#1027 Darius Dale On How To Navigate These Difficult Moments In The Market

Darius Dale is the Founder & CEO of 42 Macro, the leading macro risk manager adviser. This week, Julia La Roche filled in for my weekly conversation with Darius. In this conversation, they discuss the macro economy, consumer expectations, recessionary fears, Darius' concerns about Bitcoin dropping below $20k, and how to navigate the market during these rough times. 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 ======================= BCB Group is the leading payment services partner for the digital assets industry. BCB Group provides payment services in 30+ currencies, FX, cryptocurrency liquidity, digital asset custody and BLINC, which is BCB’s free, instant settlements network for the BCB client ecosystem. Find out more by visiting bcbgroup.com/pomp ======================= 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. ======================= The Pod Pro Cover by Eight Sleep is the most advanced solution on the market for thermoregulation. It pairs dynamic cooling and heating with biometric tracking. Go to https://www.eightsleep.com/Pomp to check out the Pod Pro Cover and save $150 at checkout. Eight Sleep currently ships within the USA, Canada, and the UK. =======================

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. Today's episode is an interview between Darius Dale and Julia LaRoche. In it, they talk about the macro economy, the Federal Reserve, interest rates, monetary and fiscal policy, and what the hell is going on in the American economy. I really enjoyed listening to this episode, and I know that Darius and Julia really enjoyed actually recording it. I hope that you enjoy it as well. Before we get into this episode, though, I first want to talk about our sponsors. This episode is brought to you by BCB Group. With a dedicated focus on institutional payment services, BCB Group provides business banking, cryptocurrency, and foreign exchange market liquidity for many of the world's

• 0:45Anthony Pompliano?

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• 1:29Anthony Pompliano?

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• 2:13Anthony Pompliano?

  go to exodus.com/pomp today. This episode is brought to you by Eight Sleep. Eight Sleep is the single best product that I have purchased over the last three years. It completely changed my life. I'm not joking. Pay attention. The Pod Pro Cover, which goes over your mattress by Eight Sleep, is the most advanced solution on the market for thermal regulation. It pairs dynamic cooling and heating with biometric tracking. You can go to eightsleep.com/pomp to check out the Pod Pro Cover, and you save $150 at checkout. They currently ship within the United States, Canada and the UK. And I told you, it changed my life. It helps me sleep deeper, helps me sleep longer. I feel much more refreshed and I have better energy. You want to know how I have relentless energy every single day? Because I sleep on an Eight Sleep. Seriously. Go check it out.

• 2:58Anthony Pompliano?

  Eightsleep.com/pomp today.

• 3:01Speaker 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.

• 3:24Speaker 02

  All right, well, I'm excited to bring in our next guest. We have Darius Dale. He's the founder and CEO of 42 Macro. Darius, welcome to the show.

• 3:34Speaker 03

  Hey, Julie, what's up? How are you?

• 3:35Speaker 02

  I'm really excited to talk to you. I was like, something I'm like, oh, my gosh, I'm just, it's something I've always wanted to do, so.

• 3:43Speaker 03

  I appreciate that.

• 3:43Speaker 02

  Yeah, I get to like.

• 3:44Speaker 03

  Before we even get going, I think you need to tell Joe and John that we're currently running at an all time high in the Employment Cost Index. That's the broadest measure of wage inflation. So they might need to have a talk with their brother.

• 3:56Speaker 02

  Oh, they've been trying to unionize. I don't know if you've heard about that.

• 3:58Speaker 03

  Unionize?

• 3:59Speaker 02

  Yeah, I don't want to be in their union.

• 4:03Speaker 02

  They're mad at me now.

• 4:05Speaker 02

  Definitely will. All right, so we're closing out the quarter. We're closing out the first half of the year. Obviously, like, markets have just been in a steep decline. Worst for the S and P about, or such a close at the worst since, I don't know, since 1970. So it's been, yeah, a long time. I would just love to start with like more of like your big picture of where we are in the market. Markets and maybe your outlook ahead.

• 4:29Speaker 03

  Yeah, absolutely. So, uh, you know, for those who have been paying attention to the show, it's pretty, uh, pretty straightforward. Uh, so I'll summarize everything. At forty two macro, we believe that if you use enough data, use enough math, have enough of a repeatable process. You can sort of harness these sort of big macro cycles that tend to drive dispersion within and across asset markets and obviously take advantage of that. Uh, from a portfolio perspective, there's sort of, you know, we consider there to be four big cycles is the liquidity cycle. So as you know, you think about the Fed balance sheet or interest rates, is that getting more positive or favorable for asset markets or less favorable? Clearly, we're in a liquidity cycle downturn. Our views is we're close to, let's call it any five or six on that.

