#1036 Darius Dale On Why The Fed Will Tighten Until Something Breaks

Darius Dale is the Founder & CEO of 42 Macro, the leading macro risk manager adviser. In this conversation, we discuss the macro economy, the recession that is already here, The Fed tightening and their efforts to lower inflation, and how low the Bitcoin price may go in the coming weeks. 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. ======================= The Pod Pro Cover by Eight Sleep is the most advanced solution on the market for thermoregulation. It pairs dynamic cooling and heating with biometric tracking. Go to https://www.eightsleep.com/Pomp to check out the Pod Pro Cover and save $150 at checkout. Eight Sleep currently ships within the USA, Canada, and the UK. =======================

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's 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

• 1:29Anthony Pompliano?

  hardware 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 Monty on Verified Collections, 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 The world's leading desktop, mobile and hardware crypto wallet.

• 2:12Anthony Pompliano?

  Go to exodus.com/pomp today. This episode is brought to you by Eight Sleep. Eight Sleep is the single best product that I have purchased over the last three years. It completely changed my life. I'm not joking. Pay attention. The Pod Pro cover, which goes over your mattress by Eight Sleep, is the most advanced solution on the market for thermal regulation. It pairs dynamic cooling and heating with biometric tracking. You can go to eightsleep.com/pomp to check out the Pod Pro cover and you save $150 at checkout. They currently ship within the United States, Canada and the UK. And I told you, it changed my life. It helps me sleep deeper, helps me sleep longer. I feel much more refreshed and I have better energy. You want to know how I have relentless energy every single day?

• 2:55Anthony Pompliano?

  Because I sleep on an Eight Sleep. Seriously. Go check it out. eightsleep.com/pomp today.

• 3:00Speaker 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.

• 3:24Anthony Pompliano?

  Darius, my friend, how are you?

• 3:26Speaker 02

  What's up, man? You're still looking spiffy.

• 3:28Anthony Pompliano?

  Hey, listen, Bear Marcus called for extreme measures. I'm ready to defeat this bad boy. I can look fear in the face.

• 3:36Speaker 02

  You're definitely helping, man. This thing, it looks like it wants to find the bottom of this range.

• 3:41Anthony Pompliano?

  The only person that I'm worried about staring down eye to eye is Mr. Jerome Powell. Jerome, bring those rates down.

• 3:52Anthony Pompliano?

  Send the assets back up, buddy.

• 3:55Speaker 02

  You know, you notice, by the way, not you, but just generally speaking, he's Jay Powell when they're doing quantitative easing. And when they're taking away the punch bowl, he goes back to Jerome, Big Daddy Jerome.

• 4:07Anthony Pompliano?

  Listen, it's like when you're a parent, your parents never call you by your full name the second you do something wrong. Anthony? Like, oh shit.

• 4:16Speaker 02

  Darius Antoine Dale.

• 4:21Speaker 02

  I think I heard that like twice though. I was a goodie too.

• 4:23Anthony Pompliano?

  That's all right. One of my questions for you is we've seen a number of data points that are starting to suggest the rest of the world is waking up to us maybe being in a recession. We saw the Fed now or the Fed GDP or GDP now, whatever the hell they call the thing. The Atlanta Fed. It went from like, I think it's going to be a positive GDP reading to negative real quick. I think it was last week. What's your take on the time that it takes for us to actually see data points? That will give more and more people in the market confidence that we are actually in the recession. Like, it's not like we have real time data.

• 5:07Anthony Pompliano?

  So how do you think about the time that needs to expire? For people to internalize, we are headed towards worse and worse financial conditions.

• 5:15Speaker 02

  Oh, that's a great question, man. Big time question. So I'll start by saying the US economy, at least according to Atlanta Fed's models and other models that are similar in nature now casting models. We are in a what we call a technical recession in the economist community. That's where you have two consecutive quarters of negative GDP growth, headline GDP growth. We are not in an actual recession. And what I mean by actual recession is sort of how the NBER, the National Bureau Economic Research defines it. And this is the organization that really determines our recessions. How they define it is sort of a statistically significant downside deviation in output. You know, it could be measured across, you know, different industries and, you know, industry manufacturing sectors, et cetera, et cetera, income, et cetera. That is very clearly not happening.

