#1402 Darius Dale | Stock Market Predictions To End 2024!

Darius Dale is the founder & CEO of 42Macro. In this conversation, we discuss inflation, productivity, asset prices, political impact, federal reserve interest rate decisions, and outlook for 2024. ======================= CrossFi is the Apple Pay for Crypto. For the first time in history, anyone with a web 3 wallet like Metamask can spend crypto through a physical or virtual visa cards anywhere in the world where Visa is accepted. Be one of the first to get your hands on a CrossFi card and a prize pool of $3 Million Dollars by joining and participating in their testnet today: ⁠⁠https://xfi.foundation/users⁠⁠ ======================= Pomp writes a daily letter to over 265,000+ 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/ ======================= View 10k+ open startup jobs: ⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠https://dreamstartupjob.com/⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠ Enroll in my Crypto Academy: https://www.thecryptoacademy.io/

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. What's up guys? Darius Dale is back on the podcast. He is the founder and CEO of 42 Macro, and you know that means he's breaking down all of the data in the legacy financial system. What's going on with inflation? How about productivity? Should you be worried about asset prices?

• 0:45Anthony Pompliano?

  How does he see all of this playing out going into the end of the year? What's up with the politicians? Are they going to print cash or are they not? Is the Fed going to cut rates? We cover all of it. Darius, dropping knowledge as usual. Here is my latest conversation with Darius Dale.

• 1:01Speaker 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.

• 1:25Anthony Pompliano?

  Today's episode is brought to you by CrossFi. CrossFi is the Apple Pay for crypto. For the first time in history, anyone with a Web3 wallet like MetaMask can spend crypto through a physical or virtual Visa card anywhere in the world where Visa is accepted. No more exchanges or middlemen. Just link your wallet, get your card, and start spending today. CrossFi card transactions have already been successfully processed in New York, Los Angeles, London, Dubai, China, Japan, and over 20 other countries. Be one of the first to get your hands on a CrossFi card in a prize pool of up to $3 million by joining and participating in their testnet today. You can go to xfi.foundation users. Again, that's xfi.foundation users. Go check it out today.

• 2:11Anthony Pompliano?

  All right, guys. Darius, another great place to start this conversation is everyone is trying to figure out what is happening in the US economy. They see job revisions occurring. They see politicians talking about how great the economy is. They see headlines, but not just what is going on in the economy, but also what does that mean for asset prices? You guys have a couple of models over at 42 Macro that I think are worth talking through, and maybe we can start with this risk matrix that you guys put together and kind of, you know, walk us through what is it telling us and how do you really look at the insights as to where we may be going?

• 2:42Speaker 02

  Yeah, 100%, man. Thanks for having me back. Always a pleasure to be here with your gang. So I'll start by saying you're absolutely right. We are in an era of peak noise. You know, so I've been doing this for almost 16 years now in terms of the institutional macro risk management side, and I don't think I've ever seen such a dispersion or cacophony of opinion regarding the near-term outlook for the US and global economy, regarding the near-term, medium-term outlook for asset markets. And so, one of the things we do well for our clients here at 42 Macro is distill signal from all the noise. And our global macro risk matrix is one of the more powerful tools we've built to do that for them. And so how this model works is it's scoring the 42 most important macro markets in the world through the lens of our volatility adjusted momentum signal, which we

• 3:23Speaker 02

  know it works really well in terms of projecting, you know, returns and things like stocks, crypto, balance, etc. And so how this, how the process works is we understand how each of these assets have historically traded, and based on the current volatility adjusted momentum signal relative to how the asset has historically traded across the four grid regimes, we can sort of sum up exactly what asset markets are trying to price in any given moment, but the obvious conclusion is, when that changes, we make changes in our portfolio so that we can remain on the right side of market risk. And if you look at slide two, you know, we've had this, you know, interesting debate over the past couple of months, really since the end of June, between Goldilocks and deflation. Right now, we're, you know, sort of deflation is sort of, has the highest share of

• 4:05Speaker 02

  the confirming markets in terms of the 18 markets that are currently confirming deflation right now, only 18 of the 42. And as you can see, in terms of that strength, the signal metric in the chart on the left here, it's actually really low. It's only the 27th percentile, the total amount of signal that's being generated by asset markets right now. Is only in the 27th percentile of daily data going all the way back to January of 1998. So we can infer from that, that there is a healthy debate going on right now amongst market participants around where we actually headed in market regime terms. We suspect based on our fundamental views, which we'll talk about later, that will ultimately resolve this debate in Goldilocks, but that doesn't necessarily mean we're out of the woods yet, and we could also see a little bit more deflation priced in in the coming weeks.

