#949 Darius Dale On Why Investors Should Be Very Nervous

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 ======================= Exodus is leading the world out of the traditional financial system by building beautiful and user-friendly blockchain products. With its focus on design and user experience, Exodus has become one of the most popular and loved cryptocurrency apps. It’s supported on both desktop and mobile, allowing you to sync your wallet across multiple devices so you can have access to your funds anywhere. You can instantly exchange around 100 different cryptocurrencies straight from your wallet. Interactive charts let you view an asset’s price history and your portfolio’s performance over time. And maybe the best part, Exodus is integrated with the Trezor hardware wallet - making advanced security easy for everyone. Visit exodus.com/pomp for your free download or search Exodus on the App Store or Playstore. ======================= 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. ======================= DeFi Technologies represents what’s next in the digital economy -- providing simplified, trusted access to crypto, decentralized finance and Web 3.0 investment opportunities. Institutions and investors can gain diversified, secure, compliant, and easily tradable access to a diversified set of industry-leading equity products and protocols, through a single stock purchase on a regulated exchange. Currently listed on U. S. (OTC: DEFTF) and Canadian (NEO:DEFI) exchanges. For more information or to subscribe to receive company updates and financial information, visit our website at http://defi.tech =======================

• 0:02Speaker 00

  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 Exodus, the world's leading desktop, mobile, and hardware crypto wallet. They offer beautiful, user-friendly blockchain products that sync across all of your devices, making it easier

• 0:45Speaker 00

  to send, receive, and exchange over 150 or more crypto assets in one place. And with world-class customer service available to you 24/7, Exodus always has your back. But the fun doesn't stop with staking and trading. They recently launched a new NFT marketplace where you can buy and sell your favorite NFTs on the Solana network. By partnering with the popular NFT platform, Magic Eden, they're offering the full Monty on verified collections, with more added every single day. Ready to check it out for yourself? Run, don't walk. Over to exodus.com/pomp for your free download today. Again, if you want the world's leading desktop, mobile, and hardware crypto wallet, go to exodus.com/pomp today. Today's episode is sponsored by Abra. They're based in California, and they're backed by

• 1:30Speaker 00

  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 13% APY on stable coins and 7.15% 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 came, you invested, now conquer. Abra, conquer crypto. Go check it out today. This episode is brought to you by DeFi Technologies. DeFi Technologies represents what's next in the digital economy. They're providing simplified trusted access to crypto, decentralized finance, and web three investment opportunities.

• 2:16Speaker 00

  Institutions and investors can gain diversified, secure, compliant, and easily tradable access to a diversified set of industry-leading equity products and protocols through a single-stock purchase on a regulated exchange. DeFi Technologies is currently listed on the U.S. Exchange at DEF T F Stock Ticker and the Canadian N E O Exchange at D E F I. For more information or to subscribe to receive company updates and financial information, visit their website at DeFi.Tech. I'm really excited about what these guys are doing. I've become an advisor to the business and I highly suggest you go check them out. Go to their website at DeFi.Tech today.

• 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.

• 3:17Speaker 00

  Darius, how are you, my friend? Pomp, what's up, buddy? How you doing? I'm doing great. I miss you, by the way. I know that the Miami Darius is not here. You're back to New York City, Darius, but I'm hoping that you're going to come back and be Miami Darius at some point in the future. Yeah, yeah, man. With the bifurcation of regulation and taxes in this country, I'd probably be a Miami Darius at some point permanently, but we'll see for now. Hey, let's go. All right. So the Fed raised interest rates by 50 basis points yesterday. This is what the market was expecting. We talked about it previously. I think you were expecting this as well. What's your read on kind of some of the commentary around the actual interest rate hike itself? Yeah, so I mean, it was, it was mostly hawkish. He laid out a couple of things that were somewhat dovish, and that's why we had the market response that we saw yesterday, right?

• 4:01Speaker 00

  Big, big squeeze higher in the market, a big unwind of a lot of bearish options positioning into the event. But then when you peel back the onion, which I did immediately, and I think The market is very much doing today. It was an incredibly hawkish event. I mean, effectively confirmed, which is something that the market had not realized that this is a Federal Reserve that is very comfortable taking interest rates beyond neutral. And that will cause a panic, it will cause a recession, it will cause things in the financial ecosystem to break. So when you start to think about that idea of a recession, obviously they're hiking interest rates as we're seeing the economic contraction from Q1. As they continue to increase the interest rate, are we expecting them to actually accelerate the recession?

