#1303 Darius Dale on Interest Rates, Fed, Election Year, Macro Outlook

Darius Dale is the Founder & CEO of 42Macro. In this conversation, we talk about the labor market, economics, Federal Reserve, interest rates, election year, and macro outlook. ======================= Introducing Espresso - the world’s most interactive portable display. They have a portable screen that is incredibly light, comes with a nice stand, and the user interface is very easy. Anyone who listens to this podcast can go to ⁠us.espres.so/pomp⁠. They have a brand new offer waiting for you. ======================= BetOnline.ag is a proud sponsor of the the Pomp Podcast. Use crypto to bet on sports, play poker and enjoy casino games at BetOnline. Visit https://promotions.betonline.ag/pomp and use promo code POMP100 to receive a 100% matching bonus on any crypto deposit. BetOnline boasts no crypto transaction fees, and processing is anonymous, instantaneous and secure. ======================= Pomp writes a daily letter to over 250,000+ investors about business, technology, and finance. He breaks down complex topics into easy-to-understand language while sharing opinions on various aspects of each industry. You can subscribe at https://pomp.substack.com/

Speaker names marked ? are inferred from speaking time and the show’s known hosts — they are not voice-verified.

• 0:02Anthony Pompliano?

  What's up everyone? This is Anthony Pompliano. Many of you know me as Pomp. You're listening to the Pomp Podcast, which is my effort to find the most interesting people in the world and sit with them for hours while I ask questions in an effort to learn. So it would mean the world to me if you would subscribe to the show on your favorite audio platform, watch episodes on YouTube, and tell your friends and family about the podcast. My goal is to help millions learn from the world's most interesting people. So let's get into today's episode. Today's episode is with 42 Macro co-founder and CEO Darius Dale. In this conversation, we talk about the labor market, economics, what is going on in the current US economy, and how the Federal Reserve should be thinking about cutting interest rates, keeping them

• 0:45Anthony Pompliano?

  the same, or potentially, maybe they should even be hiking them. A lot of that has to do with whether a recession is coming or not, and Darius unpacks it all for us. I always enjoy these conversations, and I hope that they are valuable to you. Here is my conversation with Darius Dale.

• 0:58Speaker 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.

• 1:23Anthony Pompliano?

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• 2:06Anthony Pompliano?

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• 2:47Anthony Pompliano?

  Trust me, I use mine every day. You'll love the espresso screen and I think it'll make you more productive. Go check them out today by clicking on the link in the description. This episode is brought to you by BetOnline. Do you like making a profit from sports betting? Well, set yourself up to take home the most profit possible using crypto to fund your sports betting. Casino and poker account at betonline.ag. You can avoid costly transaction fees, get your payouts lightning fast, and do it all securely and anonymously with the highest deposit and withdrawal limits in the industry. If you want to get in on the action, do it the smart way with crypto at betonline.ag. Head to the website, sign up with promo code POMP100 to get 100% bonus on your crypto deposit today.

• 3:30Anthony Pompliano?

  If you go and you deposit, they'll give you 100% bonus if you use promo code POMP100. BetOnline, the game starts here. BetOnline.ag. Go check them out today. All right, guys. Bang, bang. I've got Darius here. Darius, a great place to start is let's just talk about the economy. Some people think it's hot. Some people think it's cool. Some people think the Fed should cut interest rates. Some people think the Fed is doing a perfect job. But before we get to what we think they should do, let's dig into some data. Low worker turnover is this huge, you know, talking point now. And you're saying that it's supportive of an economic expansion. Explain.

• 4:06Speaker 02

  Yeah, absolutely. So thanks for having me as always. Great to be here. So this chart where we show Jolt's total job openings divided by total unemployed workers. That's that all important ratio that Jay Powell's been guiding us to as an indication of how much slack or tightness is exhibits in the labor market. In the second panel there, we show the private sector hires rate at 3.9% was unchanged month over month in the month of December. That's a below trend rate relative to the 2015 and 2019 trend. Third panel there, we show the private sector's quits rate, which declined to 2.4%, which is the exactly the same number it trended at prior to the pandemic. And the reason that's important is because when we see lower turnover, as we've seen in recent quarters, it is supportive of the

• 4:47Speaker 02

  economic expansion because it takes the pressure off of wages in terms of the labor market.