• 5:09Speaker 03

  Um, you know, for those of you who are not Americans, uh, any baseball is played in nine innings. So you were probably, let's call it two thirds of the way done. In terms of liquidity cycle downturn, um, as it relates to the growth cycle, which is another important cycle. We're probably an inning four or five in the growth cycle downturn. It's set to, uh, significantly, uh, deepen, uh, in the coming months. Um, at least according to our forecast, uh, we're probably an extra innings in the inflation cycle upturn. Um, as evidenced by the most recent, uh, PC headline PC and, and, and headline CPI or CPI reports that we've gotten in recent weeks. And then lastly, I think we're probably close to any one or two of the profits cycle downturn.

• 5:48Speaker 03

  What I mean by profits, we're talking about corporate profits, corporate earnings, the things that will drive, you know, incremental decisions, you know, going back to your previous discussion. About, uh, you know, whether or not companies are spending more money on marketing, more money on hiring, et cetera. So, uh, we are not in a favorable place to be speculating. Uh, on the long side of most risk assets as a function of those four, uh, downturns.

• 6:09Speaker 02

  I, I, there's a lot of talk right now about, you know, are we in a recession? I will obviously find out when we get this second quarter GDP print, but. What is kind of your thought process there? And like, how do you kind of think about that?

• 6:22Speaker 03

  Yeah. So I see you guys are charts. Are you able to put them up?

• 6:24Speaker 02

  Yeah, we can pull the charts up. Um, which one would you like us to pull up? Maybe the, the.

• 6:29Speaker 03

  First one. So model and five probability?

• 6:31Speaker 02

  Yeah, let's pull up the model and.

• 6:32Speaker 03

  model implied probabilities chart if we can. Yeah, so this, uh, this first, so what we're trying to do with these charts is identify uh, whether or not we are in recession or likely headed to a recession over the medium term and some investable time horizon, anything over a year is generally not uh, investable from a risk management perspective. It can be, you know, it's, you can talk about stuff from a year from now, but it's not going to really matter to markets. Um, so what I'm showing in this, um, in this top chart, uh, the blue line in the, uh, upper panel just shows the New York Fed, that's the Federal Reserve Bank of New York's recession plot implied probability model. Uh, down at four percent, uh, four percent probability of having a recession over the next, uh, 12 months. Uh, one, I think that number's wrong, but two, it's significantly lower than where it's typically at on a mean basis.

• 7:15Speaker 03

  Heading into recession, that number's around 27%. So typically right into a new, you know, recession, that number's on average around 27%. So, uh, it tells you a couple of things. It tells you one, um, at the onset of recession, even the recession probabilities are still generally low. So you need to have forward-looking indicators to give you a better view on that. And then number two, the red line in the upper panel just shows the, uh, uh, a model I put together just based on a couple of Bloomberg models that are anchoring on the 10s, 2s Treasury yield curve and the 10-year, 3-month Treasury yield curve. Uh, that procession probability is currently around 25%. Historically, it's been on average around 35% at the onset of recession. So that's much closer to signaling, hey, look, we might actually be in recession.

• 7:57Speaker 03

  Uh, but to me, I think the discussion around recession is really coming from the consumer. Um, the second chart I send you is, uh, consumer confidence. Yeah, we can pull that up too. Yeah, absolutely. So, uh, the chart, uh, the top upper panel on that chart shows, uh, the blue line just shows, uh, Conference Board's consumer confidence measure. That's sort of, uh, one of the more stickier, um, auto-correlated consumer confidence measures that we have. It tends to be more correlated to the labor cycle than the, uh, in University of Michigan survey, which is also widely followed. That tends to be more correlated to inflation. But the key takeaway on this chart is that historically, we've seen consumer confidence break down below its trailing three-year average. Um, you're typically in or just about heading into recession and very clearly with the most recent data point we got yesterday. Uh, I want to say yesterday or two days ago, um, you know, 99, I think we're, you know, we're now.

