#1009 Darius Dale On Why We’re Already In A Recession

Darius Dale is the Founder & CEO of 42 Macro, the leading macro risk manager adviser. In this conversation, we discuss the macro economy, what's happening in the financial markets, the most hawkish Fed we've seen in 40 years, how the recessionary environment is already affecting American citizens, and The Feds sole focus to stop inflation. Darius joins us every Thursday on "The Best Business Show." To see the video with the corresponding charts that Darius references throughout the interview, go to "The Best Business Show: LIVE" YouTube Channel ======================= BCB Group is the leading payment services partner for the digital assets industry. BCB Group provides payment services in 30+ currencies, FX, cryptocurrency liquidity, digital asset custody and BLINC, which is BCB’s free, instant settlements network for the BCB client ecosystem. Find out more by visiting bcbgroup.com/pomp ======================= Exodus is leading the world out of the traditional financial system by building beautiful and user-friendly blockchain products. With its focus on design and user experience, Exodus has become one of the most popular and loved cryptocurrency apps. It’s supported on both desktop and mobile, allowing you to sync your wallet across multiple devices so you can have access to your funds anywhere. You can instantly exchange around 100 different cryptocurrencies straight from your wallet. Interactive charts let you view an asset’s price history and your portfolio’s performance over time. And maybe the best part, Exodus is integrated with the Trezor hardware wallet - making advanced security easy for everyone. Visit exodus.com/pomp for your free download or search Exodus on the App Store or Playstore. ======================= Today’s episode is brought to you by Coinbase Wallet, your key to the world of crypto. Crypto wasn’t made to just buy, sell, and hodl. With Coinbase Wallet, you can do so much more: Collect more NFTs, earn more with DeFi, and trade more than 4,000 tokens. Whether you’re looking to play, stake, spend, or just explore a trending new protocol — Coinbase Wallet is your key to more. Long-time HODLers already know that wallets are a must-have if you want complete control of your crypto. That’s why Coinbase Wallet makes self-custody simple, while providing the safety and security of the most trusted name in crypto. Visit http://coinbase.com/wallet to learn more. =======================

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. Most of you know me as Pomp. You're listening to the Pomp Podcast, simply the best podcast out there. Now let's kick this thing off. Darius Dale is the founder and CEO of 42 Macro, the leading macro risk management advisor. In this conversation, we talk about what's going on in the macro economy, what's happening in the financial markets, how Darius is looking at various metrics, and also what you at home should be thinking about as you invest your capital. I really enjoyed this conversation with Darius, and I hope you do as well. Before we get into this episode, though, I want to quickly talk about our sponsors. This episode is brought to you by BCB Group. With a dedicated focus on institutional payment services, BCB Group provides business banking, cryptocurrency, and foreign exchange market liquidity for many of the world's largest crypto-engaged financial institutions.

• 0:47Anthony Pompliano?

  BCB Business Accounts allow businesses to load fiat currency and cryptocurrencies for payments, operations, and trading purposes. BCB's clients can trade FX and cryptocurrencies quickly and at scale with market-leading value. BCB's Blink Network is the European crypto industry's first instance settlements network, and one of the first real-time payment networks of its kind to allow free, real-time transactions across fiat and digital currencies. BCB's vision is to empower the global financial revolution through sustainable and innovative banking. You can find out more by visiting bcbgroup.com/pomp today. Again, if you want to learn more, go to bcbgroup.com/pomp today. Today's episode is brought to you by Exodus, the world's leading desktop, mobile, and hardware

• 1:29Anthony Pompliano?

  crypto wallet. They offer beautiful, user-friendly blockchain products that sync across all of your devices, making it easier to send, receive, and exchange over 150 or more crypto assets in one place. And with world-class customer service available to you 24/7, Exodus always has your back. But the fun doesn't stop with staking and trading. They recently launched a new NFT marketplace where you can buy and sell your favorite NFTs on the Solana network. By partnering with the popular NFT platform, Magic Eden, they're offering the Full Monte Unverified Collection, with more added every single day. Ready to check it out for yourself? Run, don't walk. Over to exodus.com/pomp for your free download today. Again, if you want

• 2:10Anthony Pompliano?

