get other opportunities to invest.

JARED BLIKRE: Yes, I think that's one of the important things, too, is that when you have the beginning stages, people kind of rush in. And a lot of times, people get in at the top of the bubble. If we're talking about the S-curve there, I think the top of the curve is where people tend to adopt the most. And then a lot of times, they get burned. But we're talking about-- let me just ask you about the disconnect here.

We're talking about a potential bubble in-- from a technology that is inherently deflationary. And arguably, over the last 30 years, thanks to computer technology, the internet, whatnot, we've seen deflationary forces counteract a lot of the inflationary ones. I'm wondering if in your early thinking about this, if it's going to be a similar phenomenon?

RAOUL PAL: So, you know, we're-- most of us in the macro world have been grappling with, OK, we've got some structural supply issues in some commodities-- oil, copper, a few others. And, you know, if economic growth comes back, do we end up with a echo inflation?

JARED BLIKRE: Yes.

RAOUL PAL: You've got some structural issues in the labor market, which I think are overhyped. We've got a low unemployment rate. The reason being is because so many people are out of the workforce because they've retired. So you've got less available people. So aggregate net demand of those people's wages going up is actually not as much as if the whole population was in the labor force. So people need to think about that.

But the other thing people are talking about is deglobalization. You know, does it mean when we build new factories in the United States, that that's inflationary? Well, firstly, we can look at what Google's just done with its factories. Those factories don't have any people in them. And you can look through these amazing drone footages of these drones flying through these massive gigafactories. There's no people. So it's robots. So it's robots and AIs ruling the day. So that's interesting. That gives you a little tip into the future of how this might play out.

So my guess is, if we do get an echo boom, it's going to be massively offset, you know, echo boom in commodities and maybe even some wages, it's going to be massively offset by the rate of rise of AI because any company is going to make the decision, do I hire another person to pay those wages, or do I just use technology instead? And I think every company in the world is going through that decision right now as we speak.

JARED BLIKRE: I think they have to. And the ones who are not are going to be left behind even more than they are now.

RAOUL PAL: Which is another reason it becomes a bubble because it's like the internet. Everybody's forced to use it from the get-go. And so--

JARED BLIKRE: But most people don't know how, though.

RAOUL PAL: Exactly.

JARED BLIKRE: Most people are going to get it wrong. And here's another thing. I think about this quite a bit. And computers for the first time, thanks to AI, are finally getting friendly. AI just figures things out. It gets the answer. And sometimes it's a fuzzy process, and it's approximation. But a lot of times, and remarkably consistently, it comes to the correct-- to the correct answer.

And if technology gets easier, if it becomes more adoptable, I think-- early on in the internet, I remember I was an early adopter. But nobody really jumped on the bandwagon because it was difficult to simply log on. If the average computer device becomes trivial to use now, and no matter how sophisticated the technology underneath, this opens up the door to massively get scale with an audience that you wouldn't have had the ability to even approach otherwise.

So people who struggle with technology now-- and there might be a lot of those people. I don't want to get into demographics, but you have a baby boomer population that is not necessarily on the same page with tech, on the TikTok page as some of the youngsters. And if they are able to get on board with some of these new technologies without the growing pains, I just see that as a--

RAOUL PAL: I mean, I can give you a perfect example of that. So--

JARED BLIKRE: Please do

RAOUL PAL: --my mother-in-law is staying with me. And she is writing a book, which is a geological history of the world in logarithmic scale. It's quite an amazing thing because it's a-- the history of the world is actually very long, millions of years.

JARED BLIKRE: Yes.

RAOUL PAL: So she's thinking about some of the text that she needs to write through it because she's actually illustrating the entire thing. And I point out ChatGPT, and I didn't know how she was going to use it. So we were talking last night over dinner. And she said, oh, yeah, you know, I asked it to summarize the last 100,000 years, explained it needs to be in a log scale, and asked it what the largest geological breakthroughs and changes on the Earth were, what the technology and changes and societal changes, and it wrote the whole thing out in--

JARED BLIKRE: 30 seconds? Yeah.

