#802 Inflation Continues To Hurt The Poor The Most 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

• 0:43Anthony Pompliano?

  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 stable coins 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. You can 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

• 1:23Anthony Pompliano?

  superpowers. With your unique NFT domains such as pomp.crypto or pomp.nft, you can replace 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.

• 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.

• 2:45Speaker 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?

  All right, we have our friend Darius coming to join us, 42 Macro, one of my favorite and probably one of the best macro analysts in the world. Darius, how are you, my friend?

• 3:19Speaker 02

  I'm good, man. Appreciate the very kind intro. How you doing?

• 3:22Anthony Pompliano?

  Of course. Yesterday is like the Super Bowl for a macro analyst. You know, the real Super Bowl is in a few weeks. We'll be there. No, no, no, no flex there. But in terms of, but in terms of the Fed meeting yesterday, just give us your kind of high level thoughts in terms of what's going on. Should we read into anything? What's the big takeaways?

• 3:43Speaker 02

  Yeah, absolutely. So there was two Fed meetings yesterday. There was the statement based on the FOMC, the Federal Open Market Committees. This is the group of people who sit around in that dark room and determine the price of money for everybody in the global economy. Their statement was effectively what the market wanted, which was essentially, hey, look, we're tightening monetary policy, we're draining liquidity from the system, we're taking away the punch bowl, but hey, don't worry, you know, the party's still going, you know, there's still just your booze in the punch bowl. The second Fed meeting yesterday sort of started with Jay Powell's press conference, Jay Powell being the chairman of the Federal Reserve and, you know, Effectively, relative to that punch bowl analogy, not only did Jay Powell say, hey, look, yeah, we're going to take away the punch bowl.

• 4:26Speaker 02

  I might actually call the cops, you know, like imagine being at a high school party or a college party where not everyone is 21 and that's like the number one fear for anybody who's ever been to a kegger. It's like the cops get called, right? He's like, yeah, I might call the cops too. So like, you know, it's a weird dynamic where the markets now have to price in this sort of persistent uncertainty of the cops showing up. And that to me is the big issue for markets and ultimately will be a big issue for the economy later this year.

• 4:52Anthony Pompliano?

  So of course he's talking about interest rates rising soon, I think was the word he kept using. Let's talk first about this idea of narrative and also inflation. So obviously, if people start saying, I think inflation is coming, I think inflation is coming, investors, they move their capital before the inflation shows up. And also people in the business world, they start to increase prices and kind of act before that inflation shows up. So you can in some way talk inflation into existence, whether you mean to or not. What my view is, is that they are trying to do the opposite now. They're basically trying to talk inflation down without actually doing anything yet. Is that your read as well with kind of this like tough talk, but no action yet?

• 5:34Speaker 02

  Yeah, 100%. And that's why they've taken so long. So they have acknowledged that there's been an inflation problem really going back since the late summer and ultimately in their statements over the last two or three statements. The issue is that they don't want to crash markets. They prefer not to ideally. The markets in the economy, you know, remain very robust throughout 2022 in the despite all their tightening initiatives. The problem is you can't get inflation under control without tightening financial conditions. And you can't, you can't, if you tighten financial conditions, you're obviously going to slow down the economy. And the issue is the Fed doesn't have a great track record. In fact, I think it's like oh, four, 12 or oh, for 13 and, you know, sort of trying to slow down the economy to beat inflation and actually not catalyzing recession. So what the market

• 6:19Speaker 02

  is ultimately really concerned about, not yet, but will be increasingly concerned about as we progress throughout 2022 and into the early part of next year is that, hey, look, at some point, the market's going to realize the Fed has overdone it. And the market will absolutely realize the Fed has overdone it before the Fed realizes and that's a problem.

• 6:36Anthony Pompliano?

  So when you think about asset prices themselves, right? We've obviously seen tons of tech stocks sell off significantly over the last few months. We've seen Bitcoin go down 50%. We've seen a kind of cooling off across a lot of these various aspects of the market, but we've also seen Berkshire Hathaway hit an all time high and kind of a lot of the value type stuff. Do well. How do you look at the impact of these Fed decisions on the actual asset prices across various sectors?

