#1416 Darius Dale | Will The Port Strike Crash The Economy?

Darius Dale is the Founder & CEO of 42Macro. In this conversation we discuss, why Republicans & Democrats are both responsible for the national debt, inflation, economic impact on the port strikes, and why both political parties practice socialism? ======================= Buy book: https://www.amazon.com/Live-Extraordinary-Life-Anthony-Pompliano/dp/0857199927/ ======================= Xapo Bank, the world’s first fully licensed Bitcoin-enabled bank, offers military-grade security with an unmatched blend of physical and digital security, as well as pioneering regulatory oversight, so your funds are always protected. Beyond secure storage, they enable you to grow and use your Bitcoin. Earn daily interest in Bitcoin, spend with zero FX fees using a global card, and make instant payments via the Lightning Network for unrivalled access and convenience. Visit ⁠⁠⁠⁠⁠⁠https://www.xapobank.com/pomp⁠⁠⁠⁠⁠⁠ to join. ======================= 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. What's up guys? Today we've got Darius Dale. He's the founder and CEO of 42 Macro, and he brings the heat. He has so many great charts that you guys are going to want to watch this entire thing. We talk about why Republicans and Democrats are both responsible for the national debt. We talk about inflation, what's going on with all the strikes in the

• 0:47Anthony Pompliano?

  ports, how long is that going to last, what is the economic impact going to be? And then we get into why do both political parties practice socialism? One does it for the rich, one does it for the poor. That is what Darius is here to talk about, is politics, economics, and the big strike at the ports. You guys are going to love this one. Here's my latest conversation with Darius Dale.

• 1:06Speaker 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.

• 1:30Anthony Pompliano?

  Today's episode is brought to you by Zappos Bank. Let this sink in for a moment. Over half a trillion dollars in Bitcoin has been lost or stolen. Whether that is misplaced hardware wallets or an exchange that went bust, the risks are very real. That's why I think where and how you store your Bitcoin is absolutely critical. Now meet Zappos Bank, the world's first fully licensed and regulated Bitcoin-enabled bank. They're known as the Fort Knox of Bitcoin. With over a decade of expertise in Bitcoin custody, they blend no holdback security, including military-grade Swiss bunkers, cutting-edge digital protocols, and strict regulatory oversight. This comprehensive approach ensures your funds are always protected, no matter what. With Zappobank, you can grow your wealth with interest paid out daily in Bitcoin.

• 2:13Anthony Pompliano?

  You can spend anywhere with zero FX fees using their global card, or you can make instant payments with the Lightning Network. Head over to zappobank.com/pomp to join. That's X A P O B A N K dot com forward slash pomp. Go check out Zappobank today. What's up, guys? Bang, bang. I've got Darius here. Darius, I hear that there are strikes at the port. What is going on? Is the US economy going to be screwed or not? How do we unpack what happens with these strikes?

• 2:42Speaker 02

  Hey, appreciate you. Thanks again for having me on. So, uh, yes, it's likely to have a transitory impact. So let me, let me take a step back and remind investors that the, uh, the bulk of the goods that come into the country are coming in through a lot of these ports in the Gulf Coast and the East Coast. Obviously, we have the port of Long Beach, as well as the big port out on the West Coast. But we are going to have a transitory, accelerationary impact as a function of the, uh, the shutdown in these ports. And so in terms of how best to monitor that and the impact on overall inflation, uh, what we show here in chart one are the ISM manufacturing and services PMIs. Uh, they both contain, uh, sort of a sub index called the percentage of respondents reporting slower supplier delivery time.

• 3:25Speaker 02

  So the higher that number goes, the slower and slower those supplier delivery times are going to go. And as you can see, uh, the red line and the blue lines in that, in that chart, uh, greatly shot up, uh, in the pandemic and in the post pandemic economy. And then they shot up again, once we dumped another, uh, three, a couple trillion dollars on, in the, in the form of the Biden, uh, stimulus in early 2021. Uh, they've since retreated and we've seen core inflation and inflation broadly retreat. But we are very likely to see as a function of the shutdown, uh, an increase in those metrics, which would, you know, contribute to the stickiness that we are currently observing in inflation.

• 3:58Anthony Pompliano?

  Now, one of the things that, uh, I saw online is the video of, I think, like the head union guy. He seems like he means business. He was like, they know what I want. Uh, he don't exactly seem like he's the type of guy who's showing up with slicked back hair. He actually had no hair, but he had, you know, tattoos and chains. And he looked like he meant, you know, real business, which tells me that he seemed pretty dug in. There might be a lengthy negotiation process here. Uh, and so the longer this goes on, what's the impact?

