The Pomp Podcast - #1290 Darius Dale on Bitcoin ETF: Wall Street Can't Wait!

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. Today's conversation is with Darius Dale, the founder and CEO of 42 Macro. In this conversation, we talk about global liquidity, what all of the Wall Street investors are saying about the Bitcoin ETF, and how the macro weather

Starting point is 00:00:43 model that 42 Macro has pioneered is showing all of the different asset prices going into 2024. In my opinion, Darius continues to nail all of the liquidity cycle and also how you should be thinking about investing your capital across different asset classes and in different allocations. This conversation is no different. I learned a ton and I hope that you enjoy it. Here's 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 strategy, but only as an

Starting point is 00:01:25 expression of his personal opinion. This podcast is for informational purposes only. This episode is brought to you by Auradon. 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 Ardine comes in. They just launched their first product line called Teraflux, which is a Bitcoin miner

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Starting point is 00:03:47 be efficient when scheduling, and make sure that no one can steal your time. All right, guys. Bang, bang. I've got Darius here. Darius, you're a Wall Street insider. You've been talking to all the big boys, giving out all of the money from the institutions. We are on the doorstep of a Bitcoin spot ETF approval. There's tons of people on the internet that are excited.

Starting point is 00:04:06 What's going on on Wall Street? Are they excited? Do they even know this is happening yet? Yeah, that's a great question, man. So everyone knows it's happening. We're all well aware of the potential pending BlackRock and Fidelity ETF approvals. There's obviously other ETF players in the game as well. In terms of the folks we talked to, so we have a very unique client base here at 42 Macro,

Starting point is 00:04:25 particularly as it relates to kind of the upper echelon of Global Wall Street. They're all very aware of Bitcoin and of the cryptocurrency asset class in general through our research. It's always been a core feature of our research here at 42 Macro. We treat Bitcoin, cryptocurrencies, just like any other asset class, whether they be stocks, bonds, commodities, et cetera, because we believe that our quantitative risk management tools and our qualitative research process can support us generating thoughtful and ultimately accurate recommendations on that asset class. So when I talk to 42 macro clients, whether they be fixed income PMs, you know, looking to allocate to Bitcoin and their PA, or they be, you know, you know, sort of RA type investors who are looking to add Bitcoin type exposure into their client portfolios. They're all, you know, it's two thumbs up. Now, obviously, we're, you know, it's the two thumbs up because we've seen a lot of positive price momentum in the chart. And so clearly, folks are going to be more interested in chasing what's been working as opposed to chasing something that hasn't been working. But generally speaking, the reception has been quite warm, but it's only because we've been, again, focused on crypto and Bitcoin specifically, really since the inception of our firm.

Starting point is 00:05:34 Now, when we look at the ETF specifically, there's a lot of people who might be excited about Bitcoin and some of them went and created a Coinbase account or, you know, went and bought Bitcoin in some other way. Are there people who are sitting there saying, I want Bitcoin, but I can't do it until there's an ETF? Like, is the structure actually an important part to unlock some capital allocation here? 100%. Yeah, it very much is. When I talk to investors, the number one thing that everyone hates, not the number one thing, there's a lot of things that people hate, particularly about taxes, but the number one thing people hate about taxes is having to file K-1s, is having to deal with the K-1 reporting and all that kind of stuff, because it just throws a real big monkey wrench into the tax reporting.

Starting point is 00:06:10 So the reality is an ETF is a very tax efficient vehicle for all asset classes. Obviously, the inclusion of Bitcoin would be very favorable there. And so you could see, what I'm expecting to see is that over time we're going to continue we're going to see a lot of that you know multi-trillion dollar asset class that is you know investment advisory type you know allocations you know folks that have their money parked with uh you know kind of financial advisors we're going to see a lot of that flow start to turn at the margins away from things like gold and other alternatives like commodities real estate etc and into the bitcoin asset class now the bitcoin asset classes is most is likely to experience uh aggressive inflows when we're in a goldilocks

Starting point is 00:06:52 regime uh from a top-down market regime standpoint which is what we're currently experiencing now um and so as long as that goldilocks regime persists we're going to have a very warm welcome to the inclusion of uh bitcoin in terms of the et in terms of the approval of the bitcoin etf if we were approving the bitcoin etf in a deflation or inflation regime um that you know which are risk-off regimes that would be a lot less supportive now what is also interesting to me is everyone is talking about what I'm going to call primary allocation to the ETF. That is an institution or investor, they see the ETF gets approved, they go and they put capital into it. There is now cracking signs of what I'm going to call secondary allocation. And what I