• 7:02Speaker 02

  Yeah. So it's a, that's a great phenomenal question. That's a, that's the high level finance question there. So I'll unpack and so you said a few things that are really important. The types of stocks that are outperforming the types of assets that are doing well or relatively well, not everything's doing well in absolute terms, but relatively well have been the sort of kind of real economy stocks like banks and, and energy stocks, you know, things that you can physically touch and taste and, and, and hold. Those types of stocks tend to be less influenced by the direction of interest rates, either short term interest rates or longer term interest rates. And all the things that have been sort of more correlated to longer term interest rates correlated to kind of narratives around sort of future growth prospects,

• 7:45Speaker 02

  future prospects of adoption, anything that is sort of has a very strong growth curve has really been hit. So that obviously includes Bitcoin, includes a lot of tech stocks. Just includes a lot of high beta, higher beta assets in general. So the fact that we're seeing that rotation is suggestive that the market is not ready to sort of go at this particular time and juncture and go all the way down and actually start the crash. Because typically what you see is that whenever the market rotates in what we call a procyclical manner in a correction, it usually leans, leads to a sort of recovery. You know, that's a dip that you generally want to be bought, but you don't want to buy it. The types of dips you don't want to buy

• 8:23Speaker 02

  are when the market is getting defensive, i.e. buying sort of boring companies like utilities, like consumer staples, like Walmart and things of that nature. Those are the kinds of dips you don't want to buy. So things are fine for now, but the, the window for them to not be fine, it continues to shrink.

• 8:37Anthony Pompliano?

  So let's talk about the Fed's impact on individuals themselves, right? Earlier this year, or I guess late last year, a couple of months ago, there was this famous quote that Jerome Powell was asked, you know, hey, do you think the Fed is contributing to wealth inequality? And he was like, well, nobody's come into my office and told me that. And we were like, I mean, we had a field day, like, we absolutely had a field day at the fact that he said that. We pulled up the picture of the office. We were like, how do you even get into that building, like, the whole thing, right? And so, obviously, I think that maybe he misspoke. Let's give him the benefit of the doubt there. But how much should we be blaming the Federal Reserve or other types of monetary and fiscal policy kind of overseers on things like the wealth inequality gap, which is now at the kind of widest range that it's ever been? Is there a way to kind of quantify that?

• 9:22Anthony Pompliano?

  Or should we actually go and kind of point the finger at them? Or is that unfair?

• 9:25Speaker 02

  No, no, they're certainly, in our opinion, the number one culprit. Now, they're not the only culprit. Sort of you could sort of, I would point to sort of kind of two big things, or actually, three big things that have really catalyzed this sort of widening income dispersion and wealth dispersion we've seen in the US, US of A, and really throughout the global economy. Because what I'm about to say is not endemic to the US. One, sort of globalization. You know, we've shipped a lot of our jobs to sort of lower cost producers, namely China, particularly when China joined the WTO back in, I want to say, November 2001. In fact, I remember when I was a kid, this must have been when I was sixth or seventh grade, the WTO riots were a huge deal in Seattle, I'm from Seattle. And, you know, and needless to say, like, you know, 20 something years later,

• 10:10Speaker 02

  and, you know, 50% of our manufacturing jobs having been offshore, I could see why that people were having a riot back then. So that was, that was kind of foreshadowing to where we are today. But you kind of direct, so that was the number one globalization and the kind of hollowing out of our manufacturing base and our middle class. Number two, I would argue, obviously, the proliferation of technology. You just need less people to do stuff. It's just a lot easier for one person or a small group of people to accomplish the things that a lot more people had historically had to. You needed more manpower to get accomplished. And then lastly, the Fed. I wouldn't say last of the Fed, because I think the Fed is probably the overall. overwhelming driving force here, which is the more you cut interest rates, the more likely it the more likely it is it favors the existing players.

• 10:54Speaker 02

  You know, the the existing players can sort of raise debt very cheaply and build very large moats around their businesses. And and and more importantly, not only do they build boats around the businesses, you know, they can start acquiring other businesses and doing things like that. And that acquisitions, obviously, you tend to see less innovation. You tend to see less new business formation and all the good stuff that comes along with that. So this dot the economy itself just becomes less dynamic.

• 11:19Anthony Pompliano?