• 4:44Speaker 00

  Like if we were at a negative 1.4% growth in Q1, is your expectation that it'll be something worse than that in Q2? Or will it stay kind of flat? Or how do you read into that? No, it's actually, so it's, growth is likely to bounce in the second quarter. Right? And, and part of the reason we saw, you know, recovery off the lows in February is that the rate of change of growth, the second derivative actually improved from January through, let's call it March or April. We're seeing that in most of the economic statistics we track, with the exception of the, the PMIs that we got this week. We've seen a lot of strength in the hard data, you know, the retail sales, the consumer spending, the industrial production. So the, what we saw in the Q1 GDP report was really just a function

• 5:24Speaker 00

  of inventories and imports really dragging down and outweighing real, a very solid report from a consumer spending perspective. When we talk about the big slowdown we see in the economy, from our perspective, that's something that looks like a second, or sorry, a third and fourth quarter event as opposed to a second quarter event. We're in this awkward transition phase from an economic standpoint where growth is slowing and is likely to start to slow at a much faster pace in the coming months. But it's coming from a high level that in that level gives the Fed and value oriented investors a lot of confidence to, you know, one, to keep hiking and two, to keep buying. And both of those parties are going to be wrong. Yeah, it's fascinating to watch this. Obviously, a lot of people, as you know, who, who listen to this

• 6:08Speaker 00

  are really invested in growth or risk assets, whether that's tech stocks, cryptocurrencies, et cetera. There's this kind of drawdown of price that's occurring. We've seen reports that Tiger Global and some of these kind of tech oriented funds are down 40 plus percent year to date. Obviously Bitcoin is down on the year. What's your read in the impact to risk assets or growth type assets as we continue into this kind of? Interest rate hiking type environment. Yeah, so it's it's interesting, right? Like so there's there's the macro trade, which is pretty clearly and obviously negative. We're in a negative slowdown from an economic standpoint. Inflation continues to be at a level that is well, much higher than the Fed can tolerate or is politically allowed to tolerate.

• 6:54Speaker 00

  And so they're likely to continue tightening policy, but then you have to layer on the behavioral dynamics, right? You know, stocks start to go down by enough. Cryptocurrencies start to go down by enough, you're going to start to see consumers, businesses, other investors demand liquidity at increasing paces, right? And so you're going to start to look around and say, okay, what hasn't gone down as much? That I can liquidate to to raise cash or, you know, to to to get to to get myself back to flat from a positioning standpoint, right? That's an issue. Uh, because, you know, people always in these times, they sell what they can, not what they should. And so, you know, let's say if you're, um, you know, if you're you you you were too levered long shitcoins, for lack of a better term. You know, you might look around and say, hey, well, Bitcoin hasn't gone down nearly as much, so let me go sell some Bitcoin and raise cash.

• 7:39Speaker 00

  Right? Because I don't want to sell something down 90% and might as well just hold it. Um, and so to me, I think, you know, I'm not sure that we're at that point in the game yet. But that's certainly a point of the game that we see coming, just given our economic outlook. And so when you start to think about how this uh, this plays out, if people are selling what they can, not what they should. Is it a fair statement that, you know, whether you're a value investor, you got a lot of liquidity, whatever? Like now is the time for people to start investing? Or there's certain metrics or data points that you guys are looking at where you're like, yeah, we're going to try to actually wait a little bit more because we think it'll only get worse. And, you know, there's not really true blood in the street. Like, how do you think about either timing markets, identifying bottoms? Or like, when should the people who don't, you know, they're not forced sellers?

• 8:23Speaker 00

  Like, when should they actually start to deploy capital? Or how do you like evaluate that from a framework standpoint? Great, great question. I think that's the the million dollar question. And there's a couple of ways, I think, um, as investors, we we can answer that question. My my general framework on when do you deploy capital in times like these? Is is it sort of ignore the nonsense about you buy when there's blood on the streets? That's that's wrong. In fact, you're proven to lose money if you buy when there's blood on the streets. It's called catching a falling knife. What typically works is you buy when you hear the sound of Federal Reserve ambulance sirens, you know, to clean up all the blood on the streets. And right now, the Federal Reserve hasn't even left the hospital. They haven't even gotten in the truck. And so that's my issue with in terms of, you know, buying assets at this particular juncture.