• 4:47Anthony Pompliano?

  Now, as this occurs, um, deflation was this really big concern. I remember Barry Sternlicht went on television, uh, kind of at maybe Q1, and he said deflation is coming, you know, there's going to be this massive issue. Um, he was accused of talking his book, uh, when it came to, uh, kind of commercial, uh, real estate. And so that deflation never really came because we still got inflation that's elevated. Um, could there be a world where, uh, inflation going down gives us some of the impact, but we still see kind of higher inflation prints? Like, is there a disconnect between maybe like what the number says versus what people feel?

• 5:30Anthony Pompliano?

  Or should we look at it as a positive number is exactly what we think it is and a negative number would, uh, would be the opposite?

• 5:37Speaker 02

  Yeah, that's a great question. So with respect to being a human, you feel the absolute number, right? The, the actual change in prices and the level of prices is what we feel as people. What markets feel are is the rate of change of those, those, those, those time series. And so what deflation is in grid regime standpoint, if that's when growth is slowing and inflation is slowing simultaneously, historically, that's a, you know, obviously a decline in nominal GDP growth. And so historically, that's led to risk off, you know, characteristics in asset markets. Doesn't necessarily mean markets always have to go down, but certainly tend to be led by defensive leadership within the equity and credit markets. And that's exactly what we've sort of seen over the past, you know, kind of six weeks or so, uh, is that, you know, deflation has really become the modal outcome from the perspective of asset markets. Now, will it stay is the question, right? You know, that's in terms of understanding, you need to understand where you are so that

• 6:22Speaker 02

  you can understand the base rate to be able to project more accurately where you're headed. And right now we understand that we are in this sort of low strength of signal, you know, low conviction. Deflation regime with the probability of Goldilocks continuing to rise. And so ultimately, we are sort of, you know, I think from a fundamental standpoint, it's more than likely that Goldilocks wins out when you layer on our projections for growth, inflation, things like liquidity, where we are in the positioning cycle, et cetera. But that doesn't necessarily mean we have to have this smooth transition from today. Right? You know, there's other things on the horizon that could create some, um, some consternation in asset markets. And the reason we bring this up is because this system is incredibly powerful at explaining and projecting market performance. If you look at slide four, where we show our global macro risk matrix market regime back

• 7:05Speaker 02

  test specifically for the S and P 500 and Bitcoin, what we see is that there is a significant amount of dispersion when you're going from one of the two risk off, risk on regimes, which are Goldilocks and inflation to one of the two risk off regimes, which are inflation and deflation. For example, with respect to the S and P 500, 97% of the S and P 500 cumulative return since January of 1998 has come when our global macro risk matrix has identified markets are in a risk on market regime. Uh, that's a hundred and nine percent uh, from Bitcoin. You know, I think Bitcoin time series starts sometime in 2009 or 2010. And so you actually, the, the, the system is actually better at trading Bitcoin than Bitcoin is at trading itself. And so that's why we spend so much time infusing and effort in terms of infusing these signals

• 7:49Speaker 02

  into how we manage risk for clients here, 42 macro, either via our KISS before the construction process, which is very simple for retail investors or discretionary risk management overlay, uh, which keeps our buy side clients on the right side of market risk.

• 8:00Anthony Pompliano?

  Now, we saw two quarters of negative GDP growth in, uh, 2022, I think it was. Um, and, and, and NBER, a fake nonprofit, uh, came out and, uh, they said, no, it's not a recession. Yeah, I called it a fake nonprofit because they're really a nonprofit, but somehow they got like king, uh, you know, uh, or, um, decided they were going to, you know, be the ones who said whether it was a, a recession or not. Why should we be worried if we get negative quarters of GDP growth? If we just say, hey, it's not a recession, like everyone just kind of forgot that that happened and it doesn't seem to really have affected markets?

• 8:44Speaker 02

  Yeah, well, I mean, it did have market impact in 2022, right? Recall that we were in a bear market in stocks and credit, but that in our opinion, that was more as a function of the duration risk that we saw develop in the bond market associated with the Fed, you know, taking the policy rate to a 40-year high at the fastest pace we've seen in 40 to 50 years. So, you know, we definitely had some, they created some market risk in 2022, but I agree with you that, that we weren't in recession and recall, you know, I was on this program with you in the, in the summer of that year, saying the economy is resilient. That's exactly when we authored our resilient US economy theme, which we've maintained every, you know, day since then, in the sense that, you know, the economy is likely to, you know, remain resilient. We're not going to go into a real recession as identified by the MBR and other sources.