  The world's leading desktop, mobile and hardware crypto wallet. Go to exodus.com/pomp today. Today's episode is brought to you by Coinbase Wallet, your key to the world of crypto. Crypto wasn't made to just buy, sell and hold. With Coinbase Wallet, you can do so much more. Collect more NFTs, earn more with DeFi and trade more than 4,000 tokens. Whether you're looking to play, stake, spend, or just explore a trending new protocol, Coinbase Wallet is your key to more. Longtime holders already know that wallets are a must have if you want complete control of your crypto. That's why Coinbase Wallet makes self custody simple while providing the safety and security of the most trusted name in crypto.

• 2:49Anthony Pompliano?

  Visit coinbase.com/wallet to learn more. Again, that's coinbase.com/wallet and learn more today.

• 2:57Speaker 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.

• 3:20Anthony Pompliano?

  My friend Darius Dale, how are you? I'm, uh, I'm good, man. I'm good personally, but I'm concerned about these markets here, dude. Am I gonna lie to you? Yesterday, the Federal Reserve 75 basis point hike after they leaked it and went to the Wall Street Journal and leaked it. Uh, what's your thought process? Yeah, is it, is it a leak if you go directly to the most widely watched source and tell them very specifically? No, I'm not sure, but, uh, Say, hey, I want to tell you something, but don't tell them that I told you, but just write the article. Yeah, exactly. By the way, why are you wearing a suit? I'm glad that you asked, my friend. Uh, we're in a bear market and this exact suit and this exact tie defeated the 2018 bear market. And I'll be wearing this suit and tie every day until we

• 4:05Anthony Pompliano?

  defeat the 2022 bear market. I love that. Look at that scruff, man. Oh my God, we're getting old. Yeah. Hey, listen, you got a little less hair, but still got the same suit and tie. That's all that matters. Absolutely. All right. So what's going on with the Federal Reserve? What, how do you read into their 75 basis point hike rather than the 50 basis points they had been saying previously? So, uh, yeah, let's get into the Fed yesterday. So, uh, overarching takeaway is that this is the most hawkish Fed meeting we've seen since 1994. Uh, we will be talking about this 25, 30 years down the road because it's really the first time. Really since then, that the Fed has effectively confirmed that they're comfortable with sending the economy into recession to defeat inflation. You can make the case that they weren't even

• 4:47Anthony Pompliano?

  as hawkish back then because Greenspan was sort of mom's the word, generally speaking, with the specter forward guidance. That's more of a Bernanke, Yellen, Powell Fed dynamic. So you could also make the case that this is probably the most hawkish Fed meeting since going back to Paul Volcker in the early 80s. And it's very clear from my perspective that there's going to be a significant reduction in liquidity from financial markets over the medium term until the Fed sees the whites of the eyes of inflation's backbreaking completely. When you start to think about their current positioning, do they believe what they're saying? And I want to give you a very specific example. They claim that they are taking this aggressive stance. Some may say that they are trying to posture kind of in

• 5:31Anthony Pompliano?

  a Paul Volcker, we're serious about taming inflation, we're going to raise interest rates. But then on their own projections, they believe inflation is still going to be over 5% at the end of the year. They don't think that it'll even be sub 3% by the end of next year. Why are they saying they're being so aggressive, but still telling us, hey, six months from now, you're still going to have 5% plus inflation, which will be compounded on top of 7% inflation in December of 2021? Yes, because let's not forget that this is a Fed who, I think, deep down at its core believes that inflation is still somewhat transitory, at least that there are transitory components to the inflation that we're observing. Obviously, if you think

• 6:15Anthony Pompliano?

  about food and energy prices, you know, roughly 10% on a three-month annualized basis, or sorry, 12% on a three-month annualized basis for food, 50% on a three-month annualized basis for energy. The Fed is convinced and always will be convinced that that kind of inflation is, you know, generally speaking, transitory because it's not sticky. However, as we talked about on this program and have been talking about on this program for six, nine months now, that there are sticky components of inflation, particularly when you look at something like the Atlanta Fed sticky CPI, you know, roughly 7% on a three-month annualized basis, fastest since the early 2000s. And then median CPI six point four percent fastest on a three month annualized basis fastest rates ever.

