The Pomp Podcast - #1325 Darius Dale on Bitcoin, Stocks All-Time Highs: Remain Bullish?

Starting point is 00:00:00 What's up everyone? This is Anthony Pompliano. Many of you know me as Pomp. You're listening to the Pomp Podcast, which is my effort to find the most interesting people in the world and sit with them for hours while I ask questions in an effort to learn. So it would mean the world to me if you would subscribe to the show on your favorite audio platform, watch episodes on YouTube, and tell your friends and family about the podcast. My goal is to help millions learn from the world's most interesting people. So let's get into today's episode. Today's episode is with Darius Dale, the founder and CEO of Fortitude Macro. We get into global liquidity and why that is driving so much of asset price movements. And then we talk about

Starting point is 00:00:39 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. This podcast is for informational purposes only. Today's episode is brought to you by Propy. Imagine a world where you could buy and sell

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Starting point is 00:02:47 All right, guys, bang, bang, I've got Darius here. Darius, inflation data comes in. Everyone thinks inflation is falling and the world is going to be perfectly fine. Is that true? It seems like maybe that's not true. Hey, what's up, man? It's good to be back. So it's true and it's not true. So this is the title of our morning note this morning was mixed signals on the inflation front. And I do want to emphasize mixed. So we put together a series of charts for you guys today to kind of go through some of the data points that we got over last 24 hours with respect to inflation in the u.s so the first chart we just show a headline cbi food cbi and energy cbi and in each of those panels the blue bars represents the three-month

Starting point is 00:03:26 annualized rates of change and the red line represents the urea rate of change and as you can see uh headline cbi accelerated to 3.9 percent uh three month annualized that numbers basically double its pre-copy trend uh it was driven by an acceleration in energy cpi the third panel down there to 4.5%. So we are now growing in terms of energy price inflation, which is a phenomenon that we've largely escaped for the past kind of year and a half. And when we see this inflation data, obviously there's multiple ways to measure it. There is year over year, there's month over month, there's kind of regular CPI, there's core, there's all these different things. How do you see each one of those individual signals? And do you try to take the totality of what's each one telling

Starting point is 00:04:06 you or do you zero in? Like at the Fed, I think they're like core PCE numbers, like the one that they really like and kind of point to always. But what do you think about the different ways to measure and kind of the manipulation of the data? Yeah, the great question. Phenomenal question. That's one of the questions we are all tasked with as investors and certainly something that we have to do here for our institutional clients at 42 Macro, which is to parse through the data to figure out what's actually signal versus what's noise. And with respect to trying to understand dynamics and inflation, to your point, there are a lot of different indicators that we can use but generally speaking you know we want to understand what the preponderance of

Starting point is 00:04:41 evidence uh is signaling uh that's kind of step one and then step two is what are policymakers focused on and then step three is what are the leading indicators for the indicators that the policymakers are focused on if you can answer each of those three questions whenever you receive any data point or any collection of data points from from economic reporting agencies you're going to do a better job than the average investor who's really not combing through all the data on a regular basis so in chart number two uh you know kind of addressing this um you know kind of the preponderance of data uh scenario that we have uh all the various measures of core inflation so the first panel shows uh just regular core inflation that accelerated to 4.1 percent three-month

Starting point is 00:05:19 annualized that the number is well above trend uh we saw the part of that acceleration was really driven uh in part by uh some of the um the the sneakiness of services we saw that was flat at six percent three-month annualized well above trend more than double the trend rate and then then we saw core service or super core, which is core services x housing, which is one of the preferred metrics that Jay Powell has been highlighting in recent months, that number accelerated to 6.7% on a three month annualized basis, that number is more than double the pre COVID trend. So we're seeing some surreal stickiness in some of the more services core services elements of inflation. And that's causing broader inflation measures to remain sticky.

