The Pomp Podcast - #1237 Darius Dale | Will Bitcoin Crash Before The Halving?

Starting point is 00:00:00 what's up everyone this is anthony pompliano many of you know me as pomp you're listening to the pomp podcast which is my effort to find the most interesting people in the world and sit with them for hours while i ask questions in an effort to learn so it would mean the world to me if you would subscribe to the show on your favorite audio platform watch episodes on youtube and tell your friends and family about the podcast my goal is to help millions learn from the world's most interesting people. So let's get into today's episode. Darius Dale is the founder and CEO of 42 Macro. They're one of the best analytics firms that I've found in the research space on Wall Street. In this conversation, we talk about their macro weather forecast, and then we also break

Starting point is 00:00:43 down Bitcoin and the pre-halving cycle. I always enjoy talking to Darius. I learn a ton and today is no different. Here's my conversation with Darius Dale. This episode is brought to you by Auradine. They're a brand new startup led by a number of Silicon Valley legends who just raised $81 million to build the future of internet infrastructure. You're probably wondering what that means. Let me explain. There are numerous new disruptive technologies that are being adopted simultaneously from blockchain to artificial intelligence to zero knowledge technologies. In order to ensure that these technologies thrive in this new world, we need new infrastructure, and that is where Auradine comes in. They just launched their first product line called

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Starting point is 00:03:50 All right, guys. Bang, bang. I've got Darius here with me. Darius, I thought a great place for us to start is you guys have this weather model. Explain what is the weather model and why is it so important to all the work that you guys do over at 42 Macro? Yeah, absolutely. Thanks again for having me on, Pomp. Always a pleasure to be here. So the number one thing that our weather model helps us do is to infuse volatility targeting into our dynamic position sizing process in terms of the asset allocation and factor exposure recommendations that we make for our clients. So it really does help us understand what the macro regime is and what these other key macro market drivers are and how they have historically influenced asset markets so that we can have a forward looking real time now casted Bayesian overlay to what's actually happening out there. So I'll give you a quick rundown in terms of what the model is currently seeing. We'll start with our real economy cycles.

Starting point is 00:04:36 So on the growth side, we have growth trending higher, is expected to trend lower over the next 12 months when you sort of source or ask the wisdom of the crowd across all the Wall Street economists. When you look at inflation, it's trending lower. It's expected to continue trending lower over the next 12 months. Employment, the unemployment rate's trending lower. It's expected to trend higher over the next 12 months. You typically don't see a 90 basis point rise in unemployment rate outside of a recession.

Starting point is 00:04:59 So that's economist consensus, you know, implicitly forecasting a recession there. With respect to corporate profits, the implied sales growth rate is trending lower alongside the implied earnings growth rate. That's neither of those numbers is particularly draconian. When you look at fiscal policy, which is something we've been talking about all year in terms of what's been, you know, one of these incrementally supportive aspects to the economy. You know, the fiscal sovereign fiscal balance has a percent of nominal GDP. That number is trending lower in that eight point four to eight point five percent range. That's a record non-war, non-recession budget deficit in the U.S. economy. So clearly getting a lot of fiscal support for the growth side.

Starting point is 00:05:36 But obviously, it's keeping inflation elevated relative to the Fed's target. The real effective exchange rate has been trending higher, though I suspect it may start to trend lower if we start to get worse inflation outcomes over the next three to six months. And so when we transition to the right side of the page, which are the financial economy cycles, we'll start with our 42 macro net liquidity model. We've talked about that before. That's the Fed's balance sheet minus the Treasury General Account and the Reversible Facility Balance. That number has been trending lower.

Starting point is 00:06:01 Our global liquidity proxy, which we touched on last week, which is the global central bank balance sheet plus global broad money supply plus global FX reserves minus gold. That number has been trending lower for a while now as well. When we look at credit through the lens of domestic and global broad money supply, those numbers are trending lower. Those are both zeroth percentile values in their respective time series. You typically don't see broad money supply contract outside of the Great Depression. We don't have monthly statistics for that to compare, but we do know that it did contract, albeit modestly, in the Great Depression. Interest rates, benchmark policy rates, that's been trading higher. Obviously, the Fed may hike one more time.

