This episode reveals the 8% 'debasement trap' silently eroding wealth and argues that only tech and crypto offer a viable escape, driven by a single, powerful macroeconomic force.
The Post-2008 Four-Year Business Cycle
- Raoul begins by explaining a fundamental shift in the global business cycle that occurred after the 2008 financial crisis. He notes that the cycle became a predictable, metronome-like four-year pattern, a phenomenon not seen since the 1950s and 60s.
- This shift was driven by a "debt jubilee" where governments, burdened with debt exceeding 100% of their GDP, effectively paused interest payments. This is similar to the interest payment forgiveness seen during the COVID-19 pandemic.
- Governments restructured their debts over three-to-five-year periods, creating a near-perfect four-year cycle of liquidity injections. We are currently in the fourth year of this cycle, where the largest portion of the debt is due.
- Raoul’s analysis highlights that this cycle involves injecting liquidity for three years, followed by a partial withdrawal in the fourth year (the "bear market year") as central banks raise rates to manage inflation.
The 8% Debasement Trap
- The core of the discussion is the concept of currency debasement, which Raoul defines as the persistent increase in global liquidity. This is the mechanism central banks use to manage the massive government debt loads.
- Debasement refers to the reduction in the value of a currency, not through consumer price inflation, but through the expansion of the money supply (liquidity). This process erodes the purchasing power of cash and cash-equivalent assets.
- Raoul calculates this debasement is occurring at a "pernicious rate of 8% a year." This consistent erosion of value is the hidden tax on savings and investments held in fiat currency.
- To measure an asset's true performance, Raoul argues it must be divided by the global liquidity index. This reveals whether the asset is actually creating wealth or simply keeping pace with currency debasement.
“If you divide an asset by the global liquidity, you get to see whether it's outperformed the debasement. People hate that chart... But it is the best chart in the world because it then tells you... if I'm to allocate to the S&P 500, I'm basically breaking even versus debasement.”
Asset Performance Through the Lens of Debasement
- Applying this debasement framework reveals a stark reality about asset performance. Most traditional assets are not generating real returns.
- S&P 500 & Global Equities: When adjusted for the 8% liquidity debasement, the S&P 500 is essentially flat, meaning it is not creating new purchasing power for investors. Other global markets show similar performance.
- Gold: Performs its traditional role as a store of value, remaining almost perfectly flat against debasement. It preserves wealth but does not grow it.
- Real Estate: Similar to equities, real estate adjusted for liquidity is a flat line.
- The Only Outperformers: Raoul’s analysis concludes that only two asset classes have consistently outperformed this 8% debasement hurdle: tech stocks (NASDAQ) and crypto. This realization fundamentally changed his macro perspective and allocation strategy, moving him away from value investing, which has underperformed in this regime.
The Demographic Driver of Debt and Debasement
- Raoul identifies the root cause of this cycle: demographics. The "magic formula" for GDP growth (debt growth + population growth + productivity growth) is breaking down due to declining population growth in developed nations.
- He points to falling birth rates and an aging population as the primary secular headwind for economic growth. This is the "demographics is destiny" problem.
- To offset the negative economic impact of a shrinking workforce, governments have massively increased debt. Raoul presents a chart showing a direct correlation between rising government debt and the declining labor force participation rate.
- This ever-increasing debt is funded by currency debasement. Central banks, like the Fed, inject liquidity into the system to service the debt, creating a self-reinforcing cycle. This debasement also explains why P/E ratios for stocks have trended higher, as the price (P) is inflated by liquidity while earnings (E) are a variable input that lags.
The Single Macro Factor Dominating Markets
- The analysis culminates in a powerful conclusion: debasement is not just a factor, but the dominant factor driving asset prices.
- Raoul states that 97% of the NASDAQ's price action and 90% of crypto's price action can be explained by the expansion of global liquidity. This makes the macro landscape surprisingly simple.
- With one force so overwhelmingly powerful, the need for traditional diversification diminishes. The primary goal for an investor becomes identifying the assets that best capture this liquidity wave.
- This framework simplifies asset allocation dramatically, pointing toward a highly concentrated strategy.
The Case for Concentrated Portfolios: Tech vs. Crypto
- Given that tech and crypto are the only two outperforming asset classes, the next logical step is to compare them directly.
- When the NASDAQ is priced in Bitcoin (NASDAQ divided by BTC), it is down 99.94% since 2012. This starkly illustrates crypto's superior performance as a vehicle for capturing debasement.
- Felix reinforces this point, noting that while the NASDAQ's total return annualizes at around 13% above debasement, Bitcoin's has annualized at roughly 150% since 2010.
- The strategic implication is a radical shift away from diversification. Raoul argues, “In a macro world, we now think you need concentrated portfolios as opposed to diverse portfolios. In fact, diversification just destroys returns now because you've got one clear macro factor.”
Gold's Illusion of Wealth
- Felix provides a final, crucial clarification on gold's role. While many see it as a safe haven, it fails the test of generating real wealth in the current environment.
- He explains that while gold has "made you money" in nominal terms, it has not "made you richer."
- When adjusted for the rate of currency debasement, holding gold results in a net loss of purchasing power over time.
- This positions gold, cash, and most other assets as dangerous holdings in a world of perpetual 8% debasement, leaving only tech and crypto as viable options for wealth accumulation.
Conclusion
This conversation reveals an 8% annual debasement tax eroding all assets. The strategic imperative for investors is to concentrate allocations in tech and crypto—the only asset classes consistently generating real purchasing power. Re-evaluating and likely abandoning traditional diversification is the critical first step in this new macroeconomic regime.
