#987 Darius Dale On The Chain Reaction Of A Recession

Darius Dale is the Founder & CEO of 42 Macro, the leading macro risk manager adviser. In this conversation, we discuss the macro economy, what's happening in the financial markets, how Darius is looking at various metrics, and what you should be considering as you're investing your capital. Darius joins us every Thursday on "The Best Business Show." To see the video with the corresponding charts that Darius references throughout the interview, go to "The Best Business Show: LIVE" YouTube Channel ======================= Exodus is leading the world out of the traditional financial system by building beautiful and user-friendly blockchain products. With its focus on design and user experience, Exodus has become one of the most popular and loved cryptocurrency apps. It’s supported on both desktop and mobile, allowing you to sync your wallet across multiple devices so you can have access to your funds anywhere. You can instantly exchange around 100 different cryptocurrencies straight from your wallet. Interactive charts let you view an asset’s price history and your portfolio’s performance over time. And maybe the best part, Exodus is integrated with the Trezor hardware wallet - making advanced security easy for everyone. Visit exodus.com/pomp for your free download or search Exodus on the App Store or Playstore. ======================= Today’s episode is sponsored by Abra. Based in California and backed by top VC firms, Abra is an all-in-one simple, secure app that allows you to trade over 110 cryptocurrencies, get 0% interest loans using your crypto as collateral and earn interest with up to 14% APY on stablecoins and 8.15% APY on Bitcoin. Join nearly 2 million users by downloading Abra from the Google Play or Apple App store. If you download the app today, you will get $15 in free crypto once you fund your account. You came, you invested — now conquer. ======================= DeFi Technologies represents what’s next in the digital economy -- providing simplified, trusted access to crypto, decentralized finance and Web 3.0 investment opportunities. Institutions and investors can gain diversified, secure, compliant, and easily tradable access to a diversified set of industry-leading equity products and protocols, through a single stock purchase on a regulated exchange. Currently listed on U. S. (OTC: DEFTF) and Canadian (NEO:DEFI) exchanges. For more information or to subscribe to receive company updates and financial information, visit our website at http://defi.tech =======================

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

• 0:02Anthony Pompliano?

  What's up everyone, this is Anthony Pompliano. Most of you know me as Pomp. You're listening to the Pomp Podcast, simply the best podcast out there. Now let's kick this thing off. Darius Dale is the founder and CEO of 42 Macro, the leading macro risk management advisor. In this conversation, we talk about what's going on in the macro economy, what's happening in the financial markets, how Darius is looking at various metrics, and also what you at home should be thinking about as you invest your capital. I really enjoyed this conversation with Darius, and I hope you do as well. Before we get into this episode, though, I want to quickly talk about our sponsors. Today's episode is brought to you by Exodus, the world's leading desktop, mobile, and hardware crypto wallet. They offer beautiful, user-friendly blockchain products that

• 0:43Anthony Pompliano?

  sync across all of your devices, making it easier to send, receive, and exchange over 150 or more crypto assets in one place. And with world-class customer service available to you 24/7, Exodus always has your back. But the fun doesn't stop with staking and trading. They recently launched a new NFT marketplace where you can buy and sell your favorite NFTs on the Solana Network. By partnering with the popular NFT platform, Magic Eden, they're offering the Full Monty Unverified Collections, with more added every single day. Ready to check it out for yourself? Run, don't walk. Over to exodus.com/pomp for your free download today. Again, if you want the world's leading desktop, mobile, and hardware crypto wallet, go to exodus.com/pomp today.

• 1:26Anthony Pompliano?

  Today's episode is sponsored by Abra. They're based in California, and they're backed by top VC firms. Abra is an all-in-one, simple, secure app that allows you to trade over 110 cryptocurrencies, get 0% interest loans using your crypto as collateral, and earn interest with up to 13% APY on stable coins, and 7.15% APY on Bitcoin. You can join nearly 2 million users by downloading Abra from the Google Play or Apple App Store. If you download the app today, you will get $15 in free crypto once you fund your account. You came, you invested, now conquer. Abra, conquer crypto. Go check it out today. This episode is brought to you by DeFi Technologies. DeFi Technologies represents what's next in the digital economy.

• 2:10Anthony Pompliano?