• 6:53Anthony Pompliano?

  You know, there are parts of inflation that are very sticky and and and you know, one thing I think we have to remember as investors because again, everyone talking about inflation right now. You know, at least from an investment perspective, you know, has not lived through a serious inflation shock before you have to go all the way back to the seventies and early eighties. Uh, to get to to to to that time to that part of the time series. And so the reality is inflation is a sticky disease. It gets worse unless it's getting better. And what he's effectively saying is we're willing to do more and more and more to get it to go get better, but it's not going to get better overnight. Because again, there are some very sticky components to it that are already kind of in the pipeline. So when you think about this, we've seen asset prices falling, will they uh wave the white flag if asset prices fall enough?

• 7:38Anthony Pompliano?

  Or do they just not care at all whatever happens to those asset prices? Oh, no, they care because ultimately there is a legitimate feedback and response mechanism between asset markets and our economy. So there's a couple of statistics I'll throw at you to support that. Um, US economy, you know, while we're down from a consumer balancing perspective in terms of overall debt. Private non financial sector debt is actually risen in the last sort of ten to fifteen years. Uh, not as quite as high as it was prior to the financial crisis, but it's still pretty elevated at about a hundred and sixty percent of GDP. And the reason that matters is because we also have a very financialized economy. Uh, when you look at private uh non financial sector debt in terms of the percent that is warehoused on bank balance sheet that isn't, you know, turning over, it's, you know, going to be sitting there to maturity.

• 8:23Anthony Pompliano?

  Versus that's about thirty percent versus the amount of of private sector, non financial sector debt. Um, that is sort of warehoused by non bank participants, shadow banks, hedge funds, asset managers, et cetera. That at seventy percent, it tells you that what happens in the markets will have a material impact on the debt dynamics of the economy, not just issuing new debt. But also rolling over existing debt and that is an issue in terms of, um, you know, uh, that will cause, you know, the significant tightening of financial conditions. Will cause and have a material adverse impact on the growth cycle, which ultimately feed back into the inflation cycle by reducing demand. So this is what the Fed wants. They just don't want too much of it, but yesterday we learned that it's for the first time that this is a Federal Reserve that actually wants that outcome. And so that.

• 9:08Anthony Pompliano?

  That's a that's a pretty significant move. When you look at things, I think this morning, US housing starts, the forecast was minus 1.8% if I remember correctly, and it ended up coming in at like minus 14.4%, just like something so egregiously off from the forecast. Do you expect us to see more and more inaccuracies in forecasts? Because now we're getting into a kind of uncharted water. We're getting into a period of so much complexity in the global macro environment that's moving, that it's going to be very difficult for many of these economists and forecasters to actually be accurate? Yeah, so there's two things I would say about that.

• 9:47Anthony Pompliano?

  The first is, we should expect more very, more significant downside surprises to housing data over the medium term. Just going back to what I just talked about in terms of how financialized the economy is. Obviously, the housing sector is one of the most financialized components of the economy. And we're currently undergoing the biggest shock in mortgage rates, at least as far back as we can get the data since going back to the late 90s ever. It's bigger than the shock we experienced in 06 ahead of the global financial crisis, ahead of the housing bust and downturn. It's bigger than the shock we experienced in 2013. It's bigger than the shock we experienced in 2018. We're talking about a 3.2 sigma move, 3.2 Z score on a trailing three-year basis

• 10:29Anthony Pompliano?

  in terms of the move we've seen in mortgage rates from basically 3% all the way up to 6%. So that's going to cause a significant slowdown in housing market activity. The number two point I want to make in response to your question. I think, you know, there is legitimate risk that we could be in recession right now. I mean, if you look at the Q1 GDP report, and again, now, most of the negative move in the Q1 GDP report was as a function of inventories. Real final sales were very robust in the first quarter. But again, we had a negative overall headline GDP print. And you look at something like the Atlanta Fed's Nowcast for the second quarter, we're basically at zero. And it could obviously get worse, you know, once we get the updated forecast after we got the Rancit retail sales data and obviously housing data today.

• 11:12Anthony Pompliano?