• 9:07Speaker 00

  We, I don't believe, at least according to a lot of the indicators we track, whether it be financial conditions, uh, whether it be credit spreads, you know, which are, you know, technically part of financial conditions. It's not, it's a belief that financial conditions have not tightened enough, uh, to, to warrant the Federal Reserve, you know, those, those paramedics leaving the hospital, getting in the truck and going to wherever there is blood on the streets. Um, you know, it's, you know, if you look at something like the Goldman Sachs Financial Conditions Index, which tracks credit spreads, the strength there, we strengthen the dollar, uh, sort of, you know, the equity risk premium, real interest rates, uh, and I think there's one more, uh, indicator in there, uh, but that, that index, you know, even as of today, or it'll be updated as of today, it'll get a little bit worse, but prior to this week,

• 9:48Speaker 00

  it was as loose and in terms of financial conditions being loose as it was at the peak of the dot com bubble. Like we already seen a 15% drawdown in the stock market and financial conditions were as loose as they were at the peak of the dot com bubble. So we've seen nothing yet from a financial conditions tightening standpoint. And this goes back to the comments I've been making on your show and on other shows for the last, let's call it four months, five months, which is, man, this is a Federal Reserve that is comfortable with pulling the rug out from under us from an asset market perspective. Now they're going to get uncomfortable at some point and that's when you want to be getting, you know, getting your cash ready to buy, to buy some things hand over fist. I mean, would love to see 28,000 on Bitcoin. I don't think we're going to get there because there's a lot of smart people like myself that are waiting on that level.

• 10:31Speaker 00

  But yeah, I mean, that's where you, that's where you take out both hands and, and, and back up the truck. So you've got these charts here, uh, that you sent over, uh, and some of it is this volatility risk premia, uh, and then you've got, also got this dispersion. Let's take the first one, this idea of crowding. Explain what this is, uh, showing us here. Yeah, absolutely. So this, this chart, in my opinion, is why we're seeing a lot of the pain that we're seeing today. In fact, together they do all. So I'll, I'll unpack. From both and so the chart on the left shows crowding and what we're doing, what we mean by crowding is uh it's we looking for extremes and options market positioning that we can take the other side of because those tend to be unwound uh in a pretty forceful way. And one thing we flagged in our morning note and our lead off morning note today uh for our clients of forty two macro

• 11:13Speaker 00

  was the fact that large swaps to the equity market, in particular the SPY, the Qs, size as a style factor and and pretty much every major style factor where all the market cap is concentrated sort of had a very deeply negative volatility risk premium. And so the in translating that in layman's terms, you know, you typically in these events like Federal Reserve or election events, typically investors build up these sort of large, short dated put positions into the event to protect themselves from that near term downside from that catalyst. Well, when the catalyst comes and goes, the dealers who sold those investors puts get to unwind those unwind those hedges, you know, the short futures contracts, short index, short equity contracts. Well, we got that unwind yesterday, but when you refresh the data as of this morning,

• 11:56Speaker 00

  it's like there's no more, there's no more of that positioning left. There's nothing left to unwind. And so now we just have to reassess and say, hey, look, what are the fundamentals? Um and so that kind of translates to the second chart, uh which shows our dispersion analysis. We're looking at month over month sharp ratios across fifty four US equity sectors, style factors and industries to get a sense of sort of um a a pod shop flows. These are the largest hedge funds. These are the hedge funds that control sixty, seventy, eighty percent uh of of the sort of equity market turnover on a given day. And what that what that analysis indicated to me in terms of the procicality of the composition of the upper quintile leadership, it signals to me that, hey, the hedge fund community

• 12:37Speaker 00

  already front ran the short squeeze that we would normally see after a FOMC event. In fact, we got a massive short squeeze um in the March FOMC, leading all the way up to the highs that we saw across most risk assets in April. Well, they already did that. And oh, by the way, if you go back and look at the left chart, we don't have any more sort of, you know, uh positioning left to unwind that could be bullish for the market. And this is exactly why the market is The bad here today for for lack of a better word. When you start to think about the Fed interest rate hikes through the end of the year, the market's still pricing in 2.75, 3% as kind of our end result. Do they get there? Can they hike that aggressively this quickly? Or will they have to call the dogs off at some point and and kind of just let it be?

• 13:21Speaker 00

  Yeah, no, they're going to call the dogs off. I assure you of that. This is a Federal Reserve that wants to talk tough and sound tough on inflation. Principally because I do believe just based on Jay Powell's characterization of how much the Fed cares about low to medium income consumers. Yesterday, I think this is a Fed that does care about the harmful impacts on inflation of inflation, right? Like you think about what the unemployment rate is, and it's causing pain and hardship for, let's call it three to 7% of the the economy at a time, whereas something like inflation, you know, really significantly harms, you know, 50, 60, 70, sometimes 100% of the economy. So these guys are very concerned about, you know, the impacts of inflation.