• 8:42Speaker 03

  Now careening well south of the trailing three year average, which takes me to my final chart. Um, consumer expectations. Um, you know, this, uh, this other chart consumer expectations, uh, sort of breaks into a couple of different indices. Within that consumer confidence report. Um, again, these are, these are, uh, June data points, so they're, they're pretty relevant. They're pretty fresh. Um, the red line in the top panel just shows the present situation index. Within that conference board, consumer confidence report, the blue line shows the, the expectations index. So how do consumers think about? What's likely to happen over the, you know, medium term? And as you can see, there's become, there's this massive divergence between how consumers. Think the economy is today, how they feel about the economy today relative to where they think the economy is going to be in the future. That's denoted by the spread there down at the bottom panel.

• 9:27Speaker 03

  Now that spread at, you know, minus eighty, ninety basis points wide to the negative side. Is about as deeply negative as it's ever been. You know, it's in the first percentile. Uh, uh, all the monthly, uh, um, readings since going back to the late sixties when this indicate, when these indicators were born. So that tells you that, you know, as you can see where those red bars are in the chart. Historically speaking, when you get to a very deeply negative spread between consumers' expectations and how they currently feel about the economy. Uh, you typically are walking into recession because that's typically how it happens, right? You start feeling bad about the future and therefore you adjust your current spending, your current, um, expenditures, et cetera. To how you feel. And this is all part of the behavioral dynamic associated with, you know, economies of financial markets called prospect theory.

• 10:09Speaker 03

  We don't need to get into that now. Definitely go check out, uh, Danny Conman's book, Thinking Fast and Slow, if you want more details on that.

• 10:14Speaker 02

  I like that. Um, and it's like, oh, like the psychology of it. Um. I, I guess like a follow on to that, cause like I'm looking at your models, like. Is there a way to like assess, um. You know, how severe a recession might be, like when you're looking at these in indicators, like, how do you kind of think about, like, is it like something that's quick and? I would love to explore that with you.

• 10:35Speaker 03

  Yeah. So the, that's a great question, Julie. So there's a couple of ways to do that on an ex ante basis. Uh, one, you could sort of, you know, the, the, the, the, the easiest way to do that is try to understand. Kind of the different leveraged cycle dynamics. The first would be how fast has credit grown into the downturn? Quickly speaking, whenever you see a significant positive deviation in the in the credit to GDP metric, particularly private non-financial sector credit to GDP into a downturn, that's what we saw in two thousand and seven. You typically get a more deeper, nastier kind of asset price led recession that takes longer to recover from. A second way to explore that on an X anti basis is looking at the looking to observe if you have a positive deviation,

• 11:17Speaker 03

  a significantly positive deviation from the trend in what we call the debt service ratio. So that's the total amount of sort of interest payments and amortization of paying back debt, you know, for the broader private non-financial sector. And currently speaking, neither of those two indicators are signaling kind of a cause for a significant alarm, i.e. neither are suggesting that we're likely to have a deep, lasty, prolonged, protractor recession, which is a good thing. Now, the one thing I'll caveat this by saying, you know, the data that, you know, we get this out, we derive those statistics from, are released on a pretty severe lag. So we're talking about Q four twenty one statistics and it's obviously the end of the second quarter of twenty twenty two. So fast forward six months from now, we could be getting statistics for the second quarter of this year that may say otherwise.

• 12:00Speaker 03

  But for now, just being data driven, we can understand that any recession we are likely to experience over the next twelve months or so should be shallow, should, in my opinion, I think it's more likely to resemble the two thousand and one recession, which was, you know, you got to need a magnifying glass to, you know, kind of really see it on the map. It was one, it was the shallowest recession in U.S. economic history at peak the trough decline and output of minus seventy basis points. But guess what? That didn't matter to the market. S and P was cut in half, Nasdaq was down eighty percent in the span of that, you know, two and a half year bear market. So you have to be careful not to associate your expected outcomes in financial market terms with your expected outcomes, the economic terms. The destination doesn't have to be the same, but the rate of change is likely to sort of perpetuate and feed upon each other.

• 12:44Speaker 02

  That's interesting. You say it like that didn't matter to the market like also just kind of makes me wonder, um, like, say, we find out like in the, we get the Q two GDP number and it's like, okay, like you have two consecutive quarters of negative. GDP growth like do you think the market's kind of priced in that scenario? Or like, is there further to go here? What do you think?

