#791 How The Macro Economy Is Affecting Your Investments w/ Darius Dale

Darius Dale is the Founder & CEO of 42 Macro, the leading macro risk manager adviser. In this conversation, we discuss the macro economy, what's happening in the financial markets, how Darius is looking at various metrics, and what you should be considering as you're investing your capital. Darius joins us every Thursday on "The Best Business Show." To see the video with the corresponding charts that Darius references throughout the interview, go to "The Best Business Show: LIVE" YouTube Channel ======================= Today’s episode is sponsored by Abra. Based in California and backed by top VC firms, Abra is an all-in-one simple, secure app that allows you to trade over 110 cryptocurrencies, get 0% interest loans using your crypto as collateral and earn interest with up to 14% APY on stablecoins and 8.15% APY on Bitcoin. Join nearly 2 million users by downloading Abra from the Google Play or Apple App store. If you download the app today, you will get $15 in free crypto once you fund your account. You came, you invested — now conquer. ======================= Unstoppable Domains is THE #1 provider of NFT domains. These aren’t traditional domains, these are domains with superpowers. With your unique NFT domain such as pomp dot crypto or pomp dot nft, you can replace your long complex wallet addresses, verify ownership of your NFTs and join the 10’s of thousands of people who are now using their NFT domain as their Twitter and Discord usernames. Go to unstoppabledomains.com and get YourName dot crypto, dot x, dot nft or a range of other endings for as low as $5 and never worry about gas or renewal fees because with Unstoppable Domains you pay once and own forever! ======================= Nasdaq-listed BTCS was the first US-public company to secure today’s top layer one protocols. Recently, BTCS launched the beta version of its digital asset analytics dashboard! From across multiple exchanges, the BTCS Data Analytics Dashboard lets you evaluate your entire portfolio’s performance with plans to add year-end reports and yield earning on your crypto through linking to staking pools. Test out the BTCS Data Analytics Dashboard today at BTCS.com. =======================

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

• 0:02Anthony Pompliano?

  What's up everyone, this is Anthony Pompliano. 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 CEO of 42 Macro, the leading macro risk management advisor. In this conversation, we talk about what's going on in the macro economy, what's happening in the financial markets, how Darius is looking at various metrics, and also what you at home should be thinking about as you invest your capital. 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. Today's episode is brought to you by Abra. Based in California and backed by top VC firms, Abra is an all-in-one, simple, secure app that allows you to trade over 110 cryptocurrencies,

• 0:46Anthony Pompliano?

  get 0% interest loans using your crypto as collateral, and earn interest with up to 14% APY on stablecoins and 8.15% APY on Bitcoin. You can join nearly 2 million users by downloading Abra from the Google Play or Apple App Store. If you download the app today, you will get $15 in free crypto once you fund your account. Go to abra.com to learn more. You came, you invested, now conquer. Abra, conquer crypto. Abra.com. Go check it out today. Today's episode is brought to you by Unstoppable Domains. Unstoppable Domains is the number one provider of NFT domains. These aren't traditional domains, these are domains with superpowers. With your unique NFT domains such as pomp.crypto or pomp.nft, you can replace

• 1:29Anthony Pompliano?

  your long, complex wallet addresses, verify ownership of your NFTs, enjoy the tens of thousands of people who are now using their NFT domain as their Twitter and Discord usernames. Go to unstoppabledomains.com and get your name.crypto.x.nft, or a range of other endings for as low as $5. And never worry about gas or renewal fees because with Unstoppable Domains, you pay once and you own it forever. Head on over to unstoppabledomains.com today to check out more about what they've got. Again, go there and you can get any domain with any ending for as low as $5. UnstoppableDomains.com. Today's episode is brought to you by BTCS. BTCS

• 2:10Anthony Pompliano?

  Is a NASDAQ listed company, the first US public company to secure many of the top layer one protocols. This quarter, BTCS just launched the beta version of a new digital asset analytics dashboard. From across multiple exchanges, the BTCS data analytics dashboard lets you evaluate your entire portfolio's performance with plans to enable year-end reports and yield earning on your crypto by linking to BTCS sneaking pools. This groundbreaking dashboard is currently in beta mode. Test out the BTCS data analytics dashboard now by visiting BTCS.com. Again, that's BTCS.com. Go check it out.

