#1354 Darius Dale | Presidential Election Could Make Assets EXPLODE

Darius Dale is the Founder & CEO of 42Macro. In this conversation, we talk about Secretary Yellen’s hawkish tone on quarterly refunding announcement, liquidity dynamics, impact of decision to flood the market with bills, rising inflation, asset prices, and future macroeconomic outlook leading up to the election. ======================= Introducing Espresso - the world’s most interactive portable display. They have a portable screen that is incredibly light, comes with a nice stand, and the user interface is very easy. Anyone who listens to this podcast can go to ⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠us.espres.so/pomp⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠. They have a brand new offer waiting for you. ======================= Meanwhile is the world’s first licensed and regulated life insurance company built for the Bitcoin economy. Protect your loved ones with sound money built to manage life’s uncertainty and a broken financial system. Their BTC-denominated Whole Life Insurance policies allow HODLers to pass more BTC on to their loved ones and a tax-advantaged way to access BTC for liquidity during their lifetime. Visit their website at https://meanwhile.bm/ to join the waitlist for a policy and to learn more. ======================= Pomp writes a daily letter to over 265,000+ investors about business, technology, and finance. He breaks down complex topics into easy-to-understand language while sharing opinions on various aspects of each industry. You can subscribe at https://pomp.substack.com/ ======================= View 10k+ open startup jobs: ⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠https://dreamstartupjob.com/⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠ Enroll in my Crypto Academy: https://www.thecryptoacademy.io/

Speaker names marked ? are inferred from speaking time and the show’s known hosts — they are not voice-verified.

• 0:02Anthony Pompliano?

  What's up everyone? This is Anthony Pompliano. Many of you know me as Pomp. You're listening to the Pomp Podcast, which is my effort to find the most interesting people in the world and sit with them for hours while I ask questions in an effort to learn. So it would mean the world to me if you would subscribe to the show on your favorite audio platform, watch episodes on YouTube, and tell your friends and family about the podcast. My goal is to help millions learn from the world's most interesting people. So let's get into today's episode. Today's episode is with Darius Dale, the co-founder and CEO of 42 Macro. In this conversation, we talk about Secretary Yellen's hawkish tone on quarterly refunding announcements, liquidity dynamics, the impact of decisions to flood the market with bills, how rising

• 0:45Anthony Pompliano?

  inflation is affecting asset prices, and future macroeconomic outlooks leading up to the election. This conversation was fascinating. There's tons to unpack in here. Darius brings charts, graphs, and insights that will definitely make you think differently about how you allocate capital. Here is my conversation with Darius Dale.

• 1:04Speaker 01

  Anthony Pompliano runs Pomp Investments. All views of him and the guests on his podcast are solely their opinions and do not reflect the opinions of Pomp Investments. You should not treat any opinion expressed by Pomp or his guests as a specific inducement to make a particular investment or follow a particular strategy, but only as an expression of his personal opinion. This podcast is for informational purposes only.

• 1:27Anthony Pompliano?

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• 2:10Anthony Pompliano?

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• 2:55Anthony Pompliano?

  I think it'll make you more productive. Go check them out today by clicking on the link in the description. Today's episode is brought to you by Meanwhile. Meanwhile is the world's first licensed and regulated life insurance company built for the Bitcoin economy. Operating on the Bitcoin standard, they do everything in Bitcoin. You pay in Bitcoin. They pay claims to your family in Bitcoin. You take out policy loans entirely in Bitcoin when you need liquidity. Meanwhile, Bitcoin life insurance has redefined what it means to hodl. Protect your family from life's uncertainty in a broken financial system. Build intergenerational Bitcoin wealth while the cost of living skyrockets in dollar terms. Get all the tax and legal benefits of life insurance now in Bitcoin. They are actively binding policies today. Whether you are a long-term

• 3:38Anthony Pompliano?

  Bitcoiner or are just considering it for the first time, a Bitcoin whole life policy could make sense for your wealth plan. Visit their website, meanwhile dot B M to join the waitlist and to learn more about the world's first Bitcoin life insurer. Again, that's meanwhile dot B M. Go check them out today. All right, guys. Bang, bang. I've got Darius here with me. Darius, Secretary Yon is in charge. She got a big, big responsibility, but she's making some pretty important decisions lately. Um, let's just dive into Q2 quarterly refunding announcement. And what does that mean? And why is she doing this?