RAOUL PAL: --three seconds. And that was like-- she was like-- for her, it's easy because she said, I've just asked an expert. And you're like, yeah, you've just made technology super accessible for everybody.

JARED BLIKRE: It's amazing to think about, and it's almost overwhelming as well. Just wondering, we've seen-- so there is definitely a current push towards adoption and distribution, just getting it out the door. Google wants to get it out the door. Microsoft wants to get their next version. Just wondering what you think the-- the more short-term developments are going to be here? Is it going to be this arms race where everybody's looking at these leaders? Just how does it-- how do you think this evolves over the next year or two?

RAOUL PAL: Look, I think it's fascinating, and it's fascinating because of Stability AI. So the AI is basically held with two giant corporations, Microsoft and Google. Now, we know Apple is developing their own. Not released yet, beyond Siri. And I'm sure Amazon are in the race. And there will probably be others. The Chinese obviously have. So these guys, even it's called OpenAI, it's not open. They're heavily restricting it. If you listen to Sam Altman, it was a shocking speech he gave when this started rolling out. He's like-- you could see his face of fear, which is like, the technology that we have, we can't roll out.

JARED BLIKRE: Yes.

RAOUL PAL: Society is not ready for the speed of which we could release this technology. So we are purposely going slow and cautiously. I spoke to the Google team yesterday, same story. It's like, you have no understanding what we have, and we can't really expose it to the world. And there's a lot of societal and terrifying things that they taught me through some of the scenarios that they're concerned over. Meanwhile, Stability AI is open source. Everybody's got it. Now, regulators have taken 10 years, and they can't even regulate crypto. How on Earth are they going to deal with this?

JARED BLIKRE: Yes.

RAOUL PAL: So Stability AI is the game-changer because there's somebody who can't be held back, and they're global. So that means that anybody can innovate there. So it's going to be very difficult. It's very difficult to keep the genie in the bottle. And it may come faster than we can even deal with.

JARED BLIKRE: You know, another thing, when you were mentioning these two behemoth, one of the first things that pops into my mind is, OK, we've got Microsoft and Google, Alphabet. One of those two companies is facing serious antitrust pressure. One of those companies faced it decades ago. Not necessarily in the clear, but they're not under-- they're not under the same microscope.

And of course, at Microsoft, they had their own antitrust concerns with their browser, which are going to be, I guess, integrated-- I would think that they're going to be integrating ChatGPT and Bing into that once again. But then Alphabet. And I just wonder how you see not necessarily-- I'm not looking for a legal answer here, but with respect to the public zeitgeist, there has been pressure from both sides here. How do you see that playing?

RAOUL PAL: So I think we've got a bigger problem at hand, really.

JARED BLIKRE: Really?

RAOUL PAL: And I've actually been speaking to as many people about it as possible is, we're about to launch chat-to-video. That's coming out in the next six months, again from Stability AI and I guess the others. So now we've got chat-- text-to-audio, text-to-video, text-to-text. So we can now scale fake content at a scale of which you couldn't understand.

So you could-- I could go onto the web and see you, Jared, in a video telling me that Tesla is filing for bankruptcy tomorrow and you've got to get short or get out. And it will look like you. It'll have Yahoo Finance on it. It'll sound like you, and it won't be you. OK, now what happens in two years' time is we have the US election. We couldn't deal with it with Cambridge Analytica. We have no way of dealing with this.

So this is where we tie back into blockchain, which is one of my other big thematics, is that we absolutely need digital identity and authentication of content because somebody, whether it's a state player or any other nefarious player, can use deep fakes at scale. We can make millions of different variations for different people with different messages, and you won't know that it's not real. It's-- and so let's go back to the question you were asking.

JARED BLIKRE: Yes.

RAOUL PAL: Google in particular run a risk-- if they get caught in the middle of this in the election, they're going to get broken up.

