The Pomp Podcast - #1297 Darius Dale | Bitcoin Data Is Giving The Green Light?!

Episode Date: January 18, 2024

Darius Dale is the Founder & CEO of 42Macro. In this conversation, we talk about global liquidity, Macro Weather Model, bitcoin & other risk assets, and impact of fiscal stimulus.  ======================= Trust and Will has simplified the process of creating and managing your will or trust online. They leverage a data-driven, design-first approach and amazing customer support to help you protect your legacy from the comfort of your home starting at just $159. Sign up today for 10% off using ⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠https://trustandwill.com/pomp⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠ ======================= This episode is brought to you by Frec — Just as easy as investing in an ETF, Frec Direct Indexing can help you earn more by unlocking tax savings, no matter the market. Done for you, automatically. Check them out at ⁠⁠⁠⁠Frec.com⁠⁠⁠ ======================= Pomp writes a daily letter to over 250,000+ investors about business, technology, and finance. He breaks down complex topics into easy-to-understand language while sharing opinions on various aspects of each industry. You can subscribe at https://pomp.substack.com/

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 episode is with Darius Dale, founder and CEO of 42 Macro. In this conversation, we talk about global liquidity. We talk about the macro weather model. What exactly is the data saying about Bitcoin and other risk assets and

how he is prepared to see what fiscal stimulus is going to do to household income, savings and spending patterns. I always enjoy talking to Darius and this conversation is no different. Hope you all enjoy this conversation. Here is the latest episode 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 expression of his personal opinion. This podcast is for informational purposes only.

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Darius, the macro weather model, what is it telling us? Look into the crystal ball. Where are we headed with financial asset prices? What's up, brother, man? It's always great to be here with you and your audience, man. So just a quick summary. The last time we were on, the macro weather model was all green skies, all green lights. Stock market signal was bullish. Bond market signal was bullish. Bitcoin signal was bullish. This update, or at least going back to an update from last week, we're now seeing more neutral signals in terms of the rolling three-month outlook for the stock market and the three-month outlook for bitcoin it's not necessarily bearish signal in isolation but directionally bearish relative to the condition

that we were in and the reason we've seen this change in signal is that we've had an inflection in one of the component features specifically the sovereign fiscal balance to nominal gdp ratio that's now inflected to a positive trend which means we are now seeing a reduced fiscal impulse as opposed to an increased fiscal impulse which is what we saw throughout most of 2023. now What does that exactly mean in terms of short-term versus medium-term? Like, how do we distill – does that mean for three months we should, you know, kind of be cautious? Or is this, like, for the rest of the year? How do you think about timelines?

Yeah, 100%, man. So, what this macro-mother model does is it helps us keep us – it helps incorporate some of the most important signals from the economy in terms of how to think about market risk on a rolling three-month forward basis. is essentially a now cast of everything that matters in the economy, whether you think about growth, inflation, liquidity, credit, positioning, fiscal policy, employment, all those things, all these different principal components and macro. What we're trying to do in this model is effectively now cast the condition that those particular indicators are in, and then relaying those signals back to those composite signals in the middle of the page. And so when you see a neutral composite signal, that means you should expect normal returns in

asset class over the next three months normal level volatility we were coming from a condition where we're expecting better than expect better than normal returns and lower than expected volatility for getting the stock market and bitcoin and so we're moving in the wrong direction now but again not yet outright perish got it now if we go to the second chart here we've got fiscal policy sovereign fiscal balance and nominal gdp what exactly is this showing us yeah 100 so just look at the chart on the left uh what this uh what we're doing with this chart is trying to help investors understand how exactly the macro weather model works and so what we're trying to do is regime segment again each of these component features which represent the principal components

