#1290 Darius Dale on Bitcoin ETF: Wall Street Can't Wait!

Darius Dale is the Founder & CEO of 42Macro. In this conversation, we talk about global liquidity, Wall Street investors on bitcoin ETF, Macro Weather Model on asset prices in 2024, and more. ======================= Auradine, a leader in web infrastructure solutions including blockchain, AI, and privacy, has unveiled the world's first 4nm Bitcoin mining systems, featuring breakthrough EnergyTune™ technology, setting new standards in performance and energy efficiency. The Teraflux™ product line from Auradine offers best-in-class performance, efficiency, and total cost of ownership (TCO), positioning it as the optimal choice for Bitcoin mining needs. With EnergyTune™, a patent-pending technology, Auradine's Teraflux™ systems enable rapid demand response and optimal energy usage, fostering a symbiotic relationship with electrical grids, and contributing to sustainable energy practices. Designed and manufactured in the US, Auradine's Teraflux™ product line not only ensures cutting-edge technology but also mitigates supply chain risks and provides increased supply chain resiliency. Visit ⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠www.auradine.com⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠ for more information the Teraflux bitcoin mining systems. ======================= Cal.com is leading the charge of scheduling platforms in the open-source sphere, offering you the chance to harness the efficiency previously reserved for elite corporations and tech gurus. That's right, Cal.com is transforming sophisticated calendar management into an accessible tool for all via a user-friendly interface. Discover how countless users are optimizing their time in unprecedented ways. Use code “POMP” for $500 off when you set your team up with Cal.com. ======================= Pomp writes a daily letter to over 250,000+ 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/

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 conversation is with Darius Dale, the founder and CEO of 42 Macro. In this conversation, we talk about global liquidity, what all of the Wall Street investors are saying about the Bitcoin ETF, and how the macro weather model that 42 Macro has pioneered

• 0:45Anthony Pompliano?

  is showing all of the different asset prices going into 2024. In my opinion, Darius continues to nail all of the liquidity cycle and also how you should be thinking about investing your capital across different asset classes and in different allocations. This conversation is no different. I learned a ton and I hope that you enjoy it. Here is my conversation with Darius Dale.

• 1:07Speaker 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.

• 1:30Anthony Pompliano?

  This episode is brought to you by Aradine. They are a brand new startup led by a number of Silicon Valley legends who just raised $81 million to build the future of internet infrastructure. You're probably wondering what that means. Let me explain. There are numerous new disruptive technologies that are being adopted simultaneously, from blockchain to artificial intelligence to zero knowledge technologies. In order to ensure that these technologies thrive in this new world, we need new infrastructure and that is where Aradine comes in. They just launched their first product line called Terraflux, which is a Bitcoin miner powered by the world's first 4 nanometer silicon chip technology. These air-cooled, single-phase, and Dual-phase immersion cooling miners have unrivaled speed and efficiency.

• 2:14Anthony Pompliano?

  They have superior uptime and they leverage a brand-new innovation called Energy Tune that allows miners to dynamically adjust the energy consumption and Bitcoin hash rate based on demand response needs of the electrical grids. Auradine is an ambitious company working on hard problems. I'm really impressed with them. And if you want to check out more, you can go to auradine.com. That's A-U-R-A-D-I-N-E dot com. Go check them out at auradine.com today. This episode is brought to you by Cal.com. What do I have in common with Chad Hurley from YouTube, Toby from Shopify, and Alexis from 776 and the co-founder of Reddit? We all use Cal.com instead of Calendly, and we are all early investors as well.

• 2:58Anthony Pompliano?

  Cal.com is leading the charge of scheduling platforms in the open-source sphere, offering you the chance to harness the efficiency previously reserved for elite corporations and tech gurus. If you like to have your calendar organized and be able to have an efficient exchange when scheduling, but you love all of the benefits of open-source technology, then Cal.com is for you. They are transforming sophisticated calendar management into an accessible tool for all via a user-friendly interface. You can customize it and you can make your calendar work for you. Use code POMP for $500 off when you set up your team with Cal.com today. Again, go to Cal.com, C-A-L dot com, and use code POMP to get $500 off when you sign up.

• 3:42Anthony Pompliano?

  Cal.com, an open-source tool that allows you to take back control of your calendar, be efficient when scheduling, and make sure that no one can steal your time.

• 3:53Anthony Pompliano?