JARED BLIKRE: Wow.

RAOUL PAL: You know, it's of that kind of magnitude. You know, Facebook less so. It's Google's YouTube that's a real problem here. And they are aware, but I don't think anybody's quite aware of the pressing urgency. And don't forget, they will get blamed, so--

JARED BLIKRE: Yes, they will.

RAOUL PAL: --because they have both the AI and the delivery system. So this moment in time is quite a tightrope that people are walking, and I think we need to figure it out as fast as we can.

JARED BLIKRE: It's pretty crazy because we're just thinking about-- these are nascent thoughts in our heads right now, and they probably don't even scratch the surface of what's going to happen in five, 10 years. But you mentioned blockchain and-- with respect to digital identity. I'm wondering, is it fair to say that blockchain solves it? Is it a-- if it's a step in the right direction, how do you marry-- how do you think those two technologies are ideally married?

RAOUL PAL: So I think in a world where nothing is real-- and that's fine. That's the digital world we're going in. That's the world of the metaverse, right? We live in a digital world. The breakthrough of what blockchain technology was, was the way to authenticate and create scarcity around digital assets or digital-- anything digital, contracts, anything, because anything in a digital world goes to zero in value because you can create infinite amounts of it, i.e., you can make infinites of deepfakes.

So how do you create content that is authenticated or people that are authenticated? Because you can create millions of bots that all look like humans because we've seen ChatGPT, and they can pass the law exams and the medical exams. So this is a something people haven't got their heads around. So what you can have with blockchain technology is the ability to have a digital passport of which you can go around the web and prove it's yourself.

Now, we want privacy as well so we can be different people on different platforms, a gaming platform versus Google or whatever. So there's something called zero knowledge proofs, which will basically-- doesn't show your KYC, but proves you've done it. So you can prove that you are a person and that you're real, et cetera, and that allows you to move around in a way that is more suitable for this day and age. That's the best method.

But we need all these systems to be interoperable. I need to be able to move my token around and log in to my Google and my Microsoft and my Amazon and everywhere else, and so it can be authenticated and they can trust each other's systems. Long-term-wise, it's more difficult because blockchain doesn't allow for massive data buckets to go on chain. So you can't put a whole video file on Ethereum right now or whichever chain it is. So somehow we need to use watermarking. It's a bit clunkier still. But, you know, many content providers have some sort of watermarking. So it will work. It will happen.

I think humanID is probably the best place first. And maybe companies like whoever, Google, who are using AI will have to have AI ID too so you know. I mean, we don't mind. We know they're going to be part of our world. And they're going to be in our Twitter feeds, and they're going to be in our everywhere. So it'd be good if they just identified as AI, and then we know.

JARED BLIKRE: With respect to-- so we finally circled back to crypto here, and let's use that opportunity for a minute or two. We talked a bit about leverage quite a bit before as well. And it seems to me the central problem with respect to the blow-up that we had in crypto was huge amount of leverage that had been employed in the system by various actors, some of them bad, FTX, et cetera. And this was over a general theme of de-risking by the markets.

Global central banks were reining in liquidity. We had QT in the US. I mean, I did a-- I did an experiment in my head. I thought, you take out the QT. If it had been a little bit less severe, it's quite possible that some of these Ponzi schemes that we saw-- and FTX, I think it's difficult to call it anything else-- would have continued. I'm just wondering whether leverage is an inherent problem in a system like crypto, where you don't have a backstop such as the Fed?

RAOUL PAL: So if you build a business on an asset that has an 80% volatility and your business model is leverage, you will go bust. It's just a matter of probabilities. And the probability over an extended period of time is about 100%. And people forget that. This is not building leverage on bonds or real estate, which have much lower volatility. This is something that does this all day, can rally 10x, can fall 90%.

