#687 Breaking Down The Macro Economy w/ Darius Dale

Darius Dale is the Founder and Chief Executive Officer at 42 Macro LLC, an online financial media company specializing in macro risk management.. He was previously the Managing Director at Hedgeye Risk Management. In this conversation, we discuss the macro economy, inflation, employment, wealth inequality, wage growth, monetary policy, and bitcoin. ======================= MiamiCoin is the first token to be released by CityCoins, a community-driven project built on Bitcoin. CityCoins aims to give people around the world a new way to support their favourite cities. The protocol has already generated over $7 million dollars in donations to the city of Miami and continues to grow every day. If you want to get involved Follow @minecitycoins on Twitter to stay up to date with the project. Visit chat. CityCoins.co to join the community discord and contribute to the movement. ======================= Cosmos is building the Internet of Blockchains, marking a new era of interoperability, scalability, and usability. The free flow of assets and data between blockchains with bridges to Ethereum and Bitcoin will unleash the potential of DeFi, NFTs, and much more. Dive into Cosmos at cosmos.network/pomp ======================= Matrixport is Asia’s fastest-growing digital asset platform founded by crypto veterans Jihan Wu and John Ge. With $10 billion in assets under management and custody. Matrixport offers one-stop crypto-financial solutions including fixed income, Defi in 1-click, structured products, Cactus Custody™, spot OTC and lending. You can earn a high double-digit yield with the Dual Currency Product or opt for the lucrative potential of our new product, Range Sniper. If you hold crypto and are actively looking to do more with your precious asset, then this app is one you don’t want to miss. Download the Matrixport App and enjoy a welcome offer of 30% APY on Fixed Income for new users. Visit invest.matrixport.com/en today.

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. Darius Dale is the founder and chief executive officer at 42 Macro LLC, an online financial media company specializing in macro risk management. He was previously the managing director at Hedge Eye Risk Management. In this conversation, we discuss the macro economy, inflation, employment, wealth inequality, wage growth, monetary policy, and Bitcoin. I really enjoyed this conversation with Darius, and I hope you do as well. Before we get into this episode, though, I want to quickly talk about our sponsors. First up is Miami Coin. As you may have heard, we just had Miami Mayor Francis Suarez on

• 0:45Anthony Pompliano?

  the show to talk all things Miami, including his excitement for a project that's really caught my attention, Miami Coin. It is the first token to be released by City Coins, a community-driven initiative built on top of Bitcoin. City Coins aims to give people around the world a new way to support their favorite cities. In short, the city of Miami was given around $7 million and counting by private citizens to improve the city with no strings attached. A city government embracing Bitcoin and crypto instead of fighting it with a historic event. Do you want to get involved? Follow @MineCityCoins on Twitter to stay up to date with the project and chat. CityCoins.co to join the community Discord and contribute to the movement. Again, @MineCityCoins or CityCoins.co. Go check them out, let

• 1:30Anthony Pompliano?

  me know what you think. Next up is Cosmos. They're building the Internet of Blockchains, marking a new era of interoperability, scalability, and usability. The free flow of assets and data between blockchains with bridges to Ethereum and Bitcoin will unleash the potential of DeFi, NFTs, and much more. Dive into Cosmos at Cosmos.network/Pomp. Again, Cosmos.network/Pomp. The Internet of Blockchains, marking a new era of interoperability, scalability, and usability. Last but not least is Matrix Port. Have you lost your way in this low-yield environment while searching for a better store of value to beat inflation? Look no further. Invest with Matrix Port to get more from your crypto with a potential for up to 200% Percent annualized yields on certain products.

• 2:12Anthony Pompliano?

  Matrix Port is Asia's fastest growing digital asset platform founded by crypto veterans. With $10 billion in assets under management and custody, Matrix Port offers one-stop crypto financial solutions, including fixed income, DeFi in one-click, structured products, Cactus custody, spot OTC and lending. You can earn a high yield with a dual currency product or opt for a lucrative potential of new product. If you hold crypto and are actively looking to do more with your precious assets, then this app is one you don't want to miss. Go download the Matrix Port app today or go to matrixport.com. Again, you can go to the App Store and download the Matrix Port app or you can go to matrixport.com. All right, let's get into this episode with Darius. I hope you guys enjoy this one.

• 2:54Speaker 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.

• 3:18Anthony Pompliano?

  Can we start with your background first? I see the Yale helmet back there. So tell us just a little bit on what you did before you started to started 42 Macro.

• 3:28Speaker 02

  Yeah, I guess I crushed skulls at Yale.

• 3:33Speaker 02

  That's probably the first, that's probably the first thing that got me on the map. I ran macroeconomic research at this firm called Hedge Risk Management, very large independent research provider based in Connecticut. And then I left this year to start my own project. You know, what we really want to do is sort of help investors across the entire, you know, asset allocation spectrum and level of sophistication, kind of get empowered with the same sort of thought processes and tools that, you know, professional investors are using to manage their overall portfolio risk.

• 4:02Anthony Pompliano?

  Got it. And so when we think about your framework for evaluating the macro economy and then actually investing, is there a certain way that you describe what that framework is?

• 4:11Speaker 02

  Yeah, it's regime segmentation.

• 4:14Anthony Pompliano?

  What the hell does that mean?

• 4:15Speaker 02

  Yeah, what it means, putting things in categories that allows you to sort of think really quickly about what the ultimate sort of impact is whenever you go into or from a different regime. I'd say the most popular investor, I'm sure you guys all know Ray Dalio is, he probably made that concept of regime segmentation quite famous. I did some, a lot of research at Hedgeye to make it even more famous and ultimately we're using a similar framework here at 42 Macro, though it's a little bit different in terms of the variables we use. What we're ultimately trying to identify is, is the economy going into one of those four states, Goldilocks, inflation, stagflation or deflation, and if so, what's the likely response and path of asset markets as a function of that?

• 4:54Anthony Pompliano?

  Okay, so let's walk through these four different kind of regimes. So Goldilocks, what exactly does that mean?