• 14:03Speaker 00

  But I also think this is a Fed that has some face saving left to do. Don't forget this, they're fresh off what is arguably the second worst call in Federal Reserve economic history. Right? Going back to 2006, I think Bernanke said we've arrived at a new normal volatility, a low volatility in 2006, which is probably worst call in finance history. But you know, this this transitory nonsense that we got last year, which is why we're in this position to begin with, is an issue. This Federal Reserve should have started hiking interest rates a year ago when the Biden administration passed that $2 trillion tax or $2 trillion spending package. We were dumping kerosene on top of an already overheating economy. And instead of sort of removing some of that that that policy accommodation in terms of the Fed's balance sheet and the interest rates,

• 14:47Speaker 00

  the Fed actually kept adding more kerosene to the bonfire. And so now we got this huge ass bonfire that the Federal Reserve is understanding that it's complicit in creating. And now they got to do something about it at the precisely the wrong time. When you think about the same Fed interest rate cuts, uh, you think they'll Cut interest rates before the end of the year? Ooh, that's a good question. Will they cut interest rates for the end of the year? No. They're only going to cut interest rates if the labor market gets to a bad enough place to cause to really, to really threaten their maximum inclusive mandate. We are probably a year to eighteen months away from that. The issue, the issue for markets now is that the economy is starting to slow

• 15:27Speaker 00

  at a place that tells the, the investors like me and tells business owners like myself and other business owners that we should probably stop doing stuff, stop investing, stop hiring. And that's what creates the bigger slowdown that we see, you know, coming in the, in the first half of next year. So my, my, uh, my bet is that they're going to cut interest rates, specifically the exact reason why you're saying it, which is, everyone right now is like, whoa, whoa, whoa, this is going to get really bad. I know multiple venture funds moratorium on investing. I know a lot of hedge funds pausing private investing or pulling back from, uh, from public markets. I know a lot of entrepreneurs are saying, hey, let's go ahead. Let's cut headcount. Let's stop spending here. Let's conserve cash. Let's do, they're just contracting, contracting, contracting.

• 16:09Speaker 00

  And because that occurs, they're going to keep hiking interest rates, which I think you and I agree through the summer. As they do that, all of a sudden midterm elections start coming. And I think that they're going to get way more pressure than we probably all are guessing from politicians being like, hey, we can't go into midterm elections in a recession. Are you guys crazy? Stimulate. And I don't think that they'll have the political will to get true like stimulus packages through. I think that we've seen them try to do some of this and it, and it feels like that's hard. But the Federal Reserve to just do one single 25 basis point cut as like a, kind of like a, like a gut check on the market of like, you guys thought we were going to just raise, you know, till, till the cows came home, if you will. Here's a little cut for you just to kind of get everyone back going again.

• 16:55Speaker 00

  Which like, I don't know how abnormal that would be. Or if it's just like, yeah, like that's kind of the game they play here, right? It's like, they do have to play this game of like short-term decision-making because the market may not listen to what they're saying to some degree. Yeah, the market's way out ahead of them. Again, this is. The Federal Reserve, that's a year late to doing all the stuff that they should have done a year ago. Right? So the Fed is basically stuck in May of 2021, where the markets are in May of 2022. Right? And so the, you know, the Fed is, is, is literally responding to the economy the way I would have suspected they would have responded a year ago. And so they're going to be late to pivot to cut interest rates. They're going to be late to, to stop. They got at first, they got to start quantitative tightening that starts next month.

• 17:39Speaker 00

  They're going to ramp that up and probably have to ramp it back down, you know, three to six months later. Yeah, I, I think there's a, don't forget though, there's a cadence to this. You had to respect the X axis when it comes to the finance economics. You know, it's not like we're going to go from above potential above trend growth, you know, as recently as, you know, March, April to below trend growth as quickly as, as something like July or August. But now that we're going to go to below trend growth by the end of the year, the early part of next year. And the path to getting there is what's scary for markets because you don't know what that terminal downside is. Especially with the Fed pulling, pulling away the rug on accommodation. Are you changing anything in your portfolio, uh, given the last, you know, two weeks or so? Not a damn thing. I just tweeted out, uh, uh, I am now up 1% year to date. It is the hardest 1% I've ever generated in my entire career.

