#1279 Darius Dale Reveals Bitcoin Strategy

Darius Dale is the founder & CEO of 42Macro. In this conversation, we talk about their Weather Model, economy & financial market conditions, and his brand new strategy that incorporates bitcoin to outperform the standard 60/40 portfolio. ======================= Base is making it their mission to bring a billion people onchain. But what exactly is Base? It's an Ethereum L2 offering a seamless experience for both builders and users. With near-zero gas fees and rapid transaction speeds, Base is shaping the future of the onchain world. Base is a canvas for everyone, with hundreds of apps in the Base ecosystem, whether you're an emerging creator, a seasoned developer, or someone exploring the onchain space for the first time, Base is designed to bring your ideas to life. So, if you're looking for a platform where the future of onchain is being built daily, Base is your destination. Join in and make onchain the next online. Learn more at ⁠⁠⁠⁠⁠⁠⁠⁠base.org⁠⁠⁠⁠⁠⁠⁠⁠ and follow along on Twitter at @BuildOnBase to see cool things to do onchain, everyday. ======================= Trust and Will has simplified the process of creating and managing your will or trust online. They leverage a data-driven, design-first approach and amazing customer support to help you protect your legacy from the comfort of your home starting at just $159. Sign up today for 10% off using ⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠https://trustandwill.com/pomp⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠ ======================= 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. This episode is with Darius Dale, the founder and CEO for Two Macro. In this conversation, we talk about their all-weather model, and then we even go as deep as understanding the KISS portfolio construction methodology. Darius is one of the best minds in macro,

• 0:45Anthony Pompliano?

  and he has a ton of very, very wealthy, very sophisticated clients, and he pulls back the curtain on exactly what he is advising them on, how they think about creating those portfolios, and what are some of the inputs to the risk models that they look at in order for people to better navigate markets through all different parts of the economic cycle. 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.

• 1:31Anthony Pompliano?

  Today's episode is brought to you by Base. Base is making it their mission to bring a billion people on-chain. What exactly is Base? It's a Layer 2 offering a seamless experience for both builders and users. With near-zero gas fees and rapid transaction speeds, Base is shaping the future of the on-chain world. Base is a canvas for everyone with hundreds of apps in the ecosystem, whether you're an emerging creator, a seasoned developer, or someone exploring the on-chain space for the first time. Base is designed to bring your ideas to life. So if you're looking for a platform where the future of on-chain is being built daily, Base is your destination. Join in and make on-chain the next online. Learn more at base.org

• 2:10Anthony Pompliano?

  or follow along on Twitter at BuildOnBase. Again, that's at BuildOnBase to see cool things to do on-chain every single day. Today's episode is brought to you by Trust and Will. I've gone through a number of different changes in my life over the last few years. I got married, I had a kid, and I had to start thinking about how could I ensure that my wife and my child would be okay if anything ever happened to me? That's where trust, wills, and estate planning come into play. Now, most people, what they do is they get introduced to a friend, an uncle, or someone in their local community. It tends to be someone who's really expensive, a lawyer, an accountant, or somebody who does estate planning, and they just simply are using a one-size-fits-all template and just telling you, "Pay me thousands of dollars and I'll use the same thing for you as the guy down the street."

• 2:55Anthony Pompliano?

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• 3:40Anthony Pompliano?

  be the difference between someone being taken care of and someone not. Go check them out today at trustandwill.com/pomp. All right, guys. Bang, bang. I've got Darius here. He is suited up, ready to go. Got the tie on. Must be, uh, must be an important day, obviously. Uh, let's start with, uh, the KISS Portfolio Construction Method. It's something you guys have helped pioneer and I think is, uh, you know, showing now why it works, but talk to us about KISS and what exactly that means.