• 9:25Speaker 02

  And a real recession is when you have a broad-based decline in things like income, production, employment, consumer spending. None of those things are happening. We had just had two negative quarters of GDP. It had a lot to do with the acceleration in the GDP deflator and the unwind of inventory build. That wasn't your typical recession and the kind of recession that we need to be concerned about as investors in terms of perpetuating a, you know, deep protracted, prolonged decline in asset markets. You know, in terms of, you know, what creates a deep protracted and prolonged decline in asset markets, there's really only three things that you need to be concerned about as an investor. And one is a sharp, you know, and sharpened, unexpected slowdown in growth. Two is a sharpened, unexpected acceleration in inflation. And number three is a sharpened, unexpected tightening of monetary and fiscal policy. We got two of those three in 2022.

• 10:10Speaker 02

  Well, actually, I would argue we had all three. A sharpened, unexpected slowdown in growth, a sharpened, unexpected acceleration in inflation. We had a sharpened, unexpected tightening of both monetary and fiscal policy in 2022. In fact, it was the tightest, it was the sharpest fiscal retrenchment we had ever seen on a year-over-year basis in the history of the US economy. So, a lot of that created problems, but when we look forward from a fundamental standpoint, if you go up slide six, where we show our grid model, which we use to assess the probability of regime change in asset markets over a medium to long-term time horizon, you know, we're not seeing a lot of negativity, at least not until we get into the first half of next year. So if you look at our projections for the US economy, we have growth slowing alongside consensus. But what we differ from consensus on the growth side is that growth is likely to surprise to the upside over the medium term. That's the chart on the bottom left.

• 10:55Speaker 02

  The chart on the bottom right is where we have more concern. But again, that concern is a little bit more tethered to the first half of next year relative to now, is that we start to see inflation pick back up again in the first half of next year. And that'll be pretty divergent from Bloomberg consensus, which is calling for inflation to continue decelerating. And that's obviously consistent with the Bloomberg consensus is consistent with what the Fed is guiding to. And so if you think about how we could see first half of next year play out, we could see something that looks a little bit kind of like 2022 light, whereas we have to price out from the four rate curve, a lot of rate cuts. And that could also cause some consternation in bond markets, which ultimately causes issues with global liquidity. So again, that's an issue we see on the horizon, but it's not necessarily something we have to deal with yet. The number one thing we think we have to deal with between now, let's call it year

• 11:39Speaker 02

  in, is the fact that growth is likely to continue surprising consensus estimates to the upside, which is something we've been consistent about since the summer of 2022.

• 11:48Anthony Pompliano?

  Why would inflation reemerge? Do you think it's, if Trump got elected, some people are saying inflation could go up? Is it that because they start cutting interest rates and the inflationary behavior from consumers returns back into the market? What could drive that? And why do you think consensus is saying it's not going to happen and you guys are arriving at a different conclusion?

• 12:11Speaker 02

  Yeah, that's a great question. So I think there's three reasons, there are three reasons, rather, why inflation is likely to start to reaccelerate when you get into the first half of next year. The number one reason is base effects. We're just cycling the lows of the time series. And we had a lot of persistent protracted disinflation over the past few years that is going to start to fall out of the time series. And if you follow the time series, you're going to be replacing that with levels of inflation that will cause an acceleration. So that's quantitated, just mathematically, it's very likely that we see an acceleration inflation. So that's step one. Step two is that, based on how, I think we understand how the business cycle works as well as anyone, I or 42 macro, having done a big deep dive empirical study on hundreds of time series to identify exactly how they perform in and around. Sessions in and around recoveries, you know, what leads, what, what lags, what?

• 12:56Speaker 02

  And what we found, and one of the most salient takeaways from that study is that inflation is by far the most lagging indicator of the business cycle, by far, like by a country mile. If you think about, you know, how the business cycle actually works, you know, you have policy titans, then you have liquidity drains, then you have corporate profits decline, then you have growth slow, then you have employment breakdown, then you have credit breakdown, and then like 12 to 15 months after recession has started, you have inflation breaking down below trend. Well, again, I said this earlier, we, we don't see a recession as a likelihood on the over medium term time horizon. And so without a recession to really, you know, kind of create that durable breakdown below trend and inflation that would allow it to, you know, have a mean of 2%, uh, that's unlikely to occur. And so if that's unlikely to occur, what is likely to occur is the base of X just start to carry the time series higher.