• 2:46Speaker 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.

• 3:09Anthony Pompliano?

  Darius, my friend, are you there?

• 3:12Speaker 02

  I am there, man. What's going on?

• 3:13Anthony Pompliano?

  I am super excited to do this. So thank you so much for agreeing. Every Thursday at 1130, Darius is going to be joining us for a little Ask Darius, which basically is my ability to get him on here and ask him all the questions I have. And then everyone in the audience, because they're sitting, listening and learn as well. Let's start first, just to refresh everyone, help us understand when you think about investing, macro risk management, etc. Like, how do you think of your philosophy in general when it comes to evaluating financial markets or the macro environment?

• 3:44Speaker 02

  We're more risk managers and what we're trying to do is use, you know, our information, our models, our forecasts about various impulses and growth, impulses and inflation, changes in policy, changes in investor sentiment. And we're trying to quantify all those things in order to sort of help us risk manage our way into and out of the right exposures. I have this saying all the time, and I think it's really important to sort of, you know, kind of kick off our first segment with this, which is, you know, being bullish or bearish doesn't really help you make money in financial markets. You know, what helps you make money in financial markets is being positioned in the right things that are going to go up in price and not being positioned in the things that are going to go down. out in price and it doesn't matter about being bullish or bear. It's just a characterization of your broader sort of investment view. So, you know, when we think about the world, it's regime segmentation.

• 4:29Speaker 02

  We have four distinct states that the world can be in, US economy, the global economy. And there's different types of behaviors in asset markets that we see to be reflected across stocks, bonds, commodities, crypto, et cetera. You're in each of those four regimes. So we can unpack any of that as we go on.

• 4:45Anthony Pompliano?

  All right. So let's break into some of these charts here. They're very colorful, by the way, which, you know, immediately grabs my attention. You've got the 42 macro grid framework. So walk us through a little bit of how, as we discuss a lot of what's going on in markets, how people should think about this grid framework and kind of what it exactly means.

• 5:02Speaker 02

  Yeah, absolutely. So I'll start by saying growth and inflation are the two most important variables you need to get right. The direction of travel and the magnitude of the change in those two variables in order to risk manage asset markets properly. Those are very clearly, you know, I'm going to lose some folks when I say this, but those are very clearly when you run any back test, the two, number one and number two principal components of asset class returns. So you need to have a good model in terms of predicting, again, the direction of travel and the magnitude of the change in those. So that's what our model is designed to do. If you look at the X axis, that's the change in inflation as measured by headline CPI on a year-over-year rate of change basis. And the Y axis shows the change in growth as measured by the OECD Composite Leading Index Time Series.

• 5:46Speaker 02

  That's a proxy leading indicator for GDP. So we use that instead of GDP. It's more lagging. You know, what we're trying to do is identify which of those boxes the economy is in. So as you know, we can sort of track it across time based on realized data. But we also project it based on our models as well. And so when you're in the upper left box there, that's called Goldilocks. That's where growth and growth is accelerating and inflation is decelerating, growth's improving, inflation is sort of getting worse. That's the best sort of regime for risk assets. That's the best regime for crypto. That's the best regime for commodities, stocks, credit, all those things that cause investors to take more and more risk and go further out on the risk spectrum. When you move to the right clockwise, that's where growth and inflation both have positive values. The

• 6:29Speaker 02

  deltas are positive and that's when they're both accelerating. That tends to be the sort of regime where you're still getting good returns in the stock market, the crypto markets, the currency markets, or in the credit markets, but you're starting to lose money in bonds. That's where, that's the, that's the regime where bonds tend to sell off the most and really have the most negative performance on a relative and absolute basis. Keep it going clockwise and I'll wrap it up quickly. When growth's decelerating, inflation's accelerating, you can get paid being long risk assets in various intervals, but it just makes it a lot harder. It's a higher volatility regime. You tend to want to be concentrating your risk to lower beta exposures. If you're going to be in the commodity markets, you tend to want to be in digital commodities as opposed to broad physical commodities, although energy and food commodities can tend to do well there. And then lastly, when you move

• 7:14Speaker 02

  finally to the bottom left box, that's the deflation. That's what everyone's concerned about. That's what they're ultimately, what all us risk managers are tasked with helping investors and clients avoid this from a P and L perspective in terms of their profit and loss in their portfolios. That's where growth and inflation are slowing simultaneously. That tends to be the regime where you see the most negative performance in stocks, crypto, credit, et cetera. And that's the regime where you tend to get paid to being long bonds and actually being long cash relative to everything else.

