The Pomp Podcast - #1318 Darius Dale | Bitcoin Hits $60,000 and Still Bullish?!

Episode Date: February 28, 2024

Darius Dale is the Founder & CEO of 42Macro. In this conversation, we look at their Weather Model and what it is telling us about stocks, bonds, bitcoin, we also talk about global liquidity, inflation, and impact of politics on financial markets. ======================= 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 ⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠https://frec.com/⁠⁠⁠⁠⁠⁠ ======================= 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.  ======================= 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 look at their weather model. What exactly it's telling us about stocks, bonds,

commodities, and Bitcoin. We also get into global liquidity and why that is driving so much of asset price movements. And then we talk about inflation and politics. We're headed into an election season. And so how will that play into financial markets? Darius has all of this and more for us in today's episode. I hope that you enjoy it. 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.

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to work from the kitchen table, my laptop doesn't have enough screen space. I lose my command center and my productivity falls off a cliff. It's a major problem, but this is where Espresso comes in. They have a portable screen that is so beautiful that you think Steve Jobs came back from the dead to create it the thing is incredibly light it comes with a nice stand and the user interface is so easy that i figured it out how to do it in less than three minutes if you listen to this podcast you know that's not an easy feat so the espresso team and i we became friends i got to know them because i really like the product and those screens they now want to offer them to any fan of the podcast so we struck a little deal here's how it works anyone who listens to this

podcast can go to us.espres.so, or that's too confusing, just go click the link in the description. If you go to Espresso's website, they've got a brand new offer there sitting for you. You get a little discount, and you'll get a beautiful screen. Trust me, I use mine every day. You'll love the Espresso screen, and I think it'll make you more productive. Go check them out today by clicking on the link in the description. all right guys bang bang we've got darius here darius the macro weather model you got a whole bunch of numbers you got a bunch of colors and it's telling us things are seeming to get better here i think what exactly is kind of the positioning of the portfolio today and what

is the weather model telling you yeah 100 thanks uh thanks for having me on again as always pleasure to be with your audience so uh yeah we do numbers and colors here at 42 macro we don't do narrators are not great at that, but we are great at the statistical analysis that it takes to stay on the right side of market risk. So what you're seeing here on this chart is our macro weather model. We use this in conjunction with our fundamental research to determine how long the current top-down market regime is likely to persist, and if it's unlikely to persist over the next three months, what's it likely to change into based on these weather model signals. So we'll give you a quick rundown of what's happening in the economy today and how they're contributing

to those composite signals uh there in the middle of the page there uh so if you look at growth we'll start with the real economy cycles on the left growth currently trending higher is expected by consensus to inflect and trend lower gdp 170 basis points over the next 12 months headline inflation is trending lower is expected by consensus to uh trend another 80 basis points lower over the next 12 months if you look at the unemployment rate that's trending higher it's expected by uh wall street economist consensus to uh to train another 40 basis points higher over the next 12 months. The implied earnings sales growth rate for the S&P is trending higher at 4.4%. The implied next 12-month earnings growth rate for the S&P is trending higher at 8.2%.

The sovereign fiscal balance is nominal GDP ratio. That number is trending higher at minus 6.3%. The dollar real effective exchange rate broke down to a bearish trend this week. So now that's trending lower. Transitioning to the financial economy cycles there on the right, if you look liquidity. We have two models that we use to derive liquidity here, one for the US, one for global. The 42 macro net liquidity model, that's the very popular model. Most people know that. That's Fed balance sheet minus the TGA and the RRP. That number is trending higher. Our global liquidity proxy, not as popular, but a much better model in terms of explaining dispersion across asset markets. That number is the Fed global central bank balance sheet plus global broad

money supply plus global FX reserves minus gold. That number is trending higher. If you look at Domestic credit growth and broad credit growth globally, those numbers are trending lower. The benchmark policy rates are trending sideways here. The two-year nominal yield spreads, pricing and rate cuts are trending lower. That aggregated dollar positioning is neutral. Aggregated positioning in the Treasuries market is bearish. Aggregated positioning across all commodities is bearish. And aggregated positioning in equities is bullish.

