#1311 Darius Dale | Will Global Liquidity Push Bitcoin To All-Time Highs?

Darius Dale is the Founder & CEO of 42Macro. In this conversation, we talk about global liquidity, quantitative risk management model, bitcoin, other assets, and macro environment conditions. ======================= 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. ======================= Get Better Crypto Data: Do you want faster, easier crypto data? Sign up for Velo Data, a new product that we have been working on to solve this problem: ⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠velowaitlist.com⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠ ======================= 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 talk about global liquidity, his quantitative risk management model, and how things like Bitcoin are going to benefit both from that global liquidity, but also the approval of the Bitcoin

• 0:45Anthony Pompliano?

  ETF. This conversation was fun and informative, and I think that you will learn a lot in it. I always enjoy talking to Darius, and today was no different. Here is my conversation with Darius Dale.

• 0:56Speaker 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.

• 1:20Anthony Pompliano?

  Today's episode is brought to you by Espresso, the maker of the world's thinnest portable display. Now, listen up. If you're like me, you feel like you are at a command center when you sit down at your desk. I got a gazillion tabs open and different windows for different activities. There's my web browser, my text messages, I have Slack open, and I got a Notes app. I normally work on a desktop, and it can be very, very productive. But everything falls apart the second I leave my desk. If I'm traveling, if I go to a coffee shop to do some work, or just want to work from the kitchen table, my laptop doesn't have enough screen space. I lose my command center, and my productivity falls off a cliff. It's a major problem. But this is where Espresso comes in. They have a portable screen that is so beautiful that you think Steve Jobs came back from the dead to create it.

• 2:03Anthony Pompliano?

  The thing is incredibly light, it comes with a nice stand, and the user interface is so easy that I figured it out. How to do it Less than three minutes. If you listen to this podcast, you know that's not an easy feat. So the espresso team and I, we became friends. I got to know them because I really like the product. And those screens, they now want to offer them to any fan of the podcast. So we struck a little deal. Here's how it works. Anyone who listens to this podcast can go to us dot E S P R E S dot S O. Or that's too confusing. Just go click the link in the description. If you go to espresso's website, they've got a brand new offer there sitting for you. You get a little discount and you'll get a beautiful screen. Trust me, I use mine every day.

• 2:46Anthony Pompliano?

  You'll love the espresso screen and I think it'll make you more productive. Go check them out today by clicking on the link in the description. Before we get into this episode, I also want to tell you about a brand new product called Velo. Velo is faster, easier crypto data. Everyone in the industry is always looking for, what's the price? What's going on on the exchanges? Where are assets flowing or not flowing? How is things like open interest and derivatives actually playing out in the market? Well, that's where Velo comes in. It's faster and easier crypto data. You can go to velowaitlist.com today. Myself and a couple of friends, we invested in the business, we're advising the founder and we think it's pretty cool.

• 3:25Anthony Pompliano?

  This one is something that keeps me informed on a daily basis. So you should check them out at velowaitlist.com. That's V E L O waitlist.com. All right, guys. Bang, bang. I've got Darius here. Darius, Janet Yellen, the Treasury Secretary recently gave an interview and she was asked how herself and President Biden think about inflation. And one of her components of the answer was a classic talking point from a politician or a government official, which was, yes, there are some prices of important goods that has gone up, but people are better off. Wages have gone up and so the American people are better off than they were pre pandemic. What do you think? Do you agree with her, disagree with her? Maybe there's nuance here?