• 4:26Speaker 02

  Yeah, so the longer this goes on, it's going to disrupt the probably it's going to lower the probability of a soft landing. We don't think it'll make the soft landing a not the model outcome, but it will, at least on a transitory basis, disrupt some of these positive side, supply-side dynamics that we have observed that have been contributing to what we believe is an elevated probability of a soft landing in the economy. So in the second chart here, we show in three panels, non-farm productivity, the growth rate of that on a quarter-over-quarter SAR, six-month annualized and year-over-year rate of change basis. And as you can see, we have above trend productivity growth currently. What we don't have right now, which is good, which is above trend unit labor cost inflation, which is the second panel, currently tracking at 0.4% quarter-over-quarter annualized. On a year-over-year basis, it's quite depressed as well. And then if you look at the bottom

• 5:11Speaker 02

  panel there, where we show the private sector employment cost index, as you can see, it's been all these metrics are inserted, particularly with the private sector ECI, it's been persistently elevated relative to its pre-COVID trend, which is the light blue dotted lines in these charts. We've been slowing in recent quarters, but the reality is, we still are comfortably above the longer-term trend in terms of our private sector of the cost index. And so, in our opinion, what we're seeing right now in the economy, and this is something we've been calling for since January of 2022, which is, we have this sort of fourth-turning-style sort of economy where the folks on the bottom part of the K in this very, you know, top-heavy K-shaped US economy are, for lack of a better word, they're just pissed off. They've been

• 5:53Speaker 02

  left behind by economic development, they've been left behind by raging bull markets and tech and Bitcoin, and they themselves have not experienced a lot of the positivity that we've experienced broadly as investors. And they're asking for their fair share of the pie, and they're going to get it.

• 6:07Anthony Pompliano?

  Now, one of the things I've talked about a lot and got a lot of heat from kind of the political class and/or central bank class is, are we just going to move the inflation target from 2% to 3% and then claim victory over inflation? You have here that maybe there is something to this idea of like 3% being the new 2%. I don't think you're saying necessarily that it's the target that moves, but describe a little bit of how you guys are looking at inflation, some of these changes.

• 6:32Speaker 02

  Yeah, great question. This is something you and I talked about two, three years ago now. In terms of our views on inflation when we first published our secular inflation model at the beginning of 2022, which was then calling for a gravitation higher on the underlying trend of core PC inflation. You know, so what this model does is it interpolates the normalized change of all these key leading indicators based on our research on the underlying trend of core inflation. And it tries to, I guess, sort of essentially forecast what the new underlying trend of core PC inflation based on the change in the, you know, the sort of devolution of these different variables. And what we find is that if you look at the 2010 to 2019, sort of the 10-year run rate of core PC inflation in that period, it was 1.6%.

• 7:16Speaker 02

  If you look at our projections for 2020 to 2029, our projections are calling for either 2.7% on the low end to 3.1% on the high end. Now, those numbers don't sound particularly different from 1.6%, but you know, you think about it, it's sort of like a 50 to 100% change. And most importantly, both of those numbers, even our low-end forecast, is comfortably above the Fed's stated 2% price stability target. Now, we've been of the view that the Fed does not want 2% price stability. What the Fed wants more than 2% price stability is financial stability and economic stability. The inflation mandate has been their, the third mandate relative to the other two.

• 7:56Speaker 02

  And we continue to believe that this is a Federal Reserve that will accept a higher trend level of inflation. They will eventually accept 3% inflation as the new 2% inflation. They may never officially ratify that in terms of their price stability target, but what they're going to do, and though they've been doing, by the way, is allowing inflation to run persistently hotter than 2% on a foreseeable basis. Again, they already are cutting interest rates by 50 basis points, going back to September 18th. They are already cutting interest at 50 basis points and core PC inflation is right around the low end of that range that we've been calling for for the past few years. So it's our belief that all is going according to plan with respect to our structural views

• 8:40Speaker 02

  on the Federal Reserve, which is a Federal Reserve that is sort of hell-bent on engineering a soft landing and perpetuating financial stability at the expense of price stability.

• 8:50Anthony Pompliano?

  Now, one of the impacts of this is that you guys foresee more populism, and then you also think that both Republicans and Democrats practice a form of socialism. It's just a different target audience. And so explain these next two charts.

