#1237 Darius Dale | Will Bitcoin Crash Before The Halving?

Darius Dale is the founder & CEO of 42Macro, they are one of the best analytics firms I have found in the research space on Wall Street. In this conversation we talk about their macro weather forecast, we also break down bitcoin, and the pre-halving cycle. ======================= Auradine, a leader in web infrastructure solutions including blockchain, AI, and privacy, has unveiled the world's first 4nm Bitcoin mining systems, featuring breakthrough EnergyTune™ technology, setting new standards in performance and energy efficiency. The Teraflux™ product line from Auradine offers best-in-class performance, efficiency, and total cost of ownership (TCO), positioning it as the optimal choice for Bitcoin mining needs. With EnergyTune™, a patent-pending technology, Auradine's Teraflux™ systems enable rapid demand response and optimal energy usage, fostering a symbiotic relationship with electrical grids, and contributing to sustainable energy practices. Designed and manufactured in the US, Auradine's Teraflux™ product line not only ensures cutting-edge technology but also mitigates supply chain risks and provides increased supply chain resiliency. Visit www.auradine.com for more information the Teraflux bitcoin mining systems. ======================= Backed by world-class investors, including Google's AI Fund, Range has redesigned wealth management from the ground up. Range delivers a tech-first experience that provides fast, high-quality, transparent wealth management services making it simple to optimize and grow your wealth. With Range, you get comprehensive services like tax optimization, investment management, and estate planning with no hidden fees. That means no AUM fees. Get started today with code POMP15 for 15% off any quarterly plan for your first year at ⁠⁠⁠⁠⁠⁠range.com/pomp⁠⁠⁠⁠⁠⁠ ======================= Pomp writes a daily letter to over 250,000+ investors about business, technology, and finance. He breaks down complex topics into easy-to-understand language while sharing opinions on various aspects of each industry. You can subscribe at https://pomp.substack.com/

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

• 0:02Anthony Pompliano?

  What's up everyone? This is Anthony Pompliano. Many of you know me as Pomp. You're listening to the Pomp Podcast, which is my effort to find the most interesting people in the world and sit with them for hours while I ask questions in an effort to learn. So it would mean the world to me if you would subscribe to the show on your favorite audio platform, watch episodes on YouTube, and tell your friends and family about the podcast. My goal is to help millions learn from the world's most interesting people. So let's get into today's episode. Darius Dale is the founder and CEO of 42 Macro. They're one of the best analytics firms that I've found in the research space on Wall Street. In this conversation, we talk about their macro weather forecast, and then we also break down Bitcoin and the pre-having

• 0:45Anthony Pompliano?

  cycle. I always enjoy talking to Darius. I learned a ton, and today is no different. Here's my conversation with Darius Dale. This episode is brought to you by Auradine. They are a brand new startup led by a number of Silicon Valley legends who just raised $81 million to build the future of internet infrastructure. You're probably wondering what that means. Let me explain. There are numerous new disruptive technologies that are being adopted simultaneously, from blockchain to artificial intelligence to zero knowledge technologies. In order to ensure that these technologies thrive in this new world, we need new infrastructure, and that is where Auradine comes in. They just launched their first product line called Terraflux, which is a Bitcoin miner powered by the world's first 4-nanometer silicon chip technology.

• 1:29Anthony Pompliano?

  These air-cooled, single-phase, and dual-phase immersion cooling miners have unrivaled speed and efficiency. They have superior uptime, and they leverage a brand-new innovation called Energy Tune that allows miners to dynamically adjust the energy consumption and Bitcoin hash rate based on demand response needs of the electrical grids. Auradine is an ambitious company working on hard problems. I'm really impressed with them, and if you want to check out more, you can go to auradine.com. That's A-U-R-A-D-I-N-E.com. Go check them out at auradine.com today. This episode is brought to you by Range. Are you day trading, a crypto enthusiast, or a tech worker? Or are you just an overall investing enthusiast? Listen up, you need Range.