  Got it. And so when you start to think about like inflation, how it impacts various kind of cohorts of the American population, right? I think it's very clear that inflation made rich richer and it made poor poorer in the sense that a lot of the inflationary goods, especially the most severely affected inflationary goods, is a large portion of monthly expenses for the least fortunate or kind of the most vulnerable in our society. And so when you start to think about this, is this one piece of like the positive side of inflation coming down of this monetary policy kind of tightening? Is that there will be some relief for those folks that are the most vulnerable? Or are we reading too much into it? And actually, prices that went up, they're not coming back down. And so maybe there's not an increasingly worse situation,

• 12:04Anthony Pompliano?

  but they're pretty much in a bad situation and they're stuck there because those prices that went up aren't going to be brought back down over time.

• 12:11Speaker 02

  Yeah, no. So prices almost never go down, right? Deflation is a very rare occurrence. It only happens in recession where you actually see prices go down. And not and even not all recessions have actually seen the price, overall price level, the price index level of CPI go down. What we're talking about when we say the word inflation is not akin to prices. It's akin to the change in prices. And so right now, on a year-over-year basis, per the most recent headline CPI statistics, the the amount of price, whatever you're paying for something, has gone up 7% on a year-over-year basis. So for example, if you bought a bag of chips that cost a dollar in December of 2020, it now costs a dollar, seven, a dollar and seven cents in December 2021. So that doesn't seem like a big deal. But the reality is when you're living on a budget and you're already living.

• 12:56Speaker 02

  Paycheck to paycheck and you know, when one costs go up, you're hopeful that you know, another cost goes down so that your overall living situation and quality of life doesn't change. But what happens with inflation is that everything is going up all at the same time and it's going up faster than your wages. And so that your overall purchasing power and the quality of your life goes down. I certainly understand that better than most.

• 13:19Anthony Pompliano?

  Yeah. And so when you start to think also about kind of the Federal Reserve, one of the things that I always you know, kind of balance in my head is they have official mandates and then they have these unofficial things that people kind of try to label or throw onto them. So the official mandates of stable prices and maximum employment, right? And that's their goal is how do we get the full employment? How do we get stable prices? For the last two years, for the most part, they failed at those two things. Now, there have been these external kind of reasons why and people can debate all day long, are we heading the right direction, wrong direction, whatever. But it also seems like the Federal Reserve is now being asked, whether it's by politicians, by the American public, by the media, etc., to start to weigh in on other issues as well, not just stable prices

• 14:02Anthony Pompliano?

  and full employment. So two examples that I'll use is global warming or climate change and racism, right? And so let's start first with the global warming type stuff, which is we've seen multiple calls, both from politicians, media, and also the American public, of the Federal Reserve should, you know, basically come out publicly, make a statement and commit to actually addressing climate change or global warming. How do you think about that type of stuff? Is that a distraction for the Federal Reserve? Do they actually have an ability to impact that stuff? Or is this like classic virtue signaling of those various groups just trying to point a finger at, oh, nobody likes, you know, central banks, let's just blame it on them?

• 14:37Speaker 02

  Yeah. Well, no, I think it's a bug of the overall system, right? The Federal Reserve, monetary authorities have no business dealing with these types of issues. The issue is that we actually can't get anything done in Congress. And so we punt these big, major societal issues, these big debates of our time, onto the only sort of, you know, policymaking board that is not as hostage to the election cycle, right? The Supreme Court's got its own, you know, it's busy doing its own thing. So like the Fed is like, all right, well, you guys don't have to get elected, you deal with this. And that's exactly what's happening when it comes to global warming. What was the other one? It was global warming and, oh, and, and sort of racism and things of that nature. And so the Fed, going back to the summer of 2020, changed its mandate a little bit, amended it slightly

• 15:21Speaker 02

  to include sort of maximum inclusive employment. And that and inclusive part means that, hey, look, we understand or based on our analysis of our own mistakes in, in years past and cycles past, is that we always sort of take the punch bowl away from the party too soon. Like right when the black kids and Hispanic kids show up, they take the punch bowl out of the party. And so the Fed effectively changed its mandate, its inflation mandate, to allow for more black kids and Hispanic kids and people who have historically been disaffected, or sort of who sort of always showed up to the party late in terms of the economy, getting wages, all that other stuff, you know, to, to, to give them an opportunity to get in and have some fun. The reality is they sort of done, they did that at precisely the wrong time as it relates to the fiscal policy agenda.

