The Pomp Podcast - #1311 Darius Dale | Will Global Liquidity Push Bitcoin To All-Time Highs?

Episode Date: February 15, 2024

Darius Dale is the Founder & CEO of 42Macro. In this conversation, we talk about global liquidity, quantitative risk management model, bitcoin, other assets, and macro environment conditions.   ======================= 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.  ======================= Get Better Crypto Data: Do you want faster, easier crypto data? Sign up for Velo Data, a new product that we have been working on to solve this problem: ⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠velowaitlist.com⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠ ======================= Pomp writes a daily letter to over 265,000+ 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/ ======================= View 10k+ open startup jobs: ⁠⁠https://dreamstartupjob.com/⁠⁠ Enroll in my Crypto Academy: https://www.thecryptoacademy.io/

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, the founder and CEO of Fortitude Macro. In this conversation, we talk about global liquidity, his quantitative risk management model, and how

things like Bitcoin are going to benefit both from that global liquidity, but also the approval of the Bitcoin ETFs. This conversation was fun and informative, and I think that you will learn a lot in it. I always enjoy talking to Darius, and today was no different. 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 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 Espresso, the maker of the world's thinnest portable display.

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Before we get into this episode, I also want to tell you about a brand new product called Velo. Velo is faster, easier crypto data. Everyone in the industry is always looking for what's the price? What's going on on the exchanges? Where are assets flowing or not flowing? How is things like open interest and derivatives actually playing out in the market? Well, that's where Velo comes in. It's faster and easier crypto data.

You can go to VeloWaitlist.com today. Myself and a couple of friends, we invested in the business, we're advising the founder, and we think it's pretty cool. This one is something that keeps me informed on a daily basis, so you should check them out at VeloWaitlist.com. That's V-E-L-O Waitlist.com. All right, guys. Bang, bang. I've got Darius here. Darius, Janet Yellen, the Treasury Secretary, recently gave an interview,

And she was asked how herself and President Biden think about inflation. And one of her components of the answer was a classic talking point from a politician or a government official, which was, yes, there are some prices of important goods that has gone up, but people are better off. Wages have gone up. And so the American people are better off than they were pre-pandemic. What do you think? Do you agree with her, disagree with her? Maybe there's nuance here. Well, maybe. So it's great to see you, man. Thanks for having me back on. I'll say this probably needs to be a little bit of shrinkflation applied to her statement, her commentary, because it is obviously just judging by the polls. You know, obviously, President Biden is is polling poorly against President Trump or former President Trump and head to head polls that her comment is nonsensical. The average American consumer, when you look at the levels of various consumer confidence ratings, are very depressed cyclically. They're moving higher. So that's been supportive of asset markets.

It's Goldilocks regime we've been calling for since early November. But that's neither here nor there. What really matters for the consumer is the perspective of cumulative price inflation. And if you think about cumulative price inflation, particularly for people on the lower end of the income spectrum, they've been down on a net basis on real income terms over the past few years. You know, the people in the upper echelons of the income and wealth distribution spectrum have done quite well. You know, things like net worth, household net worth, cash on household balance sheets, those types of statistics have broadly outpaced inflation since the start of the pandemic, really since the start of the fiscal and monetary largesse we've seen really since early 2020.

But if you think about things like just wage inflation, particularly, again, for those lower to medium income consumers, it hasn't been great from that perspective. So I would disagree with her comment, but I don't know that I would agree with the other side of her comment, which is this is obviously bad because, again, from a distributional standpoint, there are winners and there are losers. Yeah, it's interesting because from pretty much when Biden stepped into office for like 22 or 24 months, I forget the exact number, negative real wage growth was the theme. It was almost like this guy's undefeated when it comes to real wage growth. He just throws up red negative numbers every single month, month after month for like two years. And again, some of it is because of his policy. Some of it is because of Trump's policies. And some of it is just the macro economy.