  All right, guys. Bang, bang. I've got Darius here. Darius, you're a Wall Street insider. You've been talking to all the big boys, giving out all of the money from the institutions. We are on the doorstep of a Bitcoin spot ETF approval. There's tons of people on the internet that are excited. What's going on on Wall Street? Are they excited? Do they even know this is happening yet?

• 4:10Speaker 02

  Yeah, that's a great question, man. So everyone knows it's happening. We're all well aware of the potential pending BlackRock and Fidelity ETF approvals. There's obviously other ETF players in the game as well. In terms of the folks we talk to, so we have a very unique client base here at 42 Macro, particularly as it relates to, you know, kind of the upper echelon of global Wall Street. They're all very aware of Bitcoin and of the cryptocurrency asset class in general through our research. It's always been a core feature of our research here at 42 Macro. We treat Bitcoin and cryptocurrencies just like any other asset class, whether they be stocks, bonds, commodities, et cetera, because we believe that our quantitative risk management tools and our qualitative research process can support us generating, you know, thoughtful and ultimately accurate recommendations on that asset class. So when

• 4:55Speaker 02

  I talk to 42 Macro clients, whether they be fixed income PMs, you know, looking to allocate to Bitcoin in their PA, or they be, you know, you know, sort of RA type investors who are looking to add Bitcoin type exposure into their client portfolios, they're all, you know, it's two thumbs up. Now, obviously, we're, you know, it's the two thumbs up because we've seen a lot of positive price momentum in the chart. And so clearly, folks are going to be more interested in chasing what's been working as opposed to chasing something that hasn't been working. But generally speaking, the reception has been quite warm, but it's only because we've been, again, focused on crypto and Bitcoin specifically, really since the inception of our firm.

• 5:34Anthony Pompliano?

  Now, when we look at the ETF specifically, there's a lot of people who might be excited about Bitcoin, and some of them went and created Coinbase account, or, you know, went and bought Bitcoin in some other way. Are there people who are sitting there saying, I want Bitcoin, but I can't do it until there's an ETF? Like, is the structure actually an important part to unlock some capital allocation here?

• 5:51Speaker 02

  Hundred percent. Yeah, it very much is. When I talk to investors, the number one thing that everyone hate, not the number one thing, it's, there's a lot of things that people hate, particularly about taxes. But the number one thing people hate about taxes is having to file K1s, is having to deal with the K1 reporting and all that kind of stuff, because it just throws a real big monkey wrench into, into the tax, you know, tax reporting. So the reality is that ETF is a very tax efficient vehicle for, you know, all asset classes. Obviously, the inclusion of Bitcoin would be very favorable there. And so you could see what I'm I'm expecting to see is that over time, we're going to continue, we're going to see a lot of that, you know, multi-trillion dollar asset class that is, you know, investment advisory type, you know, allocations, you know, folks that have their money parked with, uh, you know,

• 6:32Speaker 02

  kind of financial advisors. We're going to see a lot of that flow start to turn at the margins toward away from things like gold and other alternatives like commodities, real estate, et cetera, and into the Bitcoin asset class. Now, the Bitcoin asset class is most is likely to experience, uh, aggressive inflows when we're in a Goldilocks regime, uh, from a top-down market regime standpoint, which is what we're currently experiencing now. Um, and so as long as that Goldilocks regime persists, we're going to have a very warm welcome to the inclusion of Bitcoin in terms of the ETF, in terms of the approval of the Bitcoin ETF. If we were approving the Bitcoin ETF in a deflation or inflation regime, um, that, you know, which are risk-off regimes, that would be a lot less supportive.

• 7:13Anthony Pompliano?

  Now, what is also interesting to me is, uh, everyone is talking about what I'm going to call primary allocation to the ETF. That is, an institution or investor, they see the ETF gets approved, they go and they put capital into it. There is now cracking signs of what I'm going to call secondary allocation. And what I mean by that is, uh, there are other ETFs or other publicly traded funds that are saying, wait a second, if an ETF gets approved, I can now take some of my assets and put them in the ETF of Bitcoin. So I get Bitcoin exposure from my investors. And so there is, uh, one example where somebody has already gone, they've manned or already updated the mandate or the charter of their publicly traded fund where they can put up to 15% of their

• 7:54Anthony Pompliano?