• 4:09Speaker 02

  Well, maybe so. It's great to see you, man. Thanks for having me back on. I'll say this probably needs to be a little bit of shrinkflation applied to her statement, her commentary, because it is obviously, just judging by the polls, you know, obviously, President Biden is polling poorly against President Trump, or former President Trump, in head-to-head polls, that her comment is nonsensical. The average American consumer, when you look at the levels of various consumer confidence readings, are very depressed cyclically. They're moving higher, so that's been supportive of asset markets, as Goldilocks regime we've been calling for since early November, but that's neither here nor there. What really matters for the consumer is the perspective of cumulative price inflation. And if you think about cumulative price inflation, particularly for people on the

• 4:54Speaker 02

  lower end of the income spectrum, they've been down on a net basis, on real income terms, over the past few years. You know, the people in the upper echelons of the income and wealth distribution spectrum have done quite well. You know, things like net worth, household net worth, cash on household balance sheets, those types of statistics have broadly outpaced inflation since the start of the pandemic, really since the start of the fiscal and monetary largesse we've seen, really since early 2020. But if you think about things like just wage inflation, particularly again for those lower to medium income consumers, it hasn't been great from that perspective. So would disagree with her comment, but I don't know that I would agree

• 5:36Speaker 02

  with the other side of her comment, which is, this is obviously bad, because again, from a distributional standpoint, there are winners and there are losers.

• 5:43Anthony Pompliano?

  Yeah, it's interesting, because from pretty much when Biden stepped into office, for like 22 or 24 months, I forget the exact number, negative real wage growth was the theme. Like, it was almost like this guy's undefeated when it comes to real wage growth. He just throws up red negative numbers every single month, month after month, for like two years. And again, some of it is because of his policies, some of it is because of Trump's policies, and some of it's just the macro economy, it didn't matter who was president, but there was just this like undefeated run of negative real wage growth. And then it flipped, and he went seven for seven, seven months in a row, and it was Positive, but then we just hit back and now we're negative again based on the January kind of re-acceleration of inflation. And so part of this also is like, well, it's kind of been mixed.

• 6:28Anthony Pompliano?

  Like, there's been times where wages have been gaining on inflation, and then there's been times, again, like, two years where wages weren't. And so you can kind of pick and choose your start and stop points and manipulate the data in a way that tells the story that you kind of want, which seems like maybe that's something that, you know, both parties would love to do going into an election here.

• 6:45Speaker 02

  Yeah, welcome, welcome to, welcome to Political Science 101. Which data sets, that's a best tell your narrative. I mean, and that's kind of what this is, right? We all know it's a parlor game, you know, it's designed to get the elites paid and, and in the right positions to take advantage of the rest of us. But it is what it is. I don't know that, you know, you know, going back to, you know, one of my favorite statistics I throw out in terms of why we are here from the perspective of above, well above trend inflation for several years, why the economy, partially why the economy has been resilient, much more so than the average investor expected, is when you go back and you look at the fiscal monetary policy response to the pandemic,

• 7:26Speaker 02

  which is obviously extreme, we grew the federal debt by $6 trillion in the two years ending in 2021, so 2020 to 2021. The Fed monetized over 50% of that. And that $6 trillion was spread out evenly in 2020 and 2021 with Trump and Biden as presidents. So this is something we've long argued, even, even for years, even going back to the early days of the Trump presidency, is that you need to, as an investor, kind of shed your old school thinking of between Democrats and Republicans. The reality is, it's populist and more populist in terms of how monetary and fiscal policy has evolved here in the US. And really, this is not a US phenomenon. This, this is something that is,

• 8:11Speaker 02

  is being driven by the fourth turning, which many of you guys know, my former colleague, Nohow, one of my mentors, his work has really helped us understand some of the political dynamics and social economic dynamics that are causing that, you know, that shift in towards populism and increasingly towards populism for, for certain pockets of these political parties. And so, in our opinion, it ain't going anywhere. It's only going to get more populist, more fiscal monetary largesse in response to crises going forward. And ultimately, there will be a tipping point that we have to deal with as investors and as people in this society, but we're probably not there yet.

• 8:48Anthony Pompliano?

  So let's talk about this quantitative risk management model that you have and you guys put together the summary, but basically they're short term, kind of short to medium term, and then you've got medium term type signals. What are you seeing and what is these models and risk management frameworks really telling us about how investors should be thinking about their portfolios and the assets that they're allocating to?

