The Pomp Podcast - #1303 Darius Dale on Interest Rates, Fed, Election Year, Macro Outlook

Episode Date: January 31, 2024

Darius Dale is the Founder & CEO of 42Macro. In this conversation, we talk about the labor market, economics, Federal Reserve, interest rates, election year, and macro outlook. ======================= Introducing Espresso - the world’s most interactive portable display. They have a portable screen that is incredibly light, comes with a nice stand, and the user interface is very easy. Anyone who listens to this podcast can go to ⁠us.espres.so/pomp⁠. They have a brand new offer waiting for you.  ======================= BetOnline.ag is a proud sponsor of the the Pomp Podcast. Use crypto to bet on sports, play poker and enjoy casino games at BetOnline. Visit https://promotions.betonline.ag/pomp and use promo code POMP100 to receive a 100% matching bonus on any crypto deposit. BetOnline boasts no crypto transaction fees, and processing is anonymous, instantaneous and secure. ======================= 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 42 Macro co-founder and CEO Darius Dale. In this conversation, we talk about the labor market, economics, what is going on in the current U.S. economy,

and how the Federal Reserve should be thinking about cutting interest rates, keeping them the same, or potentially, maybe they should even be hiking them. A lot of that has to do with whether a recession is coming or not, and Darius unpacks it all for us. I always enjoy these conversations, and I hope that they are valuable to you. 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

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BetOnline.ag. Go check them out today. All right, guys. Bang, bang. I've got Darius here. Darius, a great place to start. Let's just talk about the economy. Some people think it's hot.

Some people think it's cool. Some people think the Fed should cut interest rates. Some people think the Fed is doing a perfect job. But before we get to what we think they should do, let's dig into some data. Low worker turnover is this huge talking point now. And you're saying that it's supportive of an economic expansion. Explain. Yeah, absolutely.

So thanks for having me as always. Great to be here. So this chart where we show Joe's total job openings divided by total unemployed workers, That's that all-important ratio that Jay Powell has been guiding us to as an indication of how much slack or tightness is exhibited in the labor market. In the second panel there, we show the private sector hires rate at 3.9% was unchanged month over month in the month of December. That's a below-trend rate relative to the 2015 and 2019 trend. Third panel there, we show the private sector's quits rate, which declined to 2.4%, which is exactly the same number it trended at prior to the pandemic. And the reason that's important is because when we see lower turnover, as we've seen in recent quarters, it is supportive of the economic expansion because it takes the pressure off of wages in terms of the labor market.

Now, when we see this turnover, I also just saw that there was payroll growth is coming in under expectations. And so how much of this is mixed signals compared to, no, some of these data points are actually more important than others. Like this next chart you have is workers that change jobs or experience faster wage growth. And so as we dig into this kind of worker data, what do you put heavy emphasis on versus maybe some of the data points that you ignore? Yeah, absolutely. So I think we do a really good job for our clients at 42 Macro of contextualizing all the things that matter within the context of all the various reports that we get out of the U.S. labor market. It's been a massive week for labor market data in particular. On Tuesday, we got the JILTS report.

On Tuesday, yesterday, we got the Consumer Confidence Board Consumer Confidence Report. There are labor market surveys embedded in that. Today, we got the Employment Cost Index and the ADP Employment Report. Tomorrow, we get Java's claims. And then Friday, we get the actual job support. So in terms of focusing investors on kind of the general lay of the land, like what's actually happening in the labor market, and then we can drill down into the chart specifically. The labor market is cooling, but it is not crashing. And cooling but not crashing is actually supportive for risk. It's supporting of this

elevated probability of a soft landing in the US economy that is underpinning the current Goldilocks market regime so let's get into this chart here number two where we say workers that change jobs experience faster wage growth that's something that we observed in both the adp median annual pay statistics we also observe that in the atlanta fed wage growth tracker statistics as well that's the blue line for the growth rate of wages for workers that change jobs relative to the red lines which are the growth rate of wages for workers that stay at their jobs so going back to that first chart where we show the private sector hires rate and the private sector's quits rate are now below trend and at trend respectively having declined over the past several quarters