• 13:42Speaker 02

  And then the final thing I'll say is that next year, uh, it doesn't matter who wins the election. This is something we've talked about on, on this program and other programs, but both parties are incredibly populist. Uh, you know, both, we'd pick Donald Trump or Kamala Harris, J D Vance or Tim Walz. It doesn't make a difference who, who, what they're saying, what you need to hear from each side of, both sides of the aisle is that the debt and deficit are going to continue to rise. And it's, you know, it's one party does it with tax cuts, the other party does it with, you know, profligate spending, and they both wind up in the same place, uh, which is, you know, deficits and debts continue to rise. And so ultimately we see a fiscal expansion, a fiscal impulse, a positive fiscal impulse, uh, in 2025 that could also contribute to some upside, uh, in inflation, which would be very consistent with how the business cycles historically behave.

• 14:24Speaker 02

  Typically you see, you know, significant deceleration in inflation late in the business cycle, only to have it re-accelerate, you know, kind of towards the very tail end of the business cycle, which obviously causes the Fed to have monetary policy, uh, too tight, uh, relative to the ultimate growth outlook. But again, this is all stuff that I think we're going to have to deal with throughout 2025. Right now, I think that the, the, the most, the most important thing we need to be concerned about, you know, looking at slide six, is the fact that growth is likely to surprise consensus to the upside, continue surprising consensus to the upside.

• 14:52Anthony Pompliano?

  If we look at this, uh, seventh slide that you have here, um, what, what exactly are we seeing in the grid model that you think people should take away?

• 15:00Speaker 02

  Yeah, so what I'm showing here, the, the, these are each of our grid models, the historical and the projections for all the major economies in the world. When you see a G in this table, that just shows that the economy is likely to be in Goldilocks, has been or likely to be in Goldilocks. That's where growth is accelerating and inflation is decelerating. R is where, we call that reflation here for the two macro. That's where growth and inflation are accelerating simultaneously on a trending basis. Inflation is where growth is decelerating and inflation is accelerating. And finally, deflation is where growth and inflation are slowing simultaneously. Goldilocks and reflation have typically, you know, catalyzed risk on market regimes, either Goldilocks or reflation dating back to that global macro matrix we talked about earlier. And then inflation and deflation have typically catalyzed risk off-market regimes

• 15:42Speaker 02

  dating back to slide five, four that we talked about earlier. And so when we look at this from a global perspective, if you look at the bottom, the world grid model and then the mode of all the countries in the sample, you know, we're seeing a lot of Gs through, you know, towards the, the end of this year. And so in our opinion, this is something that could also create some positive dynamics and positive forces for asset markets over the medium term. Now, again, the, the, the macro markets, generally speaking, we're sort of relating what's happening in the economy versus what's actually happening in asset markets through the lens of that global macro matrix we talked about earlier. Typically, what happens is the US economy's grid, you know, grid sequence is, is more dominant than the global grid sequence. So I would put more weight on what's likely to occur in the US economy over the medium term than I would on the global

• 16:27Speaker 02

  economy. But the fact that we have these, you know, now global tailwinds as opposed to persistent global headwinds, which is what we had from, you know, basically the second half of 2021 all the way through the first, you know, kind of the end of 2023. Now those have turned into tailwinds from a growth perspective. And so that's positive at the margins. But again, it's really going to hinge on whether or not we're right on US growth surprises to the upside and inflation remaining relatively tame until, you know, at least year in.

• 16:51Anthony Pompliano?

  When you look at asset prices in general, there's a lot of, I think, investors asking themselves, I can buy S and P, I can buy tech, I can buy, name your, you know, other kind of verticals within public equities. I can buy crypto, I can buy bonds, whatever. One of the things that I find most interesting is there's been this boom in AI. And a lot of people are saying, hey, that's why the tech sector is taking off. And the question is, you know, can it continue in, in the path that it's on? But AI also promises productivity gains, which if that promise comes to fruition should lead to growth gains and GDP growth.

• 17:33Anthony Pompliano?

  How do you start to kind of think about AI as investable, you know, kind of a universe? And whether people should be evaluating that on just itself or looking at the market more broadly? But then also trying to look at the technology and the companies and all this stuff and seeing like, does it change some of these models and, you know, potential future growth? And, and maybe actually lead the Fed to want to cut faster or, you know, more severely? And kind of all these like knock on and second, third, fourth order effects that, that maybe aren't being as discussed today as they should be?

