#1214 Darius Dale | Central Banks Are Secretly Controlling Stock Prices?!

Darius Dale is the founder & CEO of 42Macro, one of the best research shops in all of Wall Street. In this conversation, we discuss global liquidity, we talk about which of the central banks are pushing liquidity up, and which of the central banks are driving liquidity out of the system. The global liquidity is one of the most important inputs to understanding asset prices, and Darius does a great job of breaking that down. ======================= Pomp writes a daily letter to over 235,000+ 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. Darius Dale is the founder and CEO of 42 Macro. They're one of the best research shops in all of Wall Street. And if you haven't checked them out yet, I highly suggest that you do. In this conversation, Darius and I discuss global liquidity. We talk about which of the central banks are pushing liquidity up and which of the central banks are driving

• 0:47Anthony Pompliano?

  liquidity out of the system. The global liquidity is one of the most important inputs to understanding asset prices, and Darius does a great job of breaking that down. Here is my conversation with Darius Dale.

• 1:00Speaker 01

  The action's on the court, and as the official beer sponsor of the NBA, Michelob Ultra is getting fans closer to the game with a chance to win courtside seats, merch, and more. Visit michelobultra.com/courtside to enter. Michelob Ultra Courtside, 26 to 27. No purchase necessary. Open to U.S. residents 21+. Begins on October 1st, 2026 and ends on June 30th, 2027. Multiple entry periods. See official rules at michelobultra.com/courtside for free entry, entry deadlines, prizes, and details.

• 1:28Speaker 02

  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.

• 1:52Anthony Pompliano?

  All right, guys. Bang, bang. We've got Darius here. Darius, global liquidity, we have been talking about it now for weeks. It looks like we have finally bottomed, but the recovery is not so much a linear thing, or is it? How do you look at the global liquidity right now?

• 2:06Speaker 03

  Yeah, hey, man. What's up? It's good to see you guys. So I'll start by saying we've had a significant increase off the lows in global liquidity. If you're already, if you showed chart number one, what I'm showing in this first chart is our global liquidity proxy. That's the blue line in the top panel. For those of who are maybe not unfamiliar, how we track global liquidity, 42 macro, we aggregate the US dollar sum, the global central bank balance sheet, global broad money supply, and global FX reserves minus gold for a variety of different reasons, we include those measures. But the one thing we'd say is if you look at the middle panel there where we show the max drawdown study for the blue line, which again is our global liquidity proxy, you know, it recovered significantly off the lows of late 2024, 2022. But as you can see in recent weeks and months, it

• 2:49Speaker 03

  had that recovery process has really stalled out and we're actually moving in the wrong direction. So this is something we've been calling out in our research. We started making noise about this in kind of in the late April, right around the year-to-date highs in Bitcoin, and we've not recovered that price. We've obviously haven't really crashed lower. But in our view, a lot of what's kind of weighed on the price of Bitcoin and really all digital assets relative to like US equities is the fact that we've seen this nonlinear recovery process in global liquidity.

• 3:16Anthony Pompliano?

  So when you start looking at asset markets, obviously, these asset markets are a key piece to it. There's kind of the response to the liquidity, if you will. How are you looking at asset markets and what is that response?

• 3:28Speaker 03

  Yeah, great question. So the next chart we have of the viewers, we have our global liquidity proxy in the top panel with respect to the S and P 500's price and the Bitcoin price. And what we show in the kind of the second, third, and fourth panels there is a trailing one-year Z score study. So we're normalizing these these measures to kind of make them a little bit more comparable. And what you see is that if you look at a one-year Z score of our global liquidity proxy, it's only at about a 0.2 sigma relative to its trailing one-year mean, whereas the S and P 500 is a plus 2.3 sigma, plus 2.2 sigma, and Bitcoin is a plus 1.1 sigma. So we're seeing a lot of bigger recovery on a normalized basis in asset markets relative to the recovery we've seen in global liquidity, which again is now moving in the wrong direction.

• 4:13Anthony Pompliano?

  So when we start looking at global liquidity impulse, that is something kind of a little bit different. You're going to have to explain to people what exactly the impulse component is, and then what are you seeing there?