• 13:07Speaker 03

  Yeah, great question. Great question. So, so I'll start by, uh, there's two things to unpack there. I'll start with the first part of your question, which is the two consecutive quarters of negative GDP. That would constitute a technical recession by the letter of the law. Two consecutive quarters of contraction is a technical recession. That will not constitute an actual recession by the sort of market and by the Federal Reserve, and certainly by the people who determine whether or not the economy's been in recession, which is the MBR. You know, their definition is more along the lines of my definition of recession, which is a statistically significant deviation, negative deviation from the trend in output. Um, you can measure output, obviously, through GDP, industrial production, consumer spending, consumer income, total employment.

• 13:49Speaker 03

  All those things tend to be correlated to the downside and a significant deviation from their respective trends. Um, we have not seen that yet. However, when you go back and you think about it from a technical recession standpoint, we are certainly developing that one. I mean, we got the PCE data, the personal consumptions expenditure data point for the month of May this morning, and it was, it was pretty bad. I, it was very bad, actually. Uh, we talked about that in our macro minute program. Um, check out our YouTube channel, by the way, for those of you who don't pay attention to those. But, um, anyway, so the, on a headline basis, so aggregate consumer spending in the economy, um, which is two thirds of overall GDP, you know, um, you know, it slowed to 0.2% on a three-month annualized basis through the month of May. And so if we stay around these levels, or if it gets, you know, any worse for the month of June,

• 14:32Speaker 03

  we will have negative consumption growth, uh, on a three-month annualized basis, on a quarter-over-quarter basis, um, in the second quarter. Um, that's being, uh, dragged down by goods consumption, uh, which is down 1.4% on a three-month annualized basis. Services consumption is up at 1%, but guess what? 1% ain't gonna cut it. One, that's half the trend growth rate. And number two, we're supposed to be in the middle of a services sector boom, right? I mean, how many stories have we heard about, you know, pandemic being over, getting on airplanes, we're going on vacation, we're going out to eat, you know, going to the theater, et cetera, et cetera. And guess what? All that, all that, that narrative adds up to a mere one. Percentage point growth rate in three month annualized terms for services assumption. So, you know, we continue to see consumers get squeezed from a real income perspective.

• 15:16Speaker 03

  You know, your real incomes have been basically trending at down four percent year over year for the last year. Um, on either a aggregate or per capita basis. And so, you know, in our opinion, the data is starting to get nasty enough to start pondering the question. Are we currently in recession or are we, you know, getting close to entering one? And I think the, the jury, the, the sort of, um, you know, the answer to that question certainly moved in the direction of recession. Very much in the last kind of two to three hours.

• 15:40Speaker 02

  I think that's why, like, I, I love, like, listening to you because I feel like I always learn things too. And you point out, yeah, like, there's been that narrative, like, oh, it's a services boom, but as you point out, uh, probably not the case, um, as it turns out. Um, I want to ask you about inflation too. Like you mentioned, we got the, the PC this morning. It was, it was bad and I know that's a gauge that the Fed does look at. Like, how do you think about inflation? Like, is it systemic? Is it abating? Like, I just wonder like how you kind of begin to assess that.

• 16:09Speaker 03

  Yeah, so inflation is very much systemic. There's a, uh, several ways we can assess that. And not the least of which is the data we got from this morning's report. Uh, we saw an acceleration in headline bit PCE inflation on both the three month annualized and year of your rate of change terms. So that was a problem. Uh, we saw a re-acceleration in three month annualized terms in core PCE, which is the Fed's preferred inflation metric at 4.1%. It's basically a double of where the Fed needs it to be. So that's a problem from the liquidity perspective of the liquidity cycle. But to answer your question specifically on is inflation systemic? The answer is unequivocally yes. The Cleveland Fed has a, has an index, uh, called median CPI, which measures the median rate of change in inflation terms. For everything in the inflation basket, there's hundreds, you know, the, the indicators in the inflation basket.

• 16:52Speaker 03

  And what we're seeing on a median basis, not on a weighted basis, on a median basis. Inflation accelerate to new all time highs. 5.5% on a year of your basis, that's a new all time high in May. 6.4% on a three month annualized basis, that's a new all time high for that time series. So to answer your question, yes, we are very much in a systemic broadening inflation, um, shock. Uh, that ultimately we think the Fed is going to. Stick to its guns and do something about.

• 17:17Speaker 02

  Let's talk about the Fed and sticking to its guns. Jay Powell, we had comments from Jay Powell this week. We also heard from Christine Lagarde. We heard from BOE's Andrew Bailey. Like, just kind of would love to hear your reaction from what we're hearing from central banks as it relates to some of these issues.

