#1318 Darius Dale | Bitcoin Hits $60,000 and Still Bullish?!

Darius Dale is the Founder & CEO of 42Macro. In this conversation, we look at their Weather Model and what it is telling us about stocks, bonds, bitcoin, we also talk about global liquidity, inflation, and impact of politics on financial markets. ======================= This episode is brought to you by Frec — Just as easy as investing in an ETF, Frec Direct Indexing can help you earn more by unlocking tax savings, no matter the market. Done for you, automatically. Check them out at ⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠https://frec.com/⁠⁠⁠⁠⁠⁠ ======================= 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. ======================= 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. Today's episode is with Darius Dale, the founder and CEO of 42 Macro. In this conversation, we look at their weather model, what exactly it's telling us about stocks, bonds, commodities, and Bitcoin. We also get into global liquidity and why that is driving so much of asset

• 0:44Anthony Pompliano?

  price movements. And then we talk about inflation and politics. We're headed into an election season, and so how will that play into financial markets? Darius has all of this and more for us in today's episode. I hope that you enjoy it. Here is my conversation with Darius Dale.

• 0:59Speaker 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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• 2:12Anthony Pompliano?

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• 3:38Anthony Pompliano?

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• 3:47Anthony Pompliano?

  All right, guys. Bang, bang. Got Darius here. Darius, the macro weather model, you got a whole bunch of numbers, you got a bunch of colors, and it's telling us things are seeming to get better here. I think what exactly is kind of the positioning of the portfolio today? And what is the weather model telling?

• 4:03Speaker 02

  Yeah, 100% Pom. Thanks for having me on again. As always, a pleasure to be with your audience. So yeah, we do numbers and colors here at 42 Macro. We don't do narratives. We're not great at that, but we are great at the statistical analysis that it takes to stay on the right side of market risk. So what you're seeing here on this chart is our macro weather model. We use this in conjunction with our fundamental research to determine how long the current top-down market regime is likely to persist. And if it's unlikely to persist over the next three months, what's it likely to change into based on these weather model signals? So, you know, we'll give you a quick rundown of what's happening in the economy today and how they're contributing to those composite signals there in the middle of the page there. So if you look at growth, we'll start with the real economy cycles on the left. Growth currently trending higher is expected by consensus to inflect and trend

• 4:48Speaker 02

  lower. GDP 170 basis points over the next 12 months. Headline inflation is trending lower is expected by consensus to trend another 80 basis points lower over the next 12 months. If you look at unemployment rate, that's trending higher. It's expected by Wall Street economists consensus to trend another 40 basis points higher over the next 12 months. The implied earnings sales growth rate for the S and P is trending higher at 4.4%. The implied next 12-month earnings growth rate for the S and P is trending higher at 8.2%. The sovereign fiscal balance is nominal GDP ratio. That number's trending higher at minus 6.3%. The dollar real effective exchange rate broke down to a bearish trend this week. So now that's trending lower. Transitioning to the financial economy cycles there on the

• 5:29Speaker 02

  right. If you look at liquidity, we have two models that we use to derive liquidity here. One for the US, one for global. The 42 macro net liquidity model, that's the very popular model. Most people know that. That's a debt balance sheet minus the TGA and the RRP. That number's trending higher. Our global liquidity proxy, not as popular, but a much better model in terms of explaining dispersion across asset markets. That number is the Fed, a global central bank balance sheet plus global broad money supply plus global FX reserves minus gold. That number's trending higher. If you look at domestic credit growth and broad credit growth globally, those numbers are trending lower. The benchmark policy rates trending sideways here. The two-year nominee yield spreads, pricing and rate cuts and trending lower. That aggregated dollar positioning is neutral. Aggregated positioning in the Treasury's market is bearish. Aggregated positioning across all commodities is bearish.

• 6:14Speaker 02

  And aggregate positioning in equities is bullish. Or sorry, is neutral. Sorry.

• 6:19Anthony Pompliano?