• 4:22Speaker 03

  Yeah, absolutely. So just a simplistic, we use big jargony words in finance, but the reality is all we're tracking is trailing through month momentum in these time series to identify whether impulse is positive or not. You can obviously pick your own duration, but we try to track that trailing through month seems to be the best in terms of fitting this with asset markets. And so as we saw again, our global liquidity proxy in the top panel of this chart relative to world equity market cap. And as you can see, we're kind of flat selling through month basis and global liquidity had been very positive, right? If you go back to the lows of, or sorry, had been very, had been very negative, then it became very positive. Now we're kind of flat. And so if you go back to the, the lows of 2022 last year, yeah, we had a minus $6 trillion trailing through month impulse in the month of, in the month of October.

• 5:06Speaker 03

  And that's obviously it's a pretty significant decline, but that kind of swung all the way around to a plus $9 trillion-ish dollar impulse, positive impulse by the time we got into Q1 of this year. And that positive impulse has been steadily waning on a trailing three month basis until we got to kind of April and May, and which is now flat. So this is not, the equity markets sort of mirror this from the perspective of, you know, the momentum in the impulse itself. So the momentum of the momentum. But the reality is we're still growing in equity market terms and which is not necessarily something, you know, that we feel is sustainable.

• 5:43Anthony Pompliano?

  Now, one of the nuances when we start looking at this is there's public sector and private sector liquidity. And sometimes they move in kind of concert with each other. Other times they do not. Right now it appears they're not. So explain the differences between public sector and private sector. And then why are they almost operating at the opposite ends of the spectrum right now?

• 5:59Speaker 03

  Yeah, absolutely. So I'll start by saying the reason we look at global liquidity in terms of our global liquidity proxy, again, central bank balance sheet, global broad money supply, global FX reserves minus gold, is to sort of identify, you know, inflection points in the liquidity cycle by isolating, you know, kind of key factors. So private sector liquidity, which is liquidity created by commercial banks, tends to be very procyclical. If growth's accelerating. Liquidity is going to be accelerating. If growth is decelerating, liquidity is going to be decelerating. You know, banks effectively extend credit, non-bank, you know, financial market participants extend credit when things are getting better. They pull back on credit intermediation when things are getting worse. So we understand that this is a very key component of liquidity, private sector liquidity in terms of exacerbating trends.

• 6:42Speaker 03

  But what causes the trends to inflect is the public sector liquidity function, i.e. central banks, what's happening with respect to central bank policy. So that's why we spend so much time talking about central banks as market participants, because ultimately they can cause an inflection either to the upside from a negative trend or an inflection to the downside from a positive trend with respect to private sector liquidity and then obviously broad liquidity when you amalgamate all these measures. And so right now what's happening, we're seeing a modest increase in private sector liquidity on a trailing through month momentum basis. Again, that's the bottom panels in these charts. And then when you see the, we're also seeing a negative trailing through month impulse in global private sector liquidity. So the private sector liquidity impulse is very much kind of mirroring the deuce to slow.

• 7:25Speaker 03

  We have a recession in the Arizona economy. We have a disappointing recovery in the Chinese economy. That's kind of inflected negatively from an impulse perspective in recent months, in the most recent month. And then obviously growth has been slowing in the U.S., although albeit still very much not in a recession. So that's kind of one thing we call out. But again, don't forget, the global liquidity impulse trailing through month is flat. It's flattish. It's moving lower on a kind of a sequential basis. And ultimately, we expect that kind of trailing through month impulse to get that negative, that flat trailing through month impulse to go negative in the coming months.

• 7:55Anthony Pompliano?

  So let's go around the world here. We can go east to west. Let's start with China and kind of the liquidity there. What are you seeing?

• 8:00Speaker 03

  Yeah, absolutely. So China is kind of bucking the trend if you, as it relates to global liquidity. So right now, the Chinese liquidity impulse, that's chart five there, is actually currently negative, only modestly negative. But they've done a series of measures in recent weeks that gives us confidence to say that that minus, that modest negative impulse is likely to inflect positive in the coming months. So they cut their seven day, their benchmark seven day reverse repurchase rate by 10 basis points that PBOC did last week. They also cut their one-year medium-term lending facility rate by 10 basis points. Last week, we seen fall through by Chinese banks this week. They're cutting their one year and five year loan prime rates by 10 basis points.

• 8:41Speaker 03

  And you know, this is kind of mirrors the the series of easing measures we saw kind of in the middle to the second half of 2022. That really helped the Chinese liquidity impulse kind of inflect positively alongside, obviously, a lot of PBOC open market operations and medium term lending financing itself. And so that's something we would expect to see over the coming months. And and and it obviously would be a positive from a global liquidity perspective, given how dominant China, the Chinese economy is in that in that in that matrix. But the issue there is that you have, you know, liquidity impulses in the US is likely to deepen. The negative liquidity impulse in the US is likely to deepen in the coming months. Eurozone is likely to inflect negative and Japan potentially may become negative and deepen as well. So we can unpack each of those separately.