  We could be currently sitting here in the second consecutive quarter of negative headline GDP. And typically what happens, we You're in recession is that the revisions to economic statistics tend to be very, very aggressive. They tend to be much, much larger than your traditional revisions on a month to month, quarter to quarter basis. And so, again, I don't want to make a headline, say, I think we're, the economy's in recession. Because again, real final sales are still trending quite positively. But certainly if we are in recession, you're definitely going to see some significant revisions and your significant downside surprises in a lot of the reporting of economic statistics. Can you talk a little bit about the disconnect maybe between the official metrics? And then how people on the ground actually could be experiencing recessary like effects?

• 11:55Anthony Pompliano?

  Where it's wage growth, it's increasing cost, they're, you know, slowing down investment, there's less hiring going on. Like, how do we actually decipher what's happening in the quote-unquote "real economy" versus, hey, did we actually get the true definition of a recession in the metrics? Yeah, so let me start that, let me answer that in reverse. Great question, but you're always on fire with the questions. The, in reverse, you know, I think it is important to define what a recession is, right? There's different definitions of recession. There's the technical recession, which is two consecutive quarters of negative GDP. From an intent for, there's also the sort of more qualitative definition of recession, which is a significant pullback in animal spirits, you know, particularly from the corporate sector.

• 12:36Anthony Pompliano?

  Where corporates, you know, are laying off, laying off workers and, and really doing what they can to sort of, to sort of protect profits. And that usually has a significant adverse outcome on, on, on growth statistics. And then there's a third, also qualitative explanation. That's part of the NBER, which is the, the official body who dates recessions in the US. There's a third qualitative definition, which is a significant downside deviation from trend in, in overall output. And a significant downside deviation from trend in overall employment. So obviously those two qualitative definitions kind of line up with each other. I tend to sit more on the qualitative camp. Who gives a damn about two consecutive quarters of, of negative GDP? That, you know, those can be gained from an accounting standpoint.

• 13:17Anthony Pompliano?

  What really matters is how far and how quickly you deviate from the trend in output and employment. And so in terms of walking you through how that might look like on the ground. I think the first thing that matters is there's been a significant reduction in consumer confidence, particularly when you look at the University of Michigan survey, we're obviously a below trend from a conference board survey as well. But when you marry that up to the significant reduction that we've seen in CEO confidence as well. You know, we're now we're sort of in the point of the process where there is a crisis of confidence that is very much being observed. And that crisis of confidence, let's take the crypto sector as an example. That crisis of confidence can filter the economy in a lot of different ways, right?

• 14:00Anthony Pompliano?

  Like, let's say the price of Bitcoin stays down here around 20,000 or goes even south of 20,000. What you're going to start to see is more layoffs at places like Coinbase, et cetera. You're going to see less advertising spend by companies like FTX and Coinbase, et cetera. And you're going to have Matt Damon flying to Vegas, you know, less frequently. And then the hotels in Vegas where he's spending money at the casino are going to, you know, start the layoff staff and workers. And this is how it works. And now you magnify that and multiply that across the economy. That's how you get a recession. What typically happens in a growth slowdown is that there's one, two, maybe a few connected sectors that are all sort of, you know, experiencing real negative dynamics. A recession is when you're seeing that broad base across the economy, across multiple sectors.

• 14:44Anthony Pompliano?

  Yeah, we've got this tweet that Zero Hedge put out that said, "The last and only time the S and P was down 10 of 11 weeks. Nixon was about to end the gold standard and kill Bretton Woods to, quote, 'fix the U.S. inflation problem.'" And we've got the chart that shows 10 out of 11 weeks for the S and P to be down. We then get coming off of the gold standard. How severe do you think that the solution is going to be here? Is it simply something where they can use their current tools of interest rates and quantitative tightening and get this under control? Or will we see some kind of very, very severe action to try to get inflation under control? Well, it depends.

• 15:26Anthony Pompliano?

  If inflation continues surprising to the upside of the way that it did last Friday in the May CPI report, which we obviously we presage very well in this program and other programs. Then, yeah, they're going to get incrementally draconian because what to me, and again, I think this is qualitative and you have to make a market call. Generally speaking, I make Call us to make money in financial markets. When I hear Powell talk about inflation, particularly when I hear him talk about how inflation impacts low income families. I'm telling you, I've been doing this boring ass job for thirteen and a half years. And I've never once heard any central banker from any place around the world, with the exception of Raghuwam Rajan over at the Reserve Bank in India, talk about the impact of inflation on low income consumers.