• 2:14Anthony Pompliano?

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• 2:57Anthony Pompliano?

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• 3:26Speaker 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.

• 3:50Anthony Pompliano?

  All right, guys, bang, bang, I've got Darius here with me. Darius, I thought a great place for us to start is you guys have this weather model. Explain what is the weather model and why is it so important to all the work that you guys do over at 42 Macro?

• 4:01Speaker 02

  Yeah, absolutely. Thanks again for having me on, Pomp. Always a pleasure to be here. So the number one thing that our weather model helps us do is to infuse volatility targeting into our dynamic position sizing process in terms of the asset allocation and factor exposure recommendations that we make for our clients. So it really does help us understand what the macro regime is, what these other key macro market drivers are, and how they have historically influenced asset markets so that we can have a forward-looking, real-time, now-casted basin overlay to what's actually happening out there. So I'll give you a quick rundown in terms of what the model is currently seeing. We'll start with our real economy cycles. So on the growth side, we have growth trending higher, is expected to trend lower over the next 12 months. When you sort of, you know, source or, you know, ask the wisdom of the

• 4:43Speaker 02

  crowd across all the Wall Street economists, when you look at inflation, it's in trending lower, it's expected to continue trending lower over the next 12 months. Employment, the unemployment rate's trending lower, it's expected to trend higher over the next 12 months. You typically don't see a 90 basis point rise in unemployment rate outside of a recession. So that's economist consensus, you know, implicitly forecasting a recession there. With respect to corporate profits, the implied sales growth rate is trending lower alongside the implied earnings growth rate. That's neither of those numbers is particularly draconian. When you look at fiscal policy, which is something we've been talking about all year, in terms of what's been, you know, one of these incrementally supportive aspects to the economy, you have the fiscal sovereign fiscal balance as a percent of nominal GDP.

• 5:24Speaker 02

  That number is trending lower in that 8.4 to 8.5% range. That's a record non-war, non-recession budget deficit in the US economy. So clearly getting a lot of fiscal support for the growth side, but obviously it's keeping inflation elevated relative to the Fed's target. The real effective exchange rate has been trending higher, although I suspect it may start to trend lower if we start to get worse inflation outcomes over the next three to six months. And so when we transition to the right side of the page, which are the financial economy cycles, we'll start with our 42 macro net liquidity model. We've talked about that before. That's the Fed's balance sheet minus the Treasury General Counter, University of Facility balance. That number's been trending lower. A global liquidity proxy, which we touched on last week, which is the global central bank balance sheet plus global broad money supply plus global FX reserves minus gold.

• 6:09Speaker 02

  That number's been trending lower for a while now as well. When we look at credit through the lens of domestic and global broad money supply, those numbers are trending lower. Those are both zeroth percentile values in their respective time series. You typically don't see broad money supply contract outside of the Great Depression. We don't have monthly statistics for that to compare, but we do know that it did contract, albeit modestly in the Great Depression. Interest rates, benchmark policy rates, that's been trading higher. Obviously, the Fed may hike one more time. It's kind of a, you know, kind of a 20, 30% chance of that, although that number's probably gone down on the advent of the Stolz data today. We have the two-year nominal yield spread versus the benchmark policy rate. That number's been trading lower. It's pricing in about 50 basis points there. In terms of aggregated US dollar positioning, we use that as one of our fear components

• 6:53Speaker 02

  to track how much fear is embedded in the market positioning. That number's neutral in terms of the minus 12% non-commercial net length as a percent of total open interest. Aggregated US rates positioning is in extreme bearish positioning. And then on the greed side, we look at aggregated commodities positioning across all the 19 components of the CRB index. That's an extreme bearish position. And then lastly, US equities is a neutral signal at minus 3% net short in terms of overall non-commercial net length as a percent of total open interest across all equity instruments.

• 7:24Anthony Pompliano?