  So when you look at this, let's talk stock market first, like what are we expecting here? And the Fed obviously was gonna cut. Now it seems like maybe they're not gonna cut. There's this risk of inflation coming raging back. How are you all looking at this?

• 6:30Speaker 02

  Yeah, absolutely. So that I would say the latter part with respect to inflation, we use our fundamental research, our qualitative research to ascertain that. And we have a series of models and qualitative analysis frameworks that we use to understand whether where inflation is like it had. It's our expectation that inflation bottoms at an undelible level sometime in Q3 and we'll start to accelerate in Q4. We don't believe markets have to price that in now, though. We do believe that their macro disinflation process is ongoing as evidenced by the inflation component there on the left. So in terms of the stock market, as you see there, the stock market signals bullish alongside the bond market signal and the Bitcoin signal there at the bottom. In terms of how to interpret this analysis, which we refresh seven days a week or six days a week for our clients here at 42 Macro, the stock with the three month, it's a rolling

• 7:14Speaker 02

  three month outlook and a bullish signal or the green light just merely indicates that an investor should expect above median returns relative to the baseline and below median volatility in the asset class relative to baseline. So that's obviously a great signal for the stock market, for the bond market, and of course, our friend Bitcoin, which doesn't seem to have down days anymore.

• 7:34Anthony Pompliano?

  So when you see these assets that are all seeming to go up here, if we look at the composite models, what are you seeing in those models?

• 7:41Speaker 02

  Yeah, so the composite models indicate, so we're currently in a Goldilocks market regime, right? And having a statistically derived expectation of better than normal returns in the stock market, below volatility in the stock market, better than normal returns in the bond market, below the normal, lower than normal volatility in the bond market, and then better than normal returns in Bitcoin, and then lower than expected volatility in that asset class. Those are all things that should contribute to supporting the expectation or sustaining this Goldilocks regime that we're currently in. You know, recall that we pivoted back to Goldilocks back in November. We had a cup of coffee and reflation last week as the market was trying to assess the probability of inflation bottoming sooner than our Q3 expectation.

• 8:23Speaker 02

  But ultimately, we pivoted back to Goldilocks, the global macro risk matrix did, and that signal is being confirmed and supported by these rolling three month forward outlooks right now. It's effectively saying that it's still a fantastic time to take risk, which is something I said on this program going back to November.

• 8:40Anthony Pompliano?

  And so global liquidity, I know you guys have this great measurement of it. It feels like the US is trying to stay as tight as possibly can. China, though, is still acting a fool and now threatening $2 trillion. What's going on there?

• 8:54Speaker 02

  Yeah, no, China has been one of the dominant drivers of the global liquidity, of the upturn in global liquidity. And it's something we've been all over here in our research report to macro. In late December, or sorry, mid-December, we authored a theme that suggested that China was going to front load policy support early in the calendar 2024 year. And that's exactly what we're seeing them do. They're doing it through a variety of means. We're seeing them, you know, lower triple R or lower facility. Sorry, not the facility, lower their reserve requirement ratio, which is unleashed several hundred billion dollars into the Chinese financial sector. We've seen them increase their pledge supplemental lending. We've seen them cut medium term lending rates, open market, seven day repo rates. We've seen them cut their loan prime rates.

• 9:35Speaker 02

  All these things are adding to the liquidity that we're seeing in the Chinese economy and the Chinese liquidity impulse. That has been sustainably positive and it's also contributing to the positive global liquidity impulse. It's not the only contributing factor. We have some very positive things going on from the perspective of the global private sector and their liquidity creation activity as well. So it's just been a fantastic, fantastic time to be an investor. You know, hopefully investors aren't missing this stuff, but you know, this is one of the reasons we refresh all of our systematic quantitative tools here. Forty two macro, six days a week for our clients is so that when things do inflect, we can spot it in real time and reposition our portfolios before the rest of the investors, you know, kind of come around to, to, to that analysis.

• 10:20Anthony Pompliano?

  What do you think most people are missing in the market right now?