• 4:08Speaker 02

  Yeah, I appreciate that, man. Thanks for, uh, thanks again for having me on. Uh, tie, ties on for now for the institutional client meetings, but for your party later, uh, we'll keep the ties off for, for that. Still looking forward to that, man. Thanks again for the invite. Uh, so in terms of our KISS portfolio construction process, uh, this is our flagship, uh, portfolio construction process that we, uh, market and maintain for, for clients of 42macro. Uh, it was really Born out of our pivot to transitory Goldilocks back in January, where we decided to stop shorting assets altogether. We had actually, we had quite a tough Q4 last year, you know, kind of getting squeezed and ultimately went to the drawing board and really tried to lean on some of the, you know, kind of core institutional learnings that I've developed throughout the course of my career in terms of developing this process.

• 4:52Speaker 02

  And what it's ultimately designed to do is help investors, your traditional money managers, traditional investors, regular retail investors outperform 6040 over the long term by introducing trend following elements into that strategy. And more importantly, introducing a permanent allocation to Bitcoin as a traditional asset class in that strategy.

• 5:15Anthony Pompliano?

  Now, when you do this, you don't just create something out of thin air and say, we think it works. You obviously back test, you go and you try to figure out how effective has this actually been? Talk a little bit about the backtesting and what those results really have shown.

• 5:29Speaker 02

  Yeah, a hundred percent, man. Absolutely. So this thing's been rolling live since, since January. Obviously, when we back test anything here at 42 Macro, it's all with all the, you know, understandings and the understandings of, you know, what the proven quantitative techniques are in the business and, and ultimately everything we construct is on an out of sample basis in terms of backtesting. But there's just a couple of highlights I throw at you in terms of our case portfolio construction process. So KISS, which is again a 603010 portfolio construction that features SPY as the equity portion, AG as the fixed income portion and BITO, at least for now, until we get a Bitcoin ETF, which we think is likely to be approved in the coming months. For now, as the, as the Bitcoin allocation, which allows, you know, again, retail investors, traditional RIA type investors

• 6:13Speaker 02

  and family offices really to, to gain access to what we believe are positive diversification benefits for Bitcoin as an inclusion in that asset class. So just going back to our performance, we actually have a chart I sent to you, you can throw it up on the screen for production. Where we show the hypothetical performance of $100,000 portfolio since January 2018, both on a, on a, on a raw basis, but also in terms of, you know, the performance over industry standard reporting horizons. And what we find is that KISS as it's currently constructed, featuring our trend following elements, as well as our top-down and bottom-up risk management overlays, which we'll talk about in a second, has a sharp ratio of about 0.9, which is more than double, which is about double

• 6:53Speaker 02

  60-40, or the double the sharp ratio of just being long 60-30-10 SPY, AG, Bitcoin in isolation without those top-down and bottom-up risk management overlay elements. You know, if you look at the chart on the right, you see that KISS, our KISS, our portfolio construction process, which is our flagship asset allocation process here at 42macro, is outperforming 60-40 on any, you know, relevant duration, and even outperforming the 60-30-10 raw approach on any relevant duration, and since exception. And then one thing I would say I'm most proud of is the max drawdown statistics, the risk management statistics, because again, it's not enough to just being able to be long assets. Any monkey with, you know, a blind monkey with, you know,

• 7:34Speaker 02

  peanut butter on its hands could be long assets. It's about keeping the money you make in asset markets for the, and having money to invest for the next cycle. And what we find is that, you know, in these backtests, you know, the max drawdown for our KISS, our flagship KISS portfolio construction process, which again includes 60-30-10 SPY, AG, and Bitcoin, and top-down and bottom-up risk management overlays therein, the max drawdown for that process is only minus 10%. And there's only one double-digit drawdown, that minus 10% since the beginning of 2018. You compare that to 60-40, the MAC, they've had three max drawdowns in 60-40 since the beginning of 2018, that eclipsed minus 10%. There's a minus 12.5% drawdown in Q4 2018,

• 8:15Speaker 02

  there's a minus 22% drawdown in COVID, and there was a minus 22% drawdown at the lows in October of 2022. And then that also compares our minus 10.6% max drawdown statistic compares extremely favorably to the 60-30-10 raw approach, which takes that 60-30-10 SPY, AG, Bitcoin allocation, and does not include our bottom-up and top-down risk management overlays. And there's been three crashes in 60-30-10 raw Bitcoin, SPY, AG, Bitcoin over the past, you know, kind of five to six years. They crashed in Q4 of 2018, crashed during COVID, down 23%, beat the trough.