Sorry, it's neutral. Sorry. So when you look at this, let's talk stock market first. Like, what are we expecting here? And the Fed obviously was going to cut. Now it seems like maybe they're not going to cut. there's this risk of inflation coming raging back. How are you all looking at this? Yeah, absolutely. So I would say the latter part with respect to inflation, we use our fundamental research, our qualitative research to ascertain that. And we have a series

of models and qualitative analysis frameworks that we use to understand where inflation is likely to head. It's our expectation that inflation bottoms at an undeleteable level sometime in Q3 and will start to accelerate in Q4. We don't believe markets have to price that in now, though, we do believe that their immaculate disinflation process is ongoing, as evidenced by the inflation component there on the left. So in terms of the stock market, as you see there, the stock market signal is bullish alongside the bond market signal and the Bitcoin signal there at the bottom. In terms of how to interpret this analysis, which we refresh seven days or six days a week for our clients here at 42 Macro, the stock of the three-month, it's a rolling three-month

outlook. And a bullish signal or the green light just merely indicates that an investor should expect above median returns relative to the baseline and below median volatility in the asset class relative to baseline. So that's obviously a great signal for the stock market, for the bond market, and of course, our friend Bitcoin, which doesn't seem to have down days anymore. So when you see these assets that are all seeming to go up here, if we look at the composite models, what are you seeing in those models? Yeah, so the composite models, so we're currently in a Goldilocks market regime, right? And having a statistically derived expectation of better than normal returns in the stock market, below volatility in the stock market,

better than normal returns in the bond market, lower than normal volatility in the bond market, and then better than normal returns in Bitcoin, and then lower than expected volatility in that asset class. Those are all things that should contribute to supporting the expectation or sustaining this Goldilocks regime that we're currently in. Recall that we pivoted back to Goldilocks back in November. We had a cup of coffee in reflation last week as the market was trying to assess the probability of inflation bottoming sooner than our Q3 expectation. But ultimately, we pivoted back to Goldilocks, the global macro risk matrix did. And that signal is being confirmed and supported by these rolling three-month forward outlooks. Right now,

it's effectively saying that it's still a fantastic time to take risk, which is something I said on this program going back to November. And so global liquidity, I know you guys have this great measurement of it. It feels like the U.S. is trying to stay as tight as possibly can. China, though, is still acting a fool and now threatening $2 trillion. What's going on there? Yeah, no, China's been one of the dominant drivers of the global liquidity, of the uptrending global liquidity. And it's something we've been all over here in our research reporting to Macro. In late December, or sorry, mid-December, we authored a theme that suggested that China was going to front load policy support early in the calendar 2024 year. And that's exactly what we're

seeing them do it. They're doing it through a variety of means. We're seeing them lower their reserve requirement ratio, which has unleashed several hundred billion dollars into the Chinese financial sector. We've seen them increase their pledged supplemental lending. We've seen them cut medium-term lending rates, open market seven-day repo rates. We've seen them cut their loan prime rates. All of these things are adding to the liquidity that we're seeing in the Chinese economy and the Chinese liquidity impulse, that has been sustainably positive. And it's also contributing to the positive global liquidity impulse. It's not the only contributing factor. We have some very positive things going on from the perspective of

the global private sector and their liquidity creation activity as well. So it's just been a fantastic time to be an investor. Hopefully, investors aren't missing this stuff. But this is one of the reasons we refresh all of our systematic quantitative tools here for each of macro six days a week for our clients is so that when things do inflect, we can spot it in real time and reposition our portfolios before the rest of the investors, you know, kind of come around to do that analysis. What do you think most people are missing in the market right now? Missing? Just the sustainability of the good times. You know, so we wrote a note this morning in our late afternoon note about how, you know, it's very likely that we could observe this

to our positioning model. But for most of the bull run that we've seen over the past year or so, it's very clear to see that the average investor, whether they be buy side, whether they be sell side, whether they be investment advisor, whether they be retail, has not participated in the upside nearly as much as they traditionally would have in such a raging bull market. So our expectation is that they're going to have to continue to play and catch up over the medium term. Now, ultimately, we're going to find the top in a lot of these assets. We're going to find the top in the equity market. We may find a, you know, a temporary top in Bitcoin, you know, early in the halving cycle. But again, you know, it's not our job to, you know, forecast the exact dates of

those tops. It's our job to refresh the quantitative risk management systems and the econometric models that we use here at 42 Macro to actually help investors proactively prepare and position for those tops and ultimately reposition their portfolios when the tops are occurring. You know, again, we want to be, it's our job, you know, we consider ourselves as macro risk managers here at 42 macro, our number one job is to help investors maximize upside capture in bull markets and minimize downside capture in bear markets. Everything else in terms of generating research insights and all this kind of stuff, yeah, it's fine. It's great to know what the Chinese property market is doing so we can project where liquidity is doing and all this other stuff. But at the end