So leverage gets exposed really fast. So when you switch from bull market to bear market, the system can take the first step down because there's inherent profits. But then the profits get wiped out, and you get the margin call. And that's when the leverage gets unwound. You know, sure, if you're a sophisticated trader, if you want to use leverage, that's fine.

But, A, retail people should not use leverage in an 80% volatile asset. It's crazy. You don't need it. The returns are high enough when it works anyway, and the risks are high enough when it doesn't work that you don't need the leverage. And you shouldn't be allowed to build business models on it, particularly if you're cosseting other people's assets.

Sure, if you want to run a hedge fund, if you want to be Three Arrows Capital and blow up, that was their problem and the problem of the people who lent them money. But if you're an exchange that's doing it, and then I think you run into more problems. And so there was a number of issues where they kind of tried to rapidly follow what the traditional markets do, which is a lot of leverage--

JARED BLIKRE: Yes.

RAOUL PAL: --without any of the processes, protocols, and oversight of which the traditional markets have had to develop. Now, that doesn't mean traditional markets are much better. I mean, I got caught out in MF Global. I mean, that was Jon Corzine that's head of Goldman Sachs, right?

JARED BLIKRE: Yes.

RAOUL PAL: And that was the same system. And, you know, humans love leverage, and humans love blowing up when times get a little bit tricky. So that's not going to change. But there needs to be more oversight in the space for the use of leverage amongst who gets that leverage. And anybody building a business model based on leverage, it's just not going to last.

JARED BLIKRE: We are arguably still in a crypto winter. We've had a nice lift off the lows in Bitcoin. I'm wondering what the next big leg in Bitcoin looks like with respect to some of the other technologies that we've been talking about? Because with this meteoric rise of AI-- and I think we both agree we're only in the beginning here-- does Bitcoin become kind of a companion technology? Is there still the latent interest in it enough to get to rapid new highs? Is it still going to be this huge speculative vehicle? Or do you think traders are just going to move on to something else?

RAOUL PAL: So I think crypto is driven by the same thing of what drives the technology markets or the liquidity. So liquidity is turning technology. It's turning crypto. I think we're in crypto spring is the point. So I think if we look back to other crypto springs, it tends to do a lot. You know, 100%, 200%, 300%, correct for a while. And when we get to the stimulus cycle eventually, it starts rising again. So that's driven by the liquidity. The adoption side of the equation, well, we're waiting for, OK, what's the next thing?

Even the CEO of Microsoft said, it's coming. The ChatGPT moment is coming in crypto. We just don't know which one it's going to be. Like, we knew AI was coming. And then when it came, we were all shocked. So I know-- and I deal with a lot of corporates in the space. And financial investors are in the space. Banks are in the space. Governments are in the space. Everybody's coming. You know, the UK is going to roll out central bank digital currency. Singapore, India's rolling one out. So it's happening everywhere. The US is a bit slower on some of that stuff. So I think we're going to see a lot of these applications coming.

This crypto winter was interesting because a lot of the VC companies have poured a lot of money into businesses who, over crypto winter, have been building. So what we'll see coming out the other side is new-- is new projects, like we saw NFTs and DeFi out of the last cycle. So what are we going to see here? We'll also see probably another rise of DeFi. So I think the adoption still continues.

We talked about one of the big needs of digital ID, which is a blockchain solution. We're seeing global business marketing models, also things changing to this web3 model. We don't really know yet what the killer app is going to start with. But I don't see a slowdown in that, and I don't see it slow down in the real interest. There's a slowdown in speculative interest, which is fine. You know, markets get overly speculative, particularly because this is really like a VC business. And most VC businesses don't trade real time, but this trades real time, 24/7.

So when I look at where things are more important, I think the main thing to talk about is less about Bitcoin because Bitcoin doesn't do anything. It just is. And that's fine for some people. It's fine. They want that asset that's kind of the purest form of digital value. But Ethereum, now that's getting very interesting. Firstly, we got smart contracts, and we've seen how a lot of those things can change. We've seen California start to talk-- this is actually on Teslas-- about putting vehicle licensing or vehicle documentation on chain. Another great use case. Any contract can go on chain that we use.

