The Pomp Podcast - #1279 Darius Dale Reveals Bitcoin Strategy

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. This episode is with Darius Dale, the founder and CEO for 2Macro. In this conversation, we talk about their all-weather model, and then we even go as deep as understanding the KISS portfolio construction methodology.

Starting point is 00:00:43 Darius is one of the best minds in macro, and he has a ton of very, very wealthy, very sophisticated clients, and he pulls back the curtain on exactly what he is advising them on, how they think about creating those portfolios, and what are some of the inputs to the risk models that they look at in order for people to better navigate markets through all different parts of the economic cycle. Here is my conversation with Darius Dale. 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

Starting point is 00:01:23 strategy, but only as an expression of his personal opinion. This podcast is for informational purposes only. Today's episode is brought to you by Base. Base is making it their mission to bring a billion people on chain. What exactly is Base? It's a layer two offering a seamless experience for both builders and users. With near zero gas fees and rapid transaction speeds, Base is shaping the future of the on-chain world base is a canvas for everyone with hundreds of apps in the ecosystem whether you're an emerging creator a seasoned developer or someone exploring the on-chain space for the first time base is designed to bring your ideas to life so if you're looking for a platform where the future of on-chain is being built daily base is your destination

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Starting point is 00:03:15 It takes most people 20 to 30 minutes to complete their estate plan with Trust and Will. And not only that, but if you go to trustandwill.com slash pomp, you'll get 10% off. Plus, you'll get free shipping of all your estate planning documents. So go to trustandwill.com slash pomp and make sure you get an estate plan in place. Whether it's for you or one of your loved ones, having a trust and or a will can literally be the difference between someone being taken care of and someone not. Go check them out today at trustandwill.com slash POM. All right, guys. Bang, bang. I've got Darius here. He is suited up, ready to go. Got the tie on. Must be an important day, obviously. Let's start with the KISS portfolio construction method. It's

Starting point is 00:04:01 something you guys have helped to pioneer and I think is showing now why it works. But talk to us about KISS and what exactly that means. Yeah, I appreciate that, man. Thanks again for having me on. Ties on for now for the institutional client meetings, but for your party later, we'll keep the ties off for that. Still looking forward to that, man. Thanks again for the invite. So in terms of our KISS portfolio construction process, this is our flagship portfolio construction process that we market and maintain for clients of 42 Macro. It was really born out of our pivot to transitory Goldilocks back in January, where we decided to stop shorting assets altogether. Actually, we had quite a tough Q4 last year, kind of getting squeezed and

Starting point is 00:04:42 ultimately went to the drawing board and really tried to lean on some of the kind of core institutional learnings that I've developed throughout the course of my career in terms of developing this process. And what it's ultimately designed to do is help investors, your traditional money managers, traditional investors, regular retail investors, outperform 60-40 over the long term by introducing trend following elements into that strategy, and more importantly, introducing a permanent allocation to Bitcoin as a traditional asset class in that strategy. Now, when you do this, you don't just create something out of thin air and say, we think it works. You obviously backtest. You go and you try to figure out

Starting point is 00:05:22 how effective has this actually been. Talk a little bit about the backtesting and what those results really have shown? Yeah, a hundred percent, man. Absolutely. So this thing's been rolling live since January. Obviously when we backtest anything here at 42 Macro, it's all with all the understandings and the understandings of what the proven quantitative techniques are in the business. And ultimately everything we construct is on an out of sample basis in terms of backtesting. But there's just a couple of highlights I throw at you in terms of our KISS portfolio construction process. So KISS, which is again, a 60-30-10 portfolio construction that features SPY as the equity portion, AG as the fixed income portion, and BITTO, at least for

Starting point is 00:06:01 now until we get a Bitcoin ETF, which we think is likely to be approved in the coming months for now as the Bitcoin allocation, which allows, again, retail investors, traditional RIA type investors, and family offices really to gain access to what we believe are positive diversification benefits for Bitcoin as an inclusion in that asset class. So just going back to performance, we actually have a chart I sent to you. You can throw it up on the screen for production, where we show the hypothetical performance of $100,000 portfolio since January 2018, both on a raw basis, but also in terms of the performance over industry standard reporting horizons. And what we find is that KISS, as it's currently constructed, featuring our trend