Starting point is 00:05:59 Now, when we look at this underlying inflation, what's fascinating to me is some of these are trending in the same direction, but underlying inflation, there's obviously a measurement of it, but there's also this element of psychological inflation. And what I mean by that is just like the Fed has got interest rates at 5.5%, stock market's at an all-time high, Bitcoin's at an all-time high, and people are spending like maniacs and they don't give a shit what the Fed is doing, right? Like, like there is this underlying component that I think you're getting at in this third chart. But then there's also just like, if people ignore the data and continue to act in an inflationary way, then the data actually will follow the like actions and psychology more

Starting point is 00:06:42 than the people follow the data, if that makes sense. A hundred percent. It's reflexive. It's always, it always has been and always forever will be reflexive. I mean, so what we're seeing now in terms of this backup and inflation that we've observed over the last couple of months, In our opinion, this is just the lagged impact of the monetary easing that we experienced as investors and as people over the past few months. Recall that asset markets, if you look at U.S. dollar money markets, whether they be Fed fund futures or overnight index swaps, price stand a significant degree of monetary easing over the next 12 months and really over the next two years over the past few months as a function primarily of the Fed's dovish pivot. And as a function of that, we are now reaping both the benefits on the growth side, but also the harm on the inflation side of that monetary easing. So a great example of this is on chart three, where we show underlying inflation, median CPI, which takes the median change of all the, let's call it, I want to say about 420 different subcomponents of inflation.

Starting point is 00:07:39 That number decelerated modestly to 5% through methanulized, which is more than twice its pre-COVID trend. And then we saw trim mean CPI, which takes the same measure, but it lops off the bottom eight and top eight percentiles from the data to get a more trim mean measure. And that number is at 4.3% accelerating to 4.3%, which is double its pre-COVID trend. So if you look at not just the main categories of inflation, but also just the general breadth of inflation is actually pretty sticky over the past few months. And in our opinion, that's partially a function of the monetary easing we saw pricing the markets. now you've got this small business like optimism survey and again goes back to kind of psychology

Starting point is 00:08:18 if people are optimistic they act one way if they're pessimistic they act a different way uh what's this telling us yeah so uh just taking a step back one of the things that i think we do uh really well that's really different from the average uh research provider is that we analyze every single major economic release in the world on a daily basis uh in rate of change terms and we contextualize that for our clients most of the time the data is noise so we don't even report on it. But there are times like this where we actually have to say, hey, look, this is actually creating signal for us in terms of altering our forward looking views on the economy and our policy. And so with respect to the NFIB survey data this morning, we got that at 6 a.m. Most

Starting point is 00:08:57 people didn't even pay attention to that. But when you break down all the different inflation subcomponents of that, whether it be the higher prices subindex, the price plans over the next three months index, the compensation index and the compensation plans index, all of these measures slowed sequentially and are at multi-year lows. And so even though we're observing a, I don't know, stickiness of reported inflation in the CBI statistics over the past couple of months, we saw it in the PC deflator statistics a couple of weeks ago, we do believe that stickiness is likely to prove transitory and ultimately resume its downtrend over the medium term because we continue to see survey-based leading indicators continue to point to a downward trajectory

Starting point is 00:09:36 of inflation. When we look at energy prices, you've got a couple of charts here. It feels like real estate, Bitcoin, and energy are all things that people are getting more bullish on because they're basically getting more bearish on the legacy system. What are you seeing in the energy markets? Yeah, 100%. So this is one of those things that is kind of going on stealth in the background. If you go up slide five, where we show the indexed performance year to date for front month gas, gasoline futures, front month WTI and Brent crude oil futures, and then front month net gas futures,

Starting point is 00:10:10 we see that gasoline futures, which obviously will eventually impact consumer wallets from the perspective of gasoline prices, those are up 23% a year today. And so this is obviously the real key takeaway. It's actually on the next chart where we show, or the next two charts rather, where we show that energy as a share of total personal consumption expenditures is only about 2.4%. So that's only in the eighth percentile of monthly readings going back to January of 1959. So the rise in energy is not likely to cause significant problems for the from the perspective of consumer spending. But the next chart is the real key takeaway here on slide seven, where the rise in gas prices is likely to negatively impact consumer confidence because energy, food and energy are those two main