  So when you look at this, what is it telling us kind of on a net basis in terms of that liquidity, but also what is it showing us in terms of these asset prices? And one of the things I find fascinating is that obviously inflation has come down. We now see the Fed talking about, well, maybe we still need to go ahead and continue to hike interest rates. What is this actually showing us in terms of what they're likely to do versus what they may be saying?

• 7:46Speaker 02

  Yeah, so there's two really important things that investors should take away from this table as it relates to what to do with their portfolio. And again, we refresh this every morning for 42 macro clients. So number one is what the three-month outlook, the rolling three-month outlooks for the particular asset class. And what that's trying to do is project excess dispersion relative to the baseline of results that we've historically experienced in the asset class. And so this current constellation of signals. Of which each of these 20 features contributes independently to each independent asset class signal. Right now, this sort of current constellation is saying, hey, this is a neutral time to be long the stock market. Uh, you know, relative to history and right now it's a bad time to be long the bond market relative to history. It's a bad time to be long the dollar relative to history.

• 8:29Speaker 02

  It's a bad time to be long commodities relative to history and it's a bad time uh to be long bitcoin relative to history. And what I mean by relative to history is you typically experience more volatility, realized volatility, larger drawdowns when you're in a bearish uh three month outlook condition in this model. We have back tests going all the way back uh as far back, you know, at least 25 years for each of these asset classes. And when you're in a neutral setting, you kind of have this, you know, pretty normal, you know, path, glide path for the asset class. And then when you're in a bullish setting, you have, you know, sort of positive excess return dispersion, negative dispersion with respect to volatility. So it's like a great time to be invested in that particular asset class. The second thing I think investors should take away from this table is what, how's it, how does this table imply from a factor dispersion perspective?

• 9:12Speaker 02

  And so as you see at the bottom there in the middle, we are currently in the Goldilocks grid regime. That's where a situation where if you look at the top left again, that's where growth's trending higher and inflation's trending lower. That's historically been the best asset, the best uh, the regime for, you know, equities, risk assets, bitcoin, et cetera. Uh, so that's uh, that's something to be note and to take note of in terms of your, you know, how you lean from a factor dispersion perspective. It's a little bit more relevant for our hedge fund clients, but certainly is important uh for, for our retail investor clients as well. And then the conviction on that Goldilocks regime is medium. And the reason it's only medium as opposed to high or low is because only one of the factors, growth and inflation, is confirming the actual um, is confirming the actual um, uh, regime.

• 9:54Speaker 02

  So as you can see, the implied next 12 month real GDP delta is pointed lower. The, the consensus economists expect GDP to be 180 basis points slower uh in a year from now than it currently is today. And so it's effectively saying, hey, look, growth's trending higher right now, but it's probably going to trend lower over the next 12 months. But you're, you're getting confirmation from the um, the implied delta on inflation. So that's why it's a medium. If you're getting a double confirmation from growth and inflation, it'd be a high conviction Goldilocks regime. You know, you feel very comfortable going all in, particularly on asset classes that have a bullish signal. And then a low conviction Goldilocks regime is when you have uh zero of the, of the two growth and inflation features uh confirming the current, the current setup.

• 10:35Anthony Pompliano?

  So now, when we think about kind of this setup that we're currently experiencing, one of the assets that a lot of people who watch and listen to this screen care about is Bitcoin. You've got the breakdown of kind of these pre-having cycles through a number of the previous havings and then obviously the bull markets that ensued. What are you showing here when you kind of go through each one of these pre-having cycles?

• 10:53Speaker 02

  Yeah, absolutely. So I, you and I had a conversation about this, I want to say back in the spring or late winter, early spring, about sort of the volatility that Bitcoin tends to exhibit in the, in the years leading up to havings. Obviously havings tend to be very positive from a structural basis for the, for the asset class. But there is a lot of, you know, the, the road to getting to that having has historically been, been quite fraught. And so, you know, on a median basis, when you look at the November 2012 having, the July 16, 2016 having, and in the May 2020 having, you know, what you see in the year leading up to those havings is that we tend to see a median, at least a number of drawdowns of consequence, which is at least 20% in our scoring. You tend to see on a median basis, three of those drawdowns.