Starting point is 00:06:44 following elements, as well as our top-down and bottom-up risk management overlays, which we'll talk about in a second, has a Sharpe ratio of about 0.9, which is more than double, which is about double 60-40 or the double the sharp ratio of just being long 60-30-10 SPY, AG, Bitcoin in isolation without those top-down and bottom-up risk management overlay elements. If you look at the chart on the right, you see that KISS, our portfolio construction process, which is our flagship asset allocation process here at 42 Macro, is outperforming 60-40 on any relevant duration and even outperforming the 60-30-10 raw approach on any relevant duration and sense exception. And then one thing I would say I'm most proud of is the max drawdown statistics,

Starting point is 00:07:27 the risk management statistics, because again, it's not enough to just being able to be long assets. Any monkey with, you know, a blind monkey with, you know, peanut butter on its hands could be long assets. It's about keeping the money you make in asset markets and having money to invest for the next cycle. And what we find is that, you know, in these back tests, you know, the max drawdown for our KISS, our flagship KISS portfolio construction process, which again includes 60, 30, 10 SPY, AG, and Bitcoin, and top-down and bottom-up risk management overlays therein, the max drawdown for that process is only minus 10%. And there's only one double-digit drawdown that minus 10% since the beginning of 2018. You compare that to 60, 40, the MAC, they've had three

Starting point is 00:08:06 max drawdowns in 6040 since the beginning of 2018, that eclipsed minus 10%. There's a minus 12.5% drawdown in Q4 2018. There's a minus 22% drawdown in COVID. And there was a minus 22% drawdown at the lows in October of 2022. And then that also compares our minus 10.6% max drawdown statistic compares extremely favorably to the 603010 raw push, which takes that 603010 SPIAG Bitcoin allocation and does not include our bottom-up and top-down risk management overlays. And there's been three crashes in 60-30-10 raw Bitcoin, SPI-AG Bitcoin over the past five to six years. It crashed in Q4 of 2018, it crashed during COVID down 23%, beat the trough, and then it crashed in 2022 down 25.3%. So the kind of quick summary is that if you're going to add

Starting point is 00:08:56 Bitcoin as a serious investor, as a traditional investor into your asset allocation approach, It obviously pays to have systematic, thoughtful, quantitatively oriented risk managements to guide that process along the way and smooth out those returns. Now, when you talk about risk management, one of the things that's really interesting is everyone notoriously is long when they should be short and short when they should be long, right? Risk management is very, very hard when it comes to just the economic machine, different asset classes, different geographies, different rate environments, and the complexity just grows from there. You all have this macro weather model that you're really using to try to understand all these different inputs. Talk a little bit about how does that model work? And then what are some of the things that you guys pay attention to that may tell you, hey, now is some time we should be paying attention to some sort of risk management, whether top or bottoms up? Yeah, great question, man.

Starting point is 00:09:49 And so, yeah, we absolutely. So our weather model, macro weather model is one of our flagship models that we use here at 42 Macro to help our primarily institutional investor client base understand the, you know, the rolling three month forward excess return dispersion environment and volatility environment across asset classes. And we ultimately use that information to construct target allocation sizes in that kids portfolio construction process. And so what this what this model is designed to do is actually regime segment all of the principal components of macro, whether you look at the oil economy cycles between growth, inflation, employment, corporate profits and fiscal policy, or whether you isolate the financial economy cycles, looking at liquidity, credit, interest rates and positioning. And it's designed, again, to regime segment each of those core features of the economy and asset markets and ultimately project the excess return and volatility characteristics that those regimes, you know, currently currently project into each asset class. And so, you know, kind of just a quick summary of the model right now, based on the current constellation of signals, as is indicated by the component features in the model, things like our net liquidity model, which is so popular across global Wall Street, that balance sheet, TGARP, yada, yada, yada. our global liquidity proxy, which will soon to be very popular across global Wall Street because that's a better model. Things like growth, things like inflation, the fiscal deficit, aggregated positioning in the treasury market. There's all these different features in the model

Starting point is 00:11:11 that are each contributing independently to the excess return dispersion projection for each asset class. And right now, what the model is saying is that over the next three months in the stock market, an investor is right to expect higher returns and lower volatility relative to baseline return and volatility profile for that particular asset class over the next three months that condition is shared by the bond market and that condition is also shared uh by the by the bitcoin market as well the dollar commodity signals are neutral and and and so going back to our case portfolio construction process you know how we implement these weather model signals into that process is visit the top down risk management overlay actually if you throw that