• 7:43Anthony Pompliano?

  So is it fair on this grid to think about where we have been over the last, I don't know, couple of months when we have this very high inflation? We've kind of been in the bottom right in that inflation bucket. And now the question, and really the debate of many people is, are we going to stay there in that inflation type kind of, you know, side of this chart? Or are we going to move to one of these other three areas?

• 8:07Speaker 02

  Yeah. So that's a great question. So our forecasts are calling for inflation to peak out, you know, kind of in this December, January timeframe, and eventually start to roll off that peak and decelerate into that, into that bottom left box there. Now, I'll say I'll caveat that by saying inflation is likely to remain very elevated relative to historical patterns and historical norms, which will keep the Fed tightening narrative in play. It's very unlikely that they'll be able to sort of pivot back to a dovish monetary policy setting that will allow risk assets some reprieve from a lot of the tightening we've recently priced in. So we'll be decelerating and that has asset allocation implications, but we won't be decelerating fast enough. If you look at our forecasts up there in that in that table, you

• 8:51Speaker 02

  know, we got six handle on CPI all the way through, I want to say, May of this year. That's a that's a that's a that's that's deceleration, but it's not enough in terms of backing the Fed off of monetary tightening. So that's what we call tightening into a slowdown. The Fed is historically, the Fed has a brilliant and very untarnished track record of tightening into slowdowns, which obviously is a stupid thing to do. But, you know, this is not necessarily the best and brightest institution in terms of their realized policy. You know, there are obviously a lot of smart people working at the Fed, some of the world's smartest people working at the Fed. But in terms of their actual policy sort of initiatives, they haven't necessarily had the best track record in terms of what they're trying to get accomplished.

• 9:31Anthony Pompliano?

  So when we think about this, right, obviously, we've had a growth not as fast as we would like, and we've had a pretty significant increase in inflation over the last, you know, 12-year kind of, or I'm sorry, 12-month change. But really, the thought process now is that growth doesn't really change that much. We continue to kind of get poor growth, but now inflation has peaked and will come down. And that's where you get that deflationary period. You've got a chart or a graph here that really goes through how this is playing out around the world as well. How should we think about this on a global basis? Is this just something in the United States? Or is this happening everywhere?

• 10:08Speaker 02

  No. So you brought up the colors, man. I mean, the only person I know who doesn't appreciate the colors, and he'll appreciate me joking about this, but David Einhorn, he's colorblind. So, you know, he's like, I can't tell your colors apart. But aside from that, like, it's pretty easy. I mean, that's why we use color coding. It makes it very easy to sort of, you know, kind of amalgamate and ultimately understand what the whole world economy is doing. It's very clear that we're transitioning from, you know, the lime green, which is very positive in terms of reflation. That's where growth and inflation are accelerating simultaneously. We sort of lost the growth impulse for most economies in terms of inflation continuing to accelerate. Those are the red boxes, but growth now starting to decelerate.

• 10:49Speaker 02

  And then ultimately, we're going to have a situation, we're going to transition to a situation where both growth and inflation. Again, the two most important things you need to get right as an investor, as a risk manager, as anybody operating in financial markets. They're both going to be going down. And those that that going down simultaneously does have asset allocation implications by itself. And then you layer on the fact that we're the Federal Reserve is hiking interest rates, shrinking its balance sheet. The fiscal authority in the U.S. and a lot of other economies are also reducing the amount of fiscal stimulus. You know, it kind of makes for a nasty concoction and we backtested all this and that's exactly what the backtest would say as well.

• 11:28Anthony Pompliano?

