This is about investor Chad Cascarilla's take on tail risk during the 2020 pandemic. He sees two extreme outcomes: a deflationary depression (banks failing, economy freezing) or runaway inflation (from massive money-printing), with a 'just right' recovery being nearly impossible. He recommends hedging with gold and Bitcoin, while stocks could be great if the middle path happens. Key holdings: S&P 500 (overpriced before crisis, profits flat for 7 years but stocks doubled—risky), Bitcoin (dropped from $10k to $3.9k due to leverage and forced selling, but long-term bullish as a scarce asset), and gold (sold off initially but rebounded after Fed stimulus, good for inflation protection).
Chad Cascarilla discussed tail risk in the context of the COVID-19 pandemic (March 24, 2020) on the Invest Like the Best program. The core argument is that the market faces two extreme scenarios—either "too cold" (deflationary depression) or "too hot" (hyperinflation)—while a "just right" recovery p
Chad Cascarilla (a successful investor who focused on the banking system during the 2008 financial crisis, now CEO of Paxos Trust Company) discussed tail risks amid the pandemic crisis on March 24, 2020. Core judgment: The market faces two extreme scenarios — "too cold" (deflationary depression) or "too hot" (hyperinflation) — while a "just right" recovery path is extremely difficult to achieve, because "no one can precisely prescribe the remedy, and the variables change every day" (meaning the Goldilocks scenario is the hardest to realize).
Cascarilla noted that before the crisis, the U.S. economy was operating at 3.3x leverage — "this is the highest economic leverage level in history," and the same applied to major global economies. Meanwhile, asset prices were "priced to perfection in nearly every area": the S&P 500's P/E ratio was near an all-time high, while U.S. pre-tax corporate profits had not grown for seven consecutive years, yet the S&P 500 had nearly doubled over that period. "This means you have almost no resilience to withstand a once-in-a-century storm."
Cascarilla argued that if stimulus is insufficient or arrives too slowly, it could trigger a feedback loop: GDP contracts sharply for multiple consecutive quarters (Q2 at -30% to -50%), widespread corporate defaults, and an undercapitalized banking system. He warned: "The banking system has only $2 trillion in capital, but if it needs to fill a $4-6 trillion hole and the funds don't arrive in time, there will be a cascading effect, especially on small and mid-sized banks."
He further outlined an extreme path: Bank holiday (markets closed for 1-2 weeks) → Bank nationalization → Possibly even currency redenomination (e.g., a "new dollar"). He assigned probabilities: The probability of a bank holiday plus partial nationalization is about 25%; the probability of currency redenomination is about 5% or lower. "Once you start nationalization and bank holidays, things become nonlinear — they go from impossible to reality. That's the jump risk."
If massive "helicopter money" (direct checks to citizens) is deployed, and the pandemic ends faster than expected, Cascarilla believes inflation could spiral out of control. "There is no real historical analogy, because none of the historical cases involve fiat currency — we have never had this unlimited ability to print money." He noted that QE in 2008 did not trigger CPI inflation, but asset price inflation was significant; this time, direct cash transfers to households could directly push up prices for goods and services.
"Just right" means perfect alignment of stimulus size, timing, and speed: funds arrive by mid-June and can be dynamically adjusted as the pandemic evolves. But Cascarilla pointed out that this is nearly impossible — "Two weeks ago, we thought we needed $500 billion in stimulus, then it became $1 trillion, and now we're discussing $2 trillion; GDP forecasts jumped from -6% to -25% to -50%. Who can hit the target precisely amid such uncertainty?"
| Scenario | Recommended Assets | Rationale |
|---|---|---|
| Just Right | Stocks | "They will undoubtedly perform spectacularly" |
| Too Hot (Inflation) | Gold, Bitcoin | Scarce assets that cannot be diluted by money printing |
| Too Cold (Deflation/Defaults) | Gold, Bitcoin, T-bills | Preserve value; but cash over $250,000 carries bank risk |
Cascarilla specifically emphasized bank risk for cash: "Deposits over $250,000 are essentially loans to the bank — if the bank defaults, you could face a haircut. This just happened in Greece and Cyprus." He advised large cash holders to buy T-bills and ensure segregated custody.