it's suggesting that we're going to continue to see slower wage growth wage disinflation in the months ahead which is obviously supportive of the rate uh uh cuts that are projected and priced into money markets now labor hoarding i never even heard of that before what is labor hoarding and what is that telling us yeah so the reason you've never heard of labor hoarding before because it really hasn't happened throughout our careers uh for the most part we saw a little bit of labor hoarding in 2018 and 2019 but really it's been a post-pandemic uh excess fiscal excess monetary stimulus phenomenon uh that is really uh that has really guided the us economy and asset markets over the past few years so what we mean by labor hoarding is is uh labor demand just simply

outstripping labor supply uh so in this chart on slide three here uh we show the total labor force in the top panel uh which is still below trend relative to the 20 not 2009 to 2019 trend we show gross domestic income on a nominal basis which is well above trend and has been since 2021 and then the third panel we show labor demand which is household survey total employment plus jolt's total job openings that's the blue line at about 170 million and then we show labor supply which is again the labor for the total labor force which is at about 167 million the third panel where we show our labor demand minus labor supply metric that number is running at 2.7 uh 2.76 million in terms of excess uh units of demand relative to units of supply of labor uh

here in the u.s economy and that's obviously really uh important because it's obviously caused it's one of those contributing factors uh to elevate it a slightly above trend uh uh sort of wage growth and so the the bottom panel there we just um you know we show uh we break out labor demand uh in terms of household survey employment the blue line uh and total job openings uh the red line and what we see is that the red line has been the only uh statistic responsible for generating the slack in the labor market uh that we've observed in the past couple of years recall that the spread between labor supply uh sorry labor demand and labor supply peaked at right around uh just north of five million uh in in the in the first quarter of 2022 and has

obviously declined again uh towards uh 2.8 million uh currently so all that slack that we've created in the labor market has really come at the expense of the red line in the bottom panel there, which is total job openings. We have not seen a broad-based decline in total employment, which is why we continue to call it labor hoarding. Companies are willing to take down job openings and slow the rate of wage growth, but they're not willing to fire people, which obviously would cause a recession. So in our opinion, we think this dynamic is persistent, is likely to persist, because at worst, corporate executives are only anticipating a shallow recession. I would argue that just based on consumer and business confidence metrics,

that that expectation of a shallow recession is actually moving in a positive manner towards expecting a soft landing and the sustainability of the business cycle. Now, you say shallow recession. It feels like a lot of people just expect the recession to come. We can go through a bunch of data points as to why they're expecting that. But this other slide you have is saying that there's a number of indicators you guys are watching that shows a low probability of a recession. So it feels like the mainstream conversation is, of course, a recession is coming. How severe will it be? But maybe you're saying something else might happen. Yeah, absolutely. So in our opinion, the probability of a soft landing remains the

highest probability outcome in the US economy. We are not in the soft landing camp. We're not in the no landing camp. We're not in the hard landing camp. We're in the camp that allows us and our clients at 42 Macro to make money. And we've been in the soft landing camp. We've been renting the soft landing camp since November 1st of last year in terms of anticipating and calling for a soft landing Goldilocks trade. So that obviously was spot on in terms of helping our clients profit from that view. In terms of this chart here, our Fab Five recession signaling indicators, and these are handpicked time series from dozens and dozens, if not hundreds of time series that we analyzed that ultimately give investors the best lead time with respect to

reporting and also the most consistency with respect to accuracy of predicting a rising or falling probability of a developing recession here in the U.S. economy. So I mentioned we got the Conference Board Consumer Confidence Index yesterday. The Labor Survey Differential within the context of that report ticked up by 8.4 points month over month in January, which is the fastest month over month delta we have seen in that time series since I want to say May of 2021. And so We're obviously moving in the wrong direction from the perspective of anyone who is positioning for a hard landing or is anticipating a hard landing outcome. And so in mass of these five data points, the only temporary employment in terms of the three-month annualized rate of change there of minus 13.3%, only one of these five is signaling a high probability of a developing recession.