  Got it. Now, when we go ahead and we look at this next chart here, I love that you say you are here. It's like when you're looking at a map in a building and they got to tell you where you're starting. So help us understand how you think about this market cycle.

• 11:40Speaker 02

  Yeah, man. Great, great, great, great call out. So the blue line in this chart, to me, let's start by saying this is the most important chart of 2022. Like in my opinion, I think investors, everyone needs to sort of screenshot this, save it on their phone, make it the background of their phone, print it if you have a printer, fax it to your grandmother. Like I'm serious, like this chart is really important and I'll take a second to explain. The blue line in the chart shows the OECD Composite Leading Index Time Series for the World Economy. It's a proxy for GDP growth, so it tends to lead, the leading indicator time series tend to lead GDP by, you know, kind of one to three quarters to pick your, pick your economy. So what that's effectively saying is, hey, look, the growth cycle, the global growth cycle in the blue line has peaked and we're now starting to decelerate.

• 12:25Speaker 02

  And it's very likely that we decelerate based on our models for an extended period of time, at least through the end of this year and more than likely into the beginning of next year as well. And so as we go down that deceleration process, again, the blue line going down on the Y axis, it's likely to catalyze, you know, some pretty significant sort of underperformance of what we call higher beta risk assets, high beta risk assets. I'll unpack what that means in a second, but you know, we kind of, actually, let me just, let me take a second back and say, okay, what do I mean by when I say high beta risk assets? These are the types of assets, so risk assets, there's stocks. Credit, like lending money to companies, commodities, both digital and physical. And, you know, so those types of things where you get kind of paid to take risk, you know,

• 13:08Speaker 02

  it's the, the, the, the return stream is uncertain. Um, you know, you're, you're kind of, you know, peering into the future and hoping that things go your way in order to make money. The high beta component of those risk assets are the ones that tend to be more volatile, that have less certainty around their cash flows, uh, that tend to be sort of longer, um, in terms of commodity speculation that take longer to get out of the ground or wherever it's, you know, buried or, you know, kind of take harder to mine or things of that nature. So there's more volatility, it's more uncertainty around those future cash flows. And so that those things tend to go down a lot. If you look at the stock market, you know, the high beta stocks relative to low beta stocks tend to decline by at least 30%. And this is on a relative basis. And so if stocks are going down at all, you know, at the bare minimum, they're going

• 13:53Speaker 02

  down on absolute basis, at least 30%. Um, and so we've seen this over the last three growth cycles. You know, we've seen that high beta, low beta ratio decline by roughly 30%. That's not why we're here. Why we're here is the red line. And the red line is, is, is certainly kind of, obviously your, your community is, is very, uh, keen and, and, and interested in that. But what I'm showing in the red line is the Bitcoin price relative to treasury bond price ratio. And, you know, the, the last three global growth cycles. So I, I'm a firm believer in, in sort of the longer term dynamics of Bitcoin. I understand the halving cycle and believe in that as well. And I certainly believe that, you know, sort of, you know, this is an asset class where volatility is a feature, not a bug. However, if you're an investor who, you know, sort of can't handle that, that sort

• 14:38Speaker 02

  of these types of drawdowns, your ears need to perk up and hear what I'm about to say. You, the, the Bitcoin tends to lose about 75 to 85% of its value relative to treasury bonds, not, not just cash, boring old treasury bonds in these global growth cycles, whenever we're decelerating, uh, from a global growth perspective. And so taking it back to what you said at the beginning of this discussion, you are here, which means we had at least a year, potentially more of deceleration from a global growth perspective. That should, if this whole historical cycles hold true, which we certainly believe they will, we certainly think we're kind of already underway for a lot of stuff. If these things hold true, there's a lot more pain to come as we progress throughout 2022.

• 15:21Speaker 02

  So I just wanted to make sure everyone is aware of that and screenshot this chart in my face next to it. I'll give you a quick smile.

• 15:30Speaker 02

  Just so everyone can remember that because I do, I want to help investors kind of not lose money.

• 15:35Anthony Pompliano?

  When you think about that, what would you put the probability on Bitcoin losing 75% plus from here? Is that something that you're like, is it high probability, low probability? It's just something that could happen? How do you think about like the probability?