• 4:15Speaker 02

  Yeah, appreciate you, Paul. Thanks for having me back on the show, man. It's always good to be here. So let's just start by explaining what the quarterly refunding announcement is for investors who may not be familiar. That's when the Treasury outlines its net financing estimates for the current and upcoming quarter. And then they also provide their projections for things like the Treasury general account balance, which is essentially the Fed's checking account.

• 4:39Speaker 02

  Or sorry, the Treasury's checking account at the Federal Reserve. And then there's a lot of other information in there as well, but the things that matter most to market participants are here on slide one. Are one of the things that matters most is here on slide one, and that's the data that we get on Wednesday or Monday afternoon in the QRA, which is the privately held net marketable borrowing totals for the current quarter and the next quarter. And then the end of quarter Treasury general account balance totals. So so for the current quarter, they're forecasting having to borrow $243 billion of net marketable borrowing from the private sector. That's up from 40, that's up 41 billion from where they projected Q2 to be in the Q1 quarterly refunding announcement.

• 5:19Speaker 02

  And then what I thought was pretty hawkish is the, when you look at the next quarter estimates for privately held net marketable borrowing, they skyrocket $604 billion to $847 billion. And that increased $847 billion is going simultaneously alongside a $100 billion increase in the Treasury general account balance. So this is a Treasury that, in our opinion, Jenny Ellen is using the Q2 quarterly refunding announcement, at least the first day of it. We'll get another update on Wednesday, but the first day of that, she's using it to send a hawkish signal to market participants.

• 5:54Anthony Pompliano?

  Now, is the signal working?

• 5:57Speaker 02

  Yeah, I mean, in recent weeks, right? Like, so if you go, if you look at slide two in this chart where we show we unpack the different dynamics of our net liquidity model, which is essentially everyone's net liquidity model now. We invented this model a few years ago. This is, it's the Fed balance sheet, the total assets on the Fed balance sheet minus the Treasury general account balance and the reverse UG facility balance. And you know, subtracting those two balances gives us a clearer indication of where, you know, net liquidity is on the Fed balance sheet. Pertains to bank reserves. And so up until, you know, really for throughout most of 2023, the Treasury is doing things from a net financing standpoint that was specifically and expressly designed to tap into the excess of funds that were fully stored on the Fed's balance sheet in the form of the reverse

• 6:41Speaker 02

  regroup facility balance. And the reverse regroup facility balance, which the Fed uses to mop up excess liquidity in the financial system in order to maintain the floor on the policy rate corridor. That that balance has declined from about $2.5 trillion at the beginning of 2023 to only $506 billion currently, as the folks showed the policy that the Jenny Yellen and our cronies at the Treasury were implementing. And that was a boost to liquidity, is a boost to asset markets throughout that time period. Well, if you see over the past kind of week or so, or really, really since the beginning of April, we've seen both the RRP and the TGA balance, Treasury General Account balance, move in a direction that is less supportive for liquidity, that drains liquidity, i.e. both balances have gone up.

• 7:24Speaker 02

  We are now at $506 billion, again, in terms of the RRP, and we're up at $910 billion from the side of the TGA.

• 7:31Anthony Pompliano?

  Got it. And then when we go and we take a look at like, the market liquidity, I guess like one story that you and I have talked about over the last couple of months is China was putting to the liquidity in the market, America was trying to drain. There was this like back and forth battle between it. It seems like now, and on slide three, you have Secretary Yellen's decision to flood the market with bills was a contributing factor to this decline. So like, talk a little bit as to how that plays into some of this.