Starting point is 00:11:50 first chart back up on the screen where we show you know if the weather model signal for the stock market for instance is bullish the target exposure for the spy is 60 percent if that weather model signal for the stock market is neutral the target exposure for the spy is 50 percent and the weather model signal for the spy is bearish for the stock market is bearish and the target exposure for the spy in this 60 30 10 kids portfolio construction process is only 40 percent and so we accordion the sizes of those target exposures up and down based on the rolling three-month forward return and volatility projections as indicated by the signals generated by our macro weather model now let's talk liquidity management because i think this is another big piece of it obviously

Starting point is 00:12:31 uh when we look at short-term treasuries and things like that people are constantly trying to figure out should i be holding cash should i be holding treasuries since there's some other asset that i could hold um liquidity how do you think about it and what are exactly people doing inside of this portfolio yeah great question bob so there's a two thing there's two types of liquidity right there's the liquidity in your portfolio you know in terms of the cash you have in your portfolio that allows you to buy more assets um obviously if you're maxed long in any given time you're not unable to do so unless you have new cash injections and then there's the liquidity that tends to drive asset markets higher and lower over the you know medium and long term

Starting point is 00:13:06 in terms of things like central bank liquidity private sector liquidity coming from commercial banks or non-bank market participants or whether it be risk quiddity that we uh see you know spill over into reserve treasury markets vis-a-vis reserve managers so uh those are two types of liquidity uh the first the second type of liquidity i.e you know net liquidity global liquidity the stuff that's currently helping bitcoin accelerate uh in price uh is obviously being captured again by our weather model signal uh which is ultimately being you know influencing um you know the excess return dispersion volatility projections uh from that from that uh from that model uh the bottom up risk management overlay in our case 60 30 10 kiss portfolio construction process which again

Starting point is 00:13:43 features bitcoin as a core element um is is really born out of what we call our volatility adjusted momentum signal uh so that's just fast a fancy you know mailman yo lingo for saying hey we use a volatility overlay to give us a better opportunity to project whether or not the current conditions in momentum are likely to be sustained over the medium term and right now if you look at um you know the charts prepared for you uh the spy spy etf which again that 60 30 that 60 anchor in that 60-30-10 approach is currently bullish from the perspective of our volatility adjusted momentum signal. And so the actual exposure vis-a-vis the bottom-up risk management overlay in this KISS portfolio construction process equals 100% of its

Starting point is 00:14:23 target allocation, which we said earlier is currently 60% because of that bullish weather model signal. The actual exposure for the ag ETF is also equivalent to 100% of its target allocation because, again, the ag ETF is bullish in so much that the Bitcoin ETF is also bullish as well. So each of these core components of our 60-30-10 portfolio construction process are currently bullish from the perspective of volatile adjustable minimum signal, which means we are, from a dynamic position sizing perspective in terms of our trend following approach, we are at max long exposure from a dynamic position sizing perspective. If any one of these ETFs went down to neutral, then those positions will get cut in half from the perspective

Starting point is 00:15:04 of that dynamic position sizing process, and any one of these ETFs broke down to bearish from the perspective of that volatility adjusted momentum signal, we'd see that dynamic position process cut those positions to 0%. And what that's designed to do, Pomp, is help investors who are investing alongside our KISP portfolio construction process. It helps them maximize upside capture in bull markets, which we are currently doing for our clients all around the world, thousands of investors around the world here at 42 Macro. But it also, the top-down and bottom-up risk management overlays helps them minimize downside capture in bear markets by taking down their target allocations when the macro weather model is saying, hey, you know, they're poor, they're

Starting point is 00:15:43 bad times ahead for each independent asset class, or when the bottom-up risk management overlay kicks in and says, okay, this particular exposure is telling you that there's more left tail risk in the months ahead based on our volatility momentum signal. So it's a complex process, but it's not a complicated process because it's extremely easy to implement as a retail investor or an REA investor, because you're only talking about ever having to risk manage three ETFs at any one time. My last question for you is I think the question on Wall Street right now. Jerome Powell, he's got two fingers, increase rates, decrease rates. Which one's he going to hit? Are we going to get the Bill