• 9:09Speaker 02

  Yeah, great question, man. A nice pivot too, because you and I can go for hours, particularly over beers, and we certainly have a lot of experience with that about, you know, some of these longer term fiscal monetary policy dynamics and economic dynamics. And I think I like him to think that, you know, you and I are two of the best in the world at that, mincing no words in that statement. But in terms of what we do for our clients at 42macro is more focused on how do we actually make and save money today? What is the medium to long term, or short to medium term outlook for asset markets? And how are we best helping investors position their portfolios to take advantage of market risk, up or down, left or right, rain, sun or sunny? And so, you know, just a little

• 9:53Speaker 02

  bit of background about myself, I spent most, I spent and spend in my career, traveling around the world, meeting with institutional investors on the global buy side, you know, probably done about 5,000 meetings with CIOs and PMs across the global buy side. And what I'm designed, what we're trying to do, the services that we provide to them are what we consider to be macro risk management. And that's a kind of a dirty word for market timing, for factor selection, factor tilting, and all this kind of stuff that institutional investors are tasked with, because they are either benchmarked to asset markets, or they're performed, they're in some sort of market neutral, long, short, kind of framework that forces them to take certain kinds of risk. And so what we've done for our clients at

• 10:37Speaker 02

  42macro is build a series of models that are really, really accurate and really, really sort of repetitive, repeatable in terms of the output that they generate to help investors stay on the right side of market risk. You know, there's a choice you have to make as an investor before we even unpack this slide. You can not stay on the right side of market Yes, right. You can be long an asset that is in a drawdown and continuing to drawdown because you believe in the long-term thesis. But you know, for institutional investors, they get fired when they do that. They can't feed their families when they do that. So they need to generally be making money all the time or on their way to making money all the time because they'll lose their jobs otherwise.

• 11:19Speaker 02

  And so what our models are designed to do is help investors, you know, kind of maximize upside capture in bull markets and minimize downside capture in bear markets. So with that preamble out of the way, let's just get into this slide. So as you guys can see, this slide is, as you can see, it's dated Thursday, February 15th, 2024. Every day, every day we publish our lead off morning note and every Saturday we publish our Around the Horn. Our quantitative risk management summary is updated and featured in that slide. And what the updates are, are just the highlighted callouts from each of those various models, which we actually publish the output of the models as well in the presentation, but we don't have time to go through that today. So as you can see, in terms of stuff that I think will be broadly relevant for most market participants,

• 12:01Speaker 02

  if you look at our positioning model, there are some interesting signals there in the positioning model. The retail trader positioning was extremely overweight stocks heading into this week's correction. That has since dissipated. But if you think about equity or investor positioning from the perspective of systematic investors and market neutral players, it's actually suggesting that there's still elevated risk of a correction from the perspective of CTA positioning being extended, from the perspective of market neutral investor positioning being extended. Just skipping down a little bit, you know, we're still, if you look at the medium-term signals, which tend to resolve themselves on a three-month or more time horizon. Our global macro risk matrix, which is the primary model we use to keep our clients on the right side of market risk.

• 12:42Speaker 02

  This is the model that called for Goldilocks going back to November alongside our positioning model and has really helped our clients, you know, really benefit from this massive bull run we've seen across stocks when a lot of investors are, you know, kind of kicking and screaming, you know, shouting bear poor narratives to the high heavens. But that's neither here nor there. So we're still in Goldilocks. If you kind of scroll back up and look at the volatility, just the momentum signal, we're starting to see changes in some of the compositions of the defensive. Assets, we're seeing things like the move index break from bearish VAMs to bullish to neutral VAMs. The currency volatility C VIX break from bearish VAMs to neutral VAMs. Treasury bonds break from bullish to neutral. And so you're starting to see the the kind of global currency and global fixed income markets.