Three are signaling a low probability, and one is signaling a middling probability. So in balance, we don't think there's a tremendous amount of risk of a hard landing here in the U.S. economy because the leading indicators that we have hand selected based on our careful research and understanding of these critical economic dynamics, that's support that suggests that recession is not really something we need to be concerned about as investors. Now, let's say that a recession is not something we need to be concerned about, then obviously we probably should keep interest rates where they are. Do you think that we should be hiking them? I would actually argue that maybe we should be cutting interest rates. Not a lot, maybe like 25 basis points with an eye to do like 50 to 75 basis points throughout the year as a way to kind of start easing back so we don't overshoot. But how are you thinking about if you're the Fed chairman and you've got to make these interest rate decisions, given the data that you've got

and the low probability of recession that you're seeing, do you just leave them where they are? Yeah, great minds think alike, my friend. The Fed in December acknowledged the market's pricing of rate cuts uh throughout 2024 and into uh over the next couple of years uh and then in my opinion that that's very warranted uh given exactly what you said which is they should be reversing course to avoid overshooting and over tightening the economy recall that the fed thinks about policy its policy rate from the perspective of the real rate not perspective of the nominal rate and right now we continue to see a very obvious signs of inflation crashing lower if you go back to friday's pce report for the month of december we got core pce in that report uh both this three

month annualized and six month annualized rates of change of core pce the fed's preferred inflation gauge are at or below two percent and so you know with that are below two percent is obviously well off the three to four to five percent uh rates of uh rates of inflation that we observed in in the last few years when the fed was you know anxiously uh tightening policy at the fastest pace in 40 years so now that we are seeing pretty uh pretty clear and obvious signs that inflation is likely to continue trending lower on a year-over-year basis over the medium term it's is a signal to us as investors but also to the fed as policy makers that they actually do need to tone down the the nominal level of the policy rate uh just to maintain the same real rate as

inflation continues to come lower so in our view it's good policy uh it's it's it's piggybacking on the great policy that we continue to observe out of the uh treasury uh the treasure we got the qr wave qra this week of the quarterly funding announcement and um the coupon auction size is surprised to the downside the net financing surprise to the downside bond issuance continues to be well subdued uh you know if you look at their cash balance estimates for into quarter q1 into quarter q2 uh the tga is above that which implies right around 100 billion dollars of fresh liquidity waiting to be pumped into the system you know so this is a lot of really positive dynamics that are uh sort of uh being pumped in asset markets from the perspective of

monetary and fiscal policy in the u.s and guess what it's for good reason it's for all the reasons we identified uh going back to um you know late october early november of last year in terms of accelerated immaculate disinflation uh evidence of a resilient u.s economy uh persisting but a cooling but not crashing labor market that is ultimately taking the winds uh sort of taking pressure out of wage growth which obviously is supportive and a guiding feature for all these uh positive dynamics now when you see the fed uh as one component we also have the politicians on the other side they just they lost their minds they're printing money they're dropping fiscal stimulus from every corner that they got um proxy wars uh infrastructure bill chips act

name all the other crazy things that they want to do uh should the fed consider those inputs into the economy and can they somehow predict what the politicians are going to do in that changing their monetary policy decisions. Like it almost feels like in 2020, they were on the same page, cut rates, print money. Now it feels like the Fed was like, let's tighten. And the politicians were like, screw you guys. This is too much fun. Let's just keep pushing money into the economy. So how do you think about the relationship between the politicians and fiscal versus the central banks and the monetary policy? Yeah, no, I think they're getting increasingly less correlated. To your point, if you think about what's happening with fiscal policy here in the

U.S., we continue to observe a very positive fiscal impulse, albeit getting less positive at the margins. And less positive at the margins is a negative sort of signal for the economy and ultimately for asset markets. I think we discussed that the last time I was on with respect to the change in our macro weather model signal for the stock market, for instance, going from bullish to neutral with respect to the rolling three-month forward outlook. So that's something at the margins that we are observing. If you look at the year-over-year nominal delta of the federal budget deficit, it's up about $320 billion year over year in the month of December. That's down from being up about $835 billion year over year in June. So we were pumping

a tremendous amount of money into the economy vis-a-vis the federal budget deficit. We are still pumping more money into the economy vis-a-vis the federal budget deficit on a year over year basis. It's just a lot smaller than it had been. But again, it's still positive. The fiscal impulse is still positive. It's just not as positive as it was. And we obviously have an election where it's an election, general election year. We're not going to, I don't think anybody wants to hear you and me talk about, participate, pontificate about what's going to happen in the election. But the one thing I will say is we've done, obviously, as always, a tremendous amount of work in trying to help investors, clients understand and ultimately position and