• 18:25Speaker 00

  Uh, but I'm proud, very proud of that. Uh, because I'm, you know, look around, there's not a lot of things uh, that aren't down double digits here today from an asset class perspective. So, uh, no, we're definitely not changing anything. Uh, if anyone wants to go check out where we're, what's, we're long and short in that portfolio construction, uh, just check us out at 42 Macro. So May 5th is when we're recording this, uh, you're up 1%. As you said, most portfolios are down double digits, uh, many of the, the large hedge funds, et cetera. Uh, what has been the biggest driver of that 1% return? Is there like a specific asset that, that has kind of outperformed everything else and, and really kind of kept you positive? Yeah, we got lucky on, on, uh, you know, you put yourself in a position to get lucky, um, in terms of your process, but

• 19:06Speaker 00

  you know, we got lucky on a few, sort of catching a few commodity trades. Um, you know, I think we were a little bit later to the party on commodities and some analysts, you know, I think of Lynn Alden, uh, comes to mind, really great analyst out there. Uh, Tony, Tony Greer over at TG Macro, uh, they were riding this commodity bull for, for, for much longer, uh, than I. And so that's been a nice positive attribution. We definitely made some, we traded well as well. We made, we sold, you know, we sold the highs at equities a couple of times this year. You know, we've made some good shorts at those highs for a couple of times as well. So the timing associated with the trades, not just the exposures, but the actual execution of getting in and out of some of the exposures has been helpful. But let's not, let's again, let's not celebrate like 1% actually

• 19:48Speaker 00

  means anything in the grander scheme of things. It's just not down 15 to 20 like a lot of folks are. And that's a testament to the process. So when you think about this, it feels like some of those trades, I don't believe in luck. I think that luck's a psychological concept and probability, obviously it's the mathematical one. But when you think about the commodity trades, is that a place where people are going to have to continue to look for alpha moving forward? Like, there's just so much volatility in commodities that that's going to be probably the most important place to look? Or do you think that the equity market will remain kind of the main focus for most investors? Yeah, so this is, we are now in an era where the

• 20:29Speaker 00

  the likelihood that inflation makes higher highs and higher lows at each subsequent cycle is greater than the likelihood that it makes lower lows and lower highs. We've been in a pattern for the past 40 years of inflation making lower highs and lower lows, and that's dragged bond yields down. It's dragged equity valuations up. And so you've had this perfectly good Goldilocks type scenario from a strategic asset allocation perspective to be long, you know, the 60-40 or some version of that, depending on what target date fund you're in. We are no longer in that, in that regime. We're in a regime where the bond yields are likely to rise, you know, structurally over the next, you know, it's called 10, 20 years as a function of that, that change in the pattern of inflation. Now, that doesn't mean bond yields are going to go up significantly from here. They're going to continue to cycle associated,

• 21:14Speaker 00

  you know, in terms of where we are in the growth inflation cycle and liquidity cycles. But that just means you're probably going to see a higher low in bond yields relative to what we saw in March of 2020. You know, in terms of where we bottomed bond yields in this down cycle that we haven't really started. Yet for bonds, we certainly started it correctly. Yeah, it's fascinating to kind of think through the ramifications of this. For people who want to know how the hell you got 1% positive return, or kind of how you guys are thinking about what's coming next. Where should we send them to find you or find some of the research you guys are putting out? Yeah, no, let's be clear that the 1% is just treading water until we get to an opportunity to buy some things, right? We are, like I said, I've been saying this every week on the show. We are not yet at the point in time where you really want to be making big asset allocation bets

• 21:58Speaker 00

  and backing the truck up and stuff. I think we're going to get one of those opportunities at some point, let's call it the next six to nine months. Maybe even sooner if the Fed really bothers it, but I think sometime between the next six to nine months, we're going to take that, you know, 50% plus cash we have in the 42 macro portfolio and put it to work. It'd be no different than putting it to work in March of 2020 or December 2018 or March of 2009. You've got to be strategic about these moves and you can't kill yourself and blow yourself up along the way so you don't ruin those opportunities. But check us out at 42macro.com. I'm on Twitter, 42macrodeel. Appreciate being on the show. Catch you back next week. My friend, you're killing it. Just keep doing exactly what you're doing. You're my favorite Wall Street analyst. It's not because we're friends. You just get it.

• 22:40Speaker 00

  So I appreciate the work that you're doing. Anyone who isn't yet subscribed, go check out 42macro.com and we'll talk to you next Thursday. Appreciate you, brother. Thank you so much, man. I see you guys. 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.