  AUM in the Bitcoin ETF. And so to me, it's like, wait a second, the primary allocations is obviously going to be large over time and people are excited about. But could the ETF actually suck some of the assets from other ETFs into it where people who have actively managed funds or even may have passively managed funds just say, look, I want Bitcoin exposure as well. And so now if I put a little bit of my AUM in there, I could draw in more inflows to my non-Bitcoin ETF.

• 8:24Speaker 02

  A hundred percent. That's going to be two sided, right? You know, there's obviously, you know, for all that potential reward, there's obviously risk as well. But generally speaking, this is an asset class that has shown it's quite durable and has performed really well over long periods of time. And we would expect that to continue, just given some of the longer term research we've done on the forward turning, etc. We have to unpack that now. So yes, I agree. One of the things we've, you and I talked about about a month ago or so on this program about our KISS portfolio construction process, which features up to a maximum allocation of 10% Bitcoin. So that's 60% SPY, 30% AG, which is the fixed income ETF, and then 10% Bitcoin. And we use our quantitative risk management systems to sort of dial up or dial down our exposure to any one of those asset classes at any given juncture. Right now, it's currently fully invested. You know,

• 9:09Speaker 02

  we don't predict the predictors in terms of the thing that the systems that use, that we use to dial up or dial down that exposure. But obviously, if we start to dial down that exposure, our clients are going to get those signals in real time.

• 9:20Anthony Pompliano?

  What is the macro weather model that you all have saying their current regime is, but also how do you look at maybe the next 90 days or so, given this model?

• 9:29Speaker 02

  Yeah, so that's a great question. So we put together this chart here for you, for your viewers, showing our macro weather models. And so what, let me just take a step back, you know, so this macro weather model, we use this system, this quantitative risk management system, to determine how long the current top down market regime is likely to persist. Right now, we are currently in Goldilocks. Obviously, Goldilocks is a risk on regimes, quite bullish for both stocks, bonds. It's pretty much only bearish for things like the dollar and dollar type assets like volatility, etc. And so in terms of our KISS portfolio construction process, we use the signals, the composite signals, which are right there in the middle of the page, to dial up or dial down our target exposure per the asset class. You know, we start with the maximum target exposure of 60% in the stock equity asset class, the maximum exposure of 30% in fixed income asset

• 10:14Speaker 02

  class, and the maximum exposure of 10% in the Bitcoin asset class. And so if the weather model signals are bullish, then you get maximum exposure. If they're neutral, then we dial that down. If they're bearish, we dial that down incrementally. So this is, this system helps us stay on the right side of market, of fundamental macroeconomic risk by, you know, sort of feeding in, by tracking and ultimately regime segmenting the principal components of macro in a way that creates very valid, very powerful signal on a rolling three month, four basis for these, for these primary asset classes.

• 10:48Anthony Pompliano?

  What about Bitcoin specifically within this model? Like you can break out by asset and it looks like the sharp ratio gets quite attractive on Bitcoin. Help us understand this.

• 11:00Speaker 02

  Yeah, absolutely. So with this chart here, the second chart shows you, you know, sort of just the evolution. The top panel on that chart shows the evolution of the macro weather model signals for the Bitcoin asset class. And as you can see, you know, it tends to be the Bitcoin tends to rise materially when you are in a bullish composite signal regime for that, for that particular asset class, in so much that all the crypto winters we've experienced, particularly over the last kind of the 10 years or so, have occurred when we are in bearish regimes for Bitcoin. What that chart on the bottom, the bottom panel shows is, is the evolution of, you know, the back test. If you use the composite signal for Bitcoin to trade Bitcoin, i.e. by being fully invested in Bitcoin when it's bullish, by cutting that position in half when it's neutral in terms of the composite signal,

• 11:43Speaker 02

  and then actually rotating out of the asset class fully when, when it's a bearish composite signal. It just shows you the relation, the, the, the performance of that system, of that back test, that out of sample back test, relative to the evolution of Bitcoin. And so what it's showing you is that by using our macro weather model composite signals as an overlay, as a top down risk management overlay for this particular asset class or any asset class, what it's ultimately designed to do is help you step aside when there's volatility ahead in financial markets. And it actually does what I think a lot of investors do very poorly, which is actually get you back in when it's time to get back in and actually participate in some upside. So quite proud of this system. Obviously it's been driven by going back to that previous page, all the principal components of macro,

• 12:27Speaker 02

  starting with the real economy cycles and then over to the financial economy cycles there on the left of that page.

• 12:32Anthony Pompliano?