  They're providing simplified trusted access to crypto, decentralized finance, and Web 3 investment opportunities. Institutions and investors can gain diversified, secure, compliant, and easily tradable access to a diversified set of industry-leading equity products and protocols through a single stock purchase on a regulated exchange. DeFi Technologies is currently listed on the U.S. Exchange at DEF T F Stock Ticker and the Canadian Neo Exchange at DEF I. For more information or to subscribe to receive company updates and financial information, visit their website at defi.tech. I'm really excited about what these guys are doing. I've become an advisor to the business and I highly suggest you go check them out. Go to their website at defi.tech today.

• 2:54Speaker 01

  Anthony Pompliano runs Pomp Investments. All views of him and the guests on his podcast are solely their opinions and do not reflect the opinions of Pomp Investments. You should not treat any opinion expressed by Pomp or his guests as a specific inducement to make a particular investment or follow a particular strategy, but only as an expression of his personal opinion. This podcast is for informational purposes only.

• 3:18Anthony Pompliano?

  Darius, what's up, man? How are you? Welcome back.

• 3:21Speaker 02

  Oh, my God, that was so entertaining. What's up, dude? I missed you.

• 3:25Anthony Pompliano?

  I missed you, too. How was your trip?

• 3:27Speaker 02

  Dude, it was fantastic. Everyone needs to go to Paris and spend at least a week there before they die.

• 3:31Anthony Pompliano?

  All right, let's jump in. Maybe the first place we could start is Jamie Dimon. I think it was yesterday or the day before. He came out and he said that he believes there's an economic hurricane on the horizon. And he basically said, look, nobody knows how big it'll be, how bad it'll be, or how long it'll last. We're going to be super conservative with our balance sheet, and I suggest, you know, basically everyone else follow the same thing. So it wasn't some like big prediction, but it definitely was like, hey, you guys should be paying attention to what's coming down the pipe and we're going to be more conservative than we have in the past because we want to be able to withstand it. What's your general reaction from the CEO of one of the largest banks in the world talking like this so openly? Is that something that we should read into or should we just expect them to do this?

• 4:11Speaker 02

  So I'll start by saying, the great, great starting point, I'll start by saying, these guys are only as good as their models and their forecasters and the people who work For them that forecast the economy, I'm not making any representations about how good the JP Morgan economist team is. All I'm saying is you shouldn't take their words more than their words, their worth, their worth. They're just, it's just a guy who has a view on the world that we have a view on the world. But I do agree with this view on the world. We are heading to something that could look like a hurricane. Now, whether it's a category two or category five is yet to be determined, but it's at least going to be a hurricane. And right now we are still on the beach in bright and sunny conditions. And so in our opinion, I think Jamie Dimon is appropriate.

• 4:53Speaker 02

  He's being a good steward of capital and trying to help investors prepare for that.

• 4:57Anthony Pompliano?

  So you've got a chart that kind of leads into this. It's the financial conditions remain uncomfortably loose. Which is very different story than what I think we're hearing in the kind of public narrative, right? Everyone's talking about quantitative tightening. They've started to conduct that. They're raising interest rates. There's been tough talks since like November of last year by the Federal Reserve. But this chart's telling a little bit of a different story. So explain kind of what this is, what this is showing us and like, why? Why is the data showing us something different than maybe the public narrative?

• 5:27Speaker 02

  Yeah, no, a hundred percent, man. So this, this is a really important chart and I want everyone to sort of take some time to kind of understand this. The red line just shows the Goldman Sachs Financial Conditions Index. Basically how to interpret the chart is when it's low, it means financial conditions are loosed or, you know, very accommodative. And when the index is high is a high value, that means financial conditions are very tight. We've seen a decent tightening off the lows in the red line, but if you look at it on a historical basis, I mean, we're basically about as loose as we were. At the peak of the dot com bubble in terms of, you know, so if you think about this in terms of the Fed's inflation fighting directive. They haven't really done anything to get growth to slow down enough to cause inflation to slow down, which tells you that, hey, as an investor here.

• 6:10Speaker 02

  We might have, you know, seen some pretty significant declines off the highs and, you know, crypto, Bitcoin, et cetera. But they could get a lot worse if the Fed is going to be successful. successful in achieving its inflation objective.

• 6:20Anthony Pompliano?

  So when you start to think about this, there's this whole idea of quantitative tightening. And really, over the last, I don't know, 13, 15 years, whatever you want to kind of count. There's been a very loose monetary policy. They at one point did try to conduct quantitative tightening. It didn't go so hot. They basically waved the white flag very quickly and went back to loose monetary policy. Explain to people in, you know, kind of one or two sentences, like when you think of quantitative tightening, what should they be paying attention to or like, what are the important things to watch as they start to conduct this?