• 4:54Anthony Pompliano?

  Now, when we see this turnover, I also just saw that there was payroll growth is coming in under expectations. And so how much of this is mixed signals compared to, no, some of these data points are actually more important than others. Like this next chart you have is workers that changed jobs or experienced faster wage growth. And so as we dig into this kind of worker data, what do you put, you know, heavy emphasis on versus maybe some of the data points you ignore?

• 5:23Speaker 02

  Yeah, absolutely. So I think we do a really good job for our clients at 42 Macro of contextualizing all the things that matter within the context of all the various reports that we get out of the US labor market. It's been a massive week for labor market data in particular. On Tuesday, we got the Jolt's report. On Tuesday, yesterday, we got the consumer confidence or consumer confidence report there and labor market surveys embedded in that. Today, we got the employment cost index and the ADP employment report. Tomorrow, we get jobless claims and then Friday, we get the actual jobs report. So in terms of focusing investors on kind of the general lay of the land, like what's actually happening in the labor market and we can drill down into the chart specifically. You know, the

• 6:02Speaker 02

  labor market is cooling, but it is not crashing. And cooling but not crashing is actually supportive for risk. It's supporting of this elevated probability of a soft landing in the US economy that is underpinned. The current Goldilocks market regime. So let's get into this chart here, number two, where we say workers that change jobs experience faster wage growth. That's something that we observed in both the ADP median annual pay statistics. We also observed that in the Atlanta Fed Wage Growth Tracker statistics as well. That's the blue line for the growth rate of wages for workers that change jobs relative to the red lines, which are the growth rate of wages for workers that stay at their jobs. So going back to that first chart where we show the private sector hires rate and the private sector quits rate

• 6:46Speaker 02

  are now below trend and at trend respectively, having declined over the past several quarters. It's suggesting that we're going to continue to see slower wage growth, wage disinflation in the months ahead, which is obviously supportive of the rate cuts that are projected and priced into money markets.

• 7:03Anthony Pompliano?

  Now, labor hoarding, I never even heard of that before. What is labor hoarding and what is that telling us?

• 7:09Speaker 02

  Yeah, so the reason you've never heard of labor hoarding before because it really hasn't happened throughout our careers. For the most part, we saw a little bit of labor hoarding in 2018 to 2019, but really it's been a post pandemic excess fiscal, excess monetary stimulus phenomenon that has really guided the US economy and asset markets over the past few years. So what we mean by labor hoarding is labor demand just simply outstripping labor supply. So in this chart on slide three here, we show the total labor force in the top panel, which is still below trend relative to the 2009 to 2019 trend. We show gross domestic income on a nominal basis, which is well above trend and has been since 2021. And then the third panel, we show labor demand, which is household survey total employment

• 7:52Speaker 02

  plus jobs total job openings, that's the blue line at about 170 million. And then we show labor supply, which is again the labor for the total labor force, which is at about 167 million. The third panel where we show our labor demand minus labor supply metric, that number is running at 2.7, 2.76 million in terms of excess units of demand relative to units of supply of labor here in the US economy. And that's obviously really important because it's obviously caused, it's one of those contributing factors to elevate it a slightly above trend sort of wage growth. And so the bottom panel there, we just, you know, we show, we break out labor demand in terms of household survey employment, the blue line and total job openings, the red line.

• 8:35Speaker 02

  And what we see is that the red line has been the only statistic responsible for generating the slack in the labor market that we've observed in the past couple of years. Recall that the spread between labor supply, sorry, labor demand and labor supply peaked at right around just north of 5 million in the first quarter of 2022 and has obviously declined again towards 2.8 million currently. So all that slack that we've created in the labor market has really come at the expense of the red line in the bottom panel there, which is total job openings. We have not seen a broad-based decline in total employment, which is why we continue to call it labor hoarding. Companies are willing to take down job openings and slow the rate of wage growth, but they're not willing to fire people, which obviously would cause a recession.

• 9:20Speaker 02

  So in our opinion, we think this dynamic is persistent, is likely to persist because at worst, corporate executives are only anticipating a shallow recession. I would argue that, you know, just based on consumer and business confidence metrics, that that expectation of a shallow recession is actually moving in a positive manner towards expecting a soft landing and the sustainability of the business cycle.