of macro into various conditions and as you can see we're coming from a condition at the bottom of that left chart there uh where the real the sovereign budget balances the percent of gdp was falling which was projecting positive excess returns for things like the stock market things like commodity markets and importantly bitcoin onto the broader composite signals in the middle the previous uh chart we are now transitioning to a rising regime for this particular statistic which ultimately means we're projecting negative excess returns for things like the stock market commodities and bitcoin and so at the margins it shifted the the overall calculus you know going back when you uh incorporate all the different component features it shifted overall calculus

for the stock market and bitcoin from bullish to neutral got it and then when we go and we look at the usd real effective exchange rate one of the things that um i see in there is the real effective exchange rate versus maybe what is always listed what is like the big differences here what do you see influencing that yeah 100 so the real effective exchange rate just accounts for the changes in inflation uh across geographies so this is a broad trade rated basket for the us dollar that tries to net out the fluctuations in inflation uh in the relative economy in our trading partners and one of the things that we're currently in a rising condition now which is contributing negative excess returns uh to the crypto market uh specifically if you look at the back test

down there at the bottom half of the chart uh if we if we got into a negative trend in the us dollar which is certainly a risk given how overvalued the dollar is on a rear basis currently then we could actually be contributing some very positive excess returns to uh to to the projection for bitcoin as you can see there uh with the back test there at the bottom half of of that chart. So, you know, the jury's still out on, you know, where if we're, you know, heading into a broader period of risk off for asset markets, there's a lot of macro catalysts on the horizon over the next few weeks that could really help determine that. Not the least of which a couple of weeks, we're going to get the JOLTS report. We're going to get the employment cost

index report. We're going to get unit labor costs and we're going to get productivity and we're going to get the jobs report. And all that's going to help investors understand, hey, is all this immaculate disinflation we've been experiencing that's really perpetuated the current Goldilocks top-down market regime? Is that immaculate disinflation process going to start to unwind? And if so, if it unwinds, then we're going to start to shift market pricing back into the no-landing camp, which obviously is much more volatility in fixed income markets and likely more volatility for broader asset markets. Now, one of the aspects I've been paying a lot of attention to is global liquidity. And it feels like tons of people that I talk to or follow are saying,

hey, global liquidity has bottomed and we now are headed up. We should expect more and more of this to kind of slosh around in the economy. Is that what you believe as well? Is that what you're seeing in some of the numbers? Yeah, absolutely. So go back to that slide one where we show the macro weather model. The top right where we show the right half of the table, we show the financial economy cycles within the 10 principal components of macro. The top component there is liquidity. So we have our 42 macro net liquidity model, which is the Fed balance sheet total assets minus the reversible facility balance minus the treasury general account balance. That metric is trending higher. 42 macro global liquidity proxy was actually a more powerful tool. It's a much more

statistically significant tool. That is the global central bank balance sheet plus global broad money supply plus global FX reserves minus gold. That statistic is trending higher as well. And we perform a lot of research from a statistical standpoint to understand the drivers and the leading indicators of these particular time series, because ultimately they have a lot of influence in terms of determining that composite signal there in the middle of the page, just like what we saw in the previous two charts. And so right now, if you look at the current constellation of leading indicators for our liquidity models, we're currently seeing what we should see is a continuation of the 42 macro net liquidity, a positive trend in the 42 macro

net liquidity, at least for the next quarter or two. And it's very likely that we continue to see a positive trend in our global liquidity proxy for at least another quarter or two as well, just given some of the dynamics that we are currently observing in the financial markets. So right now, if you break apart liquidity, we're not getting much liquidity globally from central banks, but we are getting a tremendous amount of liquidity globally from commercial banks and from non-bank financial market participants. They create liquidity as well. And some of the leading indicators like bond market volatility, currency volatility, broader asset market volatility, credit spreads, those things are continuing to signal that it's a good time to be taking risk