• 10:22Speaker 02

  Missing, just the sustainability of the good times. You know, so we wrote a note this morning in our lead off morning note about how, you know, the, it's very likely that we're, and we could observe this through our positioning model. But, you know, for the most of the bull run that we've seen over the past year or so, we, you know, it's very clear to see that the average investor, whether they be buy side, whether they be sell side, whether they be investment advisor, whether they be retail, has not participated in the upside nearly as much as they traditionally would have. In such a raging bull market. So in our expectation is that they're going to have to continue to play and catch up over the medium term. Now, you know, ultimately, we're going to find the the top in a lot of these assets. We're going to find the top in the equity market. We may find a, you know, a temporary top in Bitcoin, you know, early in the halving cycle.

• 11:05Speaker 02

  But again, you know, it's not our job to, you know, forecast the exact dates of those tops. It's our job to refresh the quantitative risk management systems and the econometric models that we use here at 42 Macro to actually help investors proactively prepare and position for those tops and ultimately reposition their portfolios when the tops are occurring. You know, again, we want to be, it's our job, you know, we consider ourselves as macro risk managers here at 42 Macro. Our number one job is to help investors maximize upside capture in bull markets and minimize downside capture in bear markets. Everything else in terms of, you know, generating research insights and all this kind of stuff. Yeah, it's fine. It's great to know where, you know, what the Chinese property market is doing so we can project where liquidity is doing and all this other stuff. But at the end of the day, if we're not helping our clients make and save money, we're not doing our job right.

• 11:51Anthony Pompliano?

  Let's talk about Bitcoin more specifically. You've got the composite signal here. What is this showing us? And then how do you think things like the halving will play into it?

• 11:57Speaker 02

  Yeah, 100%. So yeah, if you're looking at this chart, the Bitcoin composite signal there, where we show the evolution of the Bitcoin composite signals over time. Since they happened in this asset class and the green corresponds to the blue bullish composite signals, the neutral, the orange corresponds to the neutral and the red corresponds to the bearish. And what you see there in the chart is that by understanding the principal components of macro, particularly the trends in the potential components of macro that we went through at the beginning of this discussion. If you can sort of, if you can build a good enough tool that allows you to project the excess returns that we're talking about in terms of that bullish, current bullish composite signal, you can see how it evolves over time. And all the big crypto run ups, the big bull runs that we've seen in Bitcoin have historically come when the weather model signal has been bullish.

• 12:41Speaker 02

  And the big drawdowns in Bitcoin, the big crypto winners have occurred when the weather model signal for Bitcoin is bearish. You know, it's not to say that every time Bitcoin goes up, it's any bullish, the macro weather for the asset class is bullish. Or every time Bitcoin goes down, the macro weather for the asset class is bearish. But generally speaking, you're going to keep yourself on the right side of crypto market risk. If you are buying by and obeying these composite signals here in our macro weather model, which are just as important as our global macro risk matrix, which determines the market regime. Again, we're in a Goldilocks market regime. We should be seeing Bitcoin go vertical because that's the kind of activity you send to see in a Goldilocks market regime. If you don't have an ability to understand what market regime we're in, we highly suggest that you partner with someone that does.

• 13:24Anthony Pompliano?

  How about the ETFs? What are you hearing from clients? And what's the impact of those been?

• 13:28Speaker 02

  Yeah, that's something we were talking from clients, talking to clients about yesterday. So we're starting to see Bitcoin added to these traditional TradFi portfolios this over the past few weeks or so. And that's something we, you know, we consider ourselves the foremost authority in the world in terms of helping investors risk manage Bitcoin in the context of a traditional multi-asset portfolio. And we're now starting to see ETFs out there with those with those same characteristics. But what those ETFs lack, in my opinion, and what's going to get investors really, really hurt in the in the in the future is the fact that those ETFs don't have our risk management overlays that we feature in our KISS portfolio construction process.