• 6:01Speaker 02

  If you look at that first chart, I don't know if you got the charts I sent you, but the first chart I sent you is the US economy is not likely in an actual recession yet. And what this chart just shows is initial jobless claims, you know, pretty famous statistic. Is this, you know, people applying for unemployment insurance usually after losing their job. And the reality is, you know, we're taking up off the lows, but neither the sort of rate of change nor the level would imply that we're actually in a, you know, significant, you know, sort of, um, you know, decline in, in labor demand, a significant decline in total employment. So, uh, I would dismiss the Atlanta Fed, uh, sort of, um, projections as sort of more kind of noise. What will be the real signal is as we, you know, progress

• 6:43Speaker 02

  throughout Q3 and, and into Q4 is when, you know, the measures like initial jobless claims, total employment, and non-bond payrolls, when those really start to slow alongside things like PMIs, that'll be your real clear indication, uh, that we're actually into or heading into an quote unquote, "actual recession."

• 6:59Anthony Pompliano?

  When you see this, is it important, the technical kind of definition? Like, does that actually matter, or does that just give people something to talk about on the internet, but, but it's less important?

• 7:09Speaker 02

  Yeah, 100%, 100% it's just noise. This is, this is what gives people fodder for FinTwit to, to go back and forth on what they speculate the Fed may or may not do, but the reality is, the Fed, one, is not looking at stuff like, you know, the Atlanta Fed GDP now cast to determine policy, right? You know, the Fed is looking at, you know, this whole host of companion, uh, large companion of indicators, particularly focused on inflation and the labor market to, um, to determine what that, uh, what that, what that stuff is. And when you look at the labor market, I sent you another chart, the labor market is cooling rapidly, but not rapidly enough. You know, the labor market is still white-hot. Like, we are, like, we are nowhere near a recession in labor market terms, uh, which is, you know, clearly one of the, the main statistics you're gonna need to determine

• 7:51Speaker 02

  if we're in recession. And so what I mean by this, I'll explain the chart. Um, so the, the, the light blue bars are sort of where the different metrics, um, you know, where, where they averaged throughout 2015, 2019, so kind of the baseline trend. The gray bar is the prior, uh, month's data and the dark blue bar is the most recent month data. I'll draw your eyes to the, uh, the second cluster of bars and the final cluster of bars. The second cluster of bars just shows of the trend in average hourly earnings for the private sector. At 5.6%, we're literally running at a double on a through-month annualized, uh, rate of change basis than we did in the sort of, on the baseline period, which is the light blue bar. Um, the, the The the fourth cluster just shows private sector at this sort of aggregate and income.

• 8:32Speaker 02

  When you sort of, you know, do the product of hours worked, wages and then total employment. You know, at eight percent on a three month annualized basis, we're, you know, more or less a double in terms of where the labor market was running on a trend basis through 2019. So this labor market is not only not in recession. It is basically as as growing as fast as it's been in recent years by basically a factor of two. And so the Fed is paying attention to data like this that's telling you they're eventually going to break, they're going to continue tightening until they break some.

• 9:04Anthony Pompliano?

  So when I think of the labor market, there's, I don't know, 10 and a half, 11 million open jobs in America. Most or around the most that there's ever been. Unemployment is near historic lows, sitting 3.5% or whatever, which still is higher because I think it was 3.4% in February of 2020, if I remember correctly. But, you know, generally the same. We saw this week, I think that the data just came out, there was like a 4,000 increase in jobless claims, which was a little bit higher than than the consensus was expecting. It came in at like 235,000 or something like that. When you think of all that, the first thing that jumps to mind is why is there so many open roles?

• 9:50Anthony Pompliano?

  Why, why is in unemployment so low if anecdotally we see companies preparing for recession? They're starting to do hiring freezes, they're starting to do layoffs. Like, is this just, we're early in this process and we should expect unemployment to go up? Larry Summers, a former Treasury Secretary, claims that we need five years of five plus percent unemployment to bring inflation down. Like, how do you kind of think about that?