• 7:57Speaker 02

  Yeah, absolutely. So this is, you know, again, so if you go back and think about the types of funds that are you being that actually allocate to the reverse regroup facility, it's typically money market funds. It's money market funds that are the safety of the Fed's balance sheet or the overnight liquidity relative to T-bill instrument, instrument, those are the treasury securities that mature in under one year time horizon. And so if you go and you sort of look at the composition of net marketable borrowing over the last 12 months, through Q1, the 69% of total net marketable borrowing was financed in the bill market, which is very anomalous. Well, to history because only if you look at total market borrowing across $27 trillion

• 8:40Speaker 02

  that the Treasury has borrowed thus far from the private sector, only 23% of that thus far is in the T bill market. And so for her to dump, you know, supply 70% of total net market borrowing in the bill market, in our opinion, is an explicit signal that she was trying to create both liquidity and spread dynamics that would cause funds to flow off the RRP and she was quite successful in doing that.

• 9:04Anthony Pompliano?

  Yeah. And then investors, they were concerned. Are they still concerned?

• 9:09Speaker 02

  Yeah. So we show on slide four is the composition of nominal net market borrowing. And so we show again, the bills, the blue bars and the red bars are the coupon issuance. And we see that bills were projected to decline by $245 billion here in Q2. And this is largely as a function, we typically see that in second quarter of the year. That's typically a function of the Treasury expecting to get a significant amount of tax increases, or sorry, tax receipts. And so they typically cause bills to go down in Q2. But what was, you know, what was quite concerning and investors were right to be concerned about that because ultimately what it means is that the decline in the RRP that has been a positive tailwind for asset markets since the start of 2023 was likely to stall out.

• 9:54Speaker 02

  We've seen it stall out in recent weeks and perhaps more importantly, we saw coupons actually increase to $447 billion. So on a net basis, you think about Treasury net financing policy, you know, it creates essentially a crowding out effect for broader asset markets, right? The US dollar, you and I talked about this a few years ago, but the US Treasury is at the very top of the global capital structure. When the Treasury issues debt, everyone, we all have to make room to absorb that debt because it is the world's reserve currency and the world's reserve liquidity management, preferred liquidity management tool. And so, you know, whenever they issue coupons, which are interest-bearing securities that have a duration and that increase the overall portfolio risk for any investor that's, you know, onboarding those securities,

• 10:40Speaker 02

  then that's when you start to see some indigestion in asset markets as investors have to create that that space, if you will, to absorb those coupons.

• 10:47Anthony Pompliano?

  Got it. And then on this last slide that you've got here, this like net marketable borrowing and the TGA, explain this a little bit more because I probably don't understand this nearly as well as you do.

• 10:57Speaker 02

  Yeah, absolutely. So going back to the discussion, you know, so, you know, going back to slide three really quickly, where we showed that, you know, Yellen was explicitly targeting the bill market in order, in our opinion, to release funds, attract funds from the RPA to the asset markets and into the economy. Well, that's been the spark call because if you look at on slide five, where we show the spread between market observed rates and the weighted average interest rate on the various segments of the treasury market. And so the spread gives you an indication of, okay, where is it most expensive and least expensive for the treasury to issue debt? And so at the top, we show the seven-year treasury yield minus the weighted average interest rate on all marketable debt.

• 11:39Speaker 02

  And seven-year treasuries is sort of corresponds to the weighted average maturity of all. That's a little bit over six years. So that plus 93 basis point spread suggests that, hey, if the treasury is just to issue, you know, six and a half year treasury instrument, they'd be paying roughly 93 basis points higher today than they would on their existing portfolio of treasuries. When you go and you look at that same spread across the various segments of the treasury market, it's pretty clear to see that the bill is, the bill market is where she's getting the most, did most of the largest discount, really the only discount, you know, minus 35 basis points. If you look at the spread between observed rates in the notes market relative to the five-year treasury yield, that's 180 basis points positive spread. So they would cost them money. It would raise the overall

• 12:24Speaker 02

  weighted average effective interest rate on their notes portfolio. If you look at a 10-year rated average interest rate on bonds, that was 188 basis points positive. So that would raise the weighted average effective interest rate on their bond portfolio. Same dynamic with TIPS market as well. That's about 114 basis points. So that minus 35 basis points we see there suggests to us that, hey, Treasury Secretary Yellen, when she outlines the composition of the net marketable borrowing for the, for Q2, for Q3 really, and then tomorrow morning's part two of the QRA.