• 5:01Speaker 02

  Yeah, that's so that's when growth is accelerating and inflation is decelerating. That's the most favorable, that's sort of macroeconomic regime for stocks, for credit, for crypto. This is where Bitcoin, Ethereum, all the sort of everything in the crypto space tends to have its outsized excess performance. You go clockwise on this chart to reflation, that's where growth and accelerating simultaneously, inflation is on the x-axis, growth on the y-axis. And that tends to be where, you know, you still have positive risk on performance, you know, you really get a commodities involved. And but you also tend to start to see real negative returns in fixed income, particularly anything with duration risk, which is very sensitive to interest rates. Right, you go continuing on clockwise, you have inflation or what, you know, what most people call stagflation.

• 5:45Speaker 02

  We call it inflation because grid sounds better than GRSD. GRSD sounds like a Z's or something.

• 5:53Speaker 02

  Anyway, you know, this is, this is when you cross the horizontal axis, that's when things start getting risk off, that's when equities and credit start to wobble. I have volatility, that's when fixing calm starts to outperform. And so really, and but the kind of the key differentiator as it relates to Bitcoin and crypto is is when you're in that bottom right quadrant, you tend to find that crypto can outperform and can work relative to equities and credit, whereas when you're in the bottom left quadrant, you tend to have all things going down simultaneously.

• 6:21Anthony Pompliano?

  Got it. And so when we start thinking about where we are right now, how do you describe which one of these regimes we're in?

• 6:26Speaker 02

  Yeah, so if you go to that, that next slide, the big table with all the different regimes. So we run very sophisticated models, econometric tools to forecast where the growth inflation rates are for any economy, for all the major economies in the world. And ultimately, what we're trying to do is track inflection points in those cycles. So we're kind of at a really critical juncture here in Q4, where, you know, the conditional probability of realizing each of those regimes, particularly stagflation, is actually quite quite wide. You know, you have a much more flat distribution of outcomes as opposed to a very narrow and skinny distribution of outcomes that we've kind of experienced over the last 18 months, whether it be going from reflation in Q4 of 18 or 19 to deflation in the first quarter of last year, back to Goldilocks, and then reflation.

• 7:11Speaker 02

  Now, we're kind of in this jumbled mess, but ultimately, we think that jumbled mess is going to resolve itself positively with another reflation trade to end of the year.

• 7:18Anthony Pompliano?

  Got it. And so when we start thinking-

• 7:19Speaker 02

  Fourth quarters, man.

• 7:20Anthony Pompliano?

  Fourth quarter, right? Fourth quarter, you know?

• 7:24Anthony Pompliano?

  At Yale, they were throwing up fourth quarter when they were losing a buck. Now, I remember. So, so let's talk about actual assets themselves, right? What we basically saw was in March of 2020, we saw a massive sell-off in asset prices. Government steps in through fiscal monetary policy. They basically inflate assets to the moon. As we start to look towards the end of this year, there's a lot of talk around, are they going to taper? Are they not? Before we get to kind of a conclusion on what you think's going to happen there, what are the factors that play into that decision that you're watching? Is it things around inflation? Is it things around unemployment? Is it things around job growth on a month-to-month basis? Like, what are the data points that you look at that you ultimately think feed into they're going to taper or they're not?

• 8:05Speaker 02

  Yeah, so it's, to me, it's number one, two, and three of the labor market dynamics, whether or not they're going to taper. I would argue that they're going to taper. taper in terms of their guide their forward guidance from the most recent FOMC meeting. They almost they basically just said, I don't really care what happens. We're going to taper in November. Now, the speed of with of the tapering program and whether or not it's a very it's a successive program, i.e. going from start to finish without any interruption, that is yet to be determined. But as it relates to sort of their accomplishing some of their goals on substantial further progress in labor market, they see they feel like they've met those goals, particularly looking at the level of total employment. Argue that there's still a lot of long ways to go. It's a different conversation.

• 8:45Speaker 02

  But on inflation, very clearly achieved substantial further progress on that front as well. And so it looks like that we're going to have liftoff in Q4. But again, the taper is not the taper is the sideshow. What markets really care about is, okay, once we get done with this tapering process, what is the likelihood that we see interest rate hikes over the near term, medium term, long term? What's that? What's that? The shape of that curve look like? And I think that's what the market is really wrestling with and trying to digest in here in Q4.

• 9:16Anthony Pompliano?

  Got it. And so when you start to look at inflation right now, we're over 5% on a CPI basis, over 4% core. These are some of the highest levels we've seen, you know, CPI numbers, I think 13 years, core like 30 years. What exactly is driving that in your opinion? Is that supply chain? Is that monetary fiscal policy stuff? Is it a combination? It seems like everyone's got an opinion, but nobody actually knows.

• 9:38Speaker 02

  Yeah, no, no. So we I mean, we do a tremendous amount of work at 42 macro unpacking all these dynamics. I sent you a bunch of these charts out of the deck. I don't know if I sent you the supply chain charts, but so it's it's a combination of factors, right? You have supply chains, you know, where there's different data sets that we look at to identify that, whether it be the Baltic Dry Index, the supplier delivery time indices within the ISM services and paid ISM services and manufacturing indices, they're all continuing to suggest supply chains on the tradable goods side is supply chain headwinds continue. In terms of the supply chain dynamics on the services side, we're actually starting to see that, you know, pick up. You go back to Friday's jobs report. We saw that the labor force participation rate for prime working age adults, you know, people who were 24 to 25 to 50

• 10:22Speaker 02

  Four years old, that actually ticked down twenty basis points. Uh, so people who should be in the labor force should be working, you know, at a very high rate. Actually are now moving in the wrong direction, partially likely driven by the Delta variant. But who knows if it's if it is a Delta variant, we'll have to see on the next data point. The reason I highlight that is because that, in my opinion, catalyzed the very sharp acceleration in average weekly earnings. We're tracking just shy of six percent on that metric, which is obviously extremely high relative to the recent past. And if, you know, we continue to see uh that supply, demand mismatched development in the in the services part of the economy. We're going to see more wage inflation and that is a very different dynamic uh than most people have had to deal with in the last twenty, thirty years.

• 11:01Anthony Pompliano?

  One of the interesting charts that you had sent me was just how much cash investors have on hand right now. It's basically record amount of cash. What's driving that?