  When you look at global liquidity, that seems to be the number one driver of a lot of Bitcoins price movement specifically.

• 12:42Anthony Pompliano?

  How do you anticipate some of this, right? So interest rate cuts, obviously, people are saying, hey, we're going to get it by kind of end of Q2. Interest rate cuts are not necessarily completely 100% correlated to what is going to happen when it comes to global liquidity. And also, what the US does is not dominant globally at all times. And so, how do you think global liquidity changes when it comes through beginning of 2024 into the end? Is this something where it's just one line trend? Do we get more and more liquidity into the market? We should expect interest rates globally to go down? Or do we have to kind of pay attention on a quarter by quarter or month by month basis? Because we actually expect maybe some nuance, you know, here, both globally and also when it comes to liquidity.

• 13:26Speaker 02

  Yeah, so I think we're among the world's elite expecting and ultimately projecting that nuance. So there is always nuance. And what the model is designed to do is to summarize the nuance in a way that allows you to create really powerful and accurate signals for the particular asset class. So we're talking about liquidity, so let's focus our eyes on the liquidity component up there in the top right. So it's the first set of indicators under the financial economy cycles, you know, in terms of, in terms of macro weather model signal. And as you can see, 42 macro net liquidity, that's the Fed balance sheet minus the TGA balance, minus the RRP balance. That model is trending higher. It's trending higher, so it's obviously creating positive impulse for the risky asset classes, as well as our global liquidity proxy, which we found to be a much more statistically

• 14:10Speaker 02

  significant model in terms of projecting asset market performance. That's the Fed, the global central bank balance sheet plus global broad money supply plus global FX reserves minus gold. That number is also trending higher as well. Answering your question specifically, so we've performed a lot of statistical analysis in terms of the drivers of liquidity. So things that typically drive liquidity are fluctuations in the currency market, particularly when they're being driven by regime change in volatility in the currency market, volatility in the fixed income market. Other factors that are leading indicators for liquidity are changes in the employment picture in key economies like the US, the United States, and the major economies in the world, changes in inflation, changes in growth. So we've done a tremendous amount of statistics.

• 14:52Speaker 02

  Analysis that we perform and distribute to our clients here 42 macro to understand those dynamics of what actually leads the liquidity cycle because ultimately you need to predict what's happening in liquidity if you want to project what's likely to occur in asset markets and right now we're seeing a lot of positive signals that are supportive of the private sectors liquidity creation function and so I think one thing you know as investors we know not we at 42 macro but a lot of investors I see still see out there kind of spend too much time focusing just solely on central bank liquidity and some investors have taken that a step further and focused on liquidity from key financial or so key fiscal players like you know the bank of Japan or sorry

• 15:33Speaker 02

  Japanese Ministry of Finance or the US Treasury Department but the reality is the public sector only creates you know a portion of liquidity you know the other portion of liquidity and they're quite dominant sometimes is the private sector you know the global bank and non-bank financial sector these institutions create a lot of liquidity as well and they tend to have they tend to create liquidity on a counter cyclical basis to things like volatility and asset markets you know big spikes in energy big spikes in the dollar etc so right now the things that are dry that lead the counter cyclical impulse liquidity impulse are still signaling quite favorably for liquidity to trend higher over the medium term but those things could change in any given time and this is why one of the core features of our process just generally here 42 macro

• 16:17Speaker 02

  is a Bayesian insistence upon refreshing the same models and the same data every single day you see that 13 2024 at the top in the middle of that chart tomorrow we're going to refresh the model it's going to say 14 2024 and the day after it's going to say 15 2024 and some point those up arrows in the liquidity section will reflect sideways or down and when they inflect sideways or down it's going to say hey stock market you used to be bullish but you're probably going to be neutral now for the next three months or if they inflect down it's a you used to be bullish but you're probably going to be bearish over the next three months and so we refreshing that these all these systems in real time this is just one of our key systems refreshing them in real time on a daily basis allows us to spot those critical inflections in real time so that we can do something about it in our portfolios

• 17:02Anthony Pompliano?

  When you see investors using these models, what do you think is the biggest thing that they get wrong? You mentioned global liquidity, too much of a focus there. What are some of the other major mistakes?