profit from some of these critical dynamics. One thing we note is that stock markets usually does really well in an election year, especially when a Democrat is an incumbent president on the ballot. Obviously, Joe Biden is not going to, for, you know, if Joe Biden is going to lose the race, it's not going to be because he didn't try in terms of spending, fiscal spending and pumping money and funds into the economy vis-a-vis the CHIPS Act, the Inflation Reduction Act. I think there's another act as well. But at the end of the day, you should be expecting these kinds of positive fiscal impulse dynamics. You should be expecting positive monetary policy dynamics just based on what's happening in the economy. So, you know, just kind of summarizing

all this, a lot of bears have just been wrong about, you know, kind of right down the middle of the fairway stuff, monetary policy, fiscal policy, growth, inflation. You can't afford to get these things wrong as an investor. And in my opinion, I think the reason a lot of investors have gotten these things wrong over the past two to three years is because they're spending entirely too much time on Twitter. That's not an investment process. It just isn't. Now, we've got over the last one year, the S&P is up 20%. Year-to-date, it's up about 3%. NASDAQ had a monster year last year. What is your expectations given where the economy is, low probability of recession, Federal Reserve is going to do what it's going to do? Are you

expecting this to be another monster year for tech and magnificent seven, et cetera? Or do you think this will kind of be a reversion back to maybe more the historical type returns you know that like six to ten percent uh for uh for the stock market yeah probably the latter uh you know there's a lot of you know very positive tailwinds uh you know supporting asset markets here but the starting point of under positioned investors and and you know kind of reasonable valuations just don't exist uh like they existed uh at the beginning of last year now that's not to say that uh we're bearish or there's any uh negative things that have really hit the tape yet you know You know, one of the things I think we do as, you know, on a very institutional high-end

buy-side level for our clients at 42 Macro that most sell-side research providers don't do is, you know, sort of a daily Bayesian grind through all the information and through all the models that really we need to be abreast of as investors to make, you know, important critical pivots in our portfolio. And, you know, we continue to refresh the same models every day, six days a week here at 42 Macro. We continue to analyze the same data sets every single month. Every time the Jones report comes out, the conference report comes out, the unit labor cost comes out, productivity comes out, we analyze those exact same data points month after month after month after month, quarter after quarter after quarter after quarter so that we can spot critical inflections in real time.

And the reality is we have not seen any fundamental data point critically inflect in a way that would be materially threatening to the current Goldilocks top-down market regime. Now, that doesn't mean it is not coming. it may come tomorrow in the form of a really negative outcome in terms of the Q4 productivity report or the unit labor cost data. It may come in the form of an adverse outcome in the form of Friday's January jobs report. We also have meta earnings. I think we have Amazon earnings tonight. We got Apple earnings tomorrow on Friday. So there's a lot of information between now and kind of 4 p.m. Friday afternoon that suggests that what I just said about the positive fundamental developments changing at the margins but until they change and and or until our medium

term quantitative risk management signals say that you know goldilocks has a low probability of surviving we're not going to change we're going to continue to be bullish so obviously you can check our clients will check back with us tomorrow for those updates where can we send people to find you on the internet or find out more about 42 macro well only if they like making money if they like making money definitely come to 42macro.com if you don't like making money then god help you uh i have you know just follow me on twitter uh darius dell at 42 is my twitter account i always appreciate it man i learned something and i appreciate your uh balanced approach to uh whether we're gonna have a recession or not as you see more and more soft landing commentary

come up uh usually that is not a good sign but yeah i know we're gonna wrap it up but let's let's i do want to leave on this uh i think you brought up a good point right the if we look at our positioning model you know one of the things we try we track a variety of different indicators in our positioning model whether it be valuation whether it be uh positioning survey based or horror positioning in the cftc report uh we track uh you know investor allocations via the ai survey so we're constantly monitoring positioning in the context of those long-term time series so that we could spot you know sort of extreme values that would signal it's a good time to take the other side of a trade or calling for a pain trade we call for the pain trade higher at the beginning

of November in the context of the soft landing signals that we got from the economy. Right now, we are starting to get some elements of our positioning model that suggests now is a good time to be tactically reducing a market risk. That doesn't necessarily mean Goldilocks is about to end from a medium-term perspective, three, four, five, six months, but it does suggest that we could get a pullback here, a correction in stocks in the order of 5% to 8%, which is very normal, very healthy, and I don't think anybody should lose any sleep over something like that. I love it. All right.

We'll definitely do it again in about two weeks. So let's hope that nothing crazy happens between now and then. Absolutely. But hope is not an investment strategy. It's not a risk management process. 42 macro is a risk management process.