as an investor, as a bank, as a banker, as a non-bank financial market participant. And ultimately that liquidity creation is likely to persist. Now, is it going to persist all throughout the year? As some investors are suggesting that remains to be seen. I don't know that we know enough. We don't know enough statistically in terms of the reported data yet to project that, but we certainly are in, you know, blue skies for at least for the time being for the least of the next quarter or two. Now, what about fiscal stimulus? You've got this chart here. It's a major contributing factor to the resiliency of household income, which is pretty interesting. Yeah, 100%. So, you know, so we just kind of going back to the

original part of the conversation, we saw a positive inflection in the trend in terms of the budget balance as a percentage GDP. So we were seeing a positive fiscal impulse, i.e. the budget deficit was getting larger as a share of GDP. Now we're seeing a negative fiscal impulse on the margin, i.e. the budget deficit is getting smaller as a share of GDP on a trend basis. So some of the things that are actually causing that are, you know, some of the, so we saw a massive sort of fiscal impulse, positive fiscal impulse throughout 2023. That's something that contributed to the resiliency of the economy and also the resiliency of inflation in certain respects. But that's obviously dissipating at the margins. And one of the reasons we're seeing that dissipate is if you

look at 2023, the cost of living adjustment in 2023 was almost 9%. That number is down about 3% for 2024. So things like Medicare and Social Security, which are 14 and 22% of the budget respectively, they're not going to be growing as fast in 2024 as they were throughout 2023. You know, right now in 2023, if you look at it on a year-to-date, year-over-year basis, that was up, Medicare was up 17% year-over-year, Social Security was up 12%. We also had net interest, if you look at it, it's about 12% of the federal budget. That number was up about 41% year-over-year on a year-to-date basis throughout 2023. And so some of these dynamics, not the least of which was the lack of tax receipts that we got from localities like California, Hawaii,

which contributed to a 16% reduction in federal income tax withholding. All of these things were basically flooding money into the economy from the perspective of the fiscal authorities. And now that's not necessarily coming to an end, but it's slowed significantly in recent months. If you go back and you look at the year-over-year nominal delta in the federal budget deficit in June, it was up $834 billion. It was up $535 billion in August, and it's now up only about $364 billion in December. We would expect to see it somewhere around that two plus 200 to plus 400 kind of billion dollar range throughout 2024, which is, again, you're contributing fiscal liquidity to the system from the perspective of the fiscal authority, but it's less than it had

been. And so at the margins, it's less for it's a worse signal for asset markets. Now, when you start seeing these households, obviously, credit card debt has been rising very rapidly. The interest rates are at near all-time highs on that credit card debt. We also have about, I think it's $1.6 trillion student loans. There's another $1.6 trillion maybe of auto loans. You just kind of go through this, and there's trillions and trillions of dollars of debt that's piling up.

Can the consumer continue to handle this? Is it as simple as just leverage on the debt and almost treat your own balance sheet the way the fed's going to treat theirs and they're just going to you know basically monetize the debt and if you just wait it out with them then you'll be okay too yeah 100 man so uh one thing i think uh you know i think it's important to contextualize when talking about uh leverage cycle dynamics whether it be the household sector or the corporate sector is understanding this on a more of a ratio basis as opposed to absolute basis and when you look at the ratios for particularly for the household sector you know we're you know we're kind of at a more normal

middling level in terms of a debt relative to household income and more importantly i would argue we're at we're practically at all-time lows in terms of debt service ratios relative to uh relative to in terms of relative to that household income and so there's obviously room for both debt service ratios and the debt itself as a ratio to you know the the the stock of you know income that we have to to service that debt to rise over time you know if you know one of the things we've um You know, we split the atom open on in terms of our research here, 42 macro a while back, which obviously contributed to our resilient U.S. economy thing that we authored in the summer of 2022. You know, one of the things that we understood at the time and continue to understand is that this business cycle has been perpetuated by income growth. You know, we continue to see a declining share of credit, financial and non-financial sector credit to GDP relative to the growth rate of the economy.