• 10:14Speaker 02

  Yeah, that's a, that's a very draconian forecast. We're definitely not in that camp and we certainly don't see the leveraged cycle dynamics to get you to an outcome like that. You'd basically have to have the Fed go AWOL in order to get there. But, you know, in terms of why there are so many open jobs in the country, one, there's a, a few reasons, right? We've seen a, so what economists are calling the sort of quote unquote great resignation, where you've seen a lot of folks who, you know, Because of the financial crisis, because of the dot com bursting of the bubble, um, they weren't able to retire, at least according to their initial plan. So they were effectively were working for longer than they anticipated. Um, obviously, we're continuing to have better health outcomes, generally speaking, um, for most of those cohorts in the society. So, people were been working longer. And so what we've seen is a pretty significant reduction,

• 10:56Speaker 02

  um, in the labor force participation rate for sort of, you know, the elderly cohorts, you know, fifty five plus, um, in this, um, in this cycle. Uh, we've also seen a broad-based reduction in female labor force participation as rate as well, you know, obviously the sort of change in COVID. During COVID, obviously, a lot of, um, you know, sort of females had to, uh, help, you know, sort of, uh, called upon to, to help raise kids incrementally with schools being closed, et cetera. But I also think there's another factor to that as well, which is, you know, you have people moving from high-cost cities to lower-cost residential areas, suburban areas, where you no longer need sort of two whole incomes to support, uh, to support families. So there's been a significant reduction in the total number of people available at the same time while the economy is growing on a nominal basis, eight, ten percent.

• 11:41Speaker 02

  You know, very quick, you know, very fast. And so clearly, companies are scrambling to sort of meet the demand for their customers and new orders, which, by the way, are falling off a cliff if you look at the ISM surveys. Um, you know, so that's, that's why we see this sort of big, the big thing in job and, and, and Jolt, big, big sort of, uh, uh, lofty level in Jolt. But there's one chart I, I did want to sort of conclude with, uh, which is something, uh, you know, I think is really important in the context of the Fed's framework, which is the Fed will tighten into a break something, labor demand. Um, and this chart just shows the, um, the ratio of Jolt's total job openings relative to the, uh, total number of unemployed workers. And we're starting to move down, which is what Jay Powell explicitly called out as something he wants to achieve, which is getting this thing back into equilibrium,

• 12:22Speaker 02

  which is somewhere around one, you know, e- job opening per one, uh, person unemployed. That would bring, in theory, the labor market into, uh, into some sort of equilibrium. Uh, we're coming off the all-time high there, but we're not moving down fast enough, nor have we achieved a level or a threshold that would tell the Fed that its job is done here. So their job, you know, I think the markets are saying, okay, we're moving in the right direction. Markets tend to function at a rate of change. But the Fed is an academic institution that functions on levels and thresholds. And right now, from a level slash threshold perspective, we are still very hot, very much overheating in the labor market. Again, even looking at this statistic by a factor of two.

• 13:00Anthony Pompliano?

  When you see this, um,

• 13:03Anthony Pompliano?

  How low does it need to go? Like, how much further does this need to fall before it quote-unquote breaks? Like, is there a threshold where you say, like, we hit this number, bam, it's broken, they'll pivot?

• 13:16Speaker 02

  Yeah, so this, this, no, I think the Fed's mandate is singularly focused on inflation for this, for the current time being. Obviously, if we crater in this statistic, it's going to drag down growth and ultimately drag down inflation with it, which is, you know, clearly what the whole point is of creating an engineering recession would be, right? Is to slow growth enough to slow demand for labor, slow demand for goods and services, and ultimately cause a recession. So where can this go? So the Fed, Jay Powell, has basically said he wants to get it back to, you know, somewhere near one, which would be sort of the equilibrium stated labor market. The problem with this and most other time series is something I've talked about in the program, which is time series don't really spend much time at their averages.

• 13:57Speaker 02

  The average is just really a statistical concept that we do in Python or Excel, right? Like, if it goes to one from 1.9, it's probably going well below one if you go back and pull the chart. You know, where does it go in recession? Well below one. So the reality is this concept that the Fed is going to be able to sort of sap, you know, the perfect amount of demand from the economy just to get this thing right back to 1.00, and everything will be fine and dandy, and we won't have any sort of, you know, overcorrection to the downside in either markets or the economy. I think that's a Pollyannaish estimate. I think that's ridiculous, quite frankly, to say the least.

• 14:31Anthony Pompliano?

  You also have this chart, the Fed will tighten until something breaks, wages. And those appear to, at least starting, or they're continuing to accelerate, it appears. But we've got the quits level is coming down. What is this showing us?