• 11:09Speaker 02

  Yeah, so slide forty, uh, yeah, absolutely. Great chart. And so the the slide forty and forty-one kind of really go hand in hand. Uh, this blue line just shows the amount of money market, uh, out of assets and money market funds. That's about four and a half true. What's interesting about this is typically when there's a lot of cash on the sideline, it's because stocks have blown up and people rushed to rush for the exits. This is very anomalous relative to, you know, any the any past of this time series. What it's telling you is that people are really concerned about bonds. Uh, they don't want to buy bonds, the long, you know, long-term treasuries with the ten-foot pole because they're very concerned about inflation. So they're looking for resolution on the inflation front, i.e. Is inflation going to be transitory? Is it going to be uh persistent from a levels perspective? I happen to think it's both rate of change, transitory, it's going to be rate of change or sorry, rate of change terms.

• 11:54Speaker 02

  It's heading down over the next twelve months, but from a levels perspective, it's going to bottom at a at a rate that's much higher than we're used to having inflation bottom uh in this economy. And that to me is a big difference and part of the reason why you're seeing all this cash on the sidelines. But I say that to say this, look at the next chart, slide forty-one. To me, slide forty-one is partially the reason why uh we anticipate there is going to be a recovery, a reflation trade uh here in in Q four. And more importantly, this is probably why you're going to see Bitcoin, Ethereum and the like go through the moon uh here in Q four. Everyone's so hyper concerned about sort of all these different dynamics, whether it be the debt ceiling, fiscal policy, all that nonsense going on down in DC. You have earnings, corporate earnings and all the supply chain dynamics that are kind

• 12:36Speaker 02

  of forcing people, investors, to take down their expectations for earnings growth. But the reality is the thing that's gotten the market to this point hasn't slowed down yet. Right? Look at the blue line in this chart shows the Fed balance sheet minus the change in the Treasury general account. That's our, a rough approximation for the amount of net liquidity being pumped in asset markets. And as long as that blue line's going up, you have to tell me a really, really interesting story about why the red line has to go down a lot. We would expect the blue line to finally peak out sometime in Q1 or Q2 of next year. You know, once the Treasury Department really starts to borrow a debt in size again, they've kind of been nowhere to be found all year and that's been very supportive for asset markets. But ultimately, once, you know, we get to the other side of the debt ceiling, we get the budget resolution passed and we have much more clarity on the fiscal policy front,

• 13:20Speaker 02

  you're going to start to see the Treasury take up its cash balance and really start to tap public markets. But again, that to me is at the earliest, three months away, probably four or five months away.

• 13:30Anthony Pompliano?

  If we go to slide 43, you've got these slides on inflation and then disinflation. So first, let's start with kind of the secular view around inflation and kind of how you're actually looking at this, both secular and cyclical. And then we'll talk about what those macro structures around disinflation are.

• 13:45Speaker 02

  Yeah, great question, man. Absolutely. So on slide 43, we just show our inflation projections, both on a long-term basis in terms of contextualizing the time series. That's on the left. And then we zoom in for the last, you know, kind of five years on the right with our cyclical view on inflation. As I mentioned, our models are pointing to disinflation over the intermediate term. Now, over the next couple of months, you could see flat to up series. If you, you know, zoom all the way in, you're going to see some flat to up data, likely to see some flat to up inflation prints here in Q4. But the reality is, you know, you go a year from now, we're talking about inflation that's 100, 200 basis points lower from a headline perspective. However, if you look at the, you know, kind of draw a line at the tail end of that chart on the right and draw a line all the way through the chart on the left, and you say,

• 14:26Speaker 02

  hey, if we bottom here, that's much higher than where we used to bottom in terms of the most recent past, right? Like inflation, and I'm going to get super academic and wonky on you, I still have a few brain cells left from my gridiron days, but you know, the stationary mean of this time series is somewhere around one and a half percent. That's kind of where it oscillates around. We're talking about the stationary mean of the CPI time series starting to oscillate around two, two and a half percent. That is a big change and one of the reasons why you're seeing all that cash on the sidelines in terms of investors not really wanting bonds, but ultimately that cash has to find a home. No one's going to sit in cash if we're talking about inflation, the stationary mean of inflation transposing itself higher by 100 basis points. That cash either has to find a home in cryptocurrency, has to find a home in commodities, which I would argue is accelerating to the upside.

• 15:10Speaker 02

  And or it has to find a home in equities and credit. And so to me, I think those dynamics really do support recovery, like reflation type trade here in Q4. But ultimately, I do believe the net liquidity dynamics will put an end to that sometime in the first part of next year.

• 15:22Anthony Pompliano?

  So before we talk about disinflation, real quick, what I want to kind of outline for people is the situation we have right now is we've got higher levels of inflation. When the rate of change of inflation comes down, it won't be at 5%, somewhere two, two and a half percent, which is much higher than it previously had been. People are sitting with cash because they don't want to buy the bonds because of their worry about the inflation. And so your argument is if we have that persistent level of inflation, people aren't going to sit in cash forever. They're going to eventually have to deploy the cash. When they deploy the cash, they basically are going to look at asset prices. They've got commodities, they've got equity, they've got credit and they've got crypto or Bitcoin. And so the argument then becomes, how can they deploy this money with the best risk return kind of profile?

• 16:02Anthony Pompliano?

  And build a portfolio that allows them to take all that cash with that inflation that's just eroding it away and get it into these assets. When we look at what is slide 46 here, this idea that while all of that is going on that I just described, there's these like macro structures that are pushing disinflation. And this is demographic, technology, globalization. So explain what this is showing.

• 16:27Speaker 02

  Yeah, absolutely. So on that chart, you know, we're just showing, go back one chart actually. So the, the, the chart prior to that, yeah, exactly. So these are the secular drivers of disinflation. This is why inflation isn't going from 5% to 10%, right? These are, these things haven't changed. The, the blue line shows the labor force participation rate. That's a proxy for demographics. The red line shows the money velocity of both are on lows, obviously, from a secular perspective. The black line shows global. As it relates to the percentage of our imports of goods and services that we import. It's obviously still quite elevated relative to, you know, the longer term time series. And then obviously, one thing that's really accelerated in the pandemic is our use of digital technology and digitization of the economy. I mean, the blue line just shows the as a proxy for that.