And so what that ultimately means is that there are levers that both the household sector and the corporate sector, they can pull some levers and twist some knobs to otherwise to lever up and actually perpetuate the business cycle forward. So we are not maxed out by any stretch of the imagination when it comes to household leverage, and we could actually go even much further. And one final statistic I'll throw at you in terms of the credit card debt, that's obviously a very big issue, and it's obviously the highest cost debt for the household sector. APR is somewhere around 25%, 30%. Pick your card. But the reality is that household credit card debt, revolving credit as a percentage of nominal disposable income, has been flat at around 5% for about 15 years now. And so the banks are really smart about not overextending themselves from a leverage cycle perspective as a function of Dodd-Frank, as a function of the lessons they learned in the GFC. And that's ultimately why we're seeing some resiliency in this business

cycle and why the probability of a soft landing remains higher than the probability of a hard landing or no landing. Bitcoin, everyone's talking about it. ETF got approved. You've got a chart here showing us, I think, good news. Yeah. Well, so we're transitioning from neutral from bullish in terms of Bitcoin. And so that's something to be aware of. And so this is just showing just quick context on the back test of those composite signals back there in that first weather model table. And so generally speaking, the big bull runs in Bitcoin happen when the macro weather is bullish. The big bear runs of the big crypto winters tend to happen when the back of where the model is bearish. And we're now kind of in a neutral signal. So it's telling us

that, you know, we're about to either break back out to bullish or bearish. You shouldn't expect to remain in this neutral setting for too long. So definitely check back with us for that update. When you look at the ETF, is there anything outside of just the charts, the graphs, you know, kind of the models that you're thinking about? You know, Wall Street is here. I joked recently and I said, when the suits show up, usually the fund is over. But at the same time, when capital is flowing in to a finite asset, the price should continue to go up. So how are you thinking about it maybe over the medium to long term? Yeah, over the medium to long term, I mean, the same way we've always thought about Bitcoin, which is it's just another asset class.

You know, they're all squiggly lines that make us rich or poor, you know, at the end of the day. That's what these things are. That's how you have to treat them from a dispassionate standpoint as an investor in order to make sure you're not being swayed by your emotions and your trading and investment decision making. And so over the long term, obviously, the ETF approval is a very positive fundamental. It's a structurally positive fundamental because we, going back, citing some of the research we performed in terms of our fourth turning, we did a deep dive empirical study on four turnings, what investors should expect from the economy, from policymakers, and ultimately asset markets. And one of the key conclusions

from that study is that you should expect much more inflation over the next decade than we've experienced in recent years and recent decades, really. And as a function of that, you're probably going to see the 60-40 portfolio not necessarily struggle throughout the entire time, but certainly will not put up the kind of returns that is historically put up in recent decades. And probably more importantly, from a portfolio construction standpoint, we're moving to a level of inflation, a persistent trend of an underlying trend of inflation that does not support the persistently inverse correlation between stocks and bonds that we've experienced throughout the last 40 years. And as a function of that, the interest in 60-40 type portfolios

from institutional investors and folks who have their money with institutional investors, that interest is going to wane. And that 40, in our opinion, is going to start to be looking for other avenues to spill over into. And that's going back to our KISS portfolio construction process. It's 60-30-10 for a reason. We're effectively saying, come here. If you got to sell 10% of your bonds or 5% of your stocks and 5% of your bonds, you're going to have 10% of your asset allocation pie needs to be allocated to something different than just your standard 60-40. And we think that something different is Bitcoin. And we're doing a great job helping investors all around the world risk manage that. I think you're doing a great job. I learn every

single time. Where can we send people to find out 42 Macro, sign up and get some of this research for themselves? I appreciate that, man. Thank you. So yeah, come check us out, 42macro.com. I'm on Twitter, DariusDale42. Hit me up on LinkedIn as well if you have any questions. We can definitely help you guys out. Appreciate you. All right, we'll do it again in the future. Thanks, brother.