• 14:46Speaker 02

  Yeah, so that quits, that blue line in the chart is the private sector quits rate. So that's the percentage of people in the labor force who are willingly quitting their jobs, obviously, to go, you know, find higher, higher wage employment, you know, better opportunities, et cetera, et cetera. When that thing's up, it's a leading indicator for wages. That's the red line, that's the employment cost index, that's the broadest measure of employee compensation that we have in our economy. So, you know, the quits rate has peaked, it peaked at an all-time High in November around three point four percent. But the problem with the level going down, again, this is a, this goes back to that economy between market participants like myself focusing on the rate of change and the direction of travel and the Fed focusing on the level.

• 15:25Speaker 02

  The level is still in the ninety five, ninety fifth percentile of all the historical data going back to two thousand, I would believe when the statistics started. They're not going to pivot on the ninety fifth percentile reading on the leading indicator for wages. Because what that's going to tell them is the red line, which is at an all time high. Uh, the, the employment cost index at four point five percent is data for Q one is pretty lagged. It, it's still going to be somewhere in the ninetieth plus percentile. By the end of that process, when we get the data for the second quarter. And so this is the key takeaway is that, hey, yeah, we're moving, we're making progress, which is to be expected, given how much the Fed has tightened both actually in terms of the Fed funds rate and quantitative tightening, but also rhetorically tighten with their words, really going back to November of last year.

• 16:06Speaker 02

  Um, so we're going to continue to see progress, quote unquote progress, and I, I do use my quotation marks here because obviously progress on this front means, you know, there are people and families losing their jobs. You know, how you have going through tough economic conditions. So you never want to cheer on a recession, but the reality is a significant slowdown in output in, in the economy is a stated goal of the Federal Reserve because they're prioritizing returning inflation back to their target much more than they're prioritizing uh, growth at this particular juncture and even a financial stability.

• 16:37Anthony Pompliano?

  So we saw uh, the report, obviously of the um, uh, unemployment claims inching up a little bit. Trade deficits uh, have hit a low uh, in twenty twenty two right now. How do you read that?

• 16:53Speaker 02

  Yeah. So I mean, it tells you that a couple of things, right? Like the man in the U S economy is, is still fairly robust. Um, particularly when you look at it on a real final sales basis, which is part of the reason why the um, the, the GDP now cast statistic is noise right now. Because it's being heavily influenced by things like inventory, you know, swings, et cetera, et cetera, stuff that is less relevant uh, for the employment labor market, less relevant for the Fed. Um, so your final sales, you know, at least in the U S economy. You know, on a nominal basis, again, as trade data is reported on a nominal basis, and obviously, we got eight and a half percent inflation in these statistics. But on a nominal basis, your economy is still, you know, growing at a very healthy pace. Unhealthy from the perspective of how much that that share is being allocated to inflation, but that's neither here nor there.

• 17:39Speaker 02

  But we also have the global economy really starting to slow significantly. You know, we got PMI data out of Europe and, you know, the broader global economy, and it's definitely moving in the wrong direction at a quickening pace, actually. You know, if you ask me all these same questions about is Europe in a recession, I would have to say, put a gun to my head, I'd say they're certainly probably very close to one. I don't think the US economy, just given the starting point of the robustness of the labor market right now, can be deemed to be in an actual recession. But eventually, over the next, call it, six to nine months, we might be getting close. Europe is much closer to the precipice of sliding into the abyss.

• 18:16Anthony Pompliano?

  So when I think of current things that people are worried about in the moment, gasoline prices is a huge problem. We've seen President Biden tweeting at mom and pop gas stations, lower the prices now.

• 18:32Speaker 02

  What the hell is that?

• 18:34Anthony Pompliano?

  I don't know. Jeff Bezos called them on it, which I thought was pretty, uh, pretty important. But we have seen gas prices slowly and, you know, very, very recently, start to come down a little bit. Gas futures appear to be coming down, which I think many people say, okay, that should lead to lower prices in the future. How do you read something like gasoline? And if gasoline comes down, obviously, that has a portion of the CPI, but it doesn't have core inflation, or it's not included in core inflation. How do you start to think about? Gas and its role in kind of the Fed being able to claim victory over inflation if it does come down.