who didn't matter who was president, but there was just this like undefeated run of negative real wage growth. And then it flipped and he went seven for seven, seven months in a row and it was positive. But then we just hit back and now we're negative again, based on the January kind of re-acceleration of inflation. And so part of this also is like, well, it's kind of been mixed. Like there's been times where wages have been gaining on inflation. And then there's been times again, like two years where wages weren't. And so you can kind of pick and choose your start and stop points and manipulate the data in a way that tells the story that you kind of want, which seems like maybe that's something that, you know, both parties would love to do going into an election

year. Yeah. Welcome to Political Science 101. Which data sets that best tell your narrative? I mean, and that's kind of what this is, right? We all know it's a parlor game. You know, it's designed to get the elites paid and in the right positions to take advantage of the rest of us. But it is what it is. I don't know that, you know, going back to, you know, one of my favorite statistics I throw out in terms of why we are here from the perspective of well above trend inflation for several years, partially why the economy has been resilient much more so than the average investors expected, is when you go back and you look at the fiscal monetary policy response to the pandemic, which is obviously extreme, we grew the federal debt by $6 trillion in the two

years ending in 2021. So 2020 to 2021, the Fed monetized over 50% of that. And that $6 trillion was spread out evenly in 2020 and 2021 with Trump and Biden as presidents. So this is something we've long argued, even for years, even going back to the early days of the Trump presidency, is that you need to, as an investor, kind of shed your old school thinking of between Democrats and Republicans. The reality is it's populist and more populist in terms of how monetary and fiscal policy has evolved here in the U.S. And really, this is not a U.S. phenomenon. This is something that is being driven by the fourth turning, which many of you guys know. My former colleague, Neil Howell, one of my mentors, his work has really helped us understand

some of the political dynamics and social economic dynamics that are causing that shift towards populism and increasingly towards populism for certain pockets of these political parties. And so, in our opinion, it ain't going anywhere. It's only going to get more populace, more fiscal and monetary largesse in response to crises going forward. And ultimately, there will be a tipping point that we have to deal with as investors and as people in this society, but we're probably not there yet. So let's talk about this quantitative risk management model that you have, and you guys put together the summary, but basically they're short-term, kind of short to medium-term, and then you've got medium-term type signals. What are you seeing and what is these models and risk

management frameworks really telling us about how investors should be thinking about their portfolios and the assets that they're allocating to? Yeah, great question, man. A nice pivot too, because you and I can go for hours, particularly over beers, and we certainly have a lot of experience with that about, you know, some of these longer term fiscal monetary policy dynamics and economic dynamics. And I think I like to think that, you know, you and I are two of the best in the world at that with mincing no words in that statement. But in terms of what we do for our clients at 42 Macro is more focused on how do we actually make and save money today? What is the medium to medium to long term or short to medium term outlook for asset markets? And how are we

best helping investors position their portfolios to take advantage of market risk up or down left or right range sign or sunny yeah and so you know just a little bit of background about myself uh i spent most i spent and spend in my career uh traveling around the world uh meeting with institutional investors on the global buy side uh you know i've probably done about 5 000 meetings with uh cios and pms across the global buy side uh and what what i'm design what we're trying to do the services that we provide uh to them uh are mac what we consider to be macros management and that's a kind of a dirty word for uh market timing for factor selection factor tilting and all this kind of stuff that institutional investors are tasked with uh because they are either benchmarked

uh to asset markets or they're performed they're into some sort of market neutral long short uh a kind of framework that that that you know forces them to take certain kinds of risks and so what we've done for our clients at 42 macro is build a series of models uh that are really really accurate and really really um uh sort of uh repetitive repeatable uh in terms of the output that they generate to help investors stay on the right side of market risk you know there's a choice you have to make as an investor before we even unpack this slide you can not stay on the right side of market risk right you can be long an asset that is in a drawdown and continuing to draw down because you believe in the long-term thesis but you know for institutional investors

they get fired when they do that they can't feed their families when they do that so they need to generally be making money all the time or on their way to making money all the time because they'll lose their jobs otherwise and so what our models are designed to do is help investors you know kind of maximize upside capture in bull markets and minimize downside capture in bear markets so So with that preamble out of the way, let's just get into the slide. So as you guys can see, this slide, as you can see, is dated Thursday, February 15th, 2024. Every day we publish our lead-off morning note, and every Saturday we publish our around the horn. Our quantitative risk management summary is updated and featured in that slide.