• 16:07Anthony Pompliano?

  To me, it seems like Powell understands just how damning and how recessionary the conditions already feel like for the lower income cohorts of our society. And so to me, I think this sort of, you know, their willingness to do whatever it takes from a financial tightening standpoint and from a growth reduction in growth standpoint to get to a situation where inflation is much lower and the economy is in a much more stable footing. I think their willingness to do that is much higher than I think the average market participant believes, and we've thought that all year. When you think about something like yield curve controls, we were talking yesterday to Nick Carter, and he thinks that that's on our horizon. How do you view that? And do you think that's something that we should expect?

• 16:50Anthony Pompliano?

  Yield curve control would be on the horizon if inflation became runaway. And the only reason I think yield curve control would be on the horizon if inflation became runaway is if the Fed allowed it to become runaway, right? The Fed, the Fed is ultimately responsible, at least from a monetary standpoint and just given how financialized the economy is, is ultimately responsible for doing something about inflation, and they can do a significant amount about inflation, right? Let's, let's go back and, you know, one thing that the Fed, I, I saw a lot of investors are chastising the Fed about, at least a lot of investors have similar market views that I do. They haven't talked at all about the ridiculous amount of fiscal stimulus we dumped into the economy, not just domestically, but globally throughout the pandemic.

• 17:34Anthony Pompliano?

  And they also haven't talked at all about the sort of aggressive monetary easing that we saw, even despite we, you know, even despite the inflationary pressure that was building from a, from a, you know, sort of a supply and demand perspective in terms of overly stimulating aggregate demand at a time where it was very clear that we were seeing a concomitant reduction in labor. Supply and ultimately a reduction in energy and agricultural supply as well. And obviously the geopolitical impacts from Russia, Ukraine are only making those last two dynamics worse. And so ultimately, the Fed can do something about inflation. It looks like they want to do something about inflation. But if they chose not to do something about inflation and let inflation hang out at these very aggressive levels or even get worse over the medium to long term, then they will have to do yield curve control.

• 18:18Anthony Pompliano?

  But I don't think that's where we're headed because ultimately I think the Fed, at least now for now, seems like it has the resolve to get this, the job done. So Nick's point, I think, was, hey, they just can't increase interest rates above some threshold, whether that's 5%, 6%, whatever, or they'll bankrupt the United States. And his thought- That's not true. Okay, so that's what I wanted to get to. Explain how high you think they could hike rates if needed. So let's not forget that the, one, the Federal Reserve has its limited balance sheet, but it's also not just the Federal Reserve, right? There is also this thing called regulation, right? We could trap a lot of money in our ecosystem by changing the rules of the game in terms of how banks are allowed to operate both internationally and domestically.

• 19:00Anthony Pompliano?

  You know, how we're allowed to sort of transact from a cross-capital, a cross-border perspective, from the perspective of capital markets. They can do a lot of moving with dials and levers to effectively crowd money into the treasury market, which is what they did going back to the regulations we saw in 2008, 2009, and then ultimately the regulations changes we saw in 2015, 2016. So they have levers that they can pool without having to resort to something that looks like yield curve control, you know, from the perspective of the central bank. But again, I think, you know, to Nick, you know, I'm not saying Nick's wrong ex ante. We don't know anything about the future, no one does. But my point is, I think we're a long way away from even having to get there because ultimately they can, there's ways in which they can trap money into the US treasury market.

• 19:42Anthony Pompliano?

  So the US is not going to default anytime soon, is at the top of the global capital structure. If the US defaults, it means that you, me, every business, every company, every country- The world likely would have defaulted first. When you think about places with very high degrees of inflation, take Argentina, others, they start to put price controls in place. And we've obviously seen a recent letter that was sent to a bunch of the oil companies saying basically you're greedy, stop raising prices. We saw the White House Communications Director recently say, you know, be a patriot, keep your prices low.