• 9:24Anthony Pompliano?

  Let's go now to the United States and their liquidity. What are you seeing there? And it almost feels like it's going to be opposite of China.

• 9:29Speaker 03

  Yeah, absolutely. So clearly, I mean, our liquidity cycle has been negative for for quite a while now. It's not no secret to anyone that's obviously doing quantitative tightening. You know, clearly, we have an issue in the in the banking sector as it relates to extending credit. Certainly not extending credit nearly at the pace that we had been in recent quarters. And so that's likely to get worse in our view for a couple of reasons. One, we have clearly the rebuild of the TGA. We've talked about this months ago, so it's not no secret. I think it's pretty consensus now. That's draining liquidity at the margins because we have not seen the decline in the reverse rule facility bounce fully offset the rise in the TGA. You know, Treasury Secretary Yellen, which is something we've talked about maybe a month or two ago on the program, did a good job of kind of concentrating

• 10:13Speaker 03

  T bill issuance, you know, kind of really, you know, hitting the market heavy and hard with T bill issuance, very short dated T bill issuance to kind of drain a lot of funds out of the Fed's reverse repo facility program and transition those into the TGA. So that's obviously offset the rise and the potential drain in liquidity that we've seen in the rise in terms of the rise of the TGA post debt ceiling. That that process is not being fully offset. So at the margins, you're seeing a little bit of decline in liquidity in the US. But what I think is the bigger issue, the more structural issue. Is the fact that we're running with these sort of record non-war, non-recession budget deficits in the US economy. We are currently tracking at minus 8% of GDP as it relates to our budget deficit

• 10:54Speaker 03

  as a percent of nominal GDP as the most recent month is May that we have the data for. And so what that ultimately means is that they're going to be issuing a lot of debt regardless. And the reason we bring this up is because the Fed has been doing quantitative tightening on autopilot in recent months. To recall that we hit the debt ceiling in mid-January and really haven't issued debt on a net basis since then. And so the return of Uncle Sam, the international capital markets, is likely to coincide with a significant uptick in coupon issuance from effectively net zero to something that's a lot less, a lot greater than net zero in the context of this structural deep negative budget deficit. So this is, in our opinion, is going to give quantitative tightening its teeth back as it relates to potentially draining bank reserves again,

• 11:36Speaker 03

  which is something quantitative tightening has not done since the beginning of the year, the very, you know, kind of middle of January. So this is something we're calling out as potential, as a very likely negative impulse on global liquidity in the coming months.

• 11:49Anthony Pompliano?

  Let's jump back over to the Eurozone. Obviously, the liquidity there, they kind of seem to be doing their own thing to some degree. But what are you seeing on that front?

• 11:59Speaker 01

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• 12:26Speaker 03

  Yeah, so last week, so last week was a big week, right? We got the Fed on Wednesday, the Eurozone on Thursday, China on Thursday, and then the PPR, so PBOC on Thursday, and then obviously the Bank of Japan on Friday. So as it relates to the Eurozone, we got a lot of important updates as it relates to their liquidity cycle. Obviously, they hiked interest rates. Madame Lagarde was extremely hawkish with respect to the guidance, which allowed terminal policy rates, you know, with respect to ECB to back up pretty meaningfully week over week last week. So you know, the mark the ECB is doing a good job of kind of pushing through tighter interest rate expectations through the kind of global financial system. But one thing that's also they called out last week is that, you know, we got 477 billion euros.

• 13:07Speaker 03

  So over 500 billion dollars of pandemic related financing for banks. That's going to mature next month that they're not going to roll over. So we know the ECB's balance sheet is going to decline by roughly 500 billion dollars next month. But we also have them not no longer reinvesting the proceeds from their asset purchase program, which is about $3 trillion thereabouts. And so that's, you know, that's it's not quite QT, but it's certainly it's that balance sheet runoff is going to be kind of negative from the perspective of global liquidity out of the eurozone. So it's very likely that this is kind of very modest. We're more or less flat, you know, this very modest kind of positive 23 month impulse in eurozone liquidity is likely to go negative and get potentially very negative in the coming months, you know, particularly around the summer.