• 9:42Anthony Pompliano?

  Now, you say shallow recession. It feels like a lot of people just expect the recession to come. We can go through a whole bunch of data points as to why they're expecting that. But this other slide you have is saying that there's a number of indicators you guys are watching that shows a low probability of a recession. So it feels like the mainstream conversation is, of course, a recession's coming. How severe will it be? But maybe you're saying something else might happen.

• 10:04Speaker 02

  Yeah, absolutely. So in our opinion, the probability of a soft landing remains the highest probability outcome in the US economy. We are not in the soft landing camp. We're not in the no landing camp. We're not in the hard landing camp. We're in the camp that allows us and our clients at 42 Macro to make money. And we've been in the soft landing camp. We've been renting the soft landing camp since November 1st of last year in terms of anticipating and calling for a soft landing Goldilocks trade. So that obviously was spot on in terms of, in terms of helping our clients profit from that, from that view. In terms of this Chart here are Fab Five recession signaling indicators and these are handpicked time series from you know dozens and dozens if not hundreds of time series that we analyze that

• 10:44Speaker 02

  that and ultimately give investors the best lead time with the sport with respect to reporting and also the most consistency with respect to accuracy of projecting the protecting rising or falling probability of developing recession here in the US economy. So I mentioned we got the conference board, consumer confidence index yesterday, the labor survey differential within the context of that report ticked up by 8.4 points month over month in January, which is the fastest month over month delta we have seen in that time series since I want to say May of 2021. And so we're obviously moving in the wrong direction from the perspective of anyone who is positioning for a hard landing or is anticipating a hard landing outcome.

• 11:28Speaker 02

  And so brought in mass of these five data points, the only temporary employment in terms of the through my annualized rate of change there of minus 13.3%. Only one of these five is signaling a high probability of a developing recession. Three are signaling a low probability and one is signaling a middling probability. So in balance, we don't think there's a tremendous amount of risk of a hard landing here in the US economy because the leading indicators that we have hands selected based on our careful research and understanding of these critical economic dynamics. That's the point that suggests that you know recession is not really something that we need to be concerned about as investors.

• 12:05Anthony Pompliano?

  Now, let's say that a recession is not something we need to be concerned about. Then obviously, we probably should keep interest rates where they are. Do you think that we should be hiking them? I would actually argue that maybe we should be cutting interest rates. Not a lot, maybe like 25 basis points with an eye to do like 50 to 75 basis points throughout the year as a way to kind of sort of easing back. So we don't overshoot. But how are you thinking about if you're, you know, the Fed chairman and you got to make these interest rate decisions, given the data that you've got and the low probability of recession that you're seeing, do you just

• 12:37Speaker 02

  Yeah, great minds think alike, my friend. The Fed in December acknowledged the markets pricing of rate cuts throughout 2024 and into over the next couple of years. And then, in my opinion, that that's very warranted, given exactly what you said, which is they should be reversing course to avoid overshooting and over tightening the economy. Recall that the Fed thinks about policy, its policy rate from the perspective of the real rate, not perspective of the nominal rate. And right now, we continue to see a very obvious signs of inflation crashing lower. If you go back to Friday's PCE report for the month of December, we got core PCE in that report, both as three-month annualized and six-month annualized rates of change of core PCE, the Fed's preferred inflation gauge are at or

• 13:22Speaker 02

  below 2%. And so, you know, with at or below 2% is obviously well off the 3% to 4% to 5% rates of inflation that we observed in the last few years when the Fed was, you know, anxiously tightening policy at the fastest pace in 40 years. So now that we are seeing pretty, pretty clear and obvious signs that inflation is likely to continue trending lower on a year-over-year basis over the medium term, it is a signal to us as investors, but also to the Fed as policymakers, that they actually do need to tone down the nominal level of the policy rate, just to maintain the same real rate as inflation continues to come lower. So in our view, it's good policy. It's piggybacking on the great policy