• 8:49Speaker 02

  And then it crashed in 2022, down 25.3%. So the kind of quick summary is that, you know, if you're going to add Bitcoin as a, as a serious investor, as a traditional investor into your asset allocation approach, it obviously pays to have systematic, thoughtful, quantitatively oriented risk managements to guide that process along the way and smooth out those returns.

• 9:11Anthony Pompliano?

  Now, when you talk about risk management, one of the things that's really interesting is everyone notoriously is long when they should be short and short when they should be long, right? Risk management is very, very hard when it comes to just the economic machine, different asset classes, different geographies, different rate environments, and the complexity just grows from there. You all have this macro weather model that you're really using to try to understand all these different inputs. Talk a little bit about how does that model work? And then what are some of the things that you guys pay attention to that may tell you, hey, now is some time we should be paying attention to some sort of risk management, whether top or bottoms up?

• 9:47Speaker 02

  Yeah, great question, man. And so, yeah, we absolutely, so our weather model, macro weather model is one of our flagship models that we use here at 42 Macro to help our primarily institutional investor client base understand the, you know, the rolling three-month forward excess return dispersion environment and volatility environment across asset classes. And we ultimately use that information to construct target allocation sizes in that case portfolio construction process. And so what this, what this model is designed to do is actually regime segment all of the principal components of macro, whether you look at the real economy cycles between growth, inflation, employment, corporate profits and fiscal policy, or whether you isolate the financial economy cycles, looking at liquidity, credit, interest rates and positioning.

• 10:31Speaker 02

  And it's designed again to regime segment each of those core features of the economy and asset markets, and ultimately project the excess return and volatility characteristics that those regimes, you know, currently, currently project into each asset class. And so, you know, kind of just a quick summary of the model right now, based on the current constellation of signals as, as indicated by the component features in the model, things like our net liquidity model, which is so popular across global Wall Street, that balance sheet, TGARP, yada, yada, yada, our global liquidity. Proxy, which is will soon to be very popular across global Wall Street because that's a better better model, you know, things like growth, things like inflation, you know, the fiscal deficit, you know, aggregated positioning in the treasury market. There's all these different features in the model that are each contributing independently to the excess return dispersion

• 11:16Speaker 02

  projection for each asset class. And right now, what the what the model is saying is that over the next three months in the stock market, an investor is is is right to expect higher returns and lower volatility relative to the baseline return and volatility profile for that particular asset class over the next three months. That condition is is shared by the bond market, and that condition is also shared by the by the Bitcoin market as well. The dollar commodity signals are neutral. And and so going back to our KISS portfolio construction process, you know, how we implement these weather model signals into that process is visit the top down risk management overlay. Actually, if you throw that first chart back up on the screen where we show, you know, if the weather model signal for the stock market, for instance, is bullish, the target exposure for the spy is 60%. If that weather model signal for the stock market is

• 12:00Speaker 02

  neutral, the target exposure for the spy is 50%. And the weather model signal for the spy is bearish for the stock market is bearish, and the target exposure for the spy in this 603010 KISS portfolio construction process is only 40%. And so we we accordion the sizes of those target exposures up and down based on the rolling three-month forward return and volatility projections as indicated by the signals generated by our macro weather model.

• 12:27Anthony Pompliano?

  Now, let's talk liquidity management, because I think this is another big piece of it. Obviously, when we look at short-term treasuries and things like that, people are constantly trying to figure out, should I be holding cash? Should I be holding treasury? Since there's some other asset that I could hold. Liquidity, how do you think about it? And what are exactly people doing inside of this portfolio?