• 17:10Speaker 02

  In Nasdaq 100 market cap as a ratio to the Russell 3000 market cap. That's the broadest measure of V S equities. And clearly, we're at the highs there. So I'm obviously talking to you guys via Zoom. We're not, you know, in the same place. You know, there's a lot of, all those things are disinflationary. Same with the following chart that you were just on. The blue line in that chart is our proxy for an obscenity power in the economy. That's the S and P 100 index market cap as a ratio to S and P 500. That's up and to the right. That means bigger companies are dominating incrementally relative to the smaller companies. And the red line in this chart just shows employee comp as a ratio to CapEx. And it's obviously down below. So, you know, there's this conversation about wages in this country and the potential for wage price spiral, which I think you do have to combat that conversation to some degree and say, hey,

• 17:54Speaker 02

  a lot of these dynamics that have kept, not only kept inflation low over the last 10 to 20 years, but really, in my opinion, kind of taken the stationary mean down over the last kind of 30 years or so. These, some of these dynamics are very much still intact. And so you have to get to a place where, okay, what is changing? To me, what is changing is the key debate about inflation right now. To me, you go to slide 58 in that deck, 58 through 62, kind of walk through what we see changing and how we think it'll likely impact inflation rates.

• 18:23Anthony Pompliano?

  This is, this is wild. Hold, hold, hold on a second, Darius. This is wild to me. Slide 58.

• 18:29Speaker 02

  Look at our buddies.

• 18:30Anthony Pompliano?

  What you are saying is that the drivers of populism put the United States from a political risk standpoint the same as a emerging market. There is no developed nation, United States, when it comes to the political risk. So explain what is going on here?

• 18:47Speaker 02

  Yeah, so that, I mean, just, I mean, just without even explaining what the chart is signifying, just look at our homies. Like, look at the guys and gals we're hanging out with in this chart. It's not like France and Korea and Japan, like our, our developed market homies. It's Russia and China, people who hack us on a regular basis, and Chile and Mexico. Like, it, this is, it's, it's, it's bonkers. So this, the X-axis on this chart shows the Gini coefficient. That's a measure of income dispersion. Higher is more unequal, uh, lower is more equal. And the Y-axis in this chart just shows unemployment rate. And so you think about unequal societies that are, you know, have high levels of unemployment. That tends to be where you get the highest amount of political risk, uh, in the economy. And as a function of that, and, and sorry, what are the reasons for the location of our dot? The reason our dot is in that location is on slide 59.

• 19:33Speaker 02

  You know, so like the, we've had, we've had a war against, you know, middle-class and low, not class, uh, low, middle-income and lower-income people in this, in this society for the past kind of 20-plus years. The blue line in this chart shows employee compensation as a percent of, uh, national income. And the red line just shows corporate profits as a percent of national income. And obviously, that was a long, healthy, stable relationship. It was cyclical, but it was pretty stable for, you know, kind of 50 years. And then over the last 20 years or so, it's kind of really reversed on its head. And, you know, why has it reversed on its head? Well, there's kind of three big factors. One, obviously globalization. China joining the WTO in, in 2001 was obviously a big factor there. Uh, you have, obviously, the advent of technology and digitization in the economy. But I would think one of the, the least talked about factors is really kind of the,

• 20:17Speaker 02

  the explosion and the growth of the private equity industry, um, and the industry consolidation we've seen as a function of that and, and all the M and A and, and associated with that. And so, really, we've gotten to the point in this chart where it's like, it's just politically unfeasible not to address this, this situation. Obviously, we had, you know, Black Lives Matter. We had black people protesting in the spring. We had angry white people protesting in January. And guess what? They're on both sides of the political aisle. It's not about Democrats or Republicans. It's about angry poor people. We created a very large amount of angry poor people in America. And as much as we try to ignore that, as people operating in and around Wall Street, the fact of the matter is, is they, they haven't gone anywhere. And so the, in our, and my, my sort of thesis on this is that, if you go back to the next slide,

• 20:59Speaker 02

  is that's why we're panicking from a fiscal policy perspective. Albeit less so than we were at the onset of the pandemic, but we're certainly still panicking. That next slide shows, the scatter plot shows the X-axis is the current account surplus for deficit as a percentage GDP. The Y-axis shows the sovereign fiscal balance as a percentage GDP. And the reality is, is our dot is at the bottom left for a reason. Like, we are panicking as a fiscal authority in response to not just COVID, because COVID was an accelerant to some of these dynamics, right? Like, COVID made poor people poor. It made people of color even more poor on a relative basis than they already were. And so, it really was an accelerant. And so, that's why you see us drop our

• 21:41Speaker 02

  dot in this chart all the way down to the bottom left. Well, you know, kind of to round up this entire discussion, the next couple of the charts kind of just kind of get to the real heart of the matter, which is why I think then inflation rate is likely to be persistent over the long term. You go to slide 60, 60 through 62, kind of just get to the real, to answer the question really quickly. Who's going to pay the bill? Slide 61 says the foreigners aren't going to pay the damn bill. You go to slide 62, it says, aha! No, yeah, go back up. So, go back to 62. The blue line in this chart just shows the Fed's balance sheet as a percent of public debt outstanding. They have to pay the bill. And, and you think about the change in the Fed's composition over the next year or so, you know, we could have a different Fed head, although I don't think we're going to. But you could have six new people on the FOMC board, all could be, you know, pretty dovish

• 22:26Speaker 02

  on a relative basis to the current composition of the board, although we will get two hawks at the margin. But, you know, this Fed could be very different over the next three to five years in terms of facilitating this lurching left of fiscal policy as a function of not just COVID, but for some of these dynamics that have been building up, these vulnerabilities that have been building up for 20 years.

• 22:47Anthony Pompliano?

  All right. So, talk to me about 42macro, the clients that you serve first, because I want people to understand the perspective at which, when you spend all day, you know, I was telling people that you're full of data, of charts, of graphs, et cetera, and you take all this, you basically synthesize it, and then you go and you talk to these clients about what they should be doing, or how they should be thinking about these markets. So, who exactly are those types of clients that you have?