And what the updates are are just the highlighted call-outs from each of those various models, which we've actually published the output of the models as well in the presentation, but we don't have time to go through that today. So as you can see, in terms of stuff that I think will be broadly relevant for most market participants, if you look at our positioning model, there are some interesting signals there in the positioning model. The retail trader positioning was extremely overweight stocks heading into this week's correction that has since dissipated. But if you think about equity or investor positioning from the perspective of systematic investors and market neutral players, it's actually suggesting that there's still an elevated risk of a correction from the perspective of CTA positioning being extended. from the perspective of market-neutral investor positioning being extended. Just skipping down a little bit, we're still, if you look at the medium-term signals, which

tend to resolve themselves on a three-month or more time horizon, our global macro risk matrix, which is the primary model we use to keep our clients on the right side of market risk, this is the model that called for Goldilocks going back to November alongside our positioning model and has really helped our clients really benefit from this massive bull run we've seen across stocks when a lot of investors are, you know, kind of kicking and screaming, you know, shouting bear poor narratives to the high heavens. But that's neither here nor there. So we're still in Goldilocks. If you kind of scroll back up and look at the volatility, just a momentum signal, we're starting to see changes in some of the compositions of the defensive assets. We're

seeing things like the move index break from bearish VAMs to bullish to neutral VAMs. The currency volatility, CVEX, break from bearish VAMs to neutral VAMs. Treasury bonds break from bullish to neutral. And so you're starting to see the kind of global currency and global fixed income markets start to price in a little bit more volatility that would be suggestive of moving out of the Goldilocks regime. Now, it's very likely that based on that weather model signals down there where we're generating the weather models currently generating bullish 3-month outlook for stocks and bonds and a neutral 3-month outlook for the dollar commodities and Bitcoin, that would suggest that we're probably headed for something that looks more like reflation rather than

Goldilocks. Reflation is also a risk on regime, but it's a risk on regime with an inflationary bias and a bias that is less positive for fixed. It was actually negative, explicitly negative for fixed income, but it continues to be quite positive for things like Bitcoin, things like the stock market. So again, this is something we refresh six days a week for our clients at 42 Macro. Obviously, we unpack the call outs as well with all the charts and the data supporting that. Now, when you start looking at assets like Bitcoin, one of the things that's been really interesting to me is it seems to be serving as like an index for global liquidity. If you look in as global liquidity increases, Bitcoin's price goes up, obviously the opposite

happens as well. And we've talked for months now about the Fed, the ECB and Japan all contracting their balance sheets while China is just bucking the trend, middle finger to the rest of the world and saying, let's pump liquidity into the global system. And so we've seen Bitcoin run up quite a bit and call it the last year or so. Is this a game of more and more assets will become these like global liquidity indexes? Or do you actually think that legacy kind of traditional assets like the stock market or others, they're not really just dependent. There's too many other fundamentals. There's too many other things that are at play. And so Bitcoin and Bitcoin alone will be that kind of index of global liquidity. I don't really know how to think about it yet, but I know that

Bitcoin is doing that today. And it's unclear whether this is just the first of many assets that will just become a global liquidity trade, or will these other assets be able to kind of retain some other drivers of price action, not just, hey, our central banks, green light, red light, and playing a game? Yeah, no, so that's a great question. So a lot to unpack there. The kind of key takeaway, just to answer the main question, which is, is Bitcoin going to continue to be this sort of being dominated by global liquidity and separate and apart from the rest of asset markets, we would say, no, if you go back and you study things like our global liquidity proxy, which for those who may not be familiar, it's the global central bank balance

sheet, the aggregated global central bank balance sheet, plus the aggregated broad money supply, plus aggregated global currency reserves, FX reserves minus gold. And when you look at that time series, it's actually highly co-integrated with every asset market, whether it be corporate bonds treasury bonds stocks uh crypto um any as every asset market with the exception of commodities which tend to be a more stationary time series uh it sends it's a you know any asset market that is a non-stationary time series which most are um then you know the exception of currencies and commodities then you're talking about it's going to be highly co-integrated if not very correlated uh with fluctuations and the level of of global liquidity so this is something that's been uh