• 16:03Speaker 02

  The fiscal policy agenda basically said, hey, no, look, we're going to give everybody a bunch of money, even though the kind of the productive sector of the economy, the productive capacity of not just our economy, but the whole global economy is actually reduced. So we created this gigantic supply and demand imbalance. At the same time, the Fed was saying, hey, no, look, we want everybody to come into the party and have a good time. And so the Fed complicated matters with respect to fiscal policy, what they should have been doing. You know, a year ago, there are a lot of really smart people in and around the Fed, former Fed presidents and chairman, sort of my man from New York Fed, I'm blanking on his name, but he's been scathing them for like a year now in terms of like, hey, look, you should be taking the punch bowl away if the fiscal authority is putting, you know, sort of supplying more punch, right?

• 16:48Speaker 02

  Imagine like, right, right, you know, like the Fed, there's like a bottle of Jager and a bottle of like grain and a bottle of vodka and they're all like just double fisted pouring stuff into the, into the punch bowl. And the punch bowl got so over full that it created a lot of these inflation problems that we see today. So now effectively the Powell, Jay Powell and the Federal Reserve now are saying, hey, look, we realize we got to take this punch bowl away now and it's becoming an issue for markets. But the problem, the bigger issue, and I think we will talk about this in a few months as we progress throughout the year, but the bigger issue. Now they're both taking it away. And that's going to become a big problem for markets.

• 17:23Anthony Pompliano?

  Yeah, one of the things as I was kind of thinking through this and I remembered that they had this whole series. So I went this morning and I went way down a rabbit hole that frankly, I probably spent too much time going back and reminding myself what happened. But back in 2021, over the summer, there was basically 12 district banks, the Federal Reserve system. They came together and they hold this whole series. They called it racism in the economy. And a lot of what you're talking about here is what they were trying to figure out. And they did a number of things, so wealth divide, health, criminal justice, entrepreneurship, economics, housing, education, employment, etc. And a lot of it was like, look, we can't have full employment if we don't do a good job educating people, right? If everyone is sick and doesn't get access to healthcare services, that's a problem in terms of the economy, etc.

• 18:02Anthony Pompliano?

  And so as I started to kind of break down and read through a lot of this stuff, it seemed like the Federal Reserve in a lot of these comments and a lot of these articles and talks was seen as kind of the central heartbeat for the economy. And a lot of the monetary policy drives this and stuff. And so how do you think about the Federal Reserve and like, is it racist? Is it not racist? Is that even a fair question to ask of those people? Should they just not be paying attention to it? Like, it's such a nuanced conversation. Like, how do you think about that? And like, if you were the Federal Reserve Chairman, would you do anything differently in terms of impacting the economy? Or do you just focus, you know, kind of blinders on monetary policy and our job is stable prices and full employment? And that's what we're going to focus on?

• 18:45Speaker 02

  Yeah, no, so that's a loaded question. So I'll start by saying the Fed's focus on sort of these sort of the sort of compositional effects with respect to the labor market, people's wages, you know, people's sort of, you know, quality of life, their ability to purchase and afford homes, where they can purchase and afford all that stuff. Again, the fact the Fed has to address any of this is a bug of the system. This is, again, this is squarely the types of things that elected officials should be debating, discussing and ultimately designing and enacting policy for. The problem is, is our congressional, our Congress has become so dysfunctional. And, you know, I would loop the White House in as well, if we've learned anything from the past, you know, five or six years. This is, look, there's so much dysfunction.

• 19:28Speaker 02

  Function in DC that we actually can't tackle some of these great issues of our time. Um, these aren't great issues of our time. These issues have been around for an extended period of time. But you know, now that they're sort of, you know, the, the younger cohorts, the Gen Z's, the millennials are really focused on this. And looking for solutions for this as part of the fourth turning. That's a great book. Uh, from my, by, written by my former colleague Neil Howe that talks about these big generational cycles. And we're currently in one that demands great political change, great societal change. And that's why you're starting to see a lot of this stuff get dumped on the Fed's lap. Because you know, those, those cohorts, those younger generations, they're demanding solutions. For big problems like global warming, big problems like racism and disparate economic outcomes and economic and health outcomes in society.