• 13:24Speaker 02

  Start to price in a little bit more volatility that would be suggestive of moving out of the Goldilocks regime. Now, it's very likely that based on that weather model signals down there where we're generating. The weather models currently generating bullish through an outlook for stocks and bonds. And a neutral theme of outlook for the dollar commodities and Bitcoin. That would suggest that we're probably headed for something that looks more like reflation rather than Goldilocks. Reflation is also a risk on regime, but it's a risk on regime with an inflationary bias. And a bias that is less positive for fixed, it was actually negative explicitly negative for fixed income. But it continues to be quite positive for things like Bitcoin, things like the stock market. So again, this is something we refresh six days a week for our clients at forty two macro.

• 14:05Speaker 02

  Obviously, we, you know, we unpacked the callouts as well with all the charts and the data supporting them.

• 14:11Anthony Pompliano?

  Now, when you start looking at assets like Bitcoin, one of the things that's been really interesting to me is. It seems to be serving as like an index for global liquidity. If you look and as global liquidity increases, Bitcoin's price goes up. Obviously, the the opposite happens as well. And we've talked for months now about the Fed, ECB in Japan, all contracting their balance sheets. While China is just bucking the trend, you know, middle finger to the rest of the world and saying. Let's pump liquidity into the global system. And so we've seen Bitcoin run up quite a bit in, you know, called the last year or so. Is this a game of more and more assets will become these like global liquidity indexes? Or do you actually think that legacy kind of traditional assets like the stock market or others?

• 14:56Anthony Pompliano?

  They're not really just dependent. There's too many other fundamentals. There's too many other things that are at play. And so Bitcoin and Bitcoin alone will be that kind of index of global liquidity. Like it, I don't really know how to think about it yet, but I know that Bitcoin is doing that today. And it's unclear whether this is just the first of many assets that will just become a global liquidity trade. Or will these other assets be able to kind of retain some other drivers of, you know, price action? Not just, hey, our central banks, you know, green light, red light and playing a game.

• 15:25Speaker 02

  Yeah, no. So that's a great question. So a lot to unpack there. The kind of key takeaway, just to answer the main question, which is, is Bitcoin going to continue to be this sort of being dominant by global liquidity and separate and apart from the rest of asset markets? We would say, no. If you go back and you study things like our global liquidity proxy, which for those who may not be familiar, it's the global central bank balance sheet, the aggregated global central bank balance sheet, plus the aggregated broad money supply, plus aggregated global currency reserves, FX reserves minus gold. And when you look at that time series, it's actually highly co-integrated with every asset market, whether it be corporate bonds, treasury bonds, stocks, crypto, any as every asset market, with the

• 16:07Speaker 02

  exception of commodities, which tend to be more stationary time series, it's a, you know, any asset market that is a non-stationary time series, which most are, then, you know, the exception of currencies and commodities, then you're talking about it's going to be highly co-integrated, if not very correlated with fluctuations and the level of global liquidity. So this is something that's been something we've observed for quite a while now. It's become more popular as part of the market discourse amongst, you know, broader market participants. But what we've been doing at 42macro, and I think we've done a great job at this, is one, help investors understand what are all the moving parts in that liquidity matrix. Which central banks are likely to continue tightening their balance sheet or starting to ease their balance sheet? Which economies are going to have an

• 16:52Speaker 02

  acceleration or deceleration in credit growth? That could be very onerous. Which economies are having, you know, positive or negative current account flows that could ultimately be positive or negative for the global liquidity matrix? So for us, you know, I think for a lot of folks who listen to podcasts and watch Twitter, you know, there's nothing wrong with those things. But I think if you want to consistently stay on the right side of market risk, you need to do a lot more than that as an investment process. And what we do in terms of helping our clients understand these liquidity flows and how they're going to ultimately impact asset markets is actually do the granular research in terms of tracking growth, tracking changes in inflation, tracking changes in policy across all the major economies, particularly here in the US, because obviously US and China tend to be dominant in these

• 17:34Speaker 02

  liquidity discussions. You know, we understand all those moving parts that cause liquidity to go up or down, or down faster, or down slower, or up faster, or up slower. That's what we're doing at 42macro, which gives our clients, you know, a much better, you know, kind of flashlight into this dark future that we're all investing in, you know, on a consistent basis.