• 15:48Speaker 02

  That's a great question. So we've seen, you know, kind of, you know, at the worst, you know, 85, 90% drawdowns in Bitcoin, you know, kind of in it, you know, over the last kind of 10, 12 years of its life cycle. And so from here, I would argue, no, right? We're already down, you know, a third from the, from the November highs. And so in my opinion, I think losing that much more from here, it's possible. But, you know, I think it's more likely that kind of Bitcoin doubles, you know, kind of the rate of its decline, you know, at that point, you know, to its ultimate nadir. Now I'll say this, you know, I'll say that to say this, like, we're currently from a market regime perspective, pricing in that reflation box, you know, so we're kind of diverged from the broader economic fundamentals, which means we're kind of in this weird awkward moment in terms of what markets are looking at

• 16:33Speaker 02

  from a near term perspective that ultimately needs to get resolved, you know, and back towards the fundamentals. So as long as we're in this reflation regime, it's very likely we could see a bounce in Bitcoin that'll give some, give a lot of investors an opportunity to get out of some of the digital asset exposures and some of the broader risk asset exposures that they don't like and don't, do not wish to maintain throughout 2022. But, you know, that bounce, in our opinion, is not going to be one that's going to be sustained well into the year. If anything, it probably only has, once we start to get, see that bounce, it probably only has one, two, maybe even three months of upside.

• 17:08Anthony Pompliano?

  Joe, John, what questions do you guys have before we continue with some of the charts?

• 17:11Speaker 03

  I gotta get the first one printed out with Darius' face.

• 17:17Speaker 03

  Oh, we already got it. We're good. There we are.

• 17:23Speaker 03

  That's amazing.

• 17:24Speaker 02

  I might get a T-shirt of that.

• 17:28Speaker 03

  Yeah, I'm gonna need one of those too.

• 17:31Speaker 03

  So Darius, when we think about everything you just said, right? Kind of what's going to happen in digital assets over the next, you know, time period, however, along that ends up being. How do you think about people? How do you, how do you generally think about how people should act in these circumstances? When they're, uh, kind of their idea is just to hold the stuff as for as long as possible. Right. They just want to continue to keep buying. Should they think more about trading things? Should they be watching certain indicators? Or should they just keep buying as much Bitcoin as they can? If this is something they're going to hold for 10, 15, 20 years?

• 17:58Speaker 02

  Yeah, no, I say this all the time. I mean, look, it's, it's, I wouldn't have a job if we didn't have behavioral limitations as human beings. Right. Like you should, as an investor, find things that have a 10 to 15 year bull thesis and allocate it and dollar cost average into it over 10 to 15 year time horizon. That would be the ultimate ideal solution. The problem is, is we're all human. We're all susceptible to our own behavioral cognitive biases that cause us to make more investment changes, changes to our portfolio than we should. It's empirically proven Danny Kahneman, Amos Tversky, Cass Sunstein have done a tremendous amount of research on this in terms of investors sort of trying to beat the market. And that, that act of trying, you know, those decisions, those incremental decisions you're making

• 18:41Speaker 02

  tend to actually make it worse and make you, and sort of put you further behind. And so, uh, you know, you know, I, we also think this as investors, I'm myself notwithstanding. And so the reason I have a job, the reason a lot of active managers have a job or investors are, are, you know, capable of earning income doing this is because we know we're going to make decisions along that path. You know, we know we're not going to buy Bitcoin and dollar cost average for 10 years because it's not possible. We're human beings. We need to do stuff. We need to, you know, we need to put our brains to use and actually touch things and move things around and, you know, trade around things. And so my goal as an investor, as a macro risk manager, is to help investors improve the quality of those decisions. You know, hopefully reduce the frequency of those, those decisions, particularly the bad decisions

• 19:26Speaker 02

  that make you worse off than, than the status quo. But at the bare minimum, we know we're going to make these decisions anyway. I.e. trading more, investing more, making different decisions, different allocations in portfolios. And so what we tried to do, going back to that. First chart that grid regime framework, you say, hey, look, let's make the appropriate kinds of decisions for the appropriate sort of regime that we're in, the market regime, the bottom up and macro regime. Let's do that. And as long as we're doing that, you know, the decisions that we do wind up making will tend to be better than the ones we otherwise would have made.