• 20:12Speaker 02

  And so the Fed, kind of sitting here after a decade of QE, which is basically inflated the stock market. And not inflated the incomes of the people who don't own stocks, which is the vast majority of Americans. Or that's sorry, not the vast majority of Americans, the vast majority of Americans don't own a significant amount of stocks. You know, they might own, you know, 500,000 bucks here, but the, most of the wealth in this country, if you look at, uh, the wealth dispersioning, uh, statistics. Uh, 65% of the overall wealth in this country is held by the top 10% of households by wealth. So that means the rest of the 35% is splitting up, uh, the, you know, the sort of the bottom 90% is splitting up the rest of the 35%. If you look at the bottom 50% of households, it's just about 2% of all the wealth in the United States in this country.

• 20:53Speaker 02

  So the Fed is well aware that it's made that problem worse by its quantitative ease, its persistent balance sheet expansion. Since the global financial crisis, um, it's made everyone that's watching this show and folks like you and me. Rich at the expense of people who can't afford to watch the show and probably getting on a bus to go to their second job. And the Fed is aware of that. And so I think there's a little bit of guilt, uh, associated with the decade plus of QE. Um, and I think they're doing their best to sort of unwind some of that.

• 21:19Anthony Pompliano?

  Yeah, it's fascinating to kind of think through this and, and what I appreciate about your perspective, I think is that, uh, you, you kind of run the gamut, right? Uh, your, your story is so incredible and also you understand, uh, how the economy works, right? And I think that the, the key piece to it, as you and I have talked offline about is like education is the great equalizer. If we can teach people this stuff and they understand how this works. Hey, you can also benefit as well, right? Just don't go consume goods, instead go invest in assets and ultimately they'll do the same thing for you. So I think it's very interesting. Before my brothers ask a couple of questions, I want to go through these two charts. So you've got this one chart that shows if inflation continues to surprise the upside, risk assets could crash. Explain what exactly happens here if we continue to see higher than 7% CPI over the next couple of months?

• 22:03Speaker 02

  Yeah, so consistent with our forecast, economists consensus forecast, the Fed's forecast is that inflation's peaking out right around here and should sort of start to trend down as we progress throughout the year with the real step function lower starting in around Q2. That's sort of the baseline scenario, however, we all kind of have similar frameworks. The problem is, is this, we've been all surprised by different, by inflation at various intervals throughout this pandemic, a lot of it stemming from supply chain disruptions, supply demand disruptions, you know, the latter. The issue what I'm showing in this chart here is the blue line shows the earnings yield. So that's the earnings of the S and P 500 divided by the price. And so the blue line, as you can see, that is as negative as it's ever been.

• 22:43Speaker 02

  So the earnings yield, the real earnings yield, if you subtract CPI, so that's 7% CPI, or whatever CPI is at any interval from that time series, you wind up with the real earnings yield. So what are investors sort of getting out of being long stocks on a real basis? And that, what they're getting is as negative as it's ever been. And historically, the reason I bring that up is so you go back over the last sort of 60 years and look at every time this line has gone negative, this blue line has gone negative, it's been ahead of a pretty material correction in the stock market. So in terms of this back test, there have been two 10% corrections, there have been one 20% correction, and then there have been three 50% corrections in the S and P 500. You know, so and each of those corrections has obviously been catalyzed by Fed policy

• 23:28Speaker 02

  tightening. And so the setup today is exactly the same as it's been in each one of those previous instances. So that's an issue as it relates to the stock market. We talked about the risk to high beta risk assets last week when we were on the program. This is another way of looking at that from the avenue of policy, because we were looking at it from the avenue of growth slowing in the most recent. One there in the second chart shows the uh the quits rate in the jolts time series so uh the BLS uh keeps uh the blue line uh that's a statistic that the sorry the BLS keeps both of these statistics but the blue line shows the percent of people who are willingly quitting their job and obviously if you willingly quit your job it's not to go sit on the couch it's usually to go