• 19:18Speaker 02

  Yeah, so if gas comes down significantly and crude oil, energy inflation, food inflation, et cetera, all the stuff the Fed continues to say that it has no control over. They would actually, they would be, they would welcome that as a partial victory, right? Like, you know, that's, that's part of the problem is, is the rise in, in energy and food prices. So this is new. It's a new dynamic. If you look at our models at, at pretty macro. Uh, we have ag prices bearish. We've, um, we've long had industrial metals prices bearish and, and crude oil, you know, irrespective of this balance is, is flirting with a, you know, uh, at least a bare, a bare minimum breakdown from being bullish. So. Um, if those things hold, we will see that feed through into headline CPI, you know, to go, let's, you know, let's recap the most recent statistics, you know, we're at.

• 19:59Speaker 02

  12% on a three month annualized basis, accelerating to 12% with food inflation. We were accelerating to 50% on a three month annualized basis. Uh, and energy inflation. So moving, we will be moving in the right direction in subsequent months. If we continue to decline and or hang around these levels. So that's positive at the margins. The issue is, why is, why are these things declining? Right? And so there's for a couple of days, and I would argue even today still. You know, there's a view that the, that declining, you know, food and energy prices means the US economy, plus you, when you couple it with the Atlanta Fed thing. US economy is inching closer to recession, which means ultimately it's bullish for the markets because. The, the Fed is inching closer to pivoting, you know, stopping rate hikes, stopping quantitative tightening and ultimately giving you what you really want as an investor, which is more drugs.

• 20:44Speaker 02

  Right? QE rate cuts, et cetera, et cetera. The problem with gas and food prices declining in isolation, um, is twofold. One. If it's declining because China's zero COVID policy. It's telling you that the supply chain disruptions that we've sort of celebrated, you know, kind of moving past in recent months. Are no longer going to be something we're moving past. We might actually be backtracking in that front. So that's, that's a, as an upside surprise, upside, uh, potential upside shock to our goods inflation. Which oh, by the way, re-accelerated in, in, in, in May. But more importantly, what we talked about, you know, going back, you know, a month ago or two months ago on this program, it said, hey, look. By the time you get to the middle of the year, goods inflation, whether it be commodities or, or core goods inflation, you know, the stuff we make out of all the commodities.

• 21:28Speaker 02

  We'll give the baton in terms of what's driving the bus on inflation over to services. Services inflation, let's go back to the last print accelerated to 7.8% on a three month annualized basis. That's the fastest pace of services inflation we've seen since 1990. And the reason that's going up is for a variety of reasons, but more most notably is the continued acceleration in shelter inflation, which being driven higher by owner's equivalent rent, which we all know is just a function of lagged impact of the bubble we've seen in housing prices. So that's something that's going to continue to inflate inflation. So, you know, the Fed has got a lot of problems. It's going to welcome the decline in food and energy prices. But guess what? That's not going to be the only thing they focus on because the things that lead

• 22:11Speaker 02

  core PCE, their preferred metric, median CPI at an all time high three month annualized rate, sticky CPI at a 30 year high in terms of the annualized rate, those things are still moving in the wrong direction.

• 22:23Anthony Pompliano?

  So when you start to look at how certain assets are performing in this environment, take Bitcoin as, you know, what I would think as the most macro asset of all of them.

• 22:33Speaker 02

  Cleanest one.

• 22:34Anthony Pompliano?

  Yeah, yeah, the cleanest one. You mentioned earlier that maybe we're starting to bottom here. How do you view Bitcoin in the grand scheme of all the macro chaos and uncertainty at the moment?

• 22:45Speaker 02

  Yeah. So let me be clear. I do not think a durable bottom has formed in Bitcoin, nor do I think a durable bottom has formed in risk assets broadly. I mean, our math, and this is going back to March when we did the presentation, our math says, you know, the base case, the upside target for our base case scenario is 3,400 on the S and P. That on a correlation basis, that translates to roughly 16,750 for Bitcoin. Our base case downside target is 3,200 on the S and P, which translates to right around 15,000 for Bitcoin. When you do the fair value on our math in terms of our net liquidity analysis, which takes into account the changes in the Fed's balance sheet, changes in the Treasury general account balance and changes in the reverse repo facility balance, all three of those things are currently draining liquidity from the markets.