But also importantly for the finance world, Ethereum has a yield. And it has a roughly 5% yield right now. So that's interesting. So now you've got a technology asset with a yield. But that was a one-year lock-up. So you had to lock up your money, and you have to take the risk of what is Ethereum going to do over the course of that year, much like you would if you buy a government bond in a foreign country. This is a foreign currency.

But in the new fork that's coming, which is the Shanghai fork, they're introducing liquid staking, which means you've got a money market curve. The money market curve means that you can lock up your ETH for a day, a week, a month, a year, just like you can with your money. So that means it becomes highly usable for a financial instrument for all sorts of different things. And the unlocking DeFi is very big. It also means that institutions are very happy to hold it. A pension plan that has a long-term need to match liabilities can hold Ethereum, and they get bond yields plus technology.

So I think there's a lot to come still from this space. And I think the integration with AI, I think the integration with a lot of the technologies, Internet of Things, I think we'll see streaming payments using cryptocurrencies because it's a more efficient way of doing it coming from cars. And I'm sure Elon will pioneer that as long as others. But that's we're seeing. We're even seeing already servers-- server farms in space paying for-- being paid for usage by satellites in crypto. That's how fast this is moving.

JARED BLIKRE: Yeah, wait until we colonize the moon and Mars and have to deal with those Lorentz transformations on the latency and all that good stuff. I can-- my brain goes wild just thinking about the possibilities. But bringing it back to Earth and the immediate, I guess, the immediacy of the need to deploy investments now, when you were just talking about commodities and gold, I want to talk about gold for a second just because, you know, is it finally being consigned to the dustbin of history?

Of course, we know that it is scarcity with respect to the supply that we have on Earth. But do you think we finally move on beyond that? Because we always see this return to hard money and the desire to when we see high inflation. It's only natural. But we didn't see for a variety of technical reasons that you can get into or not want to that gold didn't really function as the inflation hedge that a lot of people thought it would. And we can talk about real yields and what the Fed was doing and why that didn't happen. But what are your thoughts on traditional commodities here?

RAOUL PAL: So my thoughts on gold are, I like gold because I think gold is just a probabilistic bet on-- on monetary stimulus. So negative real yields, debasement of currency, you own gold. Now, the issue gold has got is it's got a competitor, which is crypto, that does the job much better in the times of actual debasement. Crypto-- gold does well in holding its value. So even though gold sold off, it obviously didn't sell off as much as crypto over time.

But crypto has a much higher leverage because of the bet on technology. But I think gold certainly has a place. The two commodities that are super interesting to me, one is copper. The long-term-- if you look at the monthly charts of copper going back the last 10 years, if it breaks anywhere near the highs, it's going up-- yeah, you need to go back a bit longer than that chart.

JARED BLIKRE: Let's see if we can take it back a little. Yeah, let me put on the monthly count, monthly--

RAOUL PAL: Yeah, put it on the monthly for a decent period of time.

JARED BLIKRE: Oh, here we go.

RAOUL PAL: So if it starts breaking all of these series of highs from 2011, 2012, and 2022, right, there's a lot of blue sky. It's like forming a huge wedge pattern to me. And I'm very interested in copper because we know the world will be short of copper as we move to EV. How I'd love to think about this is, if you don't like EV, you're not sure about the theme, you don't like to invest in Tesla or whatever it is, just buy copper, and it should work. So I like copper. And the other one I like for the similar secular theme based around technology is carbon. So EU has a carbon market. I think there's an ETF called K-- actually, it's like a KraneShares carbon, EU carbon.

JARED BLIKRE: KRBN?

RAOUL PAL: No, there's another one. KREU or UA? EUA?

JARED BLIKRE: I'll look for it here.

RAOUL PAL: KEUA, I think it is. And that's the EU allowances.

JARED BLIKRE: All right.

