Ex-Goldman Sachs Group Inc (NYSE:GS) hedge fund hotshot, Raoul Pal, is sounding the alarm bells. According to him, a financial storm is brewing, and he thinks that the Federal Reserve might soon be forced to roll out bailout packages to keep the situation under control.
During a candid chat with Real Vision Crypto, Pal painted a worrying picture of the future. He hinted at a potential roller-coaster ride for the banking sector, especially regional banks. He suggested, “a parabolic movement could take place in the near future due to the increasing proximity of a banking crisis.”
In Pal’s opinion, a situation like this would mean one thing: the Federal Reserve stepping in. Rising interest rates and an inverted yield curve only add fuel to the fire, he says. Not great news for the banks, to say the least.
Digging into the recent past, Pal drew an unsettling comparison between the current market situation and the 2015-2016 cycle.
Recalling the twists and turns of 2019, Pal characterized it as a year of surprises. First, the markets took a hard hit. But, what followed was a remarkable recovery. It was like watching a phoenix rising from the ashes, but in fast forward.
Using the Regional Banking ETF as a barometer, Pal said, “if that starts breaking $35, $30, then it’s game on for more cowbell to come because the Fed will have to bail these people out. And then we’ve got the commercial real estate problems behind it. So that’s the backdrop of why the cowbell will come.”
According to Pal, this crisis could push the Federal Reserve to loosen its typically tight grip on monetary policy, ultimately giving the government the liquidity it so desperately needs to handle its mountainous national debt.
He put forward an intriguing theory about the Federal Reserve’s current strategy, stating, “Maybe that’s why the Fed is tightening rates even further is to create a crisis so they can cut rates and monetize the debt. Because if they don’t, they have to print more money because the interest rates are higher to pay for the debt payments, which becomes a total catastrophe. The key point is liquidity up.” In other words, he believes the Federal Reserve might be intentionally stirring up a crisis to justify cutting rates and monetizing the debt. It’s a bold claim, but Pal isn’t shying away from making it.