• 18:03Speaker 02

  Yeah, no, 100%. I'm so glad you brought up productivity because that's one of the things that the productivity dynamics are one of the things that helped us, you know, get our clients back on the long side of risk in November. We recall that in October of 2023, we were on the bear side for about a month, but then we got back on the bull side, you know, the beginning of November of last year. And one of the catalysts for that pivot, among many, one of the catalysts for that pivot was the recovery we saw then in productivity growth. And productivity growth, to your point, is very positive for asset markets because it ultimately allows you to grow the economy with disinflationary pressure. And so whenever you have productivity growth rising, you have margin expansion, which ultimately allows you to have, you know, labor market growth without, you know, necessarily having,

• 18:45Speaker 02

  you know, the sort of, you know, sort of inflationary impulse that will cause, you know, corporations, corporations to, you know, kind of fire people. And so that was something that was really positive at the margins. We saw that that persists, that dynamic does persist. But with respect to AI, you know, I don't know that we're at the point in AI where we're really going to start to achieve productivity gains. And the reason I say that is because when you look at the leadership in the stock market with respect to AI, it's still relatively concentrated to the picks and shovels. It has not necessarily broadened out from a leadership standpoint to the kind of application providers. And so it's got to get to the application providers first. They really need to see the outsized benefit before we really start to see an outsized benefit in productivity for the, for the broader economy. That's coming. It's more than likely coming, right? But this could be something that

• 19:30Speaker 02

  I could take 12 months, 18 months, 24 months, 36 months. You know, we, any one of us would be a fool to pretend like we understand how this is going to play out because it's, you know, this is industrial revolution type stuff. You just, you can't predict the outcomes. But what we do know is that we aren't necessarily there yet. And this is, this going back to this Goldilocks versus deflation debate, you know, going back up slide two. Yeah, I think what Goldilocks versus deflation within the context of AI is, is trying to argue is, do I want to bet on the mega cap safety of the folks, the picks and shovels and the companies that we know are directly exposed that are going to have outsized revenue and cash flow growth over the medium term? Or Goldilocks, which is, do I want to bet on that kind of broadening out to the rest of the economy? And so ultimately, you know, that's kind of how to think about it from the set of AI.

• 20:14Speaker 02

  But again, I don't know that, that AI is the dominant driver of the asset markets over the, you know, the, over the medium term. But they will be a dominant, i- i- if it's what it is supposed to be, right? And none of us knows if it is going to be what it's supposed to be. But if it is, if it turns out to be what it's supposed to be, then it will have an enormous impact on the, on the future of the economy that, you know, I don't think we can really understand all the ways and we just have to be basing about that along the way.

• 20:36Anthony Pompliano?

  I have no clue what all the impact's going to be. It just feels like, uh, yeah, it's going to be helpful. Right?

• 20:42Speaker 02

  It already is kind of, you know, I, we use our AI applications and whatnot. It is certainly helpful. We're integrating AI into more and more into our client dashboard. If that's been super helpful in terms of, you know, generating summaries and helping clients, you know, find answers to questions during our research and whatnot. So like, it's certainly helpful and productive. It's speeding up the amount of time for information transfer. And you used to have a library, you used to go to college or, you know, get a PhD to learn things. Now you, you, then you went to the internet, but now the AI just actually takes all the stuff from the internet and dumps it right into your lap in a way that's, you know, saves time. And ultimately, if you could save time, you could speed up your development process for different, uh, different tools, applications, et cetera.

• 21:19Anthony Pompliano?

  Yeah, it's pretty incredible. Where can we send people to find, uh, 42 macro?

• 21:23Speaker 02

  42macro.com come check us out. I appreciate you, man. It's always a pleasure to be here with you guys and you ask the best questions, my friend. So you keep doing what you're doing for your community. I know they really appreciate it.

• 21:32Anthony Pompliano?

  You're so kind. I learned something today that you think inflation is going to reaccelerate and consensus doesn't. So I'm gonna go study that a little bit more and then we'll come back and next time we talk, hopefully I'll have some answers for you.

• 21:45Speaker 02

  Absolutely. Again, that's the first half of next year issue. So I wouldn't put that on right just yet. But again, I think that's something we'll deal with as investors primarily through bond markets and global liquidity in the first half of next year. But between now and then, I think we should have some relatively smooth selling barring obviously our usual September, October seasonality.

• 22:01Anthony Pompliano?

  All right, my friend. Thank you so much. We'll do it again.

• 22:04Speaker 02

  Appreciate you, brother. I'll see you next time.