• 23:08Speaker 02

  Yeah, no, it's anybody who likes making money and not losing.

• 23:13Speaker 02

  I say that very succinctly. I mean, I talked to the biggest hedge funds and mutual funds in the world, the guys who run those funds. And I talked to guys who, you know, retire rich guys who just have, you know, tons of money in their account. I mean, the reality is, you know, we created 42 macro to democratize information. I believe in what you're doing. I believe in the democratization of information as the most important factor for narrowing the gap between the haves and haves not society. As you know, you know me for many years. I was very much a have not in this society. Plenty of people would love that I continue to be a have not. But unfortunately, that's not going to be the case. And so we created 42 macro to actually, you know, democratize the processes and the tools, all this data that you're referring to, to everybody.

• 23:54Speaker 02

  Whoever can afford our research can come by the research, you know, we're going to help you construct thoughtful, balanced portfolios in the context of what we see as the most probable outcomes from a macro risk management perspective.

• 24:04Anthony Pompliano?

  When you look at portfolios today, especially of younger people, what is the most common portfolio that you're seeing in terms of you're like, yep, they, you know, the tactical differences aside, that seems to be like either the common portfolio or the portfolio that is best positioned from a structure standpoint for the macro environment we're in.

• 24:22Speaker 02

  Yeah, I would, that's a great question. And so, you know, I will, I'll take, I'll answer it in a slightly different way. You know, when I spend my time on Zoom meetings and whatnot, it's usually with our highest tier of clients for obvious reasons. And so, you know, they tend to be hedge fund and mutual fund type investors. And the reality is there is a clear difference between, I would say, millennial investors, you know, portfolio managers who are kind of in our age range versus those who are in the, you know, kind of, you know, Gen X to Baby Boomer age range. There's just a lot more risk taking among, you know, sort of folks like us. I think we all sort of came to, we came of age in a time where the market really didn't go down and it didn't pay to be a permabear.

• 25:06Speaker 02

  I mean, there's a lot of people that are just from previous experience, you know, going back to the Gen Z Baby Boomers who've seen two 50-plus percent market declines in like 20 years. And so I think they, you know, there's a real, you know, kind of, there's a permabear community out there that increasingly will die and die, go by the wayside. And I think they've been replaced by investors who really understand all these monetary and fiscal dynamics that have gotten the market to this point and are likely to get the market to a different point over the future, over the long term.

• 25:33Anthony Pompliano?

  Talk to me about Bitcoin and cryptocurrencies. How does that fit into all this?

• 25:36Speaker 02

  Yeah, great question. So you go to slide 104. So we backtested everything that ticks in macro. We can invest in it, or there's some way to get exposure to it. We backtested it within the context of those grids. And right now, we're actually long Bitcoin and Ethereum in our model portfolio construction as a function of sort of being in this in this kind of hybrid, what we call grid zero environment whereby, you know, each of the the four grid regimes is reasonably probable over the next over the next few months. And so, understanding that Bitcoin, if you look at that backtest, it says it has 137% annualized monthly return whenever we're in inflation, that's stagflation. And so that's one of the exposures we've actually allocated to in the model portfolio construction to take advantage of the fact that, hey, you

• 26:19Speaker 02

  know, the the economy may actually tip into stagflation here in Q4. And if we're if we're wrong in our views on reflation, and it actually is stagflation, you're going to have some exposure to to to that downside risk with respect to asset markets. And so Bitcoin, Ethereum, two of the best places you can be right now as it relates to price against stagflation, nat gas, uranium, those are other features in the portfolio construction as well. We're not all fully built tilted into stagflation, but we certainly think crypto plays a very important role in terms of protecting investor portfolios to the upside of inflation and also to the downside of growth over the next few months.

• 26:55Anthony Pompliano?

  Talk about when you're looking at it in terms of that protection to a portfolio in both of those scenarios, what is the allocation size that you're seeing? Is this like half a percent, 1% type stuff? Is it 5%, 10%? Bigger, somewhere in between?

• 27:09Speaker 02

  Yeah, so I've spent many a years consulting institutional investors on on portfolio construction, and really position sizing. That's kind of like the final frontier of investing. There's no real right way to do it. There's wrong ways to do it, for sure. I think licking your finger in the air is probably the worst way to do it. But the reality is, I mean, I've tried, you know, mean variance optimization, I've tried it all. And the reality is, nothing works. Nothing works ex ante, it always works ex post. And so I've actually just gone, I've gone straight with just equal weighted position sizes, but more importantly, controlling your allocation to the themes. If you do have the slide If you have the slide deck, go to slide 23, you'll see sort of how we're balanced across the four different regimes.

• 27:52Speaker 02

  And also have a decent cash position in the context of expecting a little bit more volatility in asset markets over the next kind of two to three weeks. I think earnings season could potentially be negative. Uh, we got a bunch of economic data this week that could be negative. It's PPI or CPI tomorrow, PPI Thursday. Retail sales Friday, consumer confidence Friday, but it really, as you can see here, it's really just about allocating to each of the regimes. And right now we're in this hybrid grid zero portfolio construction where we're saying, hey, each of the four regimes is reasonably probable in terms of realizing that economically here in Q4, both in the US economy and also abroad. And so we don't want to be tilted too far into any one regime. If you, if we had this conversation in November of last year, that entire freaking circle would be lime green. It's like, this is going to be the most historical inflation trade you've ever seen in your life.

• 28:35Speaker 02

  Um, I was on several programs like this, saying that screaming at the top of my lungs, saying, look, Bitcoin's probably going to a hundred thousand by the spring. Now, we only got to sixty some thousand, but I certainly think it's probably going to a hundred thousand by the end of this year. Um, and that's, and you can, you can write me down on that. I like, I like timestamps. But the reality is that the, the size of each of those pie slices and the portfolio construction varies with respect to, uh, what's the actual probability of realizing that regime. And so right now the probabilities are pretty balanced. So we're pretty balanced, but the next, you know, the next time, next time you get me on the program, it may be all dark blue or maybe all dark green. Who knows?

• 29:10Anthony Pompliano?