• 14:03Speaker 02

  that we continue to observe out of the Treasury. The Treasury got the QRA this week, the quarterly year funding announcement, and the coupon auction size is surprised to the downside, the net financing surprised to the downside, bond issuance continues to be well subdued. You know, if you look at their cash balance estimates for into quarter Q1, into quarter Q2, the TGA is above that, which implies right around $100 billion of fresh liquidity waiting to be pumped into the system. You know, so there's a lot of really positive dynamics that are sort of being pumped in asset markets from the perspective of monetary and fiscal policy in the US. And guess what? It's for good reason. It's for all the reasons we identified, going back to, you know, late October, early November of last year, in

• 14:43Speaker 02

  terms of accelerated immaculate disinflation, evidence of a resilient US economy persisting, but a cooling but not crashing labor market that is ultimately taking the winds, sort of taking pressure out of wage growth, which obviously is supportive and a guiding feature for all these positive dynamics.

• 15:01Anthony Pompliano?

  Now, when you see the Fed as one component, we also have the politicians on the other side. And they just, they lost their minds. They're printing money. They're dropping fiscal stimulus from every corner that they got. Proxy wars, infrastructure bill, CHIPS Act, name all the other crazy things that they want to do. Should the Fed consider those inputs into the economy? And can they somehow predict what the politicians are going to do in that changing their monetary policy decisions? Like, it almost feels like in 2020, they were on the same page. Cut rates, print money. Now, it feels like the Fed was like, let's tighten. And the politicians were like, screw you guys. This is too much fun. Let's just keep, you know, pushing money into the economy. So how do you think about the relationship

• 15:45Anthony Pompliano?

  between the politicians and fiscal versus the central banks and the monetary policy?

• 15:49Speaker 02

  Yeah, no, I think they're getting increasingly less correlated. This is your point. If you think about what's happening with fiscal policy here in the US, we continue to observe a very positive fiscal impulse, albeit getting less positive at the margins. And less positive at the margins is a negative sort of signal for the economy and ultimately for asset markets. I think we discussed that the last time I was on with respect to the change in our macro weather model signal for, for the stock market, for instance, going from bullish to neutral with respect to the rolling three-month forward outlook. So that's, that's something at the margin that we are observing. Like, if you look at the, the year-over-year nominal delta of the federal budget deficit, it's up about $320 billion year-over-year in the month of December. That's down from up being up about $835 billion year-over-year in June,

• 16:34Speaker 02

  right? So like, we are pumping a tremendous amount of money into the economy vis a vis the federal budget deficit. Then we are still pumping money, more money into the economy vis a vis the federal budget deficit on a year-over-year basis. It's just a lot smaller than it had been. But again, still positive. The fiscal impulse is still positive. It's just not as positive as it, as it was. And, and we obviously have a, an election where it's an election, general election year. You know, we're not gonna, I don't think anybody wants to hear you and me talk about participate, pontificate about what's going to happen in the election. But the one thing I will say is we've done, obviously, as always, a tremendous amount of work in trying to help investors, clients, understand and ultimately position. And profit from you know, some of these critical dynamics. Uh, one thing we know is that stock market usually does really well uh in an election year,

• 17:18Speaker 02

  especially when a Democrat uh is an incumbent president on the ballot. Uh, obviously, Joe Biden is not going to uh for for, you know, if if Joe Biden is going to lose the race, it's not going to be because he didn't try uh in terms of spending uh fiscal spending and and pumping money and funds into the economy vis a vis the CHIPS Act, the Inflation Reduction Act. I think there's another act as well, uh but the the the end of the day, uh you should be expecting these kinds of positive fiscal impulse dynamics. You should be expecting uh positive monetary policy dynamics just based on what's happening in the economy. So, um, you know, just kind of summarizing all this. A lot of bears have just been wrong about, you know, kind of right down the middle of the fairway stuff. Monetary policy, fiscal policy, growth, inflation. You can't afford to get these things wrong as an investor.

• 18:04Speaker 02

  And in my opinion, I think the reason a lot of investors have gotten these things wrong over the past two to three years is because they're spending entirely too much time on Twitter. That's not an investment process. It just isn't.

• 18:14Anthony Pompliano?

  Now, we've got over the last one year, the S and P is up 20%. Uh, year to date, it's about 3%. Nasdaq had a monster year last year. What is your expectations, given where the economy is, low probability of recession, Federal Reserve is going to do what it's going to do? Are you expecting this to be another monster year for kind of tech and and magnificent seven, et cetera? Or do you think that this will kind of be a reversion back to maybe more of the historical type returns? You know, and that like 6 to 10% uh for for the stock market?