• 24:06Speaker 02

  get a job that pays better or is in a more desirable location or has a better hours to work like balance is usually a reason and nine times out of ten the reason is you go get a pay more and so as you can see there's a pretty tight relationship between the blue line and the red line and the red line is the employment cost index that's the broadest measure of ways wages that we track in the economy and so you know this is an issue for the Fed is because hey look the Fed now only acknowledged that it might be it's taking the punch bowl away we know it's taking the punch bowl away but they might actually even call the cops and they will call the cops if these lines continue to uh ascend higher um as it relates to the Fed getting incrementally hawkish from here and hawkish means they're tightening policy at a faster rate and so to me I think this is kind of the issue of the day which is the Fed has no off ramp

• 24:51Speaker 02

  the Fed not only has told us it's taking away the punch bowl and it might call the cops they can't do anything other than that for several quarters in our opinion as a function of a lot of these dynamics so uh those are issues for asset markets that we're gonna have to chew through as investors uh as I said twenty twenty two is gonna be very different than twenty twenty one uh could potentially be the exact opposite so I'll stay tuned for the updates there.

• 25:12Anthony Pompliano?

  Joe John questions you guys got. Darius what's up man.

• 25:16Speaker 02

  What's up boys how you doing?

• 25:17Anthony Pompliano?

  Good so my question would just be around the balance sheet right it more than I think more than doubled over the pandemic uh it's kind of near nine trillion now uh they said that they're gonna start to reduce this soon they're gonna let you know the the program finish out in March and then they're gonna start to let bonds mature and roll off the balance sheet just talk me through kind of how you see all this playing out do we get much like aggressively lower do we stay kind of consistent like do they change their mind etc.

• 25:39Speaker 02

  Yeah absolutely great question excellent question and so.

• 25:42Anthony Pompliano?

  That's all I asked Darius.

• 25:46Speaker 02

  Indeed so I think so it's so let me start to take a step back and say they outline sort of these principles for balance sheet reduction yesterday um you know in and around the FOMC statement and kind of the main. That we want they they sort of told us is that, hey, look, number one, we're going to do this by just letting things well, letting bonds mature, raw up the balance sheet and not reinvesting uh that those principal uh payments. So that number two, where they want the balance sheet to be mostly focused on treasuries as opposed to mortgage backed securities, which obviously are perpetuating a bubble in the housing market. Or actually, I wouldn't say bubble. Sorry, that's that's the wrong word. It's just perpetuating a excessive supply, a demand relative to supply in the housing market.

• 26:25Speaker 02

  Uh, and so those are the first principles. Second principles are not principles, but this we know the Fed is going to lose about 1.3 trillion dollars on its balance sheet. You know, in the year, kind of in the year from today, right? And so if if that's in terms of the speed of the balance sheet contraction, we know it's going to be at least, you know, kind of one, 1.3 trillion dollars. Now, could it speed up? Yeah, that's what Jay Powell told us in terms of he can call the cops on us, right? Like, like if he if he calls the cops, that'll be like either the balance sheet gets sped up because they think they're not uh making enough progress on inflation soon enough because don't forget inflation is a political issue. There's a midterm election coming up in November and the Democrats are well on their way out, both both houses of Congress.

• 27:05Speaker 02

  Um, if they don't get this inflation issue under control, and I would argue they're probably well on the way out of both houses of Congress, even if they get it under control. Because the path they're gonna have to take to get it under control in terms of actually having those statistics on hand uh for the campaign trail would be one that's very uh negative for a stock market and things of that nature. So um they're kind of damned if they do, damned if they don't in that regard.

• 27:24Speaker 03

  John, what questions you got? There's can you just talk about like what you expect to see later on this year? So the Fed's obviously laid out a plan for the rate hikes in March. They said there's a possibility they do more than three. Like, can you just talk about like stocks and everything and what's going to happen for the rest of this year, you think?

• 27:41Speaker 02

  Yeah, so I'll start with the Fed policy. They're definitely going to do four hikes. I mean, I think that's a baseline. The market has already pressed that in in terms of uh where the bond, not bond markets, but where where money, where rates markets are are are projecting that. So that that's a done deal. Um, the only thing that would stop that from being a done deal is like the stock market is down 30, 40%, which, you know, it could be, but I I don't think that's the baseline scenario. It's more, it's increasing. Reasonably likely that the sort of dovish pivot side of the equation is increasingly a low probability event. Whereas the hawkish right tail I've been talking about in our research is actually the probability associated with them doing more than four hikes.