• 9:01Speaker 02

  Yeah, 100%. And so it's, you know, obviously, the upcoming elections, Kamala Harris, Donald Trump's kind of the top of the ticket. But it's more than just a top of ticket race. It's really about how is the next sort of, if you will, the next, the next batch of populism is going to be administered. Is it going to be administered in socialism for the rich or socialism for the poor? But we're going to see more populism in the coming, in the coming years as a function of the starting point of the sort of, the sort of social contract in America has been broken and it sort of started to get broken back in the early 2000s. And I remember being a child in Seattle and there were some big WTO riots when they were trying to, trying to allow China into the World Trade Organization. Obviously, folks really, the folks at the time who were protesting and there was some

• 9:46Speaker 02

  violent protests, the folks at the time really understood the structural impact of allowing China with this, you know, very large, at the time, very large sort of excess labor supply into the World Trade Organization, which is, we're going to ship all of our shops to China and we're going to have a hollowed out middle class. Well, that's exactly what this chart shows. The blue line in this chart shows employee compensation divided by national income. The red line shows corporate profits divided by national income. The horizontal dotted lines correspond to the mean of those time series from 1960 all the way through 2000. As you can see, the blue horizontal dotted line is way higher than the red horizontal dotted line in that time period. But over the past 20 to 30 years, we've seen a complete reversal in those, in that relationship. Corporations are now making way more profits and taking a much higher share of the economic,

• 10:31Speaker 02

  economic output than the, than the workers. And as a function of that, you've had, you know, a big sort of acceleration in populism, boots on the ground across both sides of the aisle. It's, you know, the reason the Republican Party is now, belongs to Donald Trump is because he, thanks to the work of, you know, my former colleague, one of my mentors, Neil Howe, thanks to the work that he's done on the four turning, convinced them through Steve Bannon that this is the number one thing you need to care about as a politician, which is the reversal, the breakdown of this relationship. And ultimately, in our opinion, as long as this relationship remains structurally broken, we are going to continue to see voters on both sides of the aisle vote for more and more populism.

• 11:11Anthony Pompliano?

  Now, one of the things that always cracks people up when they learn this because it violates everything that they've ever been told is that both Republicans and Democrats continue to contribute to the national debt. Is that just going to continue? Doesn't matter who's in the office, national debt's going up?

• 11:25Speaker 02

  Yeah, 100%. I mean, you know, there's, you know, the path, I mean, they will go up the fastest in the either a Democratic sweep, which is low probability, or Republican sweep, which is a moderate probability. But the reality is, it's the national debt's going to go up and it continue to accelerate. And we continue, based on our work on the four turning, we did a big deep dive, empirical study on how the various economic and policy dynamics have historically evolved in four turnings. And one of the key takeaways is that you gotta take, you gotta hammer the over on the growth rate of public debts and deficits, largely as a function of the populism that is demanded in these four turning regimes. So quickly on slide five, where we show the growth rate of government social benefits divided by household income, that's just been up and to the right, up and to the right.

• 12:07Speaker 02

  And you can see in the four turning, which essentially began in roughly around the start of the global financial crisis, you can see the sharp accelerations, the murmurs, you know, if you're looking at this like one of those EKGs, the murmurs are getting much bigger as a function of the demand for populism in these, coming from the, coming from the left side of the aisle. We also continue to see a socialism for the rich coming from the right side of the aisle as well. So the bottom panel shows the effective corporate tax rate, which is now 12% down from a high of in the mid 40s, going back to 1970s. That's just been lower and lower and lower. So the key takeaway is, no matter how we, you know, no matter how it's done, either profligates fiscal spending, or, you know, cutting out taxes and allowing the budget

• 12:52Speaker 02

  deficit to go up as a function of the previously ratified profligate fiscal spending, we continue to see, you know, sort of unfettered and unchurned growth in our public debts and deficits. And in our opinion, we think that conversation needs to change in this country around that as a function of the table we show on slide six. This table, you know, this is one of the most eye-opening, sort of intellectual exercises that I've ever done with data, which is essentially to identify, okay, we have this, you know, unusual Conversation in this country around which party is responsible for the debts and deficits, if only because of the success of Fox News and garnering a national audience. But the reality is both parties are essentially identical when it comes to burdening of the country with debt.

• 13:35Speaker 02

  So if you look at in the post-war era, which began, you know, obviously with the, I want to say Dwight D Eisenhower. In the post-war era, we've seen Republicans and Democrats, the growth rate of the national debt be equivalent in the Republican and Democrat administrations. So if you look at the median after the cumulative debt growth after one year from a Democrat regime, it's a plus seven, a plus six percent versus plus five percent for Republican regimes on a median basis. After two years, it's plus 10% versus plus 12%. After three years, it's plus 22% versus plus 21%. And then after four years, you actually have Republicans on a median basis having generated more national debt. It plus 26% versus plus 39%.

• 14:18Speaker 02

  And even if you want to exile Trump from the, from the sample, which I believe is, you know, responsible to do, just to make the analysis more sound, then you're talking about a 26% versus a 36% of median cumulative debt growth in Democrat versus Republican administrations. So we actually have slightly more debt growth in this country when Republicans are the president. And as that's largely is our function, it's largely as a function of what they are doing with taxes in terms of blowing a hole in the federal budget deficit.

• 14:45Anthony Pompliano?