Starting point is 00:07:29 mean by that is there are other ETFs or other publicly traded funds that are saying, wait a second, if an ETF gets approved, I can now take some of my assets and put them in the ETF of Bitcoin. So I get Bitcoin exposure from my investors. And so there is one example where somebody has already gone, they've already updated the mandate or the charter of their publicly traded fund where they can put up to 15% of their AUM in the Bitcoin ETF. And so to me, it's like, wait a second, the primary allocations is obviously going to be large over time and people are excited about, but could the ETF actually suck some of the assets from other ETFs into it where people who have actively managed funds or even may have passively managed funds

Starting point is 00:08:15 just say, look, I want Bitcoin exposure as well. And so now if I put a little bit of my AUM in there, I could draw in more inflows to my non-Bitcoin ETF. 100%. That's going to be two-sided, right? For all that potential reward, there's obviously risk as well. But generally speaking, this is an asset class that has shown it's quite durable and has performed really well over long periods of time. And we would expect that to continue just given some of the longer term research we've done on the forward turning etc we have to unpack that now so yes i agree one of the things we've you and i talked about about a month ago or so on this program about our kids were full of construction process which features up to a maximum allocation of 10 bitcoin

Starting point is 00:08:53 so that's 60 spy 30 ag which is the fixed in core fixed income etf and then 10 bitcoin and we use our quantitative risk management systems to sort of you know dial up or dial down our exposure to any one of those asset classes uh any given juncture right now it's currently fully invested um you know we don't predict the predictors in terms of the things that the systems that use uh that we use to dial up or dial down that exposure but obviously if we start to dial down that exposure our clients are going to get those signals in real time what is the macro weather model that you all have saying their current regime is but also how do you look at maybe the next you know 90 days or so uh given this model yeah so that's a great question uh so uh we put

Starting point is 00:09:31 together this uh this chart here for you uh for your viewers um that's sort of showing our macro weather models and so what let me just take a step back you know so this macro weather model we use this system this this quantitative risk management system to determine how long the current top-down market regime is likely to persist right now we are currently in goldilocks obviously goldilocks is at risk on regimes quite bullish for both stocks bonds it's pretty much only bearish for things like the dollar um and dollar type assets like volatility etc and so in terms of our kisper flow construction process we use the signals the composite signals which which are right there in the middle of the page

Starting point is 00:10:04 to dial up or dial down our target exposure per the asset class. We start with the maximum target exposure of 60% in the stock equity asset class, the maximum exposure of 30% in fixed income asset class, and the maximum exposure of 10% in the Bitcoin asset class. And so if the weather model signals are bullish, then you get maximum exposure.

Starting point is 00:10:23 If they're neutral, then we dial that down. And if they're bearish, we dial that down incrementally. So this system helps us stay on the right side of market, of fundamental macroeconomic risks by sort of feeding in, by tracking and ultimately regime segmenting the principal components of macro in a way that creates very valid, very powerful signal

Starting point is 00:10:44 on a rolling three month, four basis for these primary asset classes. What about Bitcoin specifically within this model? Like you can break out by asset and it looks like the Sharpe ratio gets quite attractive on Bitcoin. Help us understand this. Yeah, absolutely. So with this chart here, the second chart shows you, you know, sort of just the evolution, the top panel on that chart shows the evolution of the macro weather model signals for the Bitcoin asset class.

Starting point is 00:11:09 And as you can see, you know, the Bitcoin tends to rise materially when you are in a bullish composite signal regime for that for that particular asset class. In so much that all the crypto winters we've experienced, particularly over the last kind of 10 years or so, have occurred when we were in bearish regimes for Bitcoin. What that chart on the bottom, the bottom panel shows is the evolution of the back test. If you use the composite signal for Bitcoin to trade Bitcoin, i.e. by being fully invested in Bitcoin when it's bullish, by cutting that position in half when it's neutral in terms of the composite signal, and then actually rotating out of the asset class fully when it's a bearish composite signal, it just shows you the performance of that system, of that back test, that out-of-sample back test, relative to the evolution of Bitcoin. And so what it's showing you is that by using our macro weather model composite signals as an overlay, as a top down risk management overlay for this particular asset class or any asset class, what it's ultimately designing to do is help you step aside when there's volatility ahead in financial markets. And it actually does what I think a lot of investors do very poorly, which is actually get you back in when it's time to get back in and actually participate in some upside. So quite proud of this system. Obviously, it's been driven by going back to that previous page, all the principal components of macro, starting with the real economy cycles, and then over to the financial economy cycles there on the left of that page. When you look at global liquidity, that seems to be the number one driver of a lot of Bitcoin's price movement specifically.