• 20:17Anthony Pompliano?

  What's going on? And like, should we expect price controls in the United States at some point in the future? So, so how stupid is that, right? Like you run a business, I run a business. Be a patriot, keep prices low. Well, it costs money, more money to run the business. I gotta either pass on the cost to the ultimate consumer of the good or service that we're selling, or I have to have less profits or even negative profits. You're going to disincentivize people from running businesses and producing incremental goods and supply of goods and services, which is what we need if you start instituting price controls. You know, we talked about this last week. Price controls are short term, you know, reward and from a, from a amelioration of price change perspective,

• 20:56Anthony Pompliano?

  but they're guaranteed to give you higher inflation in the future because all you're doing is reducing the total amount of available supply on the lag. Right? And so clearly the, what's causing inflation, what has caused every inflation in the history of inflations since going back to Adam and Eve, and maybe even before that, if you guys watch Ancient Civilizations on Amazon, which is great, by the way. It's always a mismanagement of supply or misalignment of supply and demand. You cannot have an inflation without a misalignment of supply and demand. One or two of those curves have to shift in an adverse manner to have a sustained inflation. And that's clearly what we have right now. So one of the things along that same line is the national average gas price, according to AAA, is now $5. It's over $5.

• 21:40Anthony Pompliano?

  We've seen gas prices in California get as high as $8, $9, $10 in certain places. Should we expect food prices to explode upwards even further? If all of a sudden oil and natural gas prices are going up, like, is there a connectedness between food and? In uh in energy prices? Yes, that is correct. So, uh, great question as well. So, uh, historically speaking, you know, what you typically have is one, whenever energy prices are going up, it's a, it's a, it's a uh intermediate good for pretty much every other good in the world. It's hard to generate goods without, you know, energy, you know, energy as an input, um, and obviously petrochemicals, et cetera, um, for plastics, et cetera. Um, but there's also energy, you know, is it part of the price for something like nitrogen, which is obviously used,

• 22:25Anthony Pompliano?

  um, to, you know, to produce agricultural goods. And so when you think about, you know, this nitrogen fertilizer we have, the ongoing, uh, trending rise in energy prices, those two factors alone are likely to continue to keep upward pressure on food prices, at least until we find some amelioration there. Um, and this is why historically, when you go back and you look at recessions, a lot of times, you know, more than 50% of the time, the price of energy, crude oil, tends to peak in the actual recession. Like, and we talked about it this couple of weeks ago, you actually, it, it usually just goes higher and higher and higher and higher, until it ultimately destroys demand for itself, which is usually the last thing, the last category of goods that we consume where demand gets destroyed, right? You, you can't not go to work, you can't not eat.

• 23:11Anthony Pompliano?

  And so ultimately, the price will rise up until the point where, uh, supply and demand are in balance. And ultimately, that, that is, um, you know, that's one of those factors that causes a recession. How do you think about compounding increases in prices? So I mentioned, you know, last December, the number was 7% inflation. They were still conducting asset purchases at the time, uh, and this December, they think that it'll be at 5%. So let's just say those numbers are right. We now are getting into kind of multiple years of high year-over-year growth. But that's not just of the CPI number. Obviously, there's things that make up CPI in terms of whether that's gasoline, food, uh, at home, out of the home, whatever, like, how, what's like a rule of thumb or a framework to analyze now when we get into these compounding? And introduces things like base effect, uh, to have people understand what exactly Exactly is happening to the price of goods.

• 23:57Anthony Pompliano?

  Yeah, so there's um, this, there's a few ways you can get around that just statistically from a mathematical perspective. So um, if you want to understand sort of um, how inflation's compounded over the last, you know, two years or three years, you can look at what we call on Wall Street, something like a two-year stack, which is just the, the two-year average uh, growth or inflation rate, you know, in that particular period. Um, you know, it's, you know, Q1 or, you know, let's call it the last month, etc. Or um, you could also do it on it from an index perspective, right? Like you can say, hey, look, since the end of 2019, we're going to index the inflation index, you know, the, the nominal, the raw inflation index, relative to, let's say, something like we are, you know, the, the overall household income or disposable personal income. And then you could see what the cumulative changes over a period of, over a longer period of time.