• 12:57Speaker 02

  She should, it makes the most economic sense to continue targeting the bill market because that's where the discount is. However, if we see an increase in coupon supply and/or an increase in bond supply, in our opinion, that would be a very explicit signal that she's actually trying to create a duration risk in global investor portfolios because ultimately that would tighten financial conditions and a tightening of financial conditions is likely to slow inflation. And that's exactly what President Biden needs. If you look at the most recent polls, going back to last week, you know, he, he had a narrow lead in a lot of swing states, but that has evaporated. And I want to say he's only leading in Michigan. And the reason for that, at least that's what's been cited broadly by political strategists,

• 13:39Speaker 02

  is that inflation continues to be the real big issue for him on the economic front. And so, you know, rather than continue to goose asset markets by creating policy, by by creating net financing policy that causes, you know, more money to flow into asset markets and more money to flow into the economy, it may be the case that here in Q2 and in Q3, the Treasury Department is actually shifting their net financing policy in a way that tightens financial conditions and actually has a depressing impact on inflation, which could potentially help save Biden his election bit, reelection bit.

• 14:10Anthony Pompliano?

  How, how should we expect this stuff to impact asset prices? Obviously inflation is kind of one component of it. We're going into an election year. I think a lot of people are looking at all the geopolitical conflict and they're saying to themselves like, how do I position my portfolio to just like protect myself to, you know, be prepared for the maybe unknown, understanding some of these dynamics that are playing?

• 14:32Speaker 02

  Yeah, a hundred percent, man. So in our opinion, it's always about understanding what the dominant drivers markets are in the context of the positioning cycle. Those are the, in my opinion, if you're trying to make median term calls on asset, on asset allocations in terms of, you know, getting more bullish or bearish, or, you know, taking up your gross exposure or net exposure to a particular asset class or taking that down, you need to understand the evolution of the dominant drivers of asset markets at any given time, particularly relative to the dominant drivers of the positioning cycle at any given time. And, and right now, we, we kind of look at and survey the global macro landscape and that's something that obviously we do at a very high level for our clients. Here are institutional and retail clients here for the macro, which is help them understand all the moving parts with the full distribution of probably economic outcomes looks like.

• 15:15Speaker 02

  And from a model outcome perspective, we continue to see, continue to get confidence in our resilient US economy thing that things been active. Uh, since uh, middle of twenty, summer of twenty twenty two, uh, that was a thing we offered back then. Uh, and then with respect to the right teller, it's things that are still uh, uh, active are our green shoots globally theme. We continue to see positive dynamics out of the, the global economy from a leading indicator perspective. Uh, our China front loading stimulus thing, we continue to receive uh, sort of confirmation uh, from, you know, leading in the coincident indicators from China. That suggests PBOC is likely to continue supplying liquidity over the medium term. Uh, but what is new and is, is suddenly become a dominant driver of asset prices, prices and ultimately the positioning cycle.

• 15:55Speaker 02

  That could cause asset prices to unwind from the current trends is the fact that sticky inflation is now a dominant theme uh, here in the US economy. And the outcome of sticky inflation is causing uh, some indigestion with respect to uh, US and global liquidity. And the reason it's doing that is because the dollar is really starting to break out. The dollar has broken out, uh, it's now bullish from the perspective of our ball, it's just a momentum signal. And one of the most important things investors need to know is that the dollar is one of the most uh, uh, counter cyclical, one that has the highest inverse correlation on a coincident basis. Uh, to global liquidity, uh, has a very high core inverse correlation, or sorry, a bond market volatility and currency market volatility, which the dollar tends to be positively correlated with.

• 16:37Speaker 02

  Also have a very high uh, inverse correlations uh, to uh, global liquidity on a coincident basis. And so what we're seeing now is sort of, we put the piece, the pieces of the puzzle together. We're saying some of the things that have been bullish for asset markets, particularly on the economic front. And on the stimulus front out of, out of the, the eight, out of, out of Asia are becoming less important to markets. And what's becoming more important to markets is stickiness of inflation in the US. And ultimately how the Fed and Treasury are either going to respond to that, which we just talked about with respect to the Treasury. Or going to ignore it and actually do, you know, sort of uh, be forced to do nothing about it. Uh, because right now we're moving from a condition where both the Fed and Treasury's policies on a debt financing basis. And on a, a forward guidance basis were explicitly dovish for most, much of the past six months.