• 17:34Speaker 03

  Yeah, so I thought Jay Powell, so was that yesterday, Wednesday? Yeah, the ECB forum. Jay Powell really stood out to me, one, in his tone, but also he made a very important direct comment to financial market participants and investors, you know, to everyone in the economy. And it was, you know, it was very basic. Look, we are going to do whatever it takes to get inflation back to our 2% target. That process will involve some pain, but that it will be a worse, that will be less of a pain than just not achieving our objective, right? So he's basically saying if we allow inflation to stick around here, more people, particularly people on the low end of the income spectrum are going to get, you know, they're already feel like it's a recession for them already, by the way. You know, some, some 10 to 20, 30% of the economy is already in recession just as a

• 18:18Speaker 03

  function of their income level. And so what he's effectively saying is, look, it's going to be bad no matter what. And right now, if we allow inflation to continue to fester, it's going to be bad for the largest number of people for the longest period of time, as opposed to just going, you know, tightening us into a significant up slowdown in output to get us to a more balanced supply and demand spectrum that that will ultimately give us better outcomes on the inflation front. So I thought that was about as direct as I've ever heard a central banker talk. Usually, yeah, sorry, I take that back, in hawkish terms. When they talk, usually they're very direct when they're talking about stimulating, right? Because they want to prevent deflation, they want asset markets to go up, they want to revive animal spirits. It's very rare that these people talk so directly and frankly, when they're actually trying to, for lack of a better term, beat asset markets with a wooden stick.

• 19:03Speaker 03

  And I've been making this joke that Powell's got this aluminum bat, he's like a 12-year-old at a birthday party with the aluminum bat, taking it to the pinata, and he doesn't even have a bind vote on, so he's just beating the crap out of the pinata until this dang thing breaks, i.e. inflation, he's going to keep beating the pinata.

• 19:18Speaker 02

  Yeah, all the candy is going to be the inflation. That's an interesting visual. You just mentioned like him being direct, like just as a market participant, someone who's been in this business for a while, like, I mean, I imagine like your peer group also was feeling similar things, like you probably want him to be more direct, I'd imagine, like, do you think that that's the kind of How we're going to get going forward?

• 19:41Speaker 03

  Yeah, I mean, well, so so to answer and sort of dating myself, I found out today I have a bald spot. Know that. So I guess I have been in this industry.

• 19:50Speaker 02

  I've been in it for a while, too.

• 19:52Speaker 03

  So that's either here or there. But yeah, so the answer is yes. This is a Federal Reserve. Don't forget, I made this comment on this program many times for the last, you know, six, nine months. That this is a Federal Reserve that is fighting two wars, not one war. It's not just inflation. They're fighting the war of credibility as well. Right? Like, they spent all of last year aggressively easing, aggressively expanding their balance sheet to the tune of $120 billion of QE per month. As inflation was continuing to fester with this sort of narrative that it was going to be transit to. One of the worst calls in in financial market history, let alone one of the worst calls for the central bank. So now they're fighting to regain the credibility associated with getting the inflation call so wrong, that call that that was so wrong that is currently roiling.

• 20:37Speaker 03

  You know, sort of the the budgets of so many millions of American households right now. You know, if you, I, everybody watching, many of the people watching this show, you know, inflation is a no, it's nuisance for a lot of us. It's not a, I grew up very poor. It's not a nuisance when you're poor. It is a life altering event. You have to stop consuming. You trade down even though you're already at the low end of the trade down spectrum. I mean, if you're buying bagged cereal because you can't afford box cereal, now you're no longer buying cereal. That's what 8.6% inflation does in this country. I'm not sure that everyone understands that.

• 21:07Speaker 02

  It's a really important point that you bring up, how it affects like lower income American, you just gave that that example. Like, let's explore that further. What could be some of the broader consequences of that? Like, what could that mean for like, maybe even like the social fabric of our country?

• 21:22Speaker 03

  So, I mean, as you can see, it's been clearly reflected in in Joe Biden's approval rating on the broader approval rating of Congress. You know, obviously, a lot going on down there. So let's, you know, get too far into that. But, you know, it's clearly an issue. I mean, this is the this is the key takeaway. And then somebody, I'm going to misquote or misassign the quote, but it was one of the most sort of one of the most interesting things I heard about inflation all year. And I apologize for who I'm still in school from. I'll remind everyone next Thursday. But they said, and I thought I agree with it, and I realized, oh, my God, this is what Powell thinks. And the quote is, when you go into recession, you know, the unemployment rate backs up two, three, you know, four, four, at a bit worse, you know, four or 500 basis points. So that's, you know, that percentage of people in an economy.