• 6:53Speaker 02

  Oh, well, I mean, number one, I mean, what's the level of volatility both implied and realized in financial markets? Because what happens when the Fed does, starts to shrink its balance sheet? We all understand that QE is positive for markets, but the reason it's positive for markets is mostly due to a substitution effect. We're taking safe securities out of the marketplace and leaving investors, you know, whether they be asset managers, you know, retail investors, ultimately through mutual funds, et cetera, with a bunch of cash that's burning a hole in their pocket and that needs to go to work if they're trying to generate a legitimate return, you know, a real return. And so the quantitative tightening effectively works in reverse. The Fed is now creating a hole on the, on the, on the sort of the risk free end of that spectrum.

• 7:36Speaker 02

  And now a lot of the money has to rush it from the, the further out on the risk curve to capitalize the US government. And it's just, you know, it's creating this sort of vacuum, this sucking effect on the out, the further outs on the risk curve. So, um, you know, when you said quantitative tightening, they tried it and then they waved the white flag. You're absolutely right. And the scary part about this particular time around is that not only are they going to do quantitative tightening into a global growth slowdown, a US growth slowdown, but more importantly, they're going to try to get to a double from the previous pace of quantitative tightening. We've never seen this before. We've never seen the Fed hiking interest rates 50 bips at a time, doing 50 to $100 billion of quantitative tightening as at a time as they will be in a few months. And so I think it's a real, it's a Experiment, to say the least.

• 8:19Anthony Pompliano?

  When you think of that, if they've never done this before, at the speed, severity, you know, kind of simultaneous actions, the whole thing, should we throw out all historical analysis? Because this is a new environment and something that we haven't seen before? Or do you think history can still serve as a great guide as we evaluate what could happen in the future?

• 8:40Speaker 02

  Yeah, no, a hundred percent. You don't want to throw out historical analysis and analogs. But what you do want to understand is that everything financial markets operate from a rate of change perspective. And particularly rate of change relative to expectations. And so, you know, when you look at the world through that sort of, you know, that very quantitative lens, rate of change, what's happening at the margin, what's changing at the margins? You then can bring in the historical analogs that help you identify, hey, you know, the Fed might be shrinking its balance sheet with bigger numbers now. But on a relative basis to what the balance sheet was, this is, you know, it's called a one sigma move lower or two sigma move lower. And so you can normalize things and help you create more scientific and more thoughtful analogs using historical data.

• 9:22Speaker 02

  And the reality is when you're talking about the kind of growth slowdown that our models projecting, at the same time, you have a quantitative tightening episode. You're talking about anything on the order of 20 to 30% annualized declines in S and P, 40 to 50% annualized declines in high beta stocks and 60% annualized declines in something like Bitcoin. This is a really negative macro environment from a flows perspective. So all bets are off if you think about, you know, trying to buy the dip here, which a lot of investors have done.

• 9:49Anthony Pompliano?

  So they continue to talk about very aggressive interest rate increases, quantitative tightening, all the stuff we're talking about. The market at one point was pricing in 10 rate hikes, 300 basis, 300 basis point interest rate. You've got some data that says we might not get there, which I think is becoming more and more obvious. Talk to us about this data and then what do you think is going to happen?

• 10:13Speaker 02

  So actually fill up that chart, the second chart, USD, EUR, yeah, not this one, the other one, USD, EUR and DVI. So we're probably not going to get there, but we don't have to get there. The market just has to get there for them. And what I mean. By this is the charts show the overnight index swap forwards for you know, basically money market rates that are that are trying to price in the Fed funds rate on future time time horizon. So you look at on a one year forward basis, the market's at somewhere around three point two percent, which is obviously significantly higher than where the current Fed funds rate expectation is. That number had peaked in early May and was really starting to flag, particularly as we start to get some leaking commentary out of Federal Reserve officials

• 10:54Speaker 02

  that they might actually consider a pause in September, you know, you know, with the expectation that obviously inflation would be starting to behave and get out of control by then. Well, in terms of our analysis, we're we're not seeing anything in the inflation data that says it has to be under control by September. I mean, in the best case scenario, we have core PCE on a three month annualized basis at just shy of three percent in the month of in the month of September data that'll be reported in late October. And so this concept that they're going to be able to pause in September really sort of has to lean lean on some very Pollyannaish forecast for inflation that somehow magically just gets under control without the Fed ever taking financial conditions into restrictive territory, which in our opinion is very aggressive.