RAOUL PAL: EU has an incredible carbon-based system, and that's super interesting. Hopefully, that's the one. And again, we've got this series of highs, and the EU is kind of tightening up on its carbon supply. And companies have to buy carbon by law in Europe, or they get fined for it. So you have this secular tailwind with government behind it that's forcing carbon prices higher over time. So that's another interesting market in the commodity markets that most people don't look at. They don't realize. So copper and carbon. Gold, I think, is decent. I'm less sure about oil, natural gas, and those for the time being.

JARED BLIKRE: We got just a couple of minutes left here. Maybe we take a little road trip down memory lane here. Just tell us about Real Vision, your ideas about founding it, why you did it, and your journey through the pandemic along with everybody else.

RAOUL PAL: So very quickly, I lived in Spain back in-- over the financial crisis and then the EU crisis. And I saw it viscerally firsthand how it affected people. And I was one of the few people in my research office, Global Macro Investor, who predicted this. And, you know, all of the big hedge funds were my clients, et cetera. But people come up to me in the street saying, why didn't we know?

And I saw so many people wiped out. Friends went bankrupt. It was terrible. And the question was, why didn't we know? And I knew at that point in financial markets, those at the center of the financial system had all the information, and nobody else had the information. And it was held by intermediaries, and the intermediaries being the banks and the investment houses. And I thought, I need to change this.

So the idea was, how can I democratize financial knowledge? And so I thought-- I had the crazy idea of starting a video company back in 2014 before really video was that prevalent. And we started filming the world's most famous hedge fund managers and saying, what do you think, and what is your view? And sitting down for an hour when media was at three-minute soundbites at that point. And so it really resonated, and it really helped people.

And we've taken people on a journey. We talked about Bitcoin first in 2014, got people through it, educated them. So we believe a lot in education. So the whole journey has become an incredible journey and a big community of people within Real Vision who are super passionate about learning. So we refer to them as the learning tribe. They come to us, and they want to learn different opinions. Because it's not about me, it's about all of the people, the analysts, strategists, much like you do, Jared, to bring them on to the platform, talk to them, get proper deep insights. We have written research as well.

And over the pandemic, we became really people's window into the world of what was going on in finance because people were terrified, firstly because the markets cratered and then they exploded higher. The rise of crypto, GameStop, everything all happened at one point. It was the most intense period. And people came to find Real Vision a place they could trust. And so that's been an amazing journey. And we help people in their crypto journeys.

We've launched a whole education business with amazing video-based tutorials to teach people how to become better investors, and done at ludicrous pricing as well to make it democratized. So it's not all about charging the highest price possible, but getting into the most number of hands possible. And that's been the journey of Real Vision, and we continue that journey. And we're building out a whole new platform and a whole bunch of experiences as we speak, embracing the web3 world. We're going to be embracing the AI world as well. So more exciting things to come from us on that, and looking after the community that we've got.

JARED BLIKRE: Raoul, I'm very excited by that. Democratizing finance and all those great things you said, kind of our mission, too, here at Yahoo Finance. And by the way, I should note that Real Vision is one of our partners. So some of their content will appear on our site. And of course, you can see that content over at realvision.com. This has been a journey. And I hope to look back on this in a few years and-- when AI is running the world and just to see our thoughts on this-- in this very nascent time.

RAOUL PAL: Yes, I think we're going to be spinning to try and keep up with what is happening. And this is just AI. I mean, then we've got-- I mean, wait till the robots come in full force. I mean, don't forget, already Amazon has half a million robots and 1 and 1/2 million workers. So a third of their workforce is robots.

JARED BLIKRE: As long as they don't vote.

RAOUL PAL: That'll flip. Yes, as long as they don't vote. They will vote at some point. It's all over then.

JARED BLIKRE: We got to end it there, but great, great picking your brain here. Raoul Pal, founder and CEO of Real Vision, thank you.

RAOUL PAL: Thank you.

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