uh something we've observed uh for for quite a while now it's become more popular as part of the market discourse amongst you know broader market participants but what we've been doing at 42 macro and i think we've done a great job at this is one help investors understand what are all the moving parts in that liquidity matrix which central banks are likely to continue um tightening their balance sheet or starting to ease their balance sheet which economies are going to have an acceleration or deceleration in credit growth uh that could be very uh onerous which economies are having you know positive or negative current account flows that could ultimately be positive or negative for the global liquidity matrix so for us you know i think for a lot of folks who

listen to podcasts and watch twitter you know there's nothing wrong with those things but i think if you want to consistently stay on the right side of market risk you need to do a lot more than that as an investment process and what we do in terms of helping our clients understand these liquidity flows and how they're going to ultimately impact asset markets is actually do the granular research in terms of tracking growth tracking changes in inflation tracking changes in policy across all the major economies particularly here in the us because obviously us and china tend to be dominant in these liquidity discussions you know we we understand all those moving parts that cause liquidity to go up or down or down faster or down slower or up faster or up slower

that's what we're doing at 42 macro which gives our clients you know a much better you know kind kind of flashlight into this dark future that we're all investing in, you know, on a consistent basis. Now, when you look at these models, what exactly are people doing differently? And, you know, we saw the 60 Minutes interview, the Fed chairman seemed to be quite revealing in his commentary, but maybe they aren't planning to cut by March. It seems like the January inflation data re-accelerating probably pushes it out a little bit further. Is most of your clients changing their portfolios right now or not really uh no well most of our clients have been benefiting from the bull run uh you know we've had some a few legacy holdovers or not even legacy holdovers we

got a few new clients who've joined us uh in the past few months uh particularly on the pro to pro investor side uh which are our general our high-end institutional client relationships uh that have uh come on and said hey look man you know we're sick again squeeze we think there's a better way to invest and we uh we're checking you guys out and and and fortuitously uh you know they found opportunities to to get their portfolios right size for the current market environment um obviously it's hard going from being very bearish to being bullish uh you know in a short period of time particularly when markets have been on such a on such a run but clearly this is a raging bull market uh particularly in in crypto and stocks and it's not something you're going to want to fight

as an investor and quite frankly uh if you go to our fundamental research summary which is a slide three in today's chart pack there is no reason to fight this from a growth inflation or policy perspective and there hasn't been a reason uh since uh late october early november at least according to our research here 42 macros so uh when we look at what our clients are doing they're by and large uh benefiting they're making uh money uh quite quite a lot actually uh when we think about what the broader investor community is doing going back to uh slide one that quantitative risk management summary uh you know investors have gotten there was some upside capitulation we saw you know heading into early february a few weeks ago not a few weeks ago two weeks ago uh we saw

retail trader positioning crash to the upside and and give us that negative signal in terms of being extremely overweight stocks uh we saw uh realized volatility uh which we use as a proxy for the trend in realized volatility which we use as a proxy for uh systematic investor positioning we saw that crash to the downside which is an indication that their positioning was getting extended and stretched to the upside in the equity market uh we saw uh implied correlations uh which is an indication that market neutral players which are these dominant you know kind of multi-platform multi-manager uh hedge funds that dominate market turnover uh you think about the citadels of the world etc you know those kinds of firms you know that it's been a great environment to take risk

for them because implied correlations amongst equity index constituents uh and particularly the volatility component of that uh had been uh or at historic lows in fact during the zeroth percentile of daily data going back to 2006. So that would suggest that these managers on the platforms are actually extending their book size, the assets that they're managing, the leverage that they're investing with is actually at max. And so there is some risk of a correction here still, in our opinion, because a lot of the cohorts of the investor community, global investor community, whether it be retail investor, REA investors, systematic investors, market neutral players, long only fund managers. Some of those cohorts are about as bullish as they possibly can