• 12:44Speaker 02

  Yeah, great question, Bob. So there's a two things. There's two types of liquidity, right? There's the liquidity in your portfolio, you know, in terms of the cash you have in your portfolio that allows you to buy more assets. Obviously, if you're maxed long in any given time, you're not unable to do so unless you have new cash injections. And then there's the liquidity that tends to drive asset markets higher and lower over the, you know, medium and long term in terms of things like central bank liquidity, private sector liquidity. Coming from commercial banks or non-bank market participants, or whether it be risk liquidity that we see spill over into reserve treasury markets vis a vis reserve managers. So those are two types of liquidity. The second type of liquidity, i.e. net liquidity, global liquidity, the stuff that's currently

• 13:25Speaker 02

  helping Bitcoin accelerate in price is obviously being captured again by our weather model signal, which is ultimately influencing the excess return dispersion volatility projections from that model. The bottom-up risk management overlay in our KISS 603010 KISS portfolio construction process, which again features Bitcoin as a core element, is really born out of what we call our volatility adjusted momentum signal. So that's just fancy, you know, yo lingo for saying, hey, we use a volatility overlay to give us a better opportunity to project whether or not the current conditions and momentum are likely to be sustained over the medium term. And right now, if you look at the charts we prepared for you, the SPY ETF, which again,

• 14:09Speaker 02

  that's 60 anchor in that 603010 approach, is currently bullish from the perspective of our volatile adjusted momentum signal. And so the actual exposure vis a vis the bottom-up risk management overlay in this KISS portfolio construction process equals 100% of its target allocation, which we said earlier is currently 60% because of that bullish weather model signal. The actual exposure for the AG ETF is also equivalent to 100% of its target allocation, because again, the AG ETF is bullish in so much that the Bitcoin ETF is also bullish as well. So each of these core components of our 603010 portfolio construction process are currently bullish from the perspective of volatile adjusted momentum signal, which means we

• 14:51Speaker 02

  are, from a dynamic position sizing perspective in terms of our trend following approach, we are at max long exposure from a dynamic position sizing perspective. If any one of these ETFs went down to neutral, then those positions will get cut in half from the perspective of that dynamic position sizing process. And if any one of these ETFs broke down to bearish from the perspective of that volatile adjusted momentum signal, we'd see that dynamic position process cut those positions to 0%. And what that's designed to do, Pomp, is help investors who are Investing alongside our KISS portfolio construction process, it helps them maximize upside capture in bull markets, which we are currently doing for our clients all around the world, thousands of investors around the world here at 42 macro. But it also, the top-down and bottom-up risk management overlays helps them minimize downside

• 15:36Speaker 02

  capture in bear markets by taking down their target allocations when the macro weather model is saying, hey, you know, they're poor, they're bad times ahead for each independent asset class, or when the bottom-up risk management overlay kicks in and says, okay, this particular exposure is telling you that there's more left tail risk in the months ahead based on our Volta just on minimum signal. So it's a complex process, but it's not a complicated process because it's extremely easy to implement as a retail investor or an RA investor, because you're only talking about ever having to risk manage three ETFs at any one time.

• 16:10Anthony Pompliano?

  My last question for you is, I think, the question on Wall Street right now. Jerome Powell, he's got, you know, two fingers, increase rates, decrease rates. Which one's he gonna hit? Are we gonna get the Bill Ackman Q1 rate cut? The market's pricing at 100% by the end of Q2. Bitcoin folks, the crazies on the internet, they're all buying Bitcoin because they think rate cuts are coming like tomorrow. What happens and when should we expect to kind of see lower rates coming to the market?