  When you think about Bitcoin specifically, you said a hundred K by the end of the year, is that a floor that you think will cross over? Or do you think that's more of like a market top? Uh, and that's how, that's like the highest you could see it going?

• 29:22Speaker 02

  No, no, I, I mean, this thing's, I mean, pick your duration. It's going to keep going up, right? Like we know the supply, the supply is being halved at various intervals. So it's really just about not being the guy or gal who buys the top of the chart and has to huddle that for like three years. That's, that's what you got to avoid in Bitcoin, right? Like that, you know, and so, um, you know, I've been following the stock to flow analysis, just like everybody else. And I don't pretend, I don't purport to be an expert in Bitcoin. I purport to be an expert in understanding how the asset actually trades with respect to its own volatility and polarians and, and, and return characteristics as a function of the economic. What's happening in the economy. That's what I'm an expert on. And in terms of using that expertise, um, I would say, hey, look, as long as they're in this period where we could either be in Goldilocks,

• 30:06Speaker 02

  reflation or stagflation, or sorry, not you can be in, the rather each of those has a reasonable probable, um, uh, probability for, uh, being realized that you're going to have positive price momentum in Bitcoin. And that's exactly what we're seeing. That's exactly what we'd expect to continue to see through year end. Ultimately, the, the, the, the sale signal on Bitcoin, it'll be when this sort of net liquidity dynamic really starts to inflect, or really to forward outlook forward to start to inflect lower because what we've seen historically going back to 2017, heading into 2018 was that Bitcoin, you know, ahead of these big market moves tends to be a leading indicator. Um, obviously Bitcoin peaked, um, you know, in, in, in Q1 of last year prior to the stock market, you know, so there, there, there is some leading characteristics with respect to Bitcoin.

• 30:48Speaker 02

  And partially because it's more of a pure market, right? Again, not a, you know, I'd certainly not a Bitcoin chiller. I, I think it's just as, I think of Bitcoin the same way I think of all the other, uh, they're like kids in the portfolio construction. You know, one kid sometimes is, is acting up, someone, one kid's out there winning awards sometimes and it, and it switches. Reality is, is understanding portfolio construction and where each of these, these children fit in that context is really the name of the game, um, in my opinion.

• 31:14Anthony Pompliano?

  So I've got two of my brothers here with me. They're real excited to talk to you. What, uh, what questions you guys got? Darius, what's going on, man? Good to see you. Uh, so my, my question revolves around your personal portfolio and you share what you want to share. Uh, but as someone who talks to more traditional institutional investors all day, I'm curious kind of how you think about, uh, personal allocation within your portfolio. Do you own a bunch of equities, uh, a bunch of bonds, gold, or do you own a bunch of crypto and Bitcoin also? Uh, and how do you think, we have a lot of younger people that watch this show. How do you think younger people should be thinking about, uh, Bitcoin and other cryptos as part of their portfolio?

• 31:48Speaker 02

  Yeah, so the first answer is the slide 23 is my personal portfolio. And so, you know, I don't spend 16 hours a day working to arrive at these mathematical conclusions, only to not use it for myself. That'd be the most preposterous activity on earth. So no, this is what my portfolio looks like. At most, you know, most times, obviously, I isolate my cash position every once in a while because I'm a human being that needs to consume stuff. But generally speaking, this is it. In terms of, you know, how I would generally talk to younger investors about portfolio construction. Obviously, if you have more time to retirement, you can take more risk in your portfolio construction. That doesn't necessarily mean you need to always be taking the same amount of risk at every single interval. There are times, you know, specifically using like the last 12 months as an example,

• 32:33Speaker 02

  there are times where it pays to take a crap ton of risk. Really, not the last 12 months. I would argue kind of from, from May of last year through June of this year. That was probably the time to take as much risk as you possibly can. And even if you didn't get in in May of last year, you could have gotten in in November of last year and still made a crap ton of money. Now, this economic environment that we're talking about is not as obvious in terms of, you know, perpetuating higher, a very positive realized outcomes in equity and credit markets than, you know, let's say a broad reflation pie. Go back to that slide. If the pie was all dark green or all lime green, you, you should be taking maximum risk. If the pie is mostly red or mostly dark blue, you should be taking a lot less risk. And that's what we're trying to help people with. I mean, you know, I can confuse people and lose a lot of people with, you know,

• 33:18Speaker 02

  volatility and covariance and conditional probability. And I certainly understand that's, that's, that discussion is for a more institutional audience. But the reality is if you can't figure out colors, you shouldn't be investing anyway. I think that's kind of the key take.

• 33:31Anthony Pompliano?

  John, what do you got?

• 33:32Speaker 03

  Yeah, Darius, what's up? Thank you for doing this. 42 macro. Love it. Love it.

• 33:41Speaker 03

  I am curious about how you look at just inflation in the stock market and bullish and bearish in that sense. What, um, what are the key drivers that you see? Is it the interest rates? Is it the inflation that we're seeing? Can you just talk about the overall macro environment we have today?

• 33:54Speaker 02

  Yeah, I'll take that a step further. Go to slide 18 in the deck. So I think the macro environment is pretty murky. Like each of the four regimes is reasonably probable at the current juncture as a function of where we are on those time series for growth and inflation. They're starting to flatten out and when you start to flatten out, it means the probability of going in one direction or the other is higher, right? If you're just sloping upward or to the downside, you know, the probability that you go back up or back down and vice versa is much, much lower. So the reality is, I think it's mostly about looking at asset markets through different lenses right now in terms of leaning forward-looking signals. So what I'm showing on this chart here, on the chart on the left, the Y-axis is showing the volatility risk premium.

• 34:39Speaker 02

  Don't worry about how we calculated, that's not for this program. But the reality is the higher up on the Y-axis you go, the more bearish people tend to be on that asset class. And the lower you on this, on the Y-axis you go, the more bullish people tend to be. And so what you're starting to see is that investors are getting really nervous about fixing common defensive assets through the lens of the options market, particularly relative to risk assets, US equities, credit, things of that nature. Even something like the S and P 500, obviously, you know, down there to the bottom right. They're effectively betting on what you're seeing in the chart on the right. The chart on the right is showing dispersion from a month-over-month sharp ratio basis, so that's the volatility-adjusted performance for each of these sort of sectors and style factors. There's 50 in the entire sample.