• 18:44Speaker 02

  Yeah, probably the latter. Uh, you know, there's a lot of, you know, very positive tailwinds, uh, you know, supporting asset markets here. But the starting point uh of under positioned investors and and and, you know, kind of reasonable valuations just don't exist uh like they existed uh at the beginning of last year. Now, that's not to say that uh we're bearish or there's any uh negative things that uh have really hit the tape yet. You know, one of the things I think we do uh as, you know, on on a very institutional high end buy site level for our clients, 42 macro, that most sell side research providers don't do is, you know, sort of a daily Bayesian grind through all the information and through all the the models that that. Really, um, we need to be abreast of as investors to make, you know, important critical pivots in our portfolio.

• 19:26Speaker 02

  And, you know, we continue to refresh the same models every day, six days a week here, forty two macro. We continue to analyze the same data sets every single month, every time it's the jobs report comes out, the conference board report comes out, the unit labor cost comes out, productivity comes out. We analyze those exact same data points, month after month after month after month, quarter after quarter after quarter after quarter, so that we can spot critical inflections in real time. And the reality is, we have not seen any fundamental data point, you know, critically inflect uh, in a way that would be materially threatening uh, to the current Goldilocks top down market regime. Now, that doesn't mean it is not coming. It may come tomorrow in the, in the form of a really negative outcome in terms of the Q four productivity report or the unit labor cost data. It may come in the form of an adverse outcome, uh, in the form of, of, of, of Friday's January jobs report.

• 20:10Speaker 02

  Uh, we also have meta earnings. Uh, we, I think we have Amazon earnings tonight. We got Apple earnings of tomorrow on Friday. So there's a lot of information between now and, you know, kind of four P M. Friday, uh, Friday afternoon uh, that suggests that, you know, what I just said about the fundamental, uh, the positive fundamental developments changing at the margins. But until they change and, and or until our medium term quantitative risk management signals say that, you know, Goldilocks has a low probability of surviving, we're not going to change. We're going to continue to be bullish. So uh, obviously you can check, uh, our clients will check back with us, uh, tomorrow for those updates.

• 20:42Anthony Pompliano?

  Where can we send people to find you on the internet or find out more about forty two macro?

• 20:46Speaker 02

  Well, only if they like making money. If they like making money, definitely come to forty two macro dot com. If you don't like making money, then, uh, God help you. Uh, I have, you know, just follow me on Twitter, uh, Darius Dell at forty two is my Twitter account.

• 20:58Anthony Pompliano?

  I always appreciate it, man. I learned something and I appreciate your balanced approach to, uh, whether we're going to have a recession or not, as you see more and more soft landing commentary come up, uh, usually that is not a good sign. But we definitely.

• 21:12Speaker 02

  I know we're wrapping up, but I let's let's I do want to leave on this. I think you brought up a good point, right? The if we look at our positioning model, you know, one of the things we try, we track a variety of the different indicators in our positioning model, whether it be valuation, whether it be positioning, survey based or hard positioning in the CFTC report, we track, investor allocations via the AI survey. So we're constantly monitoring positioning in the context of those long term time series so that we could spot, you know, sort of extreme values that would signal it's a good time to take the other side of a trade or calling for a pain trade. We call for the pain trade higher at the beginning of November in the context of the soft landing signals that we got from the economy. Right now, we are starting to get some

• 21:55Speaker 02

  elements of our positioning model that suggests now is a good time to be tactically reducing a market risk. That doesn't necessarily mean Goldilocks is about to end from a medium term perspective, you know, three, four, five, six months, but it does suggest that, you know, we could get a pullback here, a correction in stocks, you know, in the order of five to eight percent, which is very normal, very healthy. And I don't think anybody should, you know, kind of lose any sleep over something like that.

• 22:18Anthony Pompliano?

  I love it. All right. We'll definitely do it again in about two weeks. So let's let's hope that nothing crazy happens between now and then.

• 22:24Speaker 02

  Absolutely. But hope, hope is not an investment strategy. It's not a risk management process. Forty two macro is a risk management process.