• 23:30Speaker 02

  Fair value for the S and P by December 31st is somewhere around 2,900. And that would roughly equate to something around 12 to 13,000 on Bitcoin. So. I don't think we're going to get to that fair value target because I think the Fed is likely to pivot before we get there because we will be in an actual recession if we get down to 2,900 in the S and P and they'll be able to say, hey, job's done. We got, we got the recession. Inflation is going to be coming down, which we'll do. We're going to do a big presentation on how that all works tomorrow for 42 macro subscribers. But the reality is, you know, everything doesn't have to get priced in today. Just because you have a view on how the medium term is likely to play out with respect to the liquidity cycle or the growth cycle, inflation cycle, et cetera, doesn't mean that Bitcoin has to go to 17,000 or 15,000 or 12,000 today. You know,

• 24:14Speaker 02

  it's got to play out. It's got to play out over a series of months.

• 24:16Anthony Pompliano?

  So when you start to look at these price targets, how do most of the institutional investors that you service at 42 macro, how do they think about entering the market when they believe they're close to the bottom? Do they start dollar cost averaging in? Do they basically wait for some, you know, threshold to be breached and then they go ahead and they deploy all of the capital at once? Like, what does that look like from an institutional approach to investing in bottoms?

• 24:44Speaker 02

  Yeah, that's a great question. So it's, I'll answer this for two ways. Mutual funds generally more or less fully invested. At most, they're going to have, you know, 5% cash. Maybe they'll cheat and have 7.5% cash. But generally speaking, they're generally almost always getting inflows from 401k type stuff. So you're there, you know, when they get towards the bottom and they think they're at the bottom, what they're more likely to do is sort of rotate the types of sectors and style factors, really mostly sectors that they're long in their funds, you know, from things like over, you know, super defensive, consumer staples, utilities, REITs, et cetera, to things that are much more early cycle cyclical, like home builders and financials and consumer discretionary, you know, particularly, you know, the more, you know, luxury, you know,

• 25:27Speaker 02

  luxury type stuff, you know. So that, that, that's like what the mutual funds do. That's kind of a, I wouldn't say less sophisticated, very bright investors there. It's just, it's a less involved process. When you're at a hedge fund, particularly the market neutral hedge funds, which tend to dominate most of the assets under management and certainly dominate the flows and the turnover in the hedge fund industry, you know, that, that's a different process. It's sort of a two-step process. One, you've got to pivot your, your longs versus your shorts. A lot of times they'll be long, you know, defensive sectors and style factors within industries, you know, within industry silos, and then they'll have to pivot to being offensive. So, you know, you know, let's say something like Walmart. Is a defensive company that's a consumer company, but then they'll have to go instead of being long Walmart, they'll have to get long target and short Walmart, you know, to to pair it off.

• 26:12Speaker 02

  And then ultimately, the the the key decision makers, you know, at the risk management level for the entire firm will ultimately determine whether or not to dial up overall leverage for the firm. And, you know, ostensibly, they've dialed it down considerably year to date. And so they'll go for maybe like the whole fund being two to three times levered to like four to five or six times levered. And so that's kind of a big process, and it's not going to be a one day process unless there's like a big, major Fed catalyst Fed announcement like we saw in March of 2020, which is, we're bringing out the biggest bazooka ever, we're making stuff up, here's an alphabet soup of of facilities, go buy stocks. We're probably not going to get that in this moment, because we don't have this kind of a sort of one catalyst to look forward to. But we're more likely to see is a series of catalysts in terms

• 26:55Speaker 02

  of Fed speak, Fed changes to policy, slowing down interest rate hikes, pausing interest rate hikes, slowing down quantitative tightening, pausing quantitative tightening, and ultimately giving you quantitative easing. I think it'll be a multi-step process where you bring fund A in, fund in, fund B in, and fund C in, and fund D in, and so on and so forth.

• 27:13Anthony Pompliano?

  When you think about a lot of the politics that are around this, it's obvious, you know, Biden tweeting, now you got Bezos, Elon can't help himself. It seems like all these different entrepreneurs and also politicians have opinions right now. Where do you kind of look for signal among all of that noise? Is there certain people or or types of occupations where you say that's where I go focus and that seems to be the best signal right now of what's actually happening?