Starting point is 00:12:42 How do you anticipate some of this, right? So interest rate cuts, obviously, people are saying, hey, we're going to get it by kind of end of Q2. interest rate cuts are not necessarily completely 100% correlated to what is going to happen when it comes to global liquidity. And also what the US does is not dominate globally at all times. And so how do you think global liquidity changes when it comes through beginning of 2024 into the end? Is this something where it's just one line trend and we get more and more liquidity into the market, we should expect interest rates globally to go down? Or do we have to kind of pay attention on a quarter by quarter or month by month basis, because we actually expect maybe

Starting point is 00:13:23 some nuance here, both globally and also when it comes to liquidity. Yeah. So I think we're among the world's elite expecting and ultimately projecting that nuance. So there is always nuance. And what the other model is designed to do is to summarize the nuance in a way that allows you to create really powerful and accurate signals for the particular asset class. So we're talking about liquidity. So let's focus our eyes on the liquidity component up there on the top right. So it's the first set of set of indicators under the financial economy cycles, you know, in terms of in terms of macro weather model signal. And as you can see, 42 macro net liquidity, that's the Fed balance sheet minus the TGA balance minus the RRP balance. That model is trending higher. It's trending higher.

Starting point is 00:14:02 So it's obviously creating positive impulse for for for the risky asset classes, as well as our global liquidity proxy, which we found to be a much more statistically significant model in terms of projecting asset market performance. That's the Fed, the global central bank balance sheet plus global broad money supply plus global FX reserves minus gold. That number is also trending higher as well. Answering your question specifically, so we've performed a lot of statistical analysis in terms of the drivers of liquidity. So things that typically drive liquidity are fluctuations in the currency market, particularly

Starting point is 00:14:32 when they're being driven by regime change in volatility in the currency market, volatility in the fixed income market. Other factors that are leading indicators for liquidity are changes in the employment picture in key economies like the us united states and the major economies in the world uh changes in inflation changes in growth so we we've done a tremendous amount of statistical analysis that we perform and just and distribute to our clients here 42 macro to understand those dynamics of what actually leads the liquidity cycle because ultimately you need to predict what's happening in liquidity if you want to project what's likely to occur in asset markets

Starting point is 00:15:05 and right now we're seeing a lot of positive signals uh that are supportive of the private sector's liquidity creation function and so i think one thing um you know as investors we you know not not we at 42 macro but but a lot of investors i see still see out there um kind of um spend too much time focusing just solely on central bank liquidity and some investors have taken that a step further and focused on liquidity from from key financial or say key fiscal players like you know the bank of japan or sorry japanese ministry of finance or the u.s treasury department but the reality is the public sector only creates you know a portion of liquidity you know the other portion of liquidity and they're quite dominant sometimes is the private sector you know the

Starting point is 00:15:44 global bank and non-bank financial sector uh these these institutions create a lot of liquidity as well and they tend to have they tend to create liquidity on a counter-cyclical basis uh to things like volatility and asset markets you know big spikes in energy uh big spikes in the dollar etc so right now the things that are dry that lead the counter-cyclical um you know impulse liquidity impulse are still signaling quite favorably for liquidity to trend higher over over the medium term, but those things could change in any given time. And this is why one of the core features of our process just generally here at 42 Macro is a Bayesian insistence upon refreshing the same models and the same data every single day. You see that 1-3-20-24

Starting point is 00:16:26 at the top in the middle of that chart? Tomorrow, we're going to refresh the model. It's going to say 1-4-20-24. And the day after, it's going to say 1-5-20-24. At some point, those up arrows in liquidity section will reflect sideways or down. And when they inflect sideways or down, it's going to say, hey, stock market, you used to be bullish, but you're probably going to be neutral now over the next three months. Or if they inflect down and say, you used to be bullish, but you're probably going to be bearish over the next three months. And so refreshing all these systems in real time, this is just one of our key systems, refreshing them in real time on a daily basis allows us to spot those critical inflections in real time so that we can do something about it