• 11:38Anthony Pompliano?

  All right. And then you've got a third graph here that says the global downturn is not adequately priced in, which is crazy to think about, given the asset price sell off, etc. What is this telling us?

• 11:49Speaker 02

  Yeah, no. So this chart is a super important. The blue line is sort of a proxy for global growth. It's the world OECD composite leading index time series. The red line shows the S and P five hundred high beta to low beta ratio. So this is the high beta stocks relative to low beta stocks and historically so in in basically throughout, you know, our duration of our careers. We've had three of these sort of global growth slowdowns, you know, kind of, you know, it's all twenty ten to twenty twelve, you know, twenty fifteen, sixteen, and then obviously twenty eighteen to twenty twenty. You know, these are non recessionary slowdowns. I don't really count the lockdown as a recession. These are non recessionary slowdowns and this S and P five hundred high beta low beta ratio, again, high beta stocks relative to low beta stocks declined thirty five to forty percent in each of these three instances.

• 12:35Speaker 02

  We're only down about, you know, it's called eighteen. 17% now, which suggests that even if we if we slow and do not go into recession, we're still only about halfway done in terms of the amount of pain that we're likely to experience in financial markets. And obviously, if we go into a recession, all bets are off. You look at the far left instance, observation there, down 60%. I mean, I'm not anticipating global financial crisis, but obviously, you know, something that looks more like the 2000 to 2002 unwind of the dot com bubble, which has been our core analog, is something that is very much on the on the table in play.

• 13:06Anthony Pompliano?

  Got it. And then when you start to think about these asset prices, obviously, we continue to watch what I'm going to call a change in psychology among market participants. So investors waking up, saying, hey, you know, things are changing. Now we're starting to see founders of businesses or the executives of businesses doing the same thing. And it seems like there's maybe like a chain reaction. Public markets, obviously, they woke up in Q1 because they saw their stock prices falling. There was a ton of talk about it. Then we started to see like the growth of stocks in the private market. They started to feel it because there were people pointing and saying, hey, well, your public comps, those multiples just compressed. You now have a different valuation, even if your business is still growing, you've got great cash, whatever.

• 13:49Anthony Pompliano?

  And now you're almost even seeing it trickle into like maybe like series A, series B, private market stuff. Like, how do you think about the relationships across even just in equities, public and private markets? And like this like chain reaction of the psychological evolution that occurs?

• 14:03Speaker 02

  Yeah, this is that's one of the best questions I've gotten all year. So thank you for doing that. Yeah, I mean, you're one of the best. So I mean, it's all good. So there's a couple of things I want to unpack there. Chain reaction is a very important phrase in that in that question, because I think what we miss as investors, we sort of think about things like recession or recovery. And in reality is it's not just this one monolithic thing. The economy is not this one monolithic thing. You know, by threshold for what I can bear from a financial debt service perspective is very different than your threshold and is very different than the thresholds of people who are watching us live right now. And so the reality is this concept that, hey, look, when it's series A, when XYZ fund takes marks on this thing, they might not even be taking their marks at the same time as other funds take their marks.

• 14:47Speaker 02

  A legitimate chain reaction and right now we're in a reflexive part of the cycle. We're in a reflexive down cycle so that when these things start to happen, they're going to send signals and triggers to other funds like right like if you're a founder, uh, you know, you're, you're, you're done well in a company, you, you, you maybe raised some, uh, some decent commands, you're probably not rushing out to buy dips in, in, you know, in small private enterprises right now. So that segment of the financing economy really slows down. Obviously we've seen, I think, want to say been a, uh, 170 to 200. I was reading this on Bloomberg this morning, uh, deal of, of, of debt financing deals that have been postponed this year, year to date. You know, so we're really starting to see a real slowdown in backup and financing activity in the economy.

• 15:29Speaker 02

  And that really matters. And the reason it really matters is because we're obviously a very indebted nation. Uh, with the exception of household debt, we're seeing a very aggressive rise in corporate credit and corporate debt outstanding and in public debt outstanding. And it's a very financialized economy on top of that. I mean, 70% of all of our, of private non-financial sector credit uh, in the US economy is, is, is, is intermediated by non-bank financial participants, which means all of these interest rates, the rise in, in corporate borrowing costs, the rise in mortgage rates, the rise in real interest rates, all this stuff really matters in terms of slowing the rate of activity.