• 11:35Speaker 02

  And the drawdowns on a median basis across all the havings, there's total, I want to say there's about five to 10, or sorry, about eight to 10 of those total havings. The drawdown on a median basis is minus 27%. So that's a long-winded way of saying you can expect to see a, you know, about three drawdowns of 27% or more in a, in a pre-having year. And so that's something we want to make sure investors are aware of. Obviously, we have some volatility in Bitcoin late last week. It's being reversed a little bit, obviously, on these, on the jolt data we're getting today. But generally speaking, I want investors to be very aware that, hey, look, as we get into the fall, we get into the spring, we get into the first half of next year, when we still think a recession is the hamoto outcome for the US economy, albeit in a flat distribution

• 12:17Speaker 02

  of outcomes, you could still see some volatility in the Bitcoin price leading up to that having that we're all so eagerly anticipating.

• 12:25Anthony Pompliano?

  Now, what's fascinating to me about this is you're talking about multiple drawdowns of over 20%, kind of this 27% kind of being that median, but still the cumulative return in the year leading up to the halving is 140%. Kind of this run up into the halving. And that's before you get to kind of what most people would think of as the bull market that really kicks off. And we've seen hundreds of percent. How do we evaluate whether we should anticipate that 140-ish percent or so kind of cumulative return in the year before the halving to occur this time versus not occur? There's certain signs that we can look at that increase or decrease the probability of it repeating?

• 13:01Speaker 02

  Yeah, so the number one feature in my perspective is a trend higher in the global liquidity cycle. You know, you typically see global, in particularly in the November 2012 and to a lesser degree, you know, July 2016 pre-having period, you had the global liquidity feature and asset markets really, really rising pretty substantially. And I want to say liquidity bottomed in 2011 and really started to rise linearly from there from a global, in terms of our global liquidity proxy. It bottomed in early 2016 and really was rising linearly from there. Oh, sorry, in late 2015, rather, and was rising linearly from there in terms of our global liquidity proxy. You just didn't see that in 2019. We had, you know, pretty draconian liquidity conditions throughout 2019.

• 13:44Speaker 02

  And obviously, we saw the worst of the pre-having drawdowns in that instance at minus 48% and 53%. And then the cumulative return leading into the halving in that particular, in that particular cycle was only 20%, right? So there's, you know, I do believe the liquidity feature in asset markets is going to play a key factor in whether or not we could have a, you know, very positive cumulative return despite having a decent amount of volatility as opposed to, and it's kind of going to meander really from where it kind of petered out in April earlier this year with a lot of volatility ahead. You know, we still think Bitcoin's headed much higher over the long term. You know, I think I've done much research as anyone in terms of trying to migrate institutional investors from thinking about 60-40

• 14:26Speaker 02

  in terms of their, you know, kind of RIA and retail type client flows to something that looks more like 60-30-10. Because I don't believe that we are in an era where it's going to get, you're going to get paid for being long, for taking long-term, you know, duration risk in the bond market. Though a couple of stats out to, you know, kind of include the program, which is we're still in a world where you still have deeply negative term premium. And for those of you who may not be familiar with that, Bond market statistic, term premia is what the excess return you get for locking in your money for let's say 10 years, 20 years, 30 years, as opposed to constantly rolling over T-bills for that amount of time. It's a statistical process to determine that in terms of what's priced into the market. But right now, if you go back and you look at the long-term

• 15:09Speaker 02

  time series history of term premia, it's about around 150 basis points plus 150 basis points. So you typically get basically paid to take duration risk. Right now, it's negative. It's negative 50 basis points. And so just going back to the average could take you 200 basis points higher in the 10-year without having any change in growth and/or inflation expectations in terms of how bonds are priced. So to me, that's a really worrying sign in the context of our secular inflation model, which I believe we talked about maybe last year or so, projecting the underlying trend, core PCE at 3% their cycle, 2.5% to 3% in terms of that range, that's way higher than it was in the previous decade, which is around

• 15:50Speaker 02

  1.6%. And more importantly, 2.5% to 3% is above the Fed's 2% inflation target. And so if they don't change their inflation target, which we happen to think they will in the next couple of years, if they don't change their inflation target, they're going to be constantly fighting the treasury market, constantly fighting asset markets from the perspective of its interest rate policy, from the perspective of its balance sheet policy. We just don't think that's politically palatable in a fourth turn.