• 19:57Speaker 03

  And the other thing I'm curious about is, I think like the bear case for some of this stuff in some people's mind is that Bitcoin is relatively new. It's a new technology. We don't have enough kind of data to back test, right? And when it comes to gold or fiat or any of this other stuff.

• 20:09Speaker 02

  That's a dumb.

• 20:10Speaker 03

  People are saying that in the chat right now. So like, what is your response to that, right? Like, how do you deal with that of saying, hey, Bitcoin's only 10 years old at this point?

• 20:19Speaker 02

  It's the stupidest thing. I'm sorry. I don't mean to disrespect anybody in the chat. So I'm not disrespecting the person who said that, but that statement is really dumb. You know what else was new when I was in college? This thing. This thing. It's called a, it's called a damn iPhone. Like, it was new when I was in college. Apple was not a $3 trillion company then. But guess what? New technologies come out and you have to, as an investor, have an ability to price that risk in terms of that, that business cycle risk and their execution risk. And I don't think Bitcoin is any different than any other nascent technology. The automobile was new, the combustion engine was new, iPhone was new, the sewing machine was new. There's all these new technologies that are new, but that doesn't mean they don't have value and more importantly, can appreciate in price over an extended period of time.

• 21:00Speaker 03

  They said, feel free to call the chat dumb. We've got thick skin.

• 21:07Speaker 02

  I'm sure there's a lot of really, really thoughtful folks that I intended to discourage any, but any one person.

• 21:12Speaker 03

  John, what do you got? Darius, can you just talk about your thoughts about what we're going to see in 2022 moving forward with inflation and then the inflation, the Fed rate hikes, and then that correlation into Bitcoin and other crypto assets?

• 21:25Speaker 02

  Yeah, absolutely. So I'll sort of break this down into kind of like three time frames. Because that's another thing that I, I think is really important for a lot of investors to realize. When, when you're constructing your portfolio, It doesn't need, it should not be, it should very much not be one static dynamic view. Like, oh, I'm bullish, therefore, I'm short everything, or I'm short a bunch of stuff, or I'm bullish, or I'm sorry, I'm bearish, or if I'm bullish, I'm long a bunch of stuff. It should be carefully constructed across different themes. I.e., you know, I have some allocation to secular inflation. Maybe I have a tail risk hedge on to some big deflation event, some geopolitical risk. But more importantly, at times, and I think this is one of those times, it needs to be sort of constructed across different durations, right?

• 22:09Speaker 02

  Like, you might be long Bitcoin and think the five to 10, 15 year view, but you might actually have some, you know, positions that actually offset that to help you manage the risk in the interim. And so, take, you know, kind of understanding that that's what we're trying to attack this problem set. Uh, that's the angle with which we're trying to attack the problem set. Let me sort of give you kind of a multi-duration theme of view on what I think is likely to happen in 2022. This is our base case scenario. Our base case scenario is that stocks, crypto, a lot of stuff bottoms here over the next week or two, and finds a sort of a relief rally, uh, kind of into, you know, kind of the, perhaps as, as, as long as it into the latter part of Q1, into the early part of Q2, maybe be as late as mid Q2.

• 22:49Speaker 02

  Uh, because I do believe the world is sort of transitioning from a pandemic phase of the, the kind of COVID-19 crisis to an endemic phase. And I do believe that endemic phase is likely to catalyze a positive, a fleeting, a transitory positive impulse in growth that I think asset markets are trying to move to price in now. Um, we can talk about why stocks and crypto have gone down recently. I think stocks are a little bit different than crypto at this point, but, you know, we can talk about why they've gone down recently, but I do believe it all has the potential to recover, you know, over the next month, two months, three months, maybe even four months at the longest. Once you get into that timeframe where you're kind of late Q1, early to mid Q2, the game is likely to start to get a lot hairier. And it's not, obviously, the Fed's likely to be hiking interest rates and well on a path towards

• 23:34Speaker 02

  uh, shrinking their balance sheet through quantitative tightening. To me, that, that's, that's, that's a big issue. But I think the, the one thing investors aren't talking about, and which is why we see, you could see some pretty material weakness develop from that, that kind of timeframe in the middle of the year, starting in the spring and into the summer. The growth outlook from that point will really start to come under question, in our opinion. You know, that's right around where our models have the speed of the decline in growth really starting to pick up to the downside. And it's, you know, it's our belief, you know, that, you know, the consensus growth expectations for 2022, you know, they're calling for roughly 4% real GDP growth in the US economy, you know, a little bit over 4% real GDP growth in the global economy.