Starting point is 00:17:00 in our portfolios. When you see investors using these models, what do you think is the biggest thing that they get wrong? You mentioned global liquidity, too much of a focus there. What are some of the other major mistakes? Well, to me, the major mistake is that investors tend to, it just is from a process standpoint, investors tend to myopically focus on what they're focused on, right? Now that doesn't sound particularly smart, but what I mean by this is when investors are bearish, they tend to go do research on things that lead them further down the bearish rabbit hole, insomuch that when investors are bullish, they tend to do more research on things that lead them down the bullish rabbit hole. And what we're trying to do at 42 Macro is just

Starting point is 00:17:40 dispassionately only do research on everything, every single day, and summarize that very succinctly for our clients so that when we are going from a state in the markets where they're generally bullish into bearish, we're actually able to spot that in real time. Our process, we fascinate ourselves as trend followers, understanding that momentum in both asset markets and in the economy are two of the most powerful forces in finance. And if you are fighting that powerful force, you're generally going to have poor results over a long period of time. And so we orient our risk management and our research process around trying to identify trends and momentum from a research standpoint, from a fundamental standpoint across all these

Starting point is 00:18:21 principal components of macro, but we're also trying to do that in terms of identifying trends and momentum from a market standpoint. And we're marrying those two separate processes into actionable portfolio construction guidance for our clients. And so when you're answering your question, what do people tend to get wrong? The number one thing I see people get wrong is they don't look at the same stuff day after day after day after day after day in order to spot those critical inflections and momentum in the asset markets and in the economy. What they're doing is, well, I think they're four. And to me, I think they're four is consistently proven, particularly over the last few years, to be quite a harmful experience for a lot of investors.

Starting point is 00:18:58 What do you think that the best investors do that the worst investors don't? And what I mean by that is like, everyone makes mistakes. Everyone has these commonalities, right, of where they could get tripped up. But in my experience, the best at anything, take for example, you know, maybe baseball. The best hitter does one thing exceptionally well that everyone else struggles with or doesn't put as much obsession and kind of focus on. Is there things like that when it comes to investors that you've interfaced with that you find there's one thing that they do better than everyone else and really has them stand out and drives their performance? Yeah, 100%, man. To me, it's about being more systematic than less systematic. A lot of what we do at 42 Macro

Starting point is 00:19:40 is a, you know, it's really just the summary of all my learning and experience on Global Wall Street for the past 15 years. You know, I've lost count, but I'm somewhere close to 45, so 4,500 meetings with institutional investors, the large, you know, everyone, you know, the who's, who's of Global Wall Street, you know, I spent most of my career flying around the world, meeting with these investors, having deep discussions about portfolio construction, asset allocation, building econometric models and things of that nature. That's my, that's my background.

Starting point is 00:20:08 And so, you know, all the stuff that I've learned from those key players on the buy side throughout my career, you know, the number one thing that I see that they do that the average investor doesn't, and certainly the average, you know, retail and RA type investor does not do, is being systematic about their research and systematic about their risk management. And notice that I said research and risk management and not just research or risk management. Those are two separate processes and they keep them very separate. You know, the research process is allowing, you know, if you're systematic about your research, You're looking at the same data sets every week, every month to identify, you know, critical inflections in those data sets that really pertain to key economic outcomes that we all care about in financial markets.

Starting point is 00:20:49 Being systematic about your risk management, you know, means you are, you know, you're dispassionately executing your risk management process and you're not, you know, you're not being beholden to what's currently happening in markets or you're beholden to your gut feeling about what's going to happen in asset markets. And to me, that's the number one thing that I see, the best performing funds, the best managers, the richest people who are buying all those expensive luxury apartments everywhere. That's what they do that we try to do and infuse into our process at 42 Macro. And we have a bird's eye view, a real insider's knowledge of those processes. And that's what you see on the screen here in terms of our weather model and the other things that we do at 42 Macro. Makes complete sense to me. Where can we send people to find you online or find out more about 42 Macro? I appreciate that, Pomp.

Starting point is 00:21:31 So obviously come check us out, 42macro.com. is our is our website uh we put out a lot of uh you know sort of educational and market uh guidance uh for free on twitter and as well on linkedin so i'm at dariusdale42 on twitter you can follow me on linkedin as well darius dell appreciate everyone for checking us out we'll do it again in the future my friend cheers man thank you very much catch you guys uh everyone have a happy new year best of luck out there in 2024 and we'll be uh we'll be here right alongside we will be here with you all along the way helping you make and save money in financial markets

The Pomp Podcast - #1290 Darius Dale on Bitcoin ETF: Wall Street Can't Wait!

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