• 16:03Anthony Pompliano?

  One of the things I keep coming back to is this idea that, uh, global debt to GDP is like 130% or, or I'm sorry, it's like 350%.

• 16:13Anthony Pompliano?

  The US is 130% give or take. Uh, and so when you start to do this, like GDP growth's gotta be double digits, right? To basically get on the other side of this. Um, is that possible? Like, is it possible to literally grow our way out of the global debt to GDP ratios?

• 16:30Speaker 02

  No, absolutely not. I mean, the, the reason we grow is because of we add new debt. Like if there, yeah, sure. Yeah. Actually, no, let me say that there could be some massive, and this is what Kathy Wood is betting on. Obviously some massive change in technology that ushers in a wave of productivity that allows us to be substantially more productive, uh, with the limited resources that we have. And I would say, uh, limited and declining resources. I mean, you, you think about the kind of the aging of the baby boomer population and, you know, the, the size of that. Relative to the Gen Z population, we're going to have a reduction in our workforce over the long term, at least over the next kind of 10, 12 years or so. So that's going to be an issue in terms of trying to create GDP, right? We're running out, we already ran out of land, we're running out of workers. So we got to find something, some technology that creates a lot more productivity and may or may not come.

• 17:15Speaker 02

  Certainly is not going to come, you know, in terms of the time horizon that we want to manage risk on as it relates to the downside of this market cycle.

• 17:22Anthony Pompliano?

  Yeah, it's, um, it's just fascinating, kind of think about the idea that like we have to keep playing this game. And so when you think about fiat currencies, you know, somebody like a Brent Johnson, who we recently had on was talking about his milkshake theory and we talked to him in 2020, talked to him again this year. And in recent weeks, he looks pretty smart, dollar strengthened again, you know, relatively against other fiat currencies. Like, how do you see the currency markets playing out with all of the fiats on a relative basis?

• 17:51Speaker 02

  You know, it's a, it's weird. I think we're at a very interesting point in the, in the, in the milkshake. Shout out to Brent because he's been nailed, he's absolutely nailed that call. You know, what, one thing I think is particularly unique in this set of circumstances is that during the COVID recovery, the US economy was aggressively capitalized by the rest of the world. And as a function of that, we significantly outperformed the rest of the world. And not just as a function of that, we obviously had better vaccines, we had better reopening. Or at least, you know, places like Miami never even really shut down. I mean, you go there in April 2020 and wouldn't know there was a pandemic, but I digress. But so we, we had a substantial outperformance in our economy. And as a function of that, investors all around the world were happy to just throw money in our markets,

• 18:34Speaker 02

  whether they be in Apple stock, you know, Google stock, you know, Amazon, Tesla, et cetera, et cetera. So much so that, you know, we've seen about six to seven trillion dollars over the last couple of years enter the US economy from a capital inflows perspective, if you look at the change in our net international investment position. Well, that's not to say that that all has to come out over the next two years, but it does seem to suggest that, hey, if the US just comes back to earth and we are, we're arguing in our research, we're not going to just go back to earth, we're going to go to a below trend growth state by the end of this sort of projection period. Our next 12 month projection period. If we go to a below trend growth state, what's the reasoning for about being, you know, overly allocated overweight US assets, particularly US risk assets relative to the rest of the world? And I would posit that there that reason significantly goes away.

• 19:18Speaker 02

  And this is exactly what happened in the unwind of the tech bubble. It wasn't just that the Fed was too easy in response to the Asian financial crisis and long term capital management that caused the the Nasdaq to go up. It was the fact that the world was blowing up and every sovereign wealth fund and every asset allocator and every, you know, global asset manager was keen to dump money in our markets because we have a legitimate growth cycle and a significant outperformance in growth back then in the late 90s. And it was no different than it was in this COVID recovery period. And now that is starting to unwind at the margin. So to answer your question, it's a very long winded answer. I apologize for this. I'm not so sure that the dollar is likely to continue heading higher, even though the Fed is um is is going to continue to remove liquidity.