Starting point is 00:06:36 It's kind of a 20%, 30% chance of that, although that number has probably gone down in the advent of these tolls data today. We have the two-year nominal yield spread versus the benchmark policy rate. That number has been trading lower. It's pricing in about 50 basis points there. in terms of aggregated U.S. dollar positioning. We use that as one of our fear components to track how much fear is embedded in the market positioning. That number is neutral in terms of the minus 12% non-commercial net length as a percent of total open interest. Aggregated U.S. rates positioning is an extreme bearish positioning. And then on the greed side,

Starting point is 00:07:06 we look at aggregated commodities positioning across all the 19 components of the CRB index. That's an extreme bearish position. And then lastly, U.S. equities is a neutral signal at minus 3% net short in terms of overall non-commercial net length as a percent of total open interest across all equity instruments. So when you look at this, what is it telling us kind of on a net basis in terms of that liquidity, but also what is it showing us in terms of these asset prices? And one of the things that I find fascinating is that obviously inflation has come down. We now see the Fed talking about, well, maybe we still need to go ahead and continue to hike interest rates. What is this actually showing us in terms of what they're likely to do versus

Starting point is 00:07:45 what they may be saying. Yeah. So there's two really important things that investors should take away from this table as it relates to what to do with their portfolio. And again, we refresh this every morning for 42 Macro clients. So number one is what the three-month outlook, the rolling three-month outlooks for the particular asset class. And what that's trying to do is project excess dispersion relative to the baseline of results that we've historically experienced in the asset class. And so this current constellation of signals of which each these 20 features contributes independently to each independent asset class signal right now this sort of current constellation is saying hey this is a neutral time to be long the stock market

Starting point is 00:08:22 you know relative to history and right now it's a bad time to be long the bond market relative to history it's a bad time to be long the dollar relative to history it's a bad time to be long commodities relative history and it's a bad time to be long bitcoin relative to history and what i mean by relative to history is you typically experience more volatility realized volatility larger drawdowns when you're in a bearish three-month outlook condition in this model we have back tests going all the way back as far back you know at least 25 years for each of these asset classes and when you're in a neutral setting you kind of have this you know pretty normal you know path glide path for the asset class and then when you're in a bullish setting you have you know sort

Starting point is 00:08:57 of positive excess return dispersion negative um dispersion with respect to volatility so it's like a great time to be invested in that particular asset class the second thing i think investors should take away from this table is what how's it how does this table imply from a factor dispersion perspective and so as you see at the bottom there in the middle we are currently in the goldilocks grid regime that's where a situation where if you look at the top left again that's where growth's trending higher and inflation is trending lower that's historically been the best asset the best of the regime for you know equities risk assets bitcoin etc uh so that's uh that's something to be note and to take note of in terms of your you know how you lean from a factor dispersion

Starting point is 00:09:34 perspective, it's a little bit more relevant for our hedge fund clients, but certainly is important for our retail investor clients as well. And then the condition on that Goldilocks regime is medium. And the reason it's only medium as opposed to high or low is because only one of the factors, growth and inflation, is confirming the actual regime. So as you can see, the implied next 12 month real GDP delta is pointed lower. The consensus economists expect GDP to be 180 basis point slower in a year from now than it currently is today. And so it's effectively saying, hey, look, growth's trending higher right now, but it's probably going to trend lower over the next 12 months. But you're getting confirmation from the implied delta on inflation. So that's why it's a

Starting point is 00:10:16 medium. If you were getting a double confirmation from growth and inflation, it'd be a high conviction Goldilocks regime. You feel very comfortable going all in, particularly on asset classes that have a bullish signal. And then a low conviction Goldilocks regime is when you have zero of the of the two growth and inflation features confirming the current the current setup so now when we think about kind of this setup that we're currently experiencing one of the assets that a lot of people who watch and listen to this screen care about is bitcoin you've got the breakdown of kind of these pre-halving cycles through a number of the previous halvings and then obviously the the bull markets that ensued what are you showing here when you kind of go through