• 35:23Speaker 02

  What I'm showing here is the top 10 versus the bottom 10. And the composition of the top 10 versus the bottom 10 is really instructive in terms of spotting in real time what investors at these sort of big, massive hedge funds that you hear about, Citadel and Point 72 and Millennium, you know, kind of the guys Bahu pulling the strings behind the curtain. You know, this is what they're either choosing to bet on or being forced to bet on as a function of the risk management systems at those platforms. And so clearly, the market is moving towards a reflationary bias. Now, I'd argue that it might be a little bit too soon as it relates to some of the catalysts we have between now and then on the economic front. And then on the operations expert front, we got S and P OpEx this Friday. We got VIX OpEx next Friday. You might see some volatility in between now and then, but I would over a medium term basis,

• 36:08Speaker 02

  I tend to agree with what this chart is saying is that, hey, look, we might see a bounce in growth post Delta in terms of the peak economic impact of that. And if that doesn't drag up inflation too fast, if you get some modest appreciation inflation between now and then, you could actually have a very positive setup for risk in Q4. Um, you know, could you see S and P 500 up four or 5% you know, between now and the end of the year? I think that's a very reasonable probability. Could you see Bitcoin up by 50% between now and then a year? I think that's also a very reasonable probability.

• 36:38Anthony Pompliano?

  Darius, when you start thinking about the questions you get from a lot of your clients, what are the most common concerns or things that people are worried about right now?

• 36:47Speaker 02

  Yeah, I would say going, uh, going back to a discussion we had earlier, what's the probability that inflation gets unhinged? Um, you know, we talk about this, you know, I think it's, it's a much bigger issue in Europe right now. Um, you look at our European inflation curves, I forget the chart, uh, don't, don't question me on the chart number, but you know, you look at our European inflation curve, it's a lot less sanguine over the next few months. Um, with respect to kind of like getting through the next couple of months. And so you could see some upside surprises in inflation there. And from a headline risk perspective, that could actually catalyze some downside volatility in risk assets. Uh, obviously the speed, in my opinion, of, of, of the appreciation we're seeing in, in that gas and crude oil, um, you know, things of that nature and going across, you know, really the, it's starting to broaden out to different commodities as well.

• 37:31Speaker 02

  Like the speed of the appreciation will determine how, how high and how much we can sort of appreciate, how much markets can appreciate all that net liquidity we're getting from the government. I mean, cause that, that, that fire hose or that, that, that fire hydrant, if you will, is still very much on. You know, it's being, it's, we're, we're not being able to realize it as a function of some of these sort of kind of back to back to back OpEx dynamics. You also have, you know, earnings season, kind of, you know, with Bloodbath and beyond and Nike and FedEx, kind of warrant, you know, kind of scaring investors. There's a lot of kind of tepid trepidation right now that is being priced in asset markets. But ultimately, we think that can get to, uh, we can, we can get past that as long as that big fire hose remains on, uh, at least for the next quarter or two.

• 38:11Anthony Pompliano?

  Over the last 12 months, somebody's asking, uh, in the comments, what's been the best producer in your portfolio? Has it been Bitcoin or something else?

• 38:19Speaker 02

  Without question. No, I mean, without, without question. Yeah, without question.

• 38:23Anthony Pompliano?

  And, and how do you look at inside of these asset classes, right? So if you think of crypto as an asset class, you've got certain allocations that, that you described. When you look inside of like equities, how do you actually decide to allocate? Is this index-based exposure? Are you doing individual security selection? How do you think about that?

• 38:40Speaker 02

  Great, great question. So going back to that slide 23, you know, right now, we've released going back to mid to late September. We made the active choice to start reducing our exposure to very specific sectors and style factors with the expectation that, hey, we might see a broadening base with the spectacular equity participation. So going back to June to mid-September, equities were led to the upside by defensive sectors and style factors. It's like low beta, you know, communication services, you know, big mega cap thing type names. All that stuff was dominating to the upside from basically mid-June to mid-September. And so we start to sell a lot of that stuff and said, hey, look, you know, we think this equity market rally could actually start to broaden out.

• 39:23Speaker 02

  Whereas you were right, you start to pick up some leadership in things like cyclical sectors and style factors. But right now, I think we're still in the process of investors getting out of that defensive stuff and into the cyclical stuff. And ultimately, when they're done with that rotational process, once the kind of the consensus market weight allocation is appropriate, then everything can start to recover at the same time. And that's kind of what we see as the most likely probable scenario for Q4.

• 39:47Anthony Pompliano?

  Got it. What are you most looking forward to over the next 12 months? Any like milestones, anything specific in the in the financial markets or from an investing perspective? That you're like, you know, if this happened, that'd be pretty cool. Whether it's the price of a single asset, whether it's a monetary fiscal policy decision, like what are you looking forward to?

• 40:03Speaker 02

  Yeah, I don't know if it's something to look forward to because it's probably going to be negative. But to me, it's when does the Treasury Department sort of authorize a big, you know, kind of debt binge, public debt binge, you go and start to tap the markets really aggressively again? Because again, that's been one of the dynamics that's been very supportive for asset markets all year. It's the fact that the Treasury has not really issued a ton of debt. And then the function of the debt ceiling and kind of breaching that, or at least potentially breaching that, doesn't look like they're going to. But, you know, they were kicking that can down the road again. And so to me, I think we're pushing that into the into Q1 or Q2 of next year. When the Fed's balance sheet is doing this, you know, it's going from exponential growth to logarithmic growth. And at the same time, the Treasury General Counsel is going from going down to going up.

• 40:46Speaker 02

  When is that moment in time where that blue line going back to slide 42? When does that blue line start to go down? Like to me, like that to me, I'm sorry, slide 41, rather. When does that blue line start to go down? That's the biggest thing that's going to have to impact asset markets. Uh, yeah, this one right here. When does this blue line start to go down as a function of those two dynamics that I just highlighted? That to me is the next big catalyst on the, on the, on the horizon. And then the catalyst after that, again, these aren't necessarily positive catalysts. But again, we just went from the freaking most historic recovery in stocks, credit and crypto in history. Like every, every year can't be like that. So let's not expect that to be the case. And the, the whole purpose of engaging with firms like mine is to understand when do these things, when do these winds change?