be. Now, the last question I have for you around implementing this stuff, the information that you all look at, how much of this information is really, we want to identify assets before they move versus we want to be positioned in the right markets. And what I mean by that is there's an overarching belief. I think investing in the right market is more important than which asset you buy in that market. So emerging markets versus domestic, equities versus somewhere else. And what I continue to come back to is it feels like a lot of people who look at macro, they've been correct in their analysis of inflation or central bank activities, etc. But they are buying more traditional assets versus buying these new assets. And so now that there's

a Bitcoin ETF, you know, let's say that people think there's going to be a re-acceleration of inflation. Maybe historically they bought gold because it was easy to buy because they just go buy GLD. Do you see people now saying like, oh, okay, like a Bitcoin ETF provides the opportunity to come to the same conclusion of inflation is going to be a problem. You want to express the same opinion, like inflation hedge assets will go up, but now they're going to try to buy the thing that's more asymmetric because they just have like more ability to do that. Yeah. So the quick answer is absolutely. We're obviously seeing from a fund flow perspective, particularly over this past week or so, investors really starting to believe in the viability of

something like Bitcoin. In our opinion, that's only going to continue. I mean, if you go back and we did, I think I've referenced this on our show many times, but last summer, we did a deep dive empirical research study with data going back to the, you know, 1800s, 1700s to determine what investors should likely expect from the economy, from policy, and ultimately from asset markets throughout the duration of this fourth turning, which again, my former colleague and mentor, Neil Howe, thinks could extend itself until, you know, early 2030s. And the key takeaway is that some of the key takeaways are, which I think have very relevant long-term implications for investors allocating to assets like Bitcoin and or gold is that you're going to have more

inflation. You're going to have much bigger budget debts and deficits than any CBO or treasury or Jeff Gundlach projection could even potentially imagine. It's going to be way worse because in a fourth turning, these things tend to explode. And as a function of that, we think we're probably going to see a decent amount of financial repression. We think we're probably going to see a decent amount of currency debasement. And so the demand for these types of assets in our opinion over the next you know 10 12 years is going to explode higher now it's not going to linearly explode higher you know if you think about an asset like bitcoin there will be crypto winters to deal with it but that doesn't necessarily mean it's not you know it's going to

be at a it's going to be at a much higher price longer term you know between now and the end of that that period so you know what we do at 42 macro uh going back to our quantitative risk management summary or a slide to our discretionary risk management overlay is to help investors you going back to answering your original question we want to make sure that we are there when the money is to be to is to be made but when there's no money to be made and or there's money to be lost we're not there right we're using our quantitative risk management tools you know particularly uh trying to identify inflections and trends and momentum in and across asset markets you know that's that's the name in the game if you're trying to make them you can save money on a

consistent basis if you just want to you know buy a unit of bitcoin or whatever many units of bitcoin you can afford and cold storage it until 2031 fine i think if you can do that if you can do that if you can allocate to your target date fund and don't look at your portfolio between now and when you retire i would highly recommend anyone that can do that from an emotional standpoint do that but for the other 99.9 of people that want to actively be involved in their you know in their investment future that want to you know that love this thing that we call investing this social activity that we call investing and want to know what's happening with liquidity want to know what's happening with policy with growth and markets etc and actually want to trade and and

actually transact a lot more than they probably should firms like ours make sure that those decisions that they're making in terms of transacting in financial markets are better and a lot really consistently a lot better than they otherwise would be without firms like 42 macro where can we send people to find you on the internet or learn more about 42 macro yeah appreciate that man thank you so uh 42macro.com come check us out uh i'm on twitter at darius dale 42. i'm pretty uh pretty uh pretty active there and on linkedin as well so i appreciate everyone uh for checking us out uh but obviously if you don't check us out we appreciate you as well because uh we think there's a lot of education that we can provide uh to the general investing

public because i you know you and i we will you know i don't want to step on any toes here because you're obviously partners with some of these organizations but i see a lot of um folks on you know the cnvcs of the world you know just you know they they're not they're not doing a good service for the broader investing public and you know we're here to change that i love it we'll do it again my friend thank you brother appreciate you