• 13:51Anthony Pompliano?

  Can you talk about Japan? You mentioned them earlier. What was going on with their liquidity?

• 13:55Speaker 03

  Yeah, absolutely. So Japan is a kind of an interesting wild card, right? So the Japan, the Bank of Japan stood pat on its yield curve control program last Friday. Governor Ueda continues to kind of anchor on wages as opposed to inflation as what's really driving that process. But we also know that if you look at their forecast for inflation in Japan, particularly for the current fiscal year, they're down at 1.8%. Whereas, you know, if you look at where core CPI is tracking in Japan now, it's about 200 basis points higher than that. And so we know that when we get to July, which is when they're going to publish their updated version of, you know, their summary of economic projections, the Japan's version of that. It's very likely they have a significant positive revision to their inflation forecast. Now, if that's significant positive revision to the current fiscal year inflation forecast

• 14:38Speaker 03

  is married by a meaningful positive revision in the out year inflation forecast, it's very likely that they're going to have to start, you know, kind of, you know, talking about or at the bare minimum, tweaking yield curve control again, not make, I don't know if we know enough that they're going to do it in July. But it's certainly something that could potentially happen in the coming months. You know, maybe it happens in September thereabouts as it relates to, you know, potentially, you know, kind of changing that program and what, why that. Relevant for global liquidity is because if Japan alters its yield curve control program, it reduces the amount of pressure that the Bank of Japan will have in terms of defending the yield peg in Japanese bond market and ultimately in the global bond market. So this is something that, you know, you go back to the kind of fall last year to the early part of this year.

• 15:21Speaker 03

  The defense of that peg was one of the things that really caused global liquidity to really spike higher, you know, from Q4 to Q1 of this year, right? And so ultimately, if we don't have that kind of market speculation because the peg is more, I guess, in line with global sovereign debt yields, then ultimately you might, you might see Japan's liquidity impulse kind of get incrementally negative in the coming months. So when you sum them all up, you have Chinese liquidity is going to be improving. We pretty much know with, I wouldn't say there's no certainty in financial markets, but there's a reasonable degree of reasonably high probability that liquidity in the US gets worse from here in the coming months. The liquidity in the eurozone gets worse from here in the coming months. And there's a strong possibility that Japanese liquidity may get worse in the coming months.

• 16:04Speaker 03

  And so when you pad up what's happening in the US and the eurozone alone, it's likely to offset what we're likely to experience in China. But when they are on Japan, which is obviously a very large economy in and of its own right, that may actually kind of make that offsetting process a little bit worse and may potentially cause, you know, some volatility in asset markets this summer, which has been our baseline view. I don't think this is the end of the kind of bull run that we've seen really since the fall of last year because ultimately we still think the average investor is very much offside with respect to the timing of recession. You know, we've been, you're not on top of this for a long time now, but we have been since the last summer of the view that a recession, if it was going to commence in the US economy, that Q4 of 2023 was the highest probability outcome.

• 16:48Speaker 03

  But the second highest probability outcome of a recession starting in the US economy is Q1 of next year. And the reason that's important as it relates to the understanding of the market cycle is that asset markets tend to squeeze very aggressively into the end of the business cycle. The median return on the S and P 500, if you go back and look at the 12 recessions, post-war recessions that we have, the median return to the S and P 500 in the year leading up to the peak and then around the recession is plus 16%. An interquartile range of fourteen to twenty percent plus twenty fourteen to plus twenty percent. There are no non double digit numbers in that entire twelve cycle samples. So this is a, you know, with that understanding, we understand that if we're right on the timing of recession being Q four, Q one, we could see markets rally into, I don't know, October, even January between now and then.

• 17:31Speaker 03

  So ultimately, we do this correction will be bought this summer. If we're right on the liquidity cycle, we're right that we get a correction as a function of the deep, then, you know, kind of adverse liquidity cycle developments. And ultimately, you probably want to buy a dip heading into year end, or maybe even to your Q four year end, because ultimately, we're not quite ready for that recession phase two credit cycle downturn.

• 17:52Anthony Pompliano?

  So when you start looking at that recession, it's kind of like the most telegraphed recession of all time, right? In terms of like, everyone's talking about, everyone's talking about, everyone's waiting for the shoe to drop, whatever. Is there a scenario where it couldn't happen? What would have to be the, the kind of inputs into that situation where, as of right now, we think it's going to happen, but what could change that then gets us in a situation where we avoid a recession?