• 22:07Speaker 03

  You're going to have that that that hard time. When you have a significant inflation shock, one hundred percent of the American citizens are dealing with it. Right now, so we're talking about, you know, a recession being this big boogeyman that may only impact, you know, significantly impact, you know, let's call it. Three to five percent of the economy as opposed to this inflation, which is currently impacting, you know, you know, skimming off the top of rich people who don't even notice. You know, at least ninety percent of the economy. So I think that's the battle they're fighting in it. To me, it's a it's a much more common sense battle.

• 22:38Speaker 02

  Yeah. Um, let's see, I'm trying to think what's let's kind of pivot a little bit and just bring up some other um topics, just because. I think it's interesting, like I like at the top of this, you go over like the indicators that you pay attention to. Um, what are kind of maybe more the underrated signals that you look to or pay attention to that could be helpful for folks watching?

• 23:02Speaker 03

  Uh, so, I mean, you know, anybody who's subscribed to our work, seen my work over the years or my career. You know, there's not any, we look at everything. I mean, if there's a statistic that matters to financial markets or that matters. To predicting GDP, to predicting CPI, to predicting, you know, eventually inflections in the liquidity cycle. Then we're analyzing. I mean, our our now cast models have thousands of data points in them from a from a fundamental standpoint. Our market regime model has that hundreds, no, sorry, one thousand four forty eight data points in it on a daily basis to. Identify what market regime we're in. You know, this is, you know, we run serious models at forty two macro, so. I I don't want to give your listeners the the sort of the the sense that, oh, there's one or two things you can look at to do this at a high level because there's not.

• 23:46Speaker 03

  You know, it's a full time job to to to be average at this industry, average at what we're trying to get accomplished here and knock on wood, we've been a lot better than average this year.

• 23:53Speaker 02

  Totally, fair enough. Um, and then also kind of going back to when you were showing the models. Um, like how the there, when you had your first chart, how the one was kind of like totally off, like. What are they missing though in the model? Like, what is what is it that's not in there?

• 24:08Speaker 03

  Well, so right now you have a pretty, the number one thing that will tell you we're unlikely to be in two things that'll tell you we're unlikely to be in a recession right now is is corporate profitability. Historically speaking, you've seen sort of a significant decline in corporate profitability during recessions. So on a trailing 12 month basis, that is very much not the case. We have some pretty robust earnings growth on a look back basis. And then second, the yield curve that is typically associated with, you know, timing recessions, which is the 10 year, three month treasury yield curve. That continues to be very positively sloped, you know, very wide yield curve, you know, very wide, you know, wide yield curve on that measure. So that continues to tell investors, say, hey, look, if we are going to recession, it's a ways away, it's a year away at best.

• 24:52Speaker 03

  If not, you know, maybe even two years away as a function of that. But, you know, I have the belief that if you get into a significant slowdown in growth, which is what our models are forecasting for, you know, really the better part of the third quarter and really into, well into the early part of next year. Once we start to observe the economic statistics associated with that significant decline in output, then you're very much likely to start to see a rally in the long end of the treasury curve while the Fed is continuing to hike. And that's how you can eventually get that inversion, perhaps by the end of the year.

• 25:20Speaker 02

  Okay, how about in terms of, I'm just thinking back to from the beginning of our conversation. I guess I wrote down a couple of notes here, but, you know, anything over a year not being investable. When you're kind of going over like the big cycles that we're in. From an investment.

• 25:36Speaker 03

  It's not that it's not investable, it's just the market won't give a damn. And when you talk about, you know, the market's response to the growth cycle, the inflation cycle, the profit cycle, and most importantly, the liquidity cycle. You, when we, I mean, we've backtested this as well as anyone I've seen. I mean, certainly we don't have the opportunity to look at everyone's buy side process, but certainly I can observe what's happening on the sell side. And I think we have some of the best backtests in the world. And our backtests show that once you get beyond three months, you know, in terms of, you know, a look forward, markets don't really have any response to those kinds of dynamics. Right. And so if you're talking about like liquidity cycle, growth cycle, Powell, inflation growth, having an impact on asset markets, it's usually within the next few months that the market is trying to, you know, fill around and price in.