  One of the things that I said yesterday that now is, you know, kind of a drum I want to beat is if you're a politician, you want to vote for spending, you should have to put your own money in every single deal. And so, you know, if you want to spend $50 million on something, or you want to spend $5 billion, you got to put 500 bucks or a thousand bucks of your own money into it. Yeah. So very quickly, I think that spending would come down.

• 15:07Speaker 02

  Oh yeah, totally. Totally. If it was their money, they take our money from us and then promise us our money back essentially. That's what they're doing at different rates. But you know, the key takeaway, and I don't want to turn this into a political discussion because at the end of the day, what we're trying to do for our clients here for the macro is find the right economic answers so that we can, you know, help them get into the right, you know, asset allocations, right? That's at the end of the day, what we care about is making money in financial markets. And so, you know, one of the key takeaways. Is that if you go to the next slide, slide seven, this we did another big deep dive empirical studies and you know, probably said that three times already, but the reality is that's kind of what we do here at forty two macro is deep dive empirical studies and and the key takeaway from this empirical study is that inflation is the most lagging indicator of the business cycle and is unlikely to return durably to trend absent a recession. So if you look at

• 15:51Speaker 02

  the chart on the left where we show how the various cycles with that comprise the business cycle have historically evolved in and around recession throughout either on a median basis throughout, you know, looking at the 12 post-war US business cycles, you know, there's kind of a sequence to to how this how this process works, you know, first you have policy get restrictive, let's call it, you know, a fifteen eighteen months out of a recession, then profits break down, let's call it a year ahead of recession, then liquidity breaks down, roughly three quarters out of recession on a median basis, then you have a growth in the markets breaking down, kind of two quarters out of the recession, then you have employment breaking down, kind of right on time when the recession starts, and then you have credit breaking down, maybe shortly after that, and then inflation, by far the most lagging indicator, breaks down durably below trend 12 to 15 months after a recession has started on a median basis,

• 16:36Speaker 02

  again, looking at the 12 of the US business cycles in the post-war era. And so knowing that as the highest probability outcome, that we're probably not going to see inflation return durably to trend absent a recession, we have to take the likelihood of incremental populism, no matter what happens in the elections in November, plus things like the uh uh growth rate of strikes and and demands from the bottom half of the K in this K-shaped US economy to have higher wages and more importantly, a higher share of national income. They want to get back to where they were for most of the, you know, the post-war era, which is, you know, a fine balance between labor share of national income and capitalism and corporate share of national income. And it's obviously that balance has been way out of whack, and this is why you're seeing that guy, the long-former guy, I forget the guy's

• 17:21Speaker 02

  name, it was a claggett or something like that, he is representing the pissed off voice of America, and they should be pissed off as a function of the policies that have been engineered over the past 20 to 35 years that have caused the K-shaped US economy to get even more K-shaped.

• 17:36Anthony Pompliano?

  It's insane to watch this happen. Where can we send people to find you and learn more about 42 Macro?

• 17:41Speaker 02

  Yeah, I appreciate you, man. Thanks again for having me on the 42macro.com. Go check us out. We actually just published our new three-hour macro class that's going to be complimentary for the entire world. We're trying to change the world, man. I'm following your lead. How to make the world a better place, how to make people better people. So I'm doing my small part on trying to help investors become better at risk managing portfolios through the lens of sort of macro indicators and macro signals. So definitely come check that out if you guys have a chance.

• 18:07Anthony Pompliano?

  Amazing. That sounds awesome. I know what I'm gonna watch, watch tonight before the VP debate.

• 18:11Speaker 02

  I appreciate it.

• 18:12Anthony Pompliano?

  Awesome. All right. Well, thank you so much for doing this and we'll definitely do it again here in a couple of weeks.

• 18:17Speaker 02

  Awesome, brother. Be good.

• 18:18Anthony Pompliano?

  What's up, guys? I hope you're enjoying this episode, but I got a quick message for you. I just released my very first book. It's called How to Live an Extraordinary Life. In this book, there are 65 life lessons that I've picked up over the years. These lessons will teach you about money, investing, relationships, work, health, happiness, and much more. In this book, I wrote letters to each one of my children, and I tried to share those life lessons with them. If you pick up this book, there's three things that I can promise you. The first is that it is very concise. The audiobook is only three hours. You can listen to it on a long drive or on a rainy afternoon. The second thing is that you're gonna learn something. It's worth the price of admission just for the lessons themselves. And then the third thing is, it will make you think more deeply about your life and how you try

• 19:03Anthony Pompliano?

  to live it. So go pick up How to Live an Extraordinary Life today. It's a quick read. It's very impactful. It's very concise, and it would mean the world to me for the support. Go check it out today on Amazon, Barnes & Noble, or wherever you buy your books. Hardcover, audiobook, it all works. Thank you so much for the support, and I'd love to hear what you think about the new book.