• 17:12Speaker 02

  Well, to me, the major mistake is that investors tend to, just from a process standpoint, investors tend to myopically focus on what they're focused on. Right now, that doesn't sound particularly smart. But what I mean by is when investors are bearish, they tend to find, they tend to go do research on things that lead them further down the bearish rabbit hole. Inso much that when investors are bullish, they tend to do more research on things that lead them down the bullish rabbit hole. And what we're trying to do at 42 Macro is just dispassionately only do research on everything every single day and summarize that very succinctly for our clients so that when we are going from a state in the markets where they're bullish, generally bullish and to bearish, we're actually able to spot that in real time.

• 17:55Speaker 02

  In our process, we kind of, we're fascinating ourselves as trend followers, understanding that momentum in both asset markets and in the economy are two of the most powerful forces in finance. And if you are fighting that powerful force, you're generally going to have poor results over a long period of time. And so we orient our risk management and our research process around trying to identify trends and momentum from a research standpoint, from a fundamental standpoint across all these principal components of macro. But we're also trying to do that in terms of identifying trends and momentum from a market standpoint. And we're marrying those two separate processes into actionable portfolio construction guidance for our clients. And so when you answer your question, what do people tend to get wrong? The number one thing I see people get wrong is

• 18:39Speaker 02

  they don't look at the same stuff day after day after day after day after day in order to spot those critical inflections and momentum in the asset markets and in the economy. What they're doing is, well, I think therefore. And to me, I think therefore is consistently proven, particularly over the last few years, to be quite a harmful experience for a lot of investors.

• 18:59Anthony Pompliano?

  What do you think that the best investors do that the worst investors don't? And what I mean by that is like, everyone makes mistakes, everyone has these commonalities, right, of where they could get tripped up. But in my experience, the best at anything, take for example, you know, maybe baseball, the best hitter does one thing exceptionally well that everyone else struggles with or doesn't put as much obsession and kind of focus on. Is there things like that when it comes to investors that you've interfaced with that you find there's one thing that they do better than everyone else and really has them stand out and drives their performance?

• 19:34Speaker 02

  Yeah, 100% man. To me, it's about being more systematic than less systematic. You know, a lot of what we do at 42 Macro is a, you know, it's really just the summary of all my learning and experience on Global Wall Street for the past 15 years. You know, I've lost count, but I'm somewhere close to 4,500 meetings with institutional investors, the large, you know, everyone, you know, the who's who's of Global Wall Street. You know, I spent most of my career flying around the world, meeting with these investors, having deep discussions about portfolio construction, asset allocation, like building econometric models and things of that nature. That's my, that's my background. And so, you know, when I, you know, all the stuff that I've learned from those, those key players on the buy side throughout my career, you know, the number one thing that I see that they do that the average investor doesn't, and certainly the average, you know,

• 20:19Speaker 02

  retail and RA type investor does not do, is being systematic about their research and systematic about their risk management. And notice that I said research and risk management and not just research or risk management. Those are two separate processes and they keep them very separate. You know, the research process is allowing, you know, if you're systematic about your research, you're looking at the same data sets every week, every month to identify, you know, critical inflections in those data sets that really pertain to key economic outcomes that we all care about in financial markets. Being systematic about your risk management, you know, means you're, you know, you're dispassionately executing your risk management process and you're not, you know, you're not being beholden to what's currently happening in markets or you're beholden to your gut feeling about what's going to happen in asset markets.

• 21:04Speaker 02

  And to me, that, that, that's the number one thing that I see. The best performing funds, the best managers, the richest people who are buying all those expensive luxury apartments everywhere, that's what they do that we try to do and infuse into our process at 42 Macro. We have a, you know, bird's eye view, a real insider's knowledge of those processes. And that's what you see on the screen here in terms of our weather model and the other things that we do at 42 Macro.

• 21:26Anthony Pompliano?

  Makes complete sense to me. Where can we send people to find you online or find out more about 42 Macro?

• 21:30Speaker 02

  I appreciate that, Pop. So obviously come check us out. 42macro.com is our website. We put out a lot of, you know, sort of educational and market guidance for free on Twitter as well and LinkedIn. So I'm at DariusDale42 on Twitter. You can follow me on LinkedIn as well, DariusDale. Appreciate everyone for checking us out.

• 21:48Anthony Pompliano?

  We'll do it again in the future, my friend.

• 21:50Speaker 02

  Cheers, man. Thank you very much. Catch you guys. Everyone have a happy new year. Best of luck out there in 2024. And we'll be, we'll be here right alongside. We will be here with you all along the way, helping you make and save money in financial markets.