Starting point is 00:10:51 each one of these pre-halving cycles yeah absolutely so i i think we you and i had a conversation about this i want to say back in the spring or late winter early spring about sort of the volatility that Bitcoin tends to exhibit in the years leading up to halvings. Obviously, halvings tend to be very positive from a structural basis for the asset class. But there is a lot of, you know, the road to getting to that halving has historically been quite fraught. And so, you know, on a median basis, when you look at the November 2020-2012 halving, the July 16, 2020-2016 halving, and then the May 2020 halving, you know, what you see in the year leading up to those halvings is that we tend to see a median, at least a number of

Starting point is 00:11:28 drawdowns of consequence, which is at least 20% in our scoring. You tend to see on a median basis, three of those drawdowns and the drawdowns on a median basis across all the halvings. And there's total, I want to say there's about five to 10, or sorry, about eight to 10 of those total halvings. The drawdown on a median basis is minus 27%. So that's a long-winded way of saying you can expect to see about three drawdowns of 27% or more in a pre-halving year. And so that's something we want to make sure investors are aware of. Obviously, we had a loss of volatility in Bitcoin late last week. It's being reversed a little bit, obviously, on the jokes data we're getting today. But generally speaking, I want investors to be very aware that, hey, look, as we get into the

Starting point is 00:12:09 fall, we get into the spring, we get into the first half of next year when we still think a recession is the modal outcome for the US economy, albeit in a flat distribution of outcomes, you could still see some volatility in the Bitcoin price leading up to that halving that we're also equally anticipating. Now, what's fascinating to me about this is you're talking about multiple drawdowns of over 20%, kind of this 27% kind of being that median, but still the cumulative return in the year leading up to the halving is 140%, kind of this run up into the halving. And that's before you get to kind of what most people would think of as the bull market that really kicks off and we've seen hundreds of percent. How do we evaluate whether we should

Starting point is 00:12:48 anticipate that 140-ish percent or so kind of cumulative return in the year before the halving to occur this time versus not occur? Are there certain signs that we can look at that increase or decrease the probability of it repeating? Yeah. So the number one feature of my perspective is a trend higher in the global liquidity cycle. You typically see global, particularly in the November, 2020, 12, and to a lesser degree, you know, July, 2016, pre-having period, you had the global liquidity feature and asset markets really, really rising pretty, pretty substantially. You know, I want to say liquidity bottomed in 2020, 11, and really started to rise linearly from there from a global, in terms of our global liquidity proxy, it bottomed in early 2016 and

Starting point is 00:13:30 really was rising linearly from there. Oh, sorry, in late 2015, rather, and was rising linearly from there in terms of our global liquidity proxy. You just didn't see that in 2019. We had pretty draconian liquidity conditions throughout 2019. And obviously, we saw the worst of the pre-halving drawdowns in that instance at minus 48% and 53%. And then the cumulative return leading into the halving in that particular cycle was only 20%. So I do believe the liquidity feature in asset markets is going to play a key factor in whether or not we can have a very positive cumulative return despite having a decent amount of volatility as opposed to and it's kind of going to meander really from where it kind of petered out in in april uh earlier this year uh with a

Starting point is 00:14:14 lot of volatility ahead you know we still think bitcoin's headed much higher over the long term you know i think i've done as much research as anyone in terms of trying to migrate institutional investors from thinking about 60 40 in terms of their you know kind of rea and retail type client flows to something that looks more like 60 30 10 because i don't believe that we are in an era where you're going to get paid for taking long-term duration risk in the bond market. I'll throw a couple of stats out to kind of include the program, which is we're still in a world where you still have deeply negative term premium. And for those of you who may not be familiar with that bond market statistic, term premium is what the excess return you get for

Starting point is 00:14:56 locking in your money for, let's say, 10 years, 20 years, 30 years, as opposed to constantly rolling over T-bills for that amount of time. It's a statistical process to determine that in terms of what's priced into the market. But right now, if you go back and you look at the long-term time series history of term premia, it's around 150 basis points plus 150 basis points. So you typically get basically paid to take duration risk. Right now, it's negative. It's negative 50 basis points. And so just going back to the average could take you 200 basis points higher in the 10-year without having any change in growth and or inflation expectations in terms of how bonds are priced. So to me, that's a really worrying sign in the context of our secular