• 27:41Speaker 02

  Hundred percent, man. That's a great question as well. So, you know, if you know me, I pride myself on being intensely data dependent. You know, I don't really think you need to wait for these people to talk. Like, these people are responding to the same data that you are exeminently available and that you can go crunch the numbers on or, you know, pay someone like myself to crunch the numbers on. So, you know, we we glean signals from the actual data, manipulating statistics in order to derive forward-looking insights from them. But in terms of people, I think the only person you really need to listen to, maybe there's one A and one B, is Jerome Powell, not Jay, Jerome Powell, and my man Bullard out of St. Louis. But, you know, going back to the Fed minutes yesterday, we got the minutes from the June FOMC meeting, and I thought there was a statement in there that, to me, told me everything I need to know in terms of how to position for the

• 28:25Speaker 02

  second half of this year, which is, quote, Many participants judged that a significant risk now facing the committee, the FOMC, was at elevated inflation could become entrenched if the public began to question the resolve of the committee to adjust the stance of policy as warranted. Now, that sounds like a lot of academic godly gooks, so let me translate it for you. You, listener, investor, think that there is a Fed put if growth slows fast enough or credit spreads widen enough, et cetera, et cetera. There is no Fed put. There is no Fed put. We are focused on fighting inflation. And so to me, I thought that was one of the most telling things we said. I mean, Jay Powell's been talking like this for months now, so I'm not sure. It certainly wasn't a surprise to markets.

• 29:10Speaker 02

  But to me, it cemented everything we needed to know about the Fed's resolve in terms of not just fighting inflation, but again, as something we talked about in this program as well, which is regaining credibility after the transitory debacle.

• 29:21Anthony Pompliano?

  When you start to see things like Boris Johnson stepping down, resigning, whatever, it seems like the world is getting more chaotic. There's always been chaos in the world, maybe social media is just amplifying it. But what's the impact on markets? Like Boris Johnson resigns, the EU market or European markets go up today. And like, sure, that's one day, it's one data point, maybe it reverses tomorrow, whatever. But like, how do you start to think about the relationship between things like, you know, the prime minister stepping down seems like a pretty big deal?

• 29:56Speaker 02

  Noise. I mean, unfortunately, in terms of our process, you know, that stuff's like, that's all noise. I mean, look, it certainly matters. I mean, it's been a headline for a while now. It's eye candy, right? It's football term, it's eye candy. You know, don't take the cheese, you know, don't be a mouse and take the cheese off the trap. There's a lot of eye candy in financial markets and right, like on any given day, you know, it's the job of CNBC, Bloomberg, Reuters, Market Watch, et cetera, et cetera, to take whatever that news headlines of that day, the raw material, the news that day, and relate it back to markets. But not every time that's what's actually driving markets. Nine times out of 10, on a very immediate term perspective, was actually driving markets or, you know, very non-discretionary choices.

• 30:37Speaker 02

  You know, these are sort of systematic funds that are, you know, redialing up or dialing down their exposure to certain asset classes. These are, you know, forced buyers, forced sales, liquidating assets and stuff, or accumulating assets because they got inflows. So nine times out of 10, the market price is more just a function of, you know, how many sellers are meeting buyers in that particular day. And less about, you know, sort of Boris Johnson or things like that. You know, it's usually only when you see a big spike move up to the to the upside or downside on an actual catalyst, like an economic statistic or an earnings release, that's actually new information that's being digested from the market. So just if I can leave everyone with one thing today, it's like, hey, don't assume that every headline you read can be correlated

• 31:19Speaker 02

  and should be, more importantly, should be correlated back to what you're seeing on your screen in that particular moment.

• 31:24Anthony Pompliano?

  So another piece of this is I've seen a number of videos of the Netherlands or elsewhere where farmers are blocking highways and it's hard to kind of wrap your head around the size and scale of these issues. But obviously there are, as part of the supply chain breakage, there's now kind of protests that are going on. And it seems like people continue to talk about food shortages and escalating food prices. How quantitative of the analysis ends up being accurate and like, hey, you just look at the numbers and that tells us the whole story? Versus does the qualitative stuff, like if there's a news story, you know, and it's the Dutch farmers are blocking all the highways

• 32:07Anthony Pompliano?

  and they're not going to produce any, you know, wheat or what, you know, I'm making up kind of an example. But like, how do you kind of balance out the qualitative and quantitative stuff in these situations?