• 28:20Speaker 02

  You know, potentially five hikes or six hikes are potentially accelerating balance sheet expansion by pulling it forward and actually selling securities again. We're not there yet. I think there's some big hurdles that they probably have to meet before that occurs, but it's now a rising probability that it does occur. And so the fact that is a rising probability that it does occur means that, hey, look, if we see the wrong stuff on the wrong data on inflation as that first chart. Or as that first chart suggests, they're going to do more and they're going to do more is how you get the bigger. Uh, big, bigger crashes as opposed to the more manageable corrections in terms of that back test. Uh, so you're kind of like my base case scenario on how this all plays out. You know, you do have a window of time for things to get a little bit better here.

• 29:03Speaker 02

  Obviously, Omicron had some impact on the economy. We're observing this throughout a lot of the data that we track. Um, and so as Omicron starts to recede in terms of case counts and and sickness and hospitalizations, all that stuff. Uh, it's likely to see like some bounce in the data, that bounce in the data could be met with a positive market response, but. At some point, you know, the next few months, like there's no way that positive market response can be sustained in the context of growth slowing back to trend. Inflation potentially being stickier than the Fed wants to be, and more importantly, the folks down in DC want it to be in terms of their agenda. And then second, thirdly, there's just very clearly a lot of positioning that's still very on one side of the trade.

• 29:44Speaker 02

  Right. The reason you're seeing such aggressive selling, it's not even aggressive selling in cryptocurrency. It's just because we don't have buyers. I don't think there's any more sellers than than there were, you know, six months ago. It's just that no one's stepping up to buy. Uh, because they're all, they were previously on one side of the trade and they have not seen enough confirmation from either the growth impulse, the credit impulse. Uh, the monetary impulse or the fiscal impulse to say, I need to go buy this today. And that's the issue. We're creating a lot of supply and demand imbalance in asset markets in the same way that we did it in reverse for goods and services.

• 30:16Anthony Pompliano?

  Darius, last question for you and then we'll let you go. When you think about moving forward over the next three months or so, are you doing anything different in your portfolio based on the meetings yesterday?

• 30:25Speaker 02

  Yeah, absolutely. So we got about just shy of 40% of the exposures in our portfolio need to go. We do plan to be selling into strength. That's our game plan is to use any market strength over the next couple of months to get rid of that stuff. And so that will obviously be, you know, get us to some, some, some are just shy of, you know, 50% cash in the portfolio. I think that's a reasonable kind of baseline to kind of wait out what could be a much be much bigger, which should be a much bigger correction, kind of, you know, my expectation is it start in the springtime and maybe persist throughout the summer. But, you know, maybe it's, it's actually even sooner than that. So I, I'd be, I'd be cautious for the sooner than that than the later than that. And that's what we learned from Jay Powell yesterday.

• 31:06Anthony Pompliano?

  Awesome, man. Where can we send people to find you or find more about 42 Macro if they, if they want to subscribe?

• 31:11Speaker 02

  Appreciate you, brother. I'm at 42macro.com. That's our website. Come check us out. We have a sample reports and stuff in terms of the research we publish on a daily, weekly, monthly basis for our subscribers. And then I'm at Twitter on 42macro. Appreciate you guys. Thank you.

• 31:25Anthony Pompliano?

  You're a legend, one of the best macro investors in the world, not just because he's my friend, not because he's a good looking dude, not because he knows how to party like the best of them. He's an absolute animal. Appreciate you and we'll see you next Thursday.

• 31:36Speaker 02

  See you next Thursday, guys.

• 31:37Anthony Pompliano?

  All right. Later, buddy. Thanks so much for listening to today's episode. I really hope you guys enjoyed this one. Make sure you subscribe on Apple, Spotify, or your favorite podcast player. And if you're looking to try to transition to get a new job in the Bitcoin or crypto industry, we've got you covered. Head over to pompscryptocourse.com. We've developed a curriculum with the top teams across the industry. It's a three-week intensive training program with over 50 events packed into that three-week time period. Go to pompscryptocourse.com to learn more and I'll meet you guys for the next episode.