• 18:13Speaker 03

  Yeah, no, it's, it's not that what could change, it's that what could continue to go right. So, you know, we've identified sort of five things that have really contributed to the resiliency of the US economy. And as a function of that, the resiliency of the US inflation cycle, which has caused obviously a lot more tightening by the Fed since we initially outlined the call back, you know, I would say it was August of last year. And so ultimately, those two of those things are, you know, record cash on corporate and near record cash on, I'm sorry, record cash on household and corporate balance sheets in the US. If you look at cash, checkable deposits as a share of total assets in the US for the household sector and the corporate sectors, right around, you know, kind of three percent for each. We haven't seen this high ratio of cash relative to total assets for both parties since going back to the kind of mid to late nineteen sixties.

• 18:58Speaker 03

  So that's kind of what step one. Step two, you know, you've obviously seen a lot of monetary policy tightening through the lens of the, the lens of the policy rate. And ultimately, that's caused a backup to bond yields and whatnot, but the reality is. It's just harder for that stuff to really impact the economy. These long and variable lags may have gotten longer in the context of how much sort of low cost fixed rate debt we have in the US economy right now. With data through, I want to say Q1 of this year, the effective mortgage rate on the, you know, total stock of mortgage debt in the US economy is still down at 3.55%. Obviously, the marginal mortgage rate, if you're in the market to buy a house, is, you know, north of 7%, but most people aren't trading their 3.5% mortgages or 7% mortgages. So it's not, the monetary policy impact of that really is muted because no one's really

• 19:42Speaker 03

  moving as a function of that. And so that's kind of step three. Step four is we've seen, or reason number four, is we've seen a significant decline in manufacturing as a share of both the labor market and as a share of GDP. You know, we used to be, I want to say, somewhere around 45% in the 40s in terms of manufacturing as a share of total employment. Now we're down at 14%. You know, we, manufacturing as a share of GDP is only 18%. And the reason this is important is because manufacturing, if you look at the net job loss that we experience in recessions, manufacturing on a median basis is going back to all the post-war recessions we have data for, manufacturing on a median basis accounts for 98% of the net job loss we tend to see in recession. So that tells you that like, hey, this is the cyclical sector of the economy.

• 20:26Speaker 03

  If it has declined as a share of total employment and share of GDP, obviously you need to have a much more significant downturn in the manufacturing sector in the US economy to actually affect a real recession across the broader services-dominated US economy. And so the final reason, number five, is we've seen a significant amount of labor hoarding in this, in this cycle. If you sort of look at the, the delta between the current level of this current size of the total labor force here in the US relative to the pre-COVID or the post-GFC trends, we're right around 5 to 6 billion, or 5 to 6 million workers shy of that trend line. So, but what's not shy of the trend line has been the recovery in gross domestic incomes. We're, you know, we're north of that trend line. And so we've seen a significant recovery in income, you know, particularly for, you

• 21:09Speaker 03

  know, US businesses, but we have not seen a significant recovery in, in labor supply. And this is as a function of that, you know, you're seeing a very tight labor market that's been extremely resilient to Fed tightening. And part of the reason for that You know, being extremely resilient to that tightening is the fact companies may just be reluctant to fire people in this particular cycle. They may have to see a significant, uh, much larger kind of a hit to their profitability and outlook for their profitability before they feel comfortable firing people because they know that in the next business cycle, it's going to be very difficult to find and retain talent, uh, find, train and retain, uh, talent. So this is something that's kind of delaying the process as well.

• 21:44Anthony Pompliano?

  Darius, I learn something every time we talk. Where can we send people to find you on the internet? Or find out more about 42 Macro?

• 21:49Speaker 03

  Uh, I appreciate you, man. So definitely come check us out at 42macro.com. Uh, obviously could, you know, research out for, uh, all top institutions, asset managers, central banks, et cetera, uh, across the global economy. We make that same research available to retail investors at the same price point, very, very low price points because we ultimately believe that knowledge is power. We want to help as many people as we can. So check us out at 42 Macro. Uh, and then we, our own Paul's on Twitter as well. My pod, my public Twitter is 42 Macro Weather. We have a private Twitter account as well for our subscribers and our members. So I spend most of my time in that private account, but we definitely do publish our public account as well.

• 22:22Anthony Pompliano?

  Awesome. I appreciate it. We'll definitely do it again in a couple of weeks.

• 22:25Speaker 03

  Absolutely, brothers. Great to see you guys. Cheers.