• 24:17Speaker 02

  You know, both of those numbers are well north of the kind of potential growth that we've historically seen in both of these economies. And so, you know, there's a lot of hope riding on sort of consumer balance sheets. There's a lot of hope riding on the ending of pandemic and that, you know, positive impulse to services consumption. And I think a lot of that stuff will happen, but the risk to asset markets is that it doesn't. Because that's where consensus expectations already are, right? You've got the Fed tightening monetary policy. You have them shrinking their balance sheets or they're hiking interest rates or shrinking their balance sheet. The fiscal authority in the US is dramatically reducing the amount of easing that they've supplied in recent years. And so when you put all those factors together at the same time where growth's starting to slow down, you might actually have a growth scare in the middle of the year in

• 25:00Speaker 02

  terms of normalizing growth back towards its trend line faster than the investors really think. So I think that that process in and of itself may catalyze at least a, you know, 20% correction in the stock market, right? Like, we saw a very similar process play out in Q4 18. That was a call we made back then where we said, hey, look, a lot of what I just said, we could pair it and say, hey, that was exactly what we're saying in September of 2018. And all that sort of catalyzed a 20% correction in stocks. Well, we're not coming off the similar asymmetric highs from a valuation and leverage perspective. You know, 20% decline in these contexts and contexts from this starting point would actually be more like a 10% decline in Q4 18. And so that's why I'm saying, hey, look, I think it's very reasonable to expect the

• 25:44Speaker 02

  stock market to be down at some point 20%. Now, stocks don't stay down. We know the Fed will back off if stocks go down 20%. They'll continue on their hiking path, but maybe they'll amend this pace of quantitative tightening or something like that. I don't know what it's going to look like. Who knows? I don't have a crystal ball. But from that point, you are likely to see a Recovery earnings probably aren't going to go off the go fall off the the bed. Companies are doing quite fine. And so maybe we have a flat year from the perspective of the equity market, but you could have a 10% drawdown at the beginning of the year, a 10, 15% recovery off that low and then a 20% correction. And then they recover, you know, to finish the year flat. Like that, to me, seems like a very legitimate, reasonable base case scenario for 2022.

• 26:24Speaker 02

  And everything I just said about stocks, you can sort of kind of extrapolate towards digital assets as well.

• 26:30Anthony Pompliano?

  Darius, last question we got for you and then we'll let you go. How are you allocated personally right now? So given everything that you know in terms of what's going on in the market, what you believe to happen in the future, how do you think about the asset allocation in your own portfolio?

• 26:43Speaker 02

  Yeah, absolutely. So we, as I mentioned, we have our portfolio construction that we run at 42 macro. So that's my, that's my P A, my personal, my personal account looks like that. It mirrors that that portfolio construction, which we put together to help investors kind of risk manage these cycles. So it's, it's, it's broken apart by in the same sort of buckets that we've identified earlier, which is, hey, multi-duration. So we have, you know, about 20% of that in reflation type assets, because we do believe that we could see a bounce in reflation kind of into the springtime of this year. And so that 20% is really allocated to take advantage of that. We got another sort of 20% or thereabouts in, in, in what we call, or sorry, roughly about 30% in, in what we call inflation.

• 27:26Speaker 02

  Those are the kinds of exposures that, you know, should do well in the kind of an environment where growth starts to slowing, inflation start to do, they're still accelerating. That, that, both of those exposures need to go. Once we pivot towards back towards what we call deflation. And roughly about 50% of the portfolio is, is, is in assets that sort of align with the deflation view as well, which is a more medium term view, kind of looking out two to three quarters, two to four quarters. So, you know, we're very prepared to sort of raise, you know, at least 50% cash at some point over the next kind of, let's call it quarter or so, in order to sort of fully pivot to deflation. But we already have a decent amount of that exposure now.