• 17:53Anthony Pompliano?

  Now, when you look at these models, what exactly are people doing differently? And you know, we saw the 60 Minutes interview, the Fed Chairman seemed to be quite revealing in his commentary. But maybe they aren't planning to cut by March. It seems like the January inflation data re-accelerating probably pushes it out a little bit further. Is most of your clients changing their portfolios right now or not really?

• 18:18Speaker 02

  Uh, no, well, most of our clients have been benefiting from the bull run. You know, we've had some, a few legacy holdovers or not even legacy holdovers. We had a few new clients who've joined us in the past few months, particularly on the proto-pro investor side, which are our general, our high-end institutional client relationships that have come on and said, hey, look, man, you know, we were sick again, squeezed, we think there's a better way to invest and we were checking you guys out. And fortuitously, you know, they found opportunities to get their portfolios right size for the current market environment. Obviously, it's hard going from being very bearish to being bullish, you know, in a short period of time, particularly when markets have been on such a, on such a run. But clearly, this is a raging bull market, particularly in crypto and stocks.

• 19:02Speaker 02

  And it's not something you're going to want to fight as an investor. And quite frankly, if you go to our fundamental research summary, which is a slide three in today's chart pack, there is no reason to fight this from a growth inflation or policy perspective. And there hasn't been a reason since late October, early November, at least according to our research here at 42 macro. So when we look at what our clients are doing, they're by and large benefiting, they're making money quite a lot, actually. When we think about what the broader investor community is doing, going back to slide one, that quantitative risk management summary, you know, investors have gotten, there was some upside capitulation we saw. You know, heading into early February, a few weeks ago, not a few weeks ago, two weeks ago, we saw retail trader positioning crash to the upside and give us that negative signal in terms of being extremely overweight stocks.

• 19:47Speaker 02

  We saw realized volatility, which we use as a proxy for. The trend in realized volatility, which we use as a proxy for systematic investor positioning, we saw that crash to the downside, which is an indication that their positioning was getting extended and stretched to the upside in the equity market. We saw implied correlations, which is an indication that market neutral players, which are these dominant, you know, kind of multi-platform, multi-manager hedge funds that dominate market turnover. You think about the citadels of the world, et cetera. You know, those kinds of firms, you know, that it's been a great environment to take risks for them because implied correlations amongst equity index constituents, and particularly the volatility component of that, have been, or at historical lows.

• 20:29Speaker 02

  In fact, during the zeroth percentile of daily data going back to 2006. So that would suggest that these managers on the platforms are actually extending their book size, their, you know, the assets that they're managing, the leverage that they're taking, they're investing with is actually at max. And so there is some, you know, risk of a correction here still, in our opinion, because a lot of the cohorts of the investor community, global investor community, whether it be retail investor, RIA investors, systematic investors, market neutral players, long-only fund managers, some of those cohorts are, you know, about as bullish as they possibly can be.

• 21:06Anthony Pompliano?

  Now, the last question I have for you around kind of implementing this stuff, the information that you all look at, how much of this information is really, we want to identify assets before they move versus we want to be positioned in the right markets? And what I mean by that is like, there's an overarching belief, I think, like, investing in the right market is more important than which asset you buy in that market. So emerging markets versus domestic equities versus, you know, somewhere else. And what I continue to come back to is it feels like a lot of people who look at macro, they've been correct in their analysis of inflation or central bank activities, et cetera.

• 21:47Anthony Pompliano?

  But they are buying kind of more traditional assets versus buying like these new assets. And so now that there's a Bitcoin ETF, you know, let's say that people think there's going to be a re-acceleration of inflation. Maybe historically they bought gold because it was easy to buy because they just go buy GLD. Do you see people now saying like, oh, okay, like a Bitcoin ETF provides the opportunity to come to the same conclusion. Inflation is going to be a problem. You want to express the same opinion, like inflation hedge assets will go up. But now they're going to try to buy the thing that's more asymmetric because they just have like more ability to do that.

