Raoul Pal's Liquidity Framework: The Everything Code

Raoul Pal is one of the most influential macro investors of the past decade. His framework—"The Everything Code"—argues that liquidity is the master variable driving all asset prices.

This article explains his core ideas and how VantMacro incorporates them into regime analysis.

Disclaimer: This is educational content explaining Pal's publicly stated views. It is not investment advice or an endorsement of any specific strategy.

Who is Raoul Pal?

Raoul Pal is the founder of Real Vision and Global Macro Investor. His background includes:

• Former head of European equity hedge fund sales at Goldman Sachs
• Retired from finance at 36 after successful macro trading
• Pioneer in economic video content (Real Vision, 2014)
• Prominent advocate for Bitcoin and crypto assets

His influence stems from consistently explaining complex macro concepts in accessible terms.

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The Everything Code

Pal's central framework is "The Everything Code"—a unifying thesis connecting liquidity, debt cycles, and asset prices.

Core Idea

Post-2008, central banks engineered a "perpetual debt jubilee" through quantitative easing (QE) and low interest rates. The result:

1. 4-Year Debt Refinancing Cycle — Government debt refinances on 3-5 year cycles, creating a predictable liquidity pulse
2. Liquidity = Master Variable — Changes in central bank balance sheets and money supply (M2) drive all risk assets
3. Fiat Debasement — The system structurally debases fiat currency at ~11% per year

The Debasement Math

Pal argues that the global financial system debases purchasing power at:

Implication: Any investment returning less than 11% annually makes you poorer in real purchasing power terms.

This 11% becomes the new risk-free hurdle rate—the bar that investments must clear to create actual wealth.

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Liquidity as Primary Alpha

In Pal's view, liquidity is the alpha in modern markets:

Why Liquidity Matters

• QE injects reserves — When central banks buy bonds, they credit banks with new reserves, creating money that flows into financial assets
• Asset prices float on liquidity — Prices rise not because of fundamentals, but because more money chases the same assets
• Correlation can be high — but the reported strength depends on the liquidity definition, the lag choice, and the sample window

M2 vs Fed Balance Sheet

VantMacro has run its own liquidity regressions to sanity-check the broad “liquidity drives prices” thesis. In log-level regressions (price levels vs liquidity levels), we observe substantial explanatory power:

Important caveat: High R² on levels can reflect shared trends (and does not imply causal or tradable predictability). When you move to changes (e.g., YoY), explanatory power drops materially.

Why track components separately anyway?

• M2, central bank balance sheets, and net-liquidity “drains” (TGA/RRP) can move in different directions
• Collapsing them into a single composite can hide offsetting forces

The Practical Application

Watch both M2 YoY and Fed balance sheet YoY separately:

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Liquidity Regimes

Pal's framework defines regimes by the year-over-year change in global liquidity:

Key Insight

Don't fight the liquidity cycle.

When the Fed, ECB, and BoE are all easing simultaneously, risk assets historically deliver extraordinary returns. When all three tighten together, even "fundamentally strong" assets suffer.

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Assets in Pal's Framework

Pal divides assets into those that benefit from debasement and those that are debased:

Assets That Beat Debasement

1. Bitcoin/Crypto — Hardest money, limited supply, benefits from liquidity expansion
2. Tech equities — High beta to liquidity, compound faster than debasement
3. Select growth stocks — Those with strong network effects and pricing power

Assets That Merely Preserve

1. Real estate — Keeps pace with inflation but rarely beats debasement after costs
2. Gold — Store of value, but typically returns <11% annually
3. Bonds — Return capital, but negative real returns in debasement environment

Assets That Are Debased

1. Cash — Loses ~11% purchasing power annually
2. Low-yield savings — Same problem
3. Low-margin businesses — Unable to pass through inflation

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Criticisms and Caveats

Pal's framework isn't without criticism:

1. The 11% Hurdle Is Approximate

The exact rate of debasement varies by:

• Time period measured
• Currency (USD, EUR, etc.)
• Definition of inflation used

Some argue the real debasement rate is closer to 5-7%, not 11%.

2. Correlation ≠ Causation

Yes, liquidity and asset prices are correlated. But:

• Both may respond to a third factor (e.g., confidence, growth expectations)
• The relationship has varied in strength over different periods
• Forward correlations are weaker than backward-looking ones

3. Bitcoin Is Not Guaranteed

Pal is famously bullish on Bitcoin, but:

• It has experienced 80%+ drawdowns multiple times
• Regulatory risk remains material
• The "hardest money" thesis is contested

4. The Framework May Break

If central banks ever genuinely normalize policy (unlikely but possible), the liquidity-drives-everything thesis may weaken.

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How VantMacro Uses This

VantMacro incorporates elements of Pal's framework while maintaining empirical rigor:

What We Adopt

1. M2 and Fed balance sheet tracked separately — Our empirical testing confirms this outperforms composites
2. Liquidity as a regime dimension — One of three dimensions in composite regime classification
3. YoY changes prioritized — Direction matters more than absolute levels

What We Temper

1. No specific return targets — We don't claim "you need 11% to break even"
2. Balanced perspective — Liquidity is one factor, not the only one
3. Empirical validation — Claims are backed by out-of-sample testing, not just in-sample fitting

View Liquidity Dashboard →

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Key Takeaways

1. Liquidity is a primary driver of risk asset returns in the post-2008 era

2. Track M2 and Fed balance sheet separately — They have different relationships with assets

3. The debasement thesis — Fiat currencies are structurally debased; assets must beat this hurdle

4. Don't fight the cycle — When central banks ease in concert, risk-on; when they tighten in concert, defensive

5. Apply with nuance — Pal's framework is a lens, not gospel; always combine with other signals

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Data Sources

• Primary framework sources: Raoul Pal’s public writing and presentations (Real Vision / Global Macro Investor) describing the “Everything Code” thesis.
• Empirical checks referenced here use standard public macro/liquidity series (e.g., broad money and central bank balance sheets) and public asset price history.

Methodology

• Separates “levels” vs “changes”: levels regressions can show high R² due to shared trends, so VantMacro sanity-checks both levels and YoY-style variants.
• Treats liquidity as a slow-moving backdrop variable and evaluates claims with long samples and out-of-sample splits where possible.

Limitations

• High explanatory power on price levels does not imply causality or tradable predictability (trend co-movement is a major confound).
• Liquidity definitions vary (M2 vs balance sheet vs composites); results can change materially with series choice, lag choice, and sample window.
• Frameworks are narratives unless operationalized and validated; use as context, not as a mechanical allocation rule.

Further Reading

• The Complete Guide to Global Liquidity — How to track liquidity
• Julien Bittel's Macro Seasons — A complementary framework
• Market Regimes Explained — VantMacro's regime classification

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See Liquidity Frameworks on VantMacro

VantMacro's Frameworks page includes:

• Raoul Pal's Everything Code summary
• Julien Bittel's Macro Seasons
• Jordi Visser's AI Macro Nexus
• Current positioning implications

Explore Frameworks →