• 24:41Anthony Pompliano?

  You know, those, you know, if you put, do that, you know, for a long period of time in the pandemic, you saw actually an increase uh, in, in, in, in uh, in, in private sector, uh, disposable personal income relative to the index change in inflation. We are now very clearly crossing that chasm in the wrong direction from the perspective of consumer income and consumer balance sheet. So now inflation from a cumulative perspective is really now starting to take its toll uh, on, on, on society and particularly on the lower income cohort of society who can't, you know, can't make easy substitutions for their consumption goods and services, or more importantly, just don't have the, the size of the wallet to, to absorb incremental consumption. When you start to think about um, jobs,

• 25:22Anthony Pompliano?

  we're near historic low unemployment. We were at, I think, 3.5%, 3.4% in uh, February of 2020. Obviously, that skyrocketed 6.6 million people a week. We're filing for first-time unemployment claims uh, at the start of the pandemic. It's come back down. We're at like 3.5% now. Uh, but when you go on Twitter, when you read headlines on these news organizations, it seems like there's lots of layoffs that have already occurred and, and more people are, are thinking that they could be coming. Should we expect unemployment to aggressively grow in America? Yeah, unemployment's not going to aggressively grow until we slow uh, economic. Economically aggressively. Now, our models are are have been are calling for and have been calling for

• 26:05Anthony Pompliano?

  an aggressive slowdown economically, starting this summertime, um and and persisting throughout the the fall and into the early part of next year. So um by the end of that process, yes, we will start to see a a rise in unemployment and a reduction in overall uh in in uh in total employment. But it's hard, you know, employment itself is a lagging indicator. It lags the broader rate of change cycle for growth. And so you typically need to observe that that growth slowdown. What you're observing from a headline perspective is just sort of uh what you know, we call from a a Bayberry economic standpoint, which is just, that's prospect theory. Uh, you know, we anchor on negative news, uh, because historically, you know, we uh our interpretation of negative news feels worse than our interpretation of positive news feels good.

• 26:46Anthony Pompliano?

  And so it's very easy to to to get anchored on, you know, when markets are having down days, the red on the screen. It's, you know, stories about layoffs, et cetera. Um, but the reality is the US labor market added three hundred ninety thousand jobs on a net basis in the most recent data point, the most recent month, which is May. You know, that three hundred ninety thousand jobs compares to an average of one hundred and ninety jobs month over month, you know, in the five years ending in twenty nineteen. So we're basically running at about a double in terms of the pace of total employment growth, which is not something you're seeing on your screens every day. You're seeing obviously the layoffs because, you know, those might be leading indicators for the cycle getting worse. But ultimately, I think what's likely to happen is that we have a cooling of labor market conditions and then eventually an actual outright deterioration of the Fed has to continue stepping its foot on the brake.

• 27:31Anthony Pompliano?

  Got it. And so when you start to think about uh the best case scenario uh for asset prices through the rest of this year, is your expectation that we go sideways to down and we continue with kind of aggressive Fed policies? Uh, or do you see some relief and potentially uh could could stocks end the year up uh or or anything like that? So, uh, it's a couple of things. I'll start by saying the most bullish scenario is having recession now that kills inflation that allows the Fed to get off this path. The worst scenario is the longer inflation stays hot, the more likely it is the Fed has to key stay on on this path of a very aggressive monetary tightening, which will keep, you know, of of, you know, pressure on asset prices to, you know, risk assets, Bitcoin, et cetera, to continue going lower in price.

• 28:15Anthony Pompliano?

  Um, you picked a hell of a day to wear that suit, by the way, because tomorrow is a OpEx Friday. And our friends at Spacema, Brinkachuba, who runs that service, he's calling out that this is the chunkiest OpEx in terms of the size of overall puts that are likely to expire since March of 2020. When you go back to March 2020, that marked a very significant low in risk assets, you know, multi-year low in risk assets in terms of removing all that exposure from the short side of the trade and causing dealers to unwind those bets. Now, what's obviously very different now is in March of 2020, you had the Fed basically get as aggressive to the easing side of the equation as they had ever done. Basically doubled its balance sheet overnight and kept it going with $120 billion QE