• 41:29Speaker 02

  You have to do something different from the perspective of your portfolio. Uh, but again, going back to that second thing, it's, it's when do we, when we get to the end of tapering? What is the discussion on inflation like then? Cause it'll be lower in, in, in terms of the level relative to where it is now. But if we're talking about different dynamics then, like wage inflation, shelter inflation, things that very well could continue to be accelerating then, then I think we're having a very different conversation about policy rate dynamics in the U.S. than we're currently anticipating, uh, just in terms of the Fed's most recent guidance.

• 42:01Anthony Pompliano?

  My last question for you actually has nothing to do with the quantifiable metrics. Uh, but I'm fascinated by this. Uh, John is, uh, 25 and a lot of his friends, we've talked about many times on the show before. They're not allocating any money to any investment unless they think it's 10x or more. There, there's this element of psychologically, uh, people who have not seen those massive market drawdowns or any market drawdowns that they've experienced have quickly been supported by fiscal monetary policy and kind of shot right back up. It almost feels like, um, they're perma bulls and there is very little understanding or worry of market risks, of safety of margin, all those types of things that I think are kind of timeless investing principles.

• 42:44Anthony Pompliano?

  And so how do you think that that plays into both the younger generations kind of continuing to enter into the financial market? But also those younger people end up actually, uh, kind of growing their careers and end up in very important, uh, capital allocation, uh, positions. And so do you see that changing as well at some of the large hedge funds or, or asset allocators? Where younger people just have kind of a different risk reward, uh, type framework. And, and now they're doing it not just with their own personal capital, but they're also doing it from a professional standpoint as well?

• 43:13Speaker 02

  Yeah, I see this all the time at the professional level. Uh, you know, I'll use, um, uh, there's a big mutual fund that everybody is touched or is it touched by it up in Boston? Um, you guys all knew it is. Uh, I have discussions all the time with sort of the, the senior guys there that, that talk about whether, you know, like, how if you made money and, and really got promoted in that, in that shop, you know, the last kind of, let's say 10 years or so, it's because of the unwillingness to adhere to traditional valuation metrics. You've been, you've had to effectively tune out valuation and the whole concept of it, and stay long, you know, rocket type charts, you know, particularly in the thing type space, um, in order to outperform. And that's been something that's been very much, uh, demarcated by whether you're a millennial versus a Gen X or baby boomer.

• 43:58Speaker 02

  And so I think that general sort of sanguine-ness, that sanguine take towards risk asset markets, is something that is shared by, uh, younger generations, and I don't think that's going anywhere, if only because we're all products of the market environment we're born in. You know, people who I talk to are, you know, 56, not 50, 60, probably 60, 70 plus, are hyper concerned about inflation all the time. People I talk to 40 to 50, they're hyper concerned about the market getting cut in half all the time. And people I talk to who are 35 and younger are hyper concerned about the next 10 bagger. Right? It's just a function of the market environment you grow up in, and the reality is markets don't change. Like, the people who are operating in markets change in their relative starting point and all the stuff that effectively trains them to, to, to deal and operate in financial markets, that changes.

• 44:41Speaker 02

  But how markets function don't really change, right? Greed and fear will always dominate financial markets, and the reality is, you know, just when, you know, the, the, the, just when that cohort at least expects, uh, to be really punished by, you know, material long-term drawdowns is when they're all gonna get one. Right? Everyone learns how to lose money in financial markets. Like, I don't, there's no, there's no cohort of investors that is just perpetually rotating from the one 10 bagger to the next. Eventually you get, you know, you go from a 10 bagger to a zero. And you go from 10 bagger to a bunch of zeros, and eventually you realize that making money in financial markets is not easy.

• 45:15Anthony Pompliano?

  When we want to send people to find you on the internet, I'm going to put your Twitter account here in the chat right now so people can follow it. Where else should we send them? Where can they find you with 42macro?

• 45:25Speaker 02

  Yeah, I appreciate that, bro. Thank you. So I'm at 42macro.com is our website. You can find me on Twitter. I'm a pretty prolific Twitter of charts and analysis. I'm at 42macro Dale, D D A L E. Come check us out. We appreciate you.

• 45:39Anthony Pompliano?

  I always enjoy talking to you and if you're going to show up with charts that say the United States from a wealth inequality standpoint and unemployment standpoint is worse than Russia and China, I think that kind of shocks people a little bit, right?

• 45:52Speaker 02

  It is. It's true.

• 45:53Anthony Pompliano?

  In terms of...

• 45:54Speaker 02

  I'm arguing math, bro.

• 45:55Anthony Pompliano?

  Well, there's a lot of people who are arguing with math. You know, Bitcoin is just math and a lot of people argue with that, but it doesn't mean that they're right.

• 46:03Speaker 02

  Indeed, they won't be.

• 46:05Anthony Pompliano?

  All right. Well, everyone who's watching, I highly, highly suggest you go check out Darius on Twitter or go to 42macro.com as well. Joe, Johnny, last comments, thoughts from you geniuses? Now, a couple of people in the chat were asking who could bench more, John or Darius, but we'll leave that up to imagination for now.

• 46:22Speaker 02

  I, I, right now, probably definitely you, John.

• 46:28Anthony Pompliano?

  42macro, go check it out.

• 46:31Speaker 02

  So this guy, the guy behind me peaked at 405. I think I did 225, 25 times is my peak there. So

• 46:39Anthony Pompliano?

  John, that's your warm up.

• 46:40Speaker 02

  There was a time where there was no contest, but I would, I'd probably give you the nod now. You got me by 10 years.

• 46:45Anthony Pompliano?

  I appreciate that. Neither of us bench enough.

• 46:49Speaker 02

  Exactly. That's the right answer.

• 46:52Anthony Pompliano?

  I don't know how we started talking about benching, but of course, John is going to throw up a little flex for everyone before we let you go. All right, Darius, listen, thanks for doing this, man.

• 47:00Speaker 02

  Appreciate you guys. Thank you so much.

• 47:02Anthony Pompliano?

  Bye, buddy.