of the day, if we're not helping our clients make and save money, we're not doing our job right. Let's talk about Bitcoin more specifically. You've got the composite signal here. What is this showing us? And then how do you think things like the halving will play into it? Yeah, 100%. So yeah, if you're looking at this chart, the Bitcoin composite signal there, where we show the evolution of the Bitcoin composite signals over time, since they happen in this asset class, and the green corresponds to the blue bullish composite signals, the neutral, the orange corresponds to the neutral and the red corresponds to the bearish. What you see there in the chart is that by understanding the principal components of macro, particularly the trends in the principal components of macro that we went through at the beginning of this discussion, if you can build a good enough tool that allows you to project the excess returns that we're talking about in terms of that current bullish composite signal, you can see how it evolves over time. And all the big crypto run ups, the big bull runs that we've seen in Bitcoin have historically come when the weather model signal has been bullish and the big drawdowns in Bitcoin, the big crypto winners have occurred when the weather model signal for Bitcoin is bearish. You know, it's not to say that every time Bitcoin goes up, it's in a bullish the macro weather for the asset class is bullish or every time Bitcoin goes down, the macro weather for the asset class is bearish. but generally speaking you're going to keep yourself on the right side of crypto market risk

uh if you are a buy buying by and obeying these uh these composite signals here and our macro weather model uh which are uh just as important as our global macro risk matrix which determines the market regime again we're in a goldilocks market regime we should be seeing bitcoin go vertical because that's the kind of activity you send to see uh in a goldilocks market regime if you don't have an ability to understand what market regime we're in we highly suggest that that you partner with someone that does. How about the ETFs? What are you hearing from clients and what's the impact of those been? Yeah, that's something we were talking to clients about yesterday. So we're starting to see Bitcoin added to these traditional TradFi portfolios

over the past few weeks or so. And that's something we consider ourselves the foremost authority in the world in terms of helping investors risk manage Bitcoin in the context of a traditional multi-asset portfolio. And we're now starting to see ETFs out there with those same characteristics. But what those ETFs lack, in my opinion, and what's going to get investors really, really hurt in the future is the fact that those ETFs

don't have our risk management overlays that we feature in our case portfolio construction process. You and I talked about our impact our case portfolio construction process in December. I'll tweet that out for those who may have missed that discussion. But one of the, you know, just some summary statistics out there

for you. If you run our 60-30-10 SPY, AG, Bitcoin strategy, it's a trend following strategy. The average annual return for that strategy is about 13%. And the max drawdown for that strategy is minus 11%. If you run that same 60-30-10 strategy without our quantitative risk management overlays, whether they be through the weather model or through the volatility, just a momentum signal for each asset class, you're talking about the same average annual return thereabouts, but you're talking about a max drawdown of minus 26%, which is more than double the max drawdown of KISS. And more importantly, you've crashed three times over the life of that out-of-sample backtest, which begins in January 2018. So what investors don't realize, particularly the

traditional Wall Street investors who are coming over and just now getting allocated to Bitcoin and just now putting Bitcoin in a traditional multi-asset portfolio, they're not going to be ready to risk manage the wild rides and the wild swings of this asset class as historically had in a way that protects their broader retirement account, their clients' broader retirement accounts. So I'm really hoping and praying that investors don't have to go through the fire of the crypto winter and seeing how that impacts their retirement savings as a traditional TradFi investor. Hopefully, they can hear this and find our KISP portfolio construction process as a much better mousetrap in terms of incorporating Bitcoin into a traditional

multi-asset portfolio you've got these two charts on liquidity walk us through them yeah so these are the two of the uh so as i mentioned uh liquidity is a component feature uh these are two of the component features of that macro weather model uh 42 macro net liquidity the global liquidity proxy we're just showing the time series over time to give investors a sense of of how they how they progress uh throughout history and ultimately how those um and how they contribute to uh to the different asset classes as you can see when liquidity is rising by the back test there on the bottom of the both charts when liquidity is rising you have positive excess returns uh in stocks and bitcoin and with clarity's following you have negative excess

returns uh in uh in stocks of bitcoin so uh it's just uh just helping investors kind of contextualize how each of these principal components of macro correspond to each of those asset class on an independent basis and then we summarize that across all the the 20 features that we show back on slide one uh and each of those features contributes independently to those composite signals so it's a very fluid very dynamic stochastic process and in our opinion it's It's the kind of analysis you need to do to make and save money on a consistent basis in this post-COVID high fiscal monetary largesse above-trend nominal GDP world that we're living in, where a lot of the traditional kind of metric tools have kind of died, in my opinion, and no longer really work. What is the thing that going through this year you're paying attention to that you're like, this will be a signal that tells us whether capital is onsides or offsides? I think that there's a lot of people who said, hey, these rate cuts, they're positioned for that.