Starting point is 00:15:37 inflation model, which I believe we talked about maybe last year or so, projecting the underlying trend of core PCE at 3% their cycle, 2.5% to 3% in terms of that range, as that's way higher than it was in the previous decade, which is around 1.6%. So, and more importantly, 2.5% to 3% is above the Fed's 2% inflation target. And so if they don't change their inflation target, which we happen to think they will in the next couple of years, if they don't change their inflation target, they're going to be constantly fighting the treasury market, constantly fighting asset markets from the perspective of its interest rate policy, from the perspective of its balance sheet policy. We just don't think that's politically palatable in a fourth turning. So I've talked

Starting point is 00:16:14 maybe a year ago about them changing that inflation target from 2% to 3%. And I said, look, I'm not saying that they're going to do it immediately. I'm not saying that they're going to 100% do it, but there's an increased odds that they're going to do it. People literally laughed at me. They said I was stupid. All kind of the critical views that you get from the intelligent internet. Now I'm seeing op-eds in major publications. I'm seeing people talk about this more and more. How do we think about handicapping? What are the odds that they're actually going to increase it? And would it be like a 2% to 2.5% increase? Or could it be like a 2% to 3%, 2% to 4% type target increase on that inflation number? Yeah. So I think, I mean,

Starting point is 00:16:50 central bankers and policymakers in general particularly those in western major western economies that you know some like the fed where everyone's constantly eyeballing it every single day and scrutinizing every decision that it makes i don't think they're going to make a big change overnight it's probably going to come in two phases we're going to be comfortable with inflation settling out above two percent and then officially when the unemployment rate is high enough and we have enough political pressure for the fed to step in and have capitalized you know these record budget deficits that we spoke about earlier then they're going to be able to say hey i think three percent is a new two right think about this jackson hole 2024 jackson hole 2025 they're

Starting point is 00:17:26 going to say yeah we're fine with it you know meandering above two percent it'll eventually get back to two percent eventually and then you know assuming the unemployment rate is is cooperating at the time maybe you get the jackson 2025 jacksonville 2025 or jacksonville 2026 that's when they just throw in the towel and they say okay three is the new two because moving from three to two or so yeah two three from two will allow them again to do qe and to lower their interest rate policy and ultimately the big the big issue of our day is the just the unfettered you know fiscal deficits as far as the eye can see with no recession projected which obviously is a pretty ridiculous thing to project if you're talking about 10 20 30 year budget forecasts

Starting point is 00:18:06 we're talking about 1.5 to 2 trillion dollar budget deficits as far as the eye can see with under no change in tax policy they're supposed to be a pretty big change in tax policy in january 2025 with the expiration of the tax cuts and jobs tax cuts but those aren't going anywhere we know nobody's going to remove those once you give people handouts in a fourth turning not only do they clamor for they want those handouts to remain but they're going to clamor for more handouts and so we know we're headed down a you know kind of a dark rabbit hole of populism that's just part of the part and parcel of where we are in terms of the longer term generational cycles that my former colleague uh neil house kind of you know introduced us all to

Starting point is 00:18:41 It makes complete sense. Darius, where can we send people to find you on the internet or find out more about 42 Macro? Yeah, I appreciate that, Bob. So come check us out, 42macro.com. We're actually relaunching our website and I didn't want to say next week or two weeks from now. So definitely come check that out

Starting point is 00:18:54 because I think everyone's going to really enjoy a lot of the education that we're going to put out there for the broader audience as well. And then in the meantime, check us out on Twitter, 42 Macro Weather is my public Twitter handle. Awesome. I appreciate it always. I learned something.

Starting point is 00:19:07 Today's no different. We'll definitely do it again in the future. Absolutely, brother. Thanks again, man.

The Pomp Podcast - #1237 Darius Dale | Will Bitcoin Crash Before The Halving?

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