• 19:59Speaker 02

  Now, the dollar may, again, I'm not saying the dollar's peaked yet, but I think if you look at it on a six month and nine month, 12 month floor basis, I could easily see a scenario where the Nasdaq's down, I don't know, 20 to 30% from here and the dollar's down 5, 10% versus peer currency.

• 20:12Anthony Pompliano?

  So when you think about kind of what the Fed can do, uh, do you have a thought process on the quantitative tightening? Like, is it September?

• 20:22Speaker 02

  They're gonna do it to break something.

• 20:24Anthony Pompliano?

  Yeah.

• 20:26Anthony Pompliano?

  But how long can that be?

• 20:27Speaker 02

  I I think they're, I I honestly think they'll be pivoting by their November 2nd meeting. Uh, that's kind of like my my core.

• 20:33Anthony Pompliano?

  Pivot in terms of let's pause? Or pivot in terms of reverse? Let's do interest rates. Let's go back to loose monetary policy QE, et cetera.

• 20:42Speaker 02

  No, I I think, uh, so pausing in the in the context, there's really no pausing in quantitative. You're either pausing by no longer shrinking or expanding balance sheet. That's what I mean by pivot. That I would represent a real pivot. Um, I don't think pausing in interest rates while still doing $100 billion or 97 billion dollars of QE, two Ts, who cares?

• 21:01Speaker 02

  We don't care about the interest rates anymore. They're already been priced in. Maybe you get another 25 to 35 basis points higher in the terminal Fed funds rate expectations if inflation over the next month or two surprises to the upside, which it very much can, by the way, we can go into all the longy details. Tells on why I think that they it might but in in terms of the pause and the pivot. I do believe that A if the Fed gets to the November second meeting. The world is sufficiently on fire from a capital markets perspective, going back to that first chart. You've seen a more substantial tightening of financial conditions. Associated with a more significant growth slowdown that we have projected, particularly throughout the summer months. Then I do believe they'll be able to say, hey. I think ninety five billion was too much. Let's just turn this off and look around and see and see where inflation settles out.

• 21:43Speaker 02

  If they pause by just saying, hey, we're going to go from ninety five billion to fifty billion and we're not hiking interest rates anymore. Then all bets are off. But I think once they once they pause, well, what what what constitute a pause in my book? Is they stop this entire program altogether. They don't have to go to QE, but they have to stop quantitative tightening. Which they haven't even started, by the way. It starts next Wednesday.

• 22:05Anthony Pompliano?

  Any thoughts on uh? Whether they will get a interest rate cut? That that's my. Contrary, this only contrarian thought I think I have right now is that we may get a, I call it an interest rate. Like a cut check where everyone is thinking one thing and they basically just give us that one cut. To say, hey, continue the party.

• 22:27Speaker 02

  No, see, see, I I I see this is this is goes to the behavioral side of the trade, which is equally as important in times like these. So. Uh, for all you watching and listening, uh, the my favorite book and I'm sure I give the actual what books do I read and what what not? Thinking Fast and Slow by Danny Kahneman, Amos Tversky is arguably the most important book you'll ever read if you want to think about finance and economics. Uh, certainly my favorite book and and you know, I highly recommend everyone read that book. In terms of understanding the behavioral side of this, we're human beings. And you have to realize that the Fed is a human being. Jenny Yellen's a human being. Jay Powell's a human being. Uh, Joe Biden, a human being. These three human beings got together on Tuesday. Just to remind the American public that, hey, even though when you go to the grocery store, it keeps going up and up and you go to the gas pump, it keeps going up and up and you.

• 23:10Speaker 02

  You take your kids school shopping and prices keep going up and up and up. You try to take your wife out for dinner. It keeps going up and up and up. Hey. We're gonna do something about it. We messed up. My bad. We got transitory wrong. I mean, did you hear yelling in Bullard yesterday? I mean, Bullard basically came. And said, look, we're gonna lose our credibility if we don't get going and Yellen was like, yeah, you're right. I got this. I got the damn call wrong.

• 23:30Anthony Pompliano?

  Do you think they got it wrong? Or do you think that they uh knew what was gonna happen and didn't say?

• 23:34Speaker 02

  No, they got it wrong. They definitely got it wrong. For sure.

• 23:37Anthony Pompliano?