• 16:40Speaker 02

  Well, the low rates are already in the market, right? If you look at market implied projections, as you mentioned, you know, whether you look at overnight index swaps or Fed Funds Futures, there's a tremendous amount of policy re easing price into 2024. Obviously, we're going to get to a overwhelming consensus on this sort of soft landing expectations in the market. And the reason we believe markets have coalesced around the soft landing expectation is because stocks or bonds are going up at the same time. If you had a no landing expectation in the market, you'd see stocks higher, bonds lower. If you saw a hard landing expectation in the market, you'd see bonds higher, stocks lower. So the mere fact that both asset classes are positively correlating still tells you that investors are currently really, you know, centrally betting on

• 17:20Speaker 02

  a soft landing as that central base case. You know, in our opinion, as investors, I think the average investor spends entirely too much time predicting. And positioning for outcomes in the economy and not nearly enough time reacting to changes in asset markets and changes in the economy as a result of the systematic investment and research and risk management process. That's what we specialize in at forty two macro. We don't specialize in saying, hey, the economy is going to soft land, therefore you must do this. We think that's a terrible way to invest and it's more than likely the reason why so many investors have really not made any money over the past few years, despite having several very important and awesome opportunities to make money as indicated by that transitory Goldilocks call we pivoted to in January.

• 18:04Speaker 02

  So in our opinion, I think that to answer your question, it doesn't really matter whether we go into a soft landing, a hard landing or no landing as an investor. As an investor, what matters is are you positioned properly for rising expectations of a soft landing? And does that process you that allows you to position properly for that? Will it get you out, you know, with a minimal degree of downside risk at the appropriate time? Once that soft landing expectation crescendos into a consensus and starts migrating to something else. And in our opinion, under having processes in place to do what I just said, it's way more important than predicting the future, which is why a lot of you, why you watching, you know, continue to underperform, you know, the broader beta in the markets.

• 18:44Anthony Pompliano?

  Now, I remember seeing a study by Bloomberg that whenever we see soft landing articles spike, the number of them, usually that is followed very quickly by a deep recession. And so we've seen the spike. Will that hold here or how are you thinking about it?

• 18:58Speaker 02

  Yeah, no, I mean, look, the probability of a recession in the US economy and materializing over the near term has risen in recent weeks. You know, as indicated by some of the indicators that we track, specifically our forty two macro Fab Five recession signaling indicators. One of those indicators in the last couple of weeks has breached its recession signaling threshold. So we went from a, you know, call it a low probability of a near term recession to a middling probability of a near term recession. You don't have to overreact to that as an investor because what we found in our backtesting and just in terms of our qualitative analysis of the US economy and financial market cycles is that the market tends to peak pretty coincident to maybe slightly ahead of the breakout in, you know, the jobless claims, the breakdown in total employment. So you don't need to put on a recession trade.

• 19:40Speaker 02

  You know, like a year too soon, like a lot of the guys who've not made any money on Wall Street for the past, you know, 12 to 18 months. So the reality is, you know, we, you, you, the market and the economy and economic statistics will give you an opportunity to get out ahead of a recession, might not get out at the exact time, but our goal as investors should never to be, you know, top ticking and bottom ticking asset markets. What we're trying to do is help investors capture the maximum amount of trend in bull markets and absolutely, you know, be away from and not, and not capture any of that trend in bear markets. And I think we're doing a fantastic job, if only because our research and risk management processes are so different than the average investor.

• 20:15Anthony Pompliano?

  That, uh, that makes sense to me. Where can we send people to find you on the internet or find out more about 42 Macro?

• 20:20Speaker 02

  Yeah, thanks, Pop. I appreciate that, man. So, uh, yeah, we're 42macro.com. Definitely come check us out. Um, at Darius Dale 42 on Twitter. Uh, we definitely put out a lot of, uh, you know, interesting, educational and helpful content out there to, uh, to satisfy our audience. So we just want to say we appreciate everyone. Hopefully everyone's out there having a great year. Happy holidays and we'll catch back here in a couple of weeks.

• 20:38Anthony Pompliano?

  You are the man. I appreciate you and we'll definitely keep doing this. So, well, thanks so much and, uh, you have a great holidays as well.

• 20:45Speaker 02

  You too, brother. Thank you.