• 32:17Speaker 02

  Oh, that's a great question. So the, you know, I have a phrase that I live by, and this is, you know, not my own doing. It's like folks like Danny Kahneman, Amos Tversky, you know, Cass Sunstein, these are Nobel Prize winning behavioral economic folks. You know, the numbers lead the narratives and then. Embarrassing for getting my own Bob Schiller, my apologies. Uh, you know, the numbers lead the narratives, right? Like, and so like when you think you see a headline about, you know, the sort of the farmers protesting, et cetera, et cetera. Nine times out of 10 is a, as a function of something that was imminently observable in data, i.e. price changes, rising shortages of X, Y, Z supply, shortages of X, Y, Z capital, et cetera,

• 33:00Speaker 02

  et cetera. So if you can get closer to the actual data changing, you're going to be able to front run the change in the narrative, which is what we, that's, I'd say that's the number one thing we specialize in is, you know, being so close to the data that we can observe and it inflects that we typically stay, you know, one to two steps ahead of consensus on the, the changing and evolving of the narrative in the market. And so, you know, when I see stuff like that, that is sort of new, i.e. there's no, I haven't been able to observe any data that can get me to that, then you do have to factor that stuff in, but it's, it's usually rare and, and I don't think you want to make a career out of doing that stuff because the reality is most narratives are lagging indicators.

• 33:35Anthony Pompliano?

  Yeah, that makes sense. Uh, my last question for you is, uh, Jim Cramer recently said that all of crypto has no value. Uh, I think if you pressed them on the details of it, he probably would say, hey, Bitcoin probably isn't going to zero, but majority of other things are. What are you hearing from institutional investors right now? Are they saying crypto's over, let's go do other things? Or are they still excited about the, uh, the asset class in the industry?

• 33:59Speaker 02

  Yeah, I mean, I certainly, so I'll be honest, like it's certainly not a focus right now. I think most institutional investors, most of their focus right now is trying to figure out where exactly are we in the profit cycle? Because that, in my opinion, is the next major shooter drop. If we have a significant sort of, you know, kind of downturn in the profit cycle, one, it's not priced in asset markets and two, we have certainly not seen it reflected in changes in estimates, either from the GDP top down perspective or from a bottom up, you know, company earnings, company sales perspective. So to me, I think, you know, all the excess work that's being done across the buy side of this particular juncture is on, hey, which companies can I actually trust the numbers on? Which companies can't I trust the numbers on? You know, how do I reposition my portfolio for that?

• 34:42Speaker 02

  So, you know, crypto's become less of a focus, but. You know, whenever you see, and I tend not to want to pick on Jim or, you know, any other investor, you know, people, we all have mistakes and wins in this industry. But, you know, whenever you see some, you know, big newsy headlines like that, you always have to remember how these people get paid, right? Like, at the end of the day, he doesn't get paid on being right on his calls. He gets paid on getting you to click on the headline, right? And so like, he did his job in terms of getting us to focus on it. But the reality is Bitcoin's going to go where Bitcoin's going to go. And in our opinion, at 42 Macro, it's going to be where it's going to go is being driven by the liquidity cycle and the growth cycle and the profit cycle, all these cycles, et cetera. So at the end of the day, that headline is moot at best. At worst, it's noise.

• 35:23Anthony Pompliano?

  It's, uh, it's pretty incredible. Where can we send people to find you on the internet? Or, uh, or find more about 42 Macro?

• 35:29Speaker 02

  I appreciate you, man. Thank you. So yeah, come check us out, 42 Macro. We're going to do a big deep dive presentation tomorrow on sort of like the mechanics of a recession, whether or not one has been priced in, what that's going to look like, et cetera. So that's going to be in our July Macro Scouting Report tomorrow afternoon. I'm going to check that out. And then on Twitter, um, at 42 Macro D Dells. So appreciate everyone. Thanks for the audience and catch back here, uh, in a couple of weeks. I'm actually going to be off next week.

• 35:51Anthony Pompliano?

  You're the man. I appreciate it always. You somehow have the ability to make me bullish and bearish at the same exact time, my friend.

• 35:59Speaker 02

  The data, the data will do that, man.

• 36:01Anthony Pompliano?

  That is true.

• 36:02Speaker 02

  I wish you could see me at 4:30 in the morning, like, ah, that's bullish, ah, that's bearish.

• 36:08Anthony Pompliano?

  All right, we'll talk soon. 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. 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.