  That's what I think as well. There's a lot of people who are very mad yesterday when I said that we should respect the fact that a public official like Janet Yellen was willing to say on national television, I got it wrong. I thought that was fantastic and that we should encourage more public officials. Doesn't excuse that they got it wrong. Doesn't mean that we should listen next time, but admitting that you're wrong in public, one, very hard for those people to do, and we should celebrate when uh when they do it at a minimum, or at least encourage other people to do it.

• 24:02Speaker 02

  Yeah, absolutely. So there's a bit, I can count on one hand of all the investors um that I could, that I know got the inflation call right. Certainly uh Jim Bianco, uh Julian Brigden, uh maybe there's a couple others that I'm forgetting. I apologize for forgetting you here, but I'll be the first person to say we, we got it wrong. Goldman Sachs got it wrong. PIMCO got it wrong. The Fed got it wrong. Ja, you know, all these institutions and research shops and and very important Wall Street institutions and not so important Wall Street institutions sitting in my uh home here, all got the inflation call wrong just to varying degrees, right? So let's be honest here. These are human beings with models and forecasts, and it's hard to model the kinds of shocks that we've experienced, uh particularly in this second half of the wave, the, you know, the kind of the Omicron dynamic shutting down the

• 24:44Speaker 02

  global economy again and the supply chain disruptions that came out of that, the Russian invasion of Ukraine and the additional supply chain pressure on things like energy and food prices, that stuff, that stuff's hard to model. It's easy to model the the core inflation dynamics, that stuff, it's pretty simple, but the other stuff has been very difficult, but that's neither here nor there. What I'm really trying to say is, this is an institution, the Federal Reserve, that is hell bent on regaining credibility from getting a call wrong. They're a wounded animal, and right now, they're fighting two battles. One, getting inflation back towards its target, and two, regaining the trust of the American people that they're, you know, the millions are being harmed by uh these very aggressive uh price rises. So uh I would argue, uh Pom, we're more

• 25:26Speaker 02

  likely to see them get incrementally hawkish relative to what's priced in the financial markets, particularly, you know, Fed Fund Futures, the Eurodollar Futures, OIS, etc., than they are to get fundamentally dovish, at least over the next few months.

• 25:37Anthony Pompliano?

  The other thing that I've seen recently is Arthur Hayes, former Bitmex CEO. He wrote a report and he said, he essentially called the bottom, right? Not explicitly, hey, this is the exact bottom, but he was like, look, I don't think Bitcoin will go below 25, 27,000. I think ETH, he was talking about like 1700, 1800, somewhere in that range. And he used three things as his argument. One was there was a decoupling to some degree of crypto from the NASDAQ 100. Two was like, the media is just yelling and screaming and being absurd and saying it's all dead. And everyone in that industry is, you know, idiotic. And then the third thing he said was a relationship to past cycles. So, you know, the price in a new cycle doesn't go below the past all time high.

• 26:21Anthony Pompliano?

  So Bitcoin at 20,000 in 2017, unlikely that we'd go below that. What's your take on like how Bitcoin crypto as an industry will, will perform kind of moving forward? Given all this macro kind of uncertainty?

• 26:34Speaker 02

  Yeah. So right now, there's a couple of things I'll say on that. So, um, right now I've been very, um, you know, one thing that's sort of, you know, keep keeping me from saying this is going to be a sustained. There's several factors that have kept us from saying this will be a sustained bear market rally, at least in stocks. Is the fact that we have not seen the kind of participation you would expect to see from the digital asset space. Obviously Bitcoin's been chopping people up between 29 and 31,000 for weeks now. Ethereum, obviously even looking even worse from a, from a technical standpoint. But just if you think about it from a broader macro market cycle perspective, I mean, a lot has to go right. If you see another 20 to 30%, no, not 20, 30%, another 20% decline in the S and P from here. Let's call it 20 to 30% decline in the NASDAQ from here for Bitcoin not to make new lows.

• 27:19Speaker 02

  It'll be, I think it'll be very difficult. And again, don't forget, it's not just about where the fundamentals or the technicals are. Cause we know, um, you know, the, sorry, I'm not great with on chain analytics, but you know, we know that, you know, somewhere around 22,000 is a key level of support. 24,000 is a key level of support. Fundamentals don't matter when people need liquidity. And I can guarantee you if growth slows, it's worse, if the growth slowdown, by the way, this is our base case scenario. If the growth slowdown is worse than our base case scenario, we do go into a profit cycle recession. And the Fed is, you know, shrinking its balance sheet at 95 billion a month. And inflation is not behaving. People will demand liquidity, they will demand cash, and the only way they're going to be able to get it is by selling risk assets because again, the deposits in the banking system are shrinking.