• 26:19Speaker 03

  It's not the next two to three years, you know, that stuff will happen along the way. You know, the catalysts are, you know, drive you higher, drive you lower along the way.

• 26:27Speaker 02

  That's a good point. Yeah, it's happening, I guess, much more, I guess closer to where we are than further out. I do want to just ask, like, maybe from an investment perspective, like. I don't know if you can share like what where would you want to be like right now like?

• 26:46Speaker 03

  Yeah, I mean, so, you know, out of respect for our paying subscribers and we're very appreciative of them. You know, I'm not going to give too specific of advice, but yeah, one thing I'll say, um, you know, just something I've been saying in the program all year, which is cash is king in an environment like this. You don't need, when you're in a simultaneous liquidity cycle downturn, growth cycle downturn and profit cycle downturn. You know, few things in the history of asset markets are as negative for risk assets as those things being, you know, in that state, in that condition all at the same time. And so, you know, if you came into the year looking backwards, you know, we were in a growth cycle upturn, liquidity cycle upturn, everything was the liquidity bonanza. I mean, it wasn't upturns of bonanza, some of the most aggressive easing we've ever seen um out of the Federal Reserve in the history of that institution.

• 27:32Speaker 03

  You know, so it was, you know, if you were, whatever risk you were running, whatever, you know, capital risk you were running in that environment, it needs to be significantly curtailed to risk manage this environment. I mean, just be, just have less risk on is the number one, the answer to your question. Then obviously, you know, just call we made going back to November last year. The higher beta, the more volatile, the things that go up the most of the markets going up the most tend to go down the most when the market's going down. And so we made a call that, hey, say, hey, if you have a lot of high beta assets in your portfolio, you need to get rid of them. Because the market is going to sell them and ultimately, obviously, it continues to sell them to this day.

• 28:07Speaker 02

  Yeah, I want to bring it up with you just because of like, you know, the makeup of our audiences. Just like kind of your views on, I don't know if you, what your latest is on Bitcoin. I'm just looking at the price right now. It's just under nineteen thousand, so it's eighteen thousand nine hundred thirty and some change right now. What are your kind of your views? Just it's, I think it's on track. It's going to be, it's, I want to say it's like worst month, at least in a long time, so.

• 28:32Speaker 03

  Worst quarter since two thousand and eleven.

• 28:33Speaker 02

  There you go. See?

• 28:34Speaker 03

  Yeah. Yeah. So, uh, so Bitcoin, I, I'm, I'm concerned. Uh, I mean, I don't want to scare. I know this is a Bitcoin friendly program. I myself am a Bitcoiner, um, but I'm definitely concerned and here's why. You know, we made a call going back to April that we thought the support, support for Bitcoin, where you would back the truck up and buy it was nineteen thousand. Uh, I am shocked that we are here so fast. I am absolutely shocked that we have gotten down here so quickly. And that tells me that. If nineteen thousand doesn't hold, I don't know, pick up, pick a round number, fifteen thousand, ten thousand, I don't know. There is no support when you break nineteen thousand, at least not in terms of our analysis. And so, you know, we talk about this liquidity cycle downturn. Let's not forget that we're only doing about half the total amount of quantitative tightening

• 29:19Speaker 03

  that the Fed intends to initiate, you know, in the course of the medium term. So by September, we're going to double the pace of quantitative tightening from draining forty-five billion, forty-five billion of liquidity out of the market, for lack of a better phrase, to ninety-five billion. That's, that's as fat, that's like as fast as the Fed has ever drained liquidity from the market by a double. And so my point I'm bringing up is that when you factor that in, you factor in the overcapitalization of the Treasury as a function of, you know, the, and the T-bow shortage as a result of that, and ultimately, the rapidly rising uptake in the Fed's reverse repo facility balance. All these dynamics are sort of combining to drain massive amounts of liquidity from financial markets.

• 30:01Speaker 03

  And so if you do the math on our analysis, you know, we get to about, you know, basically, you know, just say I have a trillion dollars of liquidity is going to get drained from financial markets between now and year end if the Fed stays on this course and if the dynamics with the reverse repo facility don't materially change. If that happens, fair value on the S and P five hundred is twenty-nine hundred. So guess where Bitcoin's going to be on a correlation weighted basis if the market declines significantly from here?