But are there other things that you're really paying attention to? Yeah, 100%. The number one thing I'm waiting for or watching this year is the evolution of productivity growth because the productivity growth is the missing ingredient to a soft landing or no landing in economy versus a hard landing in the economy or one that is perpetuated by the Fed having to perpetuate rate hikes. I recall that productivity growth is currently tracking above trend, and that's really positive because historically, in order to have a soft landing, you need two things to occur, really three to two of these three things to occur. You need above trend productivity growth. You need the Fed to pivot to rate cuts and you need above trend fiscal spending growth. Right now, we currently have, you know, two and a half of those three. And so that's obviously a really, really positive setup. But the reason productivity is a missing ingredient, such an important feature of this bull market is because what high productivity growth allows the economy to do through the lens of the corporate sector, it takes pressure off of them in terms of having to push through price increases to consumers because it takes pressure off their margins.

And it also takes pressure off of them from the margin perspective in terms of having to fire people. So high productivity lowers the probability that we see a firing cycle. Higher productivity lowers the probability that we see accelerating inflation. If productivity started to go back to where it had been over the past couple of years, which is negative and deeply negative, then we're going to have problems. And so we have our eyes very much glued on this upcoming series of productivity and productivity-related data points because, to me, that, in our opinion, was part of the reason we started – we pumped into a Goldilocks regime in November. We got the Q3 productivity data in late October, in our opinion, and if we see a negative development in this segment of the economy, then we're going to go back into a bearish market regime. I don't want to open a can of worms, but all that's going on, right? Okay, that's where we are now. I look on the horizon, I see Joe Biden, Donald Trump, they'll be facing off in November, this election, the Fed says, hey, we're not political. The closer they get to making cuts or not making cuts to an election, the more political the accusations are going to be. And so how do we think about the political kind of, you know, season, the election, all that playing into the economy? Yeah, that's a great question.

I mean, so first we have to ask the question, is the Fed even going to be cutting rates? And our expectation is that they may be one and done if they can get it done in May or June, because we do expect immaculate disinflation to persist into the second half of the year. So they may be able to get one or two done between May and June. But as I mentioned, our inflation models are suggesting that inflation is likely to bottom sometime in Q3. And so as we get into the second half of the year, anticipating cuts in and around the election, I want to say there's a meeting in September. and then there's a meeting right after the election on the 7th, and then there's a meeting in mid-December, irrespective of the election, they may not be able to have political cover to cut anyway because the inflation dynamics are no longer supporting them.

So to me, it's more about following the evolution of the economy and inflation, not necessarily focusing on the election because, again, I think the election is a secondary component. Now, if we told me that inflation was going to persistently trend lower throughout the second half of the year and into 2025, then I would expect them to continue cutting irrespective of the election. We've seen the Fed be very active in election years. Just going back, obviously, they were extremely active in 2020. That's the most active they've probably ever been in terms of the alphabet soup of liquidity that they threw at markets during COVID. If you go back to 2018, they were hiking interest rates, caused a market crash in 2018.

You go back to 2016, that was the Shanghai Accord, where Janet Yellen backed off in terms of easing U.S. fiscal liquidity policy. You go back to 2012, that's when they launched QE3 in 2012. You go back to 2010, that's when QE1 stopped and caused a pretty sharp drawdown in asset markets. I mean, you go back to 2008, obviously, they took rates to zero in 2008 and introduced QE1. So, you know, the Fed has been active in every general election, whether they be midterm or presidential, you know, since, you know, 2008 and perhaps even prior to that. So in my opinion, we think the Fed is much more responsive to dynamics in the economy than the political cycle. Where can we send people to find you on the Internet? If they can't find me, they need to turn their light switch on.

But we're at Summit42Macro.com. Come check us out. uh you know because i mentioned we refresh all of our quantitative risk management systems for our clients both across the institutional investor world we have plenty of retail clients we have plenty of our investment advisor clients the reality is if you're the kind of investor that wants to stay on the right side of market risk i.e you're not this sort of long-term investor that's okay with wearing a 50 to 70 80 drawdown for multiple years at a time or you're you're not someone who's so convicted in a bearish bear porn thesis that you need to get squeezed all the way

way to the high heavens, then if you're not those people and you prefer to make and save money along the way, then come check us out at 42macro.com. You can find me on Twitter at DariusDale42. I think it's Deion Sanders that says, I ain't hard to find. Ain't hard to find, baby. All right. Thank you very much. We'll do it again in the future. Cheers, brother. See you, man.