• 22:18Speaker 02

  Yeah, so the quick answer is absolutely. We're obviously seeing from a fund full perspective, particularly over this past week or so. You know, investors really starting to believe in the viability of the, you know, something like Bitcoin. In our opinion, that's only going to continue. I mean, if you go back and you, we did a, I think I've referenced this on our show many times, but you know, we, last summer, we did a deep dive empirical research study with data going back to the, you know, 1800s, 1700s to determine what investors should likely expect from the economy, from policy and ultimately from asset markets throughout the duration of this fourth turning, which again, my former colleague and mentor Neil Howe thinks could extend itself until, you know, early 2030s.

• 23:00Speaker 02

  And the key takeaway is that, some of the key takeaways are, which I think have very relevant long-term implications for investors allocating to assets like Bitcoin and/or gold is that you're going to have more inflation. You're going to have much bigger budget debts and deficits than any CBO or Treasury or Jeff Gundlak projection could even potentially imagine. It's going to be way worse because, you know, in a fourth turning, these things tend to explode. And as a function of that, we think we're probably going to see a decent amount of financial repression. We think we're probably going to see a decent amount of currency debasement. And so the demand for these types of assets, in our opinion, over the next, you know, 10, 12 years is going to explode higher. Now, it's not going to literally explode higher. You know, if you think about an asset like Bitcoin, there will be crypto winters to deal with.

• 23:43Speaker 02

  But that doesn't necessarily mean it's not, you know, it's going to be at a, it's going to be at a much higher price longer term, you know, between now and the end of that, that period. So, you know, what we do with 42 macro, going back to our quantitative risk management summary or slide. To our discretionary risk management overlay is to help investors, you know, going back to answering your original question. We want to make sure that we are there when the money is to be made. But when there's no money to be made and or there's money to be lost, we're not there. Right. We're using our quantitative risk management tools, you know, particularly trying to identify inflections and trends and momentum in and across asset markets. You know, that's the name of the game. If you're trying to make money, you can save money on a consistent basis.

• 24:24Speaker 02

  If you just want to, you know, buy a unit of Bitcoin or whatever, many units of Bitcoin you can afford and cold storage it until 2031. Fine. I think if you can do that, if you can do that, if you can allocate to your target date fund and don't look at your portfolio between now and when you retire. I would highly recommend anyone that can do that from an emotional standpoint, do that. But for the other 99.9% of people that want to actively be involved in their, you know, in their investment future. That want to, you know, that love this thing that we call investing, this social activity that we call investing and want to know what's happening with liquidity. Want to know what's happening with policy with growth and markets, et cetera, and actually want to trade and actually transact a lot more than they probably should.

• 25:08Speaker 02

  Firms like ours make sure that those decisions that they're making in terms of transacting in financial markets are better and a lot, really consistently a lot better than they otherwise would be without firms like 42 Macro.

• 25:20Anthony Pompliano?

  Where can we send people to find you on the internet or learn more about 42 Macro?

• 25:23Speaker 02

  Yeah, appreciate that, man. Thank you. So 42macro.com. Come check us out. I'm on Twitter at DariusDale42. Pretty, pretty, pretty active there and on LinkedIn as well. So I appreciate everyone for checking us out. But obviously, if you don't check us out, we appreciate you as well because we think there's a lot of education that we can provide to the general investing public. Because I, you know, you and I, we will, you know, and I don't want to step on any toes here because you're obviously partners of some of these organizations. But I see a lot of folks on, you know, the CNBCs of the world, you know, just, you know, they, they're not, they're not doing a good service for the broader investing public. And, you know, we're here to change that.

• 26:00Anthony Pompliano?

  I love it. We'll do it again, my friend.

• 26:02Speaker 02

  Thank you, brother. Appreciate you.