Starting point is 00:16:23 Blackman Q1 rate cut. The market's pricing at 100% by the end of Q2. Bitcoin folks, the crazies on the internet, they're all buying Bitcoin because they think rate cuts are coming like tomorrow. What happens and when should we expect to kind of see lower rates coming to the market? Well, the low rates are already in the market, right? If you look at market applied projections, as you mentioned, whether you look at overnight index swaps or Fed funds futures, there's a tremendous amount of policy rate easing price into 2024. Obviously, we're going to get to a overwhelming consensus on this sort of soft landing expectations in the market. And the reason we believe markets have coalesced around the soft landing expectation is because stocks or bonds

Starting point is 00:17:04 are going up at the same time. If you had a no landing expectation in the market, you'd see stocks higher, bonds lower. If you saw a hard landing expectation in the market, you'd see bonds higher, stocks lower. So the mere fact that both asset classes are positively correlating still tells you that investors are currently really centrally betting on a soft landing as that central base case. In our opinion, as investors, I think the average investor spends entirely too much time predicting and positioning for outcomes in the economy and not nearly enough time reacting to changes in asset markets and changes in the economy as a result of a systematic investment and research and risk management process. That's what we specialize in at 42

Starting point is 00:17:44 Macro. We don't specialize in saying, hey, the economy is going to soft land, therefore you must do this. We think that's a terrible way to invest. And it's more than likely the reason why so many investors have really not made any money over the past few years, despite having several very important and awesome opportunities to make money, as indicated by that transitory Goldilocks call we pivoted to in January. So in our opinion, I think that to answer your question, it doesn't really matter whether we go into a soft landing, a hard landing, or no landing as an investor. As an investor, what matters is, are you positioned properly for rising expectations of a soft landing? And does that process that allowed you to position properly for that, will it get you out

Starting point is 00:18:23 with a minimal degree of downside risk at the appropriate time once that soft landing expectation crescendos into a consensus and starts migrating to something else? And in our opinion, under having processes in place to do what I just said, it's way more important than predicting the future, which is why a lot of you watching continue to underperform the broader beta in the markets. Now, I remember seeing a study by Bloomberg that whenever we see soft landing articles spike, the number of them, usually that is followed very quickly by a deep recession. And so we've seen the spike. Will that hold here or how are you thinking about it? Yeah, no, I mean, look, the probability of a recession in the U.S. economy and materialize over the near term has risen in recent weeks, you know, as indicated by some of the indicators that we track, specifically our 42 macro Fab Five recession signaling indicators. one of those indicators in the last couple of weeks has breached its recession signaling

Starting point is 00:19:15 threshold. So we went from a, you know, call it a low probability of a near-term recession to a middling probability of a near-term recession. You don't have to overreact to that as an investor because what we found in our backtesting and just in our terms of our qualitative analysis of the U.S. economy and financial market cycles is that the market tends to peak pretty coincident to maybe slightly ahead of the breakout in jobless claims, the breakdown in total employment. So you don't need to put on a recession trade, you know, like a year too soon like a lot of the guys who've not made any money on wall street for the past you know 12 to 18 months um so the reality is you know we you the market and the economy and economic statistics

Starting point is 00:19:51 will give you an opportunity to get out um ahead of a recession might not get out at the exact high but our goal as investors should never be you know top taking and bottom taking asset markets what we're trying to do is help investors capture the maximum amount of trend in bull markets and absolutely you know be away from and not and not capture any of that trend uh in bear markets and And I think we're doing a fantastic job, if only because our research and risk management processes are so different than the average investor. That makes sense to me. Where can we send people to find you on the internet or find out more about 42 Macro?

Starting point is 00:20:20 Yeah, thanks, Bob. I appreciate that, man. So yeah, we're at 42macro.com. Definitely come check us out at DariusDale42 on Twitter. We definitely put out a lot of interesting, educational, and helpful content out there to satisfy our audience. So we just want to say we appreciate everyone. Hopefully everyone's out there having a great year.

Starting point is 00:20:36 Happy holidays, and we'll catch you back here in a couple of weeks. you are the man i appreciate you and we'll definitely keep doing this so well thanks so much and uh you have a great holidays as well you too brother thank you

The Pomp Podcast - #1279 Darius Dale Reveals Bitcoin Strategy

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