• 28:03Anthony Pompliano?

  What would cause, I lied, I got another question. What would cause you to pivot or make that decision? Is there like a Specific data point that you would look for and you'd be like, okay, fine, we're going to sell our reflation and inflation assets and then either move to cash or move into the deflation and kind of double down on that.

• 28:20Speaker 02

  Yeah, so there's four things and I'll be quick because I know we're running out of time, but there's there's four things. We've been actually writing about kind of we we measure and map each of these four things daily in our research notes. So it's that it won't be a surprise to our subscribers, but the sort of number one thing that will kind of get you to make that pivot sooner rather than later. Uh, is what we call our full horseman market risk, looking at the V VIX fix ratio, the high beta, low beta ratio, small cap mega cap ratio, and then the value to growth ratio. When three of those four ratios are signaling negatively, signaling bearish and making new lows, that's time to get the heck out of of risk assets. That's that tends to persuade, you know, some pretty material corrections historically. Uh, so that's number one. That's kind of the the what we call sudden stop risk, like get out now.

• 29:02Speaker 02

  Uh, rolling stop risk, like, okay, I have a little time to get out, uh, is when we see our dispersion analysis pivot back to defensive leadership in the stock market, which means, you know, kind of the you're more you're you're you're more defensive companies like Coca-Cola and Costco are doing better than your sort of high flying, um, kind of, you know, uh, the energy financial type stocks. Right now it's being very much dominated by prosicicality, which in our in our opinion is a signal of risk on a risk on dynamics are kind of building up and could resolve themselves to the upside. Number three, so that's rolling stop risk. Number three would be kind of at the party, but having drinks by the door, you're enjoying a few beers by the door. You know, that's what we call, uh, we have this analysis, what we call our sum of confirming markets, but specifically the conviction score within that.

• 29:46Speaker 02

  If things get really good, you know, if we do see this bounce into the springtime, that analysis will tell you when things are getting too good. Uh, we've actually made a very similar call back in June where we say, hey, think the reflation trade is getting too good here. Um, and so you got to start to book gains and a lot of that stuff. And then lastly, um, sort of, you know, kind of dancing into the music stops. The old Chuck Prince from Citigroup quote, uh, we have what we call our cross asset correction risk indicator. Not only does it tell you that things are going too good, you're willing to go past the point of things being too good and actually only really selling down risk and raising cash. Once you get that first tick down from things being too good to things being slightly less good. So, uh, we have sort of four sets of indicators that we refresh daily to give us a clue as to, hey, do we get the heck out now?

• 30:31Speaker 02

  Or do we wait until things get better? And when they get better, what are our indicators saying, you know, about the kind of terminal destination for that that improvement?

• 30:39Anthony Pompliano?

  I love it.

• 30:40Speaker 02

  Thanks, man.

• 30:41Anthony Pompliano?

  It's almost like you know what you're talking about, almost.

• 30:44Speaker 02

  I know a thing or two here. It's mostly from a career of making dumb mistakes and learning from them.

• 30:49Anthony Pompliano?

  Darius, obviously, what I appreciate about you is not only that you you've got kind of frameworks to think through this stuff, but also you've got the data to back it up and do the work on a daily basis. So there's only one person I know that grinds grinds more than you. And you're talking to him.

• 31:05Speaker 03

  It's me.

• 31:06Speaker 02

  No, I was gonna say, yeah, I do you.

• 31:09Anthony Pompliano?

  Well, other than that, I appreciate it, man.

• 31:11Speaker 02

  From you over the years, and certainly the grind is one of them, man. So I appreciate your leadership.

• 31:15Anthony Pompliano?

  All right, sounds good. We'll talk next Thursday. Anyone who's got questions, go check out 42 Macro. Joe, John, you guys got any questions? Okay, good not to hear.

• 31:22Speaker 03

  Shout out 42 Macro, let's get it.

• 31:25Speaker 02

  I'll see you in Miami in a few weeks.

• 31:26Anthony Pompliano?

  All right, buddy, sounds good.