• 14:07Speaker 02

  You and I talked about our impact our KISS portfolio construction process in December. I'll tweet that out for those who may have missed that discussion. But one of the, you know, just just those some summary statistics out there for you, you know, if you if you run our 60 30 10 spy ag Bitcoin strategy, it's a trend following strategy, you know, the average annual return for that strategy is about 13% and the max drawdown for that strategy is minus 11%. If you run that same 60 30 10 strategy without our quantitative risk management overlays, whether they be through the weather model or through the volatility, just a momentum signal for each asset class, you're talking about the same average annual return thereabouts, but you're talking about a max drawdown of minus 26%,

• 14:46Speaker 02

  which is more than double the max drawdown of KISS. And more importantly, you've crashed three times over the life of that out of sample back test, which begins in January 2018. So what investors don't realize, particularly the traditional Wall Street investors who are coming over and just now getting allocated to Bitcoin and just now putting Bitcoin in a traditional multi-asset portfolio, they're not going to be ready to risk manage the wild ride. In the wild swings of this asset class has historically had in a way that protects their broader retirement account, their clients broader retirement accounts. So I'm really hoping and praying that, you know, investors are, you know, don't have to go through the fire of the crypto winter and seeing how that impacts their retirement savings.

• 15:28Speaker 02

  Uh, you know, as a traditional tradFi investor with, you know, hopefully they can, you know, hear this and find our KISS for local construction process and as a better, much better mousetrap in terms of incorporating Bitcoin into a traditional multi asset portfolio.

• 15:41Anthony Pompliano?

  You've got these two charts on liquidity. Walk us through them.

• 15:44Speaker 02

  Yeah. So these are the two of the, uh, so as I mentioned, uh, liquidity is a component feature. Uh, these are two of the component features of that macro weather model, uh, 42 macro net liquidity, the global liquidity proxy. We're just showing the time series over time to give investors a sense of, uh, of how they, how they progressed, uh, throughout history and ultimately how those, um, how they contribute to, uh, to the different asset classes. As you can see, when liquidity is rising by the back test there on the bottom of the, of both charts, when liquidity is rising, you have positive excess returns, uh, in, in stocks and Bitcoin. And with clarity is falling, you have negative excess returns, uh, in, uh, in stocks and Bitcoin. So, uh, it's just, uh, just helping investors kind of contextualize how each of these principal components of macro correspond to each of those asset class on an independent basis.

• 16:24Speaker 02

  And then we summarize that across all the, the 20 features that we show back on, on slide one, uh, and each of those features contributes independently to those composite signals. So it's a very fluid, very dynamic stochastic process. And in our opinion, it's the kind of analysis you need to do to make and save money on a consistent basis, uh, in this, in this post COVID, uh, high fiscal monetary largesse, above trade nominal GDP world that we're living in. Uh, where a lot of the traditional, uh, kind of metric tools have, have kind of died in my opinion and no longer really work.

• 16:53Anthony Pompliano?

  What is the thing that going through this year, you're paying attention to that you're like, this will be a signal that tells us whether capital is on sides or off sides. I think that there's a lot of people who said, hey, these rate cuts, they're positioned for that. But are there other things that you're really paying attention to?

• 17:08Speaker 02

  Yeah, 100%. The number one thing I'm waiting for or watching this year is the evolution of productivity growth because the productivity growth is the missing ingredient to a soft landing or no landing in economy versus a hard landing in the economy or one that is perpetuated by the Fed having to perpetuate rate hikes. Recall that productivity growth is currently tracking above trend and that's really positive because historically in order to have a soft landing, you need two things to occur, really three, two of these three things to occur. You need above trend productivity growth, you need the Fed to pivot to rate cuts, and you need above trend fiscal spending growth. Right now, we currently have, you know, two and a half of those three. And so that's obviously a really, a really positive setup. You know, the reason productivity is

• 17:50Speaker 02

  a missing ingredient, such an important feature of this bull market is because, you know, what product, what high productivity allows, high productivity growth allows the economy to do it through the lens of the corporate sector, it takes pressure off of them from in terms of having to push through price increases to consumers because it takes pressure off their margins. And it also takes pressure off of them from the margin perspective in terms of having to fire people. So high productivity lowers the probability that we see a firing cycle, higher productivity lowers the probability that we see accelerating inflation. If productivity started to go back to where it had been over the past couple of years, which is negative and deeply negative, they were going to have problems. And so we have our eyes very much glued on this upcoming series of productivity and productivity related data points. Because to me, that, that,

• 18:31Speaker 02

  that, that, in our opinion, was part of the reason we started, pumped into a Goldilocks regime in November, we got the Q3 productivity data in late October, in our opinion. And if we, if we see a negative development in this, in this segment of the economy, then we're going to go back into a bearish market regime.