• 30:27Speaker 02

  I'm just looking right now. You said a trillion?

• 30:32Speaker 03

  It's nine hundred fifteen billion to be exact, so.

• 30:34Speaker 02

  Okay, okay, I know, I'm, I guess like the quick follow-on question too, like when you talk about the liquidity cycle downturn, you said at the top of this program, we're in the fifth or sixth inning. Does it accelerate over time? Does it get like, as you go through that cycle? Like, how does that kind of, how does that play out? Is it like a smoothing or does it just like spiral and get worse and worse as you get further in the cycle?

• 30:57Speaker 03

  I'd love for it to be smooth, but the reality is I wake up at four thirty in the morning every day because it's not smooth. It's nonlinear. Markets are, you know, they're dynamic ecosystems. And so the reality is, you know, one acceleration and one factor can lead to a deceleration, another factor and vice versa. We're very likely to get a reduction in the size of rate increases, particularly as we get past this July 27 FOMC meeting. I'm not so sure we're going to get another 75 basis point rate hike. I mean, maybe it's 75, but I think, you know, by the time we get there, it could be 50 if we get a couple of decent inflation prints. We get June CPI on the 13th. Maybe we get some decline, significant decline in crude oil into the summertime potentially. I don't know. I'm not making that call. That could cause the Fed to go to 50 in July 27, but the reality is, you know, we're not going to stick at 75, 75, 75. That's unlikely.

• 31:42Speaker 03

  So, you know, we're going to see a slowdown in the, in the, in the pace of rate hikes. But we're, at the same time, we're going to get an acceleration in the, the, the quantitative tightening program. So, you know, on net, generally speaking, quantitative tightening has a more of a near term sort of coincident impact on asset markets QE and QT than interest rate hikes and interest rate cuts.

• 32:03Speaker 02

  Just like on, you mentioned the inflation print. Do you have like a kind of a number in mind? Like, I don't, I don't know if we actually mentioned a specific number, but what are you kind of thinking there?

• 32:13Speaker 03

  For headline CPI, we are at, I'll pull up our estimates now. We're sticking at 8.6 for June, or yeah, sorry, yeah, for June, yeah. So that number will be out on, on July 13th.

• 32:26Speaker 02

  Gotcha. Any parting thoughts before I let you go?

• 32:29Speaker 03

  Yeah, this is, this is not the time to be cavalier. I know a lot of folks have, probably this first half of the year has not gone the way they probably hoped. And that's okay. You know, not everything in life is going to go the way you hope. But the most important, you know, thing you need to make is you need to make a decision, determination on what is your next play? You know, sometimes you give up a sack, sometimes you give up a touchdown, but at the end of the day, the game is not over. You have to make a decision on how to regroup, refocus your, reallocate your focus budget so that you can take advantage of the next series of opportunities and catalysts in markets. And if you don't know what those opportunities and catalysts are, then come check us out at 42 Macro. If not, just so, catch back here next week.

• 33:07Speaker 02

  I love that. Well, I was gonna ask you, where can folks find you online? So you mentioned 42macro. Uh, let, yeah, let folks know where they can find you and learn more.

• 33:14Speaker 03

  Yeah, so, uh, come check us out at 42macro.com. If you're a serious investor, what I mean by serious investors, someone who has legitimate investment objectives, you know, serious size in terms of their asset allocation, in terms of their capital risk, um, you can be professional, you can be not professional, you know, both, obviously, as, as subscribers. And if, and, you know, obviously, if you're either non-serious investor, someone who can't afford it, college student, etc., then come follow us on Twitter. We, we put out a lot of research on our, uh, YouTube channel as well. So, you know, we definitely have something for everybody, but I, I definitely think this is the time where if you don't have a legitimate macro process heading into the second half of this year, you will struggle. That's a guarantee.

• 33:50Speaker 02

  Yeah. They can also find you on Twitter as well. We just, uh, showed your handle.

• 33:53Speaker 03

  42macro details, my handle.

• 33:54Speaker 02

  Amazing. Well, Darius Dale, founder and CEO of 42macro, I thank you so much for your time and your fascinating, um, discussion and just also the way you end things with like those parting words of wisdom for everyone, really puts things in perspective. So thanks again.

• 34:08Speaker 03

  Of course, Julia. Look forward to, uh, next time. Cheers.

• 34:11Anthony 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.