Cascarilla said he was "surprised" by Bitcoin's drop from $10,000 to $3,900, but attributed it to three factors: 1) Bitcoin is still a speculative asset, not yet gold; 2) The crypto market had accumulated significant leverage (similar to the put option selling during the 1987 crash); 3) Cross-asset liquidation — investors were forced to sell everything to meet margin calls.
However, he believes fundamentals remain unchanged: "Bitcoin was created precisely for this situation. The crisis will accelerate its adoption curve." He observed that after the Fed announced unlimited QE, both gold and Bitcoin rebounded, even as stocks continued to fall — "This is not risk aversion; it's a reset after liquidation ends."
Cascarilla explicitly stated he is "extremely bullish on the U.S.": It has the best water systems, deep-water ports, and form of government in the world. "Italy is the third-largest sovereign bond market and is already in trouble; Europe is more vulnerable due to the structural issues of the eurozone." But he stressed that managing tail risk is not the same as being bearish on the U.S. — "It's about preserving capital during the crisis so you can seize the incredible buying opportunities that follow."
| Position | Guest's Stance | Key Data |
|---|---|---|
| S&P 500 | Risk warning | P/E near all-time high before crisis; pre-tax profits flat for seven years while index doubled |
| Bitcoin | Bullish long-term, speculative short-term | Fell from $10,000 to $3,900 (-60%); "Not gold yet, but will become gold" |
| Gold | Bullish | Dropped $90 in a single day during crisis (liquidation, not risk aversion); rebounded after unlimited QE |
| PAX Gold (Paxos Gold Token) | Recommended | Backed by physical gold bars with serial numbers in Brinks vaults |
| PAX Dollar (Paxos Dollar Token) | Recommended | Backed only by T-bills and FDIC insurance; no bank risk |
| U.S. T-bills | Recommended | Large cash holders should hold them with segregated custody |
1. "We have never had this unlimited ability to print money — none of the historical cases involve fiat currency." (Cascarilla) — This means inflation risk cannot be measured by historical experience; helicopter money could directly trigger goods and services inflation.
2. Probability of a bank holiday plus partial nationalization is about 25%; probability of currency redenomination is ≤5%. (Cascarilla) — This is not a doomsday prophecy, but a projection based on "if GDP contracts by more than 30% for two consecutive quarters, the banking system's $2 trillion in capital is insufficient to cover a $4-6 trillion hole."
3. "This is not risk aversion; it's liquidation — the two are different." (Cascarilla) — Gold and Bitcoin fell together early in the crisis because investors were forced to sell everything to meet margin calls; once liquidation ends, scarce assets will reprice.
4. Bank deposits over $250,000 carry bank default risk — this just happened in Greece and Cyprus. (Cascarilla) — FDIC only insures up to $250,000; large cash holdings should be converted to T-bills or tokenized assets with segregated custody.
5. Reasons for Bitcoin's drop from $10,000 to $3,900: leverage, cross-asset liquidation, speculative nature. (Cascarilla) — But fundamentals remain unchanged; the crisis will accelerate its adoption curve.
6. "Just right" is the hardest scenario to achieve — because variables change every day, and no one can precisely prescribe the remedy. (Cascarilla) — Within two weeks, GDP forecasts jumped from -6% to -50%, and stimulus from $500 billion to $2 trillion.
7. The U.S. real economy has enormous advantages (water systems, ports, form of government), but financial risks are globally interconnected. (Cascarilla) — Italy is the third-largest sovereign bond market; Europe is more vulnerable due to the eurozone's structural issues.
8. QE in 2008 did not trigger CPI inflation, but it triggered asset price inflation — this time, direct cash transfers to households could be different. (Cascarilla) — Where money flows, inflation follows.