• 17:22Speaker 02

  And we are now moving into a period where they're perhaps going to be explicitly hawkish or at the very minimum, just hawkish at the margins, uh, which is a much less bullish backdrop for asset markets.

• 17:31Anthony Pompliano?

  And when you kind of uh, look through this, um. Should we expect this stuff to change? Or are we already in the like, whatever they call it, like the election playbook? Right? And that doesn't necessarily mean that the Treasury or the Federal Reserve is like actually looking at the election. But just like, it does feel like there's these four year cycles. It does feel like there's people starting to talk about this stuff. They are paying attention. There is, you know, at least the accusation of if you don't start cutting now, you're going to wait till you're closer towards the election. It does have an impact, whatever. Like, are we already kind of, whatever is in motion now, we should continue to expect to be in motion by November? Or do you think that there are like pivot point where we could go from, hey, we've got one kind of approach today?

• 18:15Anthony Pompliano?

  End of summer, we could pivot and be in a whole different regime by election time?

• 18:19Speaker 02

  Yeah, that's, that's, that's, that's very much could be the case. I mean, in our opinion, going back to the, you know, just trying to play this from a game theory perspective. Start by thinking, okay, what does President Biden want? Cause he's going to have some influence over how the Treasury chooses to enact policy, right? The Treasury has, you know, the Treasury knows the budget deficit is going to be generally speaking. But how they choose to finance the budget deficit are, you know, sort of discretionary choices by, by nature. And so they could do things that are, I guess, more supportive for what the administrators or deckers are, or less supportive. Depending on the relationship there. And obviously, Yellen has a very positive relationship with Joe Biden. And so in our opinion, you know, when you think about this from the perspective of just isolating the election, you know, typically elections are actually quite bullish. Stocks typically perform well into presidential elections.

• 19:03Speaker 02

  You know, if you look at, so we're right around, you know, let's call it six months out, out of the election, or six months out before the election. You know, the six months leading up to an election with data going back to the 1948 election. The median return for the S and P is plus 4% with an 84% percent positive ratio. And then that if you have a Democratic incumbent running, the median return doubles to about plus 8%. And this is a six month return prior to the election. And so that's the baseline. We're not saying you have to expect the baseline, but any, any statistic, any back test with such a high percent positive ratio tells you that there are underlying and structural and more importantly, stable market forces that are causing that. And so in our opinion, you know, I think it doesn't, you know, it doesn't necessarily pay to be a

• 19:45Speaker 02

  Bear heading into election unless you have very specific, uh, high probability catalysts on the bear side, uh, that are likely to materialize and become dominant drivers of asset markets, uh, before the election. And one of the things that we're doing, uh, tremendous amount of research on is trying to understand the interplay between sticky inflation and what the treasury events policy responses are likely to be, uh, to the advent of sticky inflation as a dominant market date. And then really we are, we're kind of very much in that debate process, but the early indications of that debate process are certainly moving, uh, in a hawk's direction as we highlighted, uh, in the previous slots.

• 20:20Anthony Pompliano?

  Where can we send people to find you or find out more about 42 macro?

• 20:23Speaker 02

  I appreciate you for having me, man. Thanks again, as always. Uh, so if you guys like staying on the right side of market risk, if you like, uh, you know, making money in bull markets and protecting gains in bear markets, then definitely come check us out, uh, 42macro.com. I'm on Twitter at Dariusdale42. So, uh, if your goal is to just be educated, uh, we're happy to do that as well. So, uh, come check us out on Twitter as well. So, we appreciate you guys.

• 20:44Anthony Pompliano?

  I, uh, I learn something every time we talk, my friend, and I always appreciate how much time and effort you put into not only the charts, but also the insights. So we'll definitely do it again in the future.

• 20:53Speaker 02

  And I appreciate you, brother. Thank you for all that you do as well, man.