• 28:01Speaker 02

  The reverse repo uptake continues to go higher and the Fed wants it to go higher. This is, this is a significant draining of liquidity from financial markets that is about to happen. And so in my opinion, I'm not sure you can price that in because again, these are technical dynamics.

• 28:15Anthony Pompliano?

  What's the thing that you're looking forward to or looking at that would surprise people the most right now?

• 28:21Speaker 02

  Oh, and 100% it'd be inflation surprising to the upside over the next couple of months.

• 28:24Anthony Pompliano?

  Surprising to the upside.

• 28:26Speaker 02

  Yeah, and the reason I say that, so right now, particularly if you look at core inflation dynamics, which is obviously what the Fed cares about most, core PCE, let's take core PC. Right now, core PC is running at about 4, 4.9%, no, is it? Yeah, 5.9%, no, 4.9% on a year-over-year basis, 3.9% on a, on a three-month annualized basis. And then you take it and look at what are the driver, what are the leading indicators for core PC? It's things like core services inflation, you know, core of goods inflation, median CPI, sticky CPI, et cetera. So let's highlight two of those factors right now. One of those factors is core good CPI, significant slowdown. We're, we're only tracking it 0.8% on a three-month annualized inflation rate basis. Yeah, that's down from a 10, a year-over-year rate of change of 10%. Right now, core services inflation is actually accelerating.

• 29:11Speaker 02

  It's up 7.5% on a three-month annualized basis versus right around up five on a year-over-year basis. So what the biggest risk I think to financial markets right now is a, is a incremental repricing higher of terminal Fed funds rate expectations and incremental hawkish rhetoric surrounding the pace, the timing, et cetera, of the quantitative tightening program. And how you get there is by services inflation alongside energy prices continuing to rise and food prices continuing to rise, taking that baton, wrestling that baton away from goods prices and causing the inflation basket to either flatten out or start to rise again from a core inflation standpoint. And to me, I think that we'd all be completely, you know, for lack of a better word, fucked if that occurs.

• 29:53Speaker 02

  And I think that's a more than, that's a more than 33% chance of occurring in the next couple of months. And, and no one's really positioned for that.

• 30:00Anthony Pompliano?

  Yeah, it's um, we're gonna be talking about this a long time. There's no right answer, right?

• 30:06Speaker 02

  Inflation is sticky. This is what we learned in the 70s. This is what we learned in kind of in the early parts of 2000s into 2008. Like it's one inflation is a lagging indicator. You can't just expect inflation to magically go down by itself without a slowdown in growth and the production, demand and easing of supply, demand dynamics. But two, it's sticky. You know, it permeates. It's sticky. You know, business A raises prices and wages go up and business B does the same thing than business C does with business B. It's a process. And so we have a lot of tightening to do ahead of us for inflation to really start to behave in, I think, the manner the Fed wants, not just because of its mandate, but also because of its, you know, very human psychology that need to heal.

• 30:43Anthony Pompliano?

  My friend, I appreciate you always coming here, dropping absolute facts on us. Where can we send people to find you on the internet or find out more about 42 Macro?

• 30:52Speaker 02

  Absolutely, man. Thank you, man. So 42macro.com. Come check us out. We definitely put out some, what I think is some world-class research. But if you can't afford it, just go check us out on Twitter at 42macro, DDALE. Appreciate your pump.

• 31:05Anthony Pompliano?

  All right, buddy. Sounds good. We'll see you next week and I'm making my Paris recommendation list and I'm gonna call you.

• 31:12Speaker 02

  I got some, the folks at the aquarium club know me very well.

• 31:17Anthony Pompliano?

  All right, buddy. I'll see you later.

• 31:21Speaker 02

  See you, brother.

• 31:21Anthony Pompliano?

  Thanks so much for listening to today's episode. I really hope you guys enjoyed this one. Make sure you subscribe on Apple, Spotify, or your favorite podcast player. And if you're looking to try to transition to get a new job in the Bitcoin or crypto industry, we've got you covered. Head over to pompscryptocourse.com. We've developed a curriculum with the top teams across the industry. It's a three-week intensive training program with over 50 events packed into that three-week time period. Go to pompscryptocourse.com to learn more and I'll meet you guys for the next episode.