• 16:12Anthony Pompliano?

  So I talked maybe a year ago about them changing that inflation target from 2% to 3%. And I said, look, I'm not saying that they're going to do it immediately. I'm not saying that they're going to 100% do it, but there's an increased odds that they're going to do it. People laughed at me. They said I was stupid, all kind of the critical views that you get from the intelligent internet. Now, I'm seeing op-eds in major publications. I'm seeing people talk about this more and more. How do we think about handicapping? What are the odds that they're actually going to increase it? And would it be like a 2% to 2.5% increase? Or could it be like a 2% to 3%, 2% to 4% type target increase on that inflation number?

• 16:49Speaker 02

  Yeah, so I think, I mean, the central bankers and policymakers in general, particularly those in western, major western economies, that, you know, something like the Fed where everyone's constantly eyeballing it every single day and scrutinizing every decision that it makes, I don't think they're going to make a big change overnight. It's probably going to come in two phases. We're going to be comfortable with inflation settling out above 2%, and then officially, when the unemployment rate is high enough and we have enough political pressure for the Fed to step in and have capitalized, you know, these record budget deficits that we spoke about earlier, then they're going to be able to say, hey, I think 3% is a new 2%, right? Think about this. Jackson Hole 2024, Jackson Hole 2025, they're going to say, yeah, we're fine with, you know, meandering above 2%. It'll eventually get back to 2% eventually. And then, you know, assuming the unemployment

• 17:33Speaker 02

  rate is cooperating at the time, maybe you get to Jackson 2025, Jackson Hole 2025, or Jackson Hole 2026, that's when they just throw in the towel and they say, okay, 3% is the new 2%, because moving from 3 to 2, or so, yeah, 2, 3 from 2 will allow them again to do QE and to lower their interest rate policy. And ultimately, the big, the big issue of our day is the, just the unfettered, you know, fiscal deficits as far as the eye can see, with no recession projected, which obviously is a pretty ridiculous thing to project if you're talking about 10, 20, 30-year budget forecasts, that we're talking about 1.5 to $2 trillion budget deficits as far as the eye can see with, under no change in tax policy. There's supposed to be a pretty big change in tax policy in January 2025

• 18:16Speaker 02

  with the expiration of the tax cuts and jobs tax cuts, but those aren't going anywhere. We know nobody's going to remove those. Once you give people handouts and a fourth turning, not only do they clamor for, they want those handouts to remain, but they're going to clamor for more handouts. And so we know we're headed down a, you know, kind of a dark rabbit hole of populism. That's just part of the part and parcel of where we are in terms of the longer-term generational cycles that my former colleague Neil Howes kind of, you know, introduced us all to.

• 18:41Anthony Pompliano?

  It makes complete sense. Darius, where can we send people to find you on the internet or find out more about 42 Macro?

• 18:46Speaker 02

  Yeah, appreciate that, Bob. So, uh, come check us out, 42macro.com. We're actually relaunching our website, and I didn't want to say next week or two weeks from now. So definitely come check that out, because I think everyone's going to really enjoy a lot of the education that we're going to put out there for, for the broader audience as well. And then in the meantime, check us out on Twitter, 42macroweather is my public Twitter handle.

• 19:04Anthony Pompliano?

  Awesome. I appreciate it always. I learned something. Today's no different. We'll definitely do it again in the future.

• 19:09Speaker 02

  Absolutely, brother. Thanks again, man.