• 28:59Anthony Pompliano?

  for, you know, for obviously way too long if you're talking about today's inflation. That is not the macro setup today. We are not at the bottom of the growth cycle. We're very clearly not at the bottom of the liquidity cycle. So I'm concerned that you might get a temporary bounce in risk assets associated with that OpEx. You know, that OpEx unwind that ultimately is to be faded. You know, let's call it in a few weeks or so. And then one thing, you know, finally, before we even in, I'm going to be doing a bootcamp with my friend Imran Locke, who runs Options Insight. If you want to understand some of these options markets dynamics a little bit better, because again, I think this is going to be a very important one, as I just mentioned. You want to understand these OpEx dynamics, options market dynamics, and ultimately how to use options to hedge your portfolio. Come join us for this bootcamp. We're going to be doing it on July 7th through 9th.

• 29:45Anthony Pompliano?

  Again, it's Imran Locke over at optionsinsight.com. So go check that out if that's something that's interested you, because I think it'll be very interesting over the next month or two. My last question for you, my friend. 75 basis point hike in June. They were supposed to do 50 in June, 50 in July. Many people think that they have to remain aggressive. But Jay Powell yesterday talked about 75 basis points won't be common. What happens in July? 50, 75, 100, 25? So I think if inflation behaves, it's going to be 50, right? But if inflation stays doing, you know, some version of what it's been doing, which is trending higher on a three-month annualized basis, it's going to be 75 is in more QT quantitative tightening until the eyes can see.

• 30:28Anthony Pompliano?

  Again, this all boils down to how will Is the central bank, you know, to, to, to basically do something about inflation and how quickly do they want to do it? And from my perspective, again, this is just my own interpretation based on, you know, analyzing, not even analyzing, studying everything that these people say and have been saying throughout this entire process. From my perspective, it seems like they're, they're very concerned that they don't want to lose credibility of the Fed. And because once you lose the credibility of the Fed, the inflation genie or disease, as I like to call it, it's very much harder to treat. And ultimately, don't forget that Jay Powell is a human being. Do you really want to retire as the guy who let the inflation genie out of the bottle in the United States of America and abroad?

• 31:09Anthony Pompliano?

  No, I think he's trying to protect his legacy and he's, and he's comfortable with having a mild to severe recession in doing that. Uh, this is, if we got a recession, we don't have the debt dynamics in this economy from a private, non-financial sector leverage perspective in terms of the buildup or the change in the debt service ratio that would cause something like the global financial crisis. It'll be, it'll be a sort of short-lived recession that we can recover from and get to better times. And so I think that's ultimately the bet they're willing to make. If you put a gun to their head, if they had to pick, you know, mild to, you know, recession over a continuation of inflation, they're going to pick mild recession. For sure. Where can we send people to find you on the internet? Absolutely, man. I appreciate that. Uh, at forty two macro, come check out our website, come check out our research. Uh, produce, uh, you know, what I think is some of the world's best research for, for every investor.

• 31:53Anthony Pompliano?

  And everyone gets all the same research. Uh, that, that tends to be an issue on Wall Street. Um, and then so, and then if you can't afford it, um, the forty two macro detail is my Twitter handle. I appreciate everyone for having me on and thank you. Uh, catch you next week. My friend, you are doing a, a fantastic job. Thanks for keeping me educated. I dropped the, uh, link in the chat there. Anyone who wants to go check out forty two macro, highly suggest it. Let's keep praying. Let's see what happens. Hey, well, I, I'll say this, prayer is not a risk management strategy. Forty two macro is a risk management strategy. Ah, what a softball. All right. See you, buddy. Double salute. Later. Cheers, brother. Thanks so much for listening to today's episode. I really hope you guys enjoyed this one. Make sure you subscribe on Apple, Spotify, or your favorite podcast player.

• 32:36Anthony Pompliano?

  And if you're looking to try to transition to get a new job in the Bitcoin or crypto industry, we've got you covered. Head over to pompscryptocourse.com. We've developed a curriculum with the top teams across the industry. It's a three-week intensive training program with over 50 events packed into that three-week time period. Go to pompscryptocourse.com to learn more, and I'll meet you guys for the next episode.