• 18:48Anthony Pompliano?

  I don't want to open a can of worms, but all that's going on, right? Okay, that's where we are now. I look on the horizon, I see Joe Biden, Donald Trump, they'll be facing off in November this election. The Fed says, hey, we're not political. The closer they get to making cuts or not making cuts to an election, the more political the accusations are going to be. And so how do we think about the political kind of, you know, season, the election, all that playing into the economy?

• 19:15Speaker 02

  Yeah, that's a great question. I mean, so first we get to ask the question is the Fed even want to be cutting rates? And our expectation is that they may be one and done if they can get it done in May or June. Because we do expect immaculate disinflation to persist into the second half of the year. So they may be able to get it one or two done between May and June. But as I mentioned, our inflation models are suggesting that inflation is likely to bottom sometime in Q3. And so as we get into the second half of the year, anticipating cuts in and around the election. I want to say there's a meeting in September, then there's a meeting right after the election on the 7th. And then there's a meeting in mid-December. You know, irrespective of the election, they may not be able to have political cover to cut anyway because inflation is no longer, the inflation dynamics are no longer supporting them.

• 19:56Speaker 02

  So to me, it's more about following the evolution of the economy and inflation relative, not necessarily focusing on the election. Because again, I think the election is a secondary component. Now, if we told me that inflation was going to persistently trend lower throughout the second half of the year and into 2025, then I would expect them to continue cutting irrespective of the election. We've seen the Fed be very active in election years. You know, just going back, obviously, they were extremely active in 2020. You know, that's the most active they've probably ever been in terms of the alphabet soup of liquidity that they threw at markets during COVID. If you go back to 2018, they were hiking interest rates, caused a market crash in 2018.

• 20:34Speaker 02

  You back to 2016, that was the Shanghai Accord with Janet Yellen backed off in terms of easing US fiscal liquidity policy. You go back to 2012, that's when they launched QE3 in 2012. You go back to 2010, that's when QE1 stopped and caused a pretty sharp drawdown in the asset markets. I mean, you go back to 2008, obviously, they took rates to zero in 2008 and introduced QE1. So, you know, the Fed has been active in every general election, whether they be midterm or presidential, you know, since, you know, 2008. And perhaps even prior to that. So in my opinion, we think the Fed is much more responsive to dynamics in the economy than the political cycle.

• 21:17Anthony Pompliano?

  Where can we send people to find you on the internet?

• 21:19Speaker 02

  If they can't find me, they need to turn the light switch on. But we're at somit42macro.com. Come check us out. You know, as I mentioned, we refresh all of our quantitative risk management systems for our clients, both across the institutional investor world. We have plenty of retail clients. We have plenty of our investment advisor clients. The reality is if you're the kind of investor that wants to stay on the right side of market risk, i.e. you're not this sort of long-term investor that's okay with wearing a 50 to 70, 80% drawdown for multiple years at a time, or you're not someone who's so convicted in a bearish, bear porn thesis that you need to get squeezed all the way to the high heavens. Then if you're not those people and you prefer to make and save money along the way, then come check us out 42macro.com. You can find me on Twitter at DariusDale42.

• 22:03Anthony Pompliano?

  I think it's Deion Sanders that says, "I ain't hard to find."

• 22:06Speaker 02

  Ain't hard to find, baby.

• 22:07Anthony Pompliano?

  All right, thank you very much. We'll do it again in the future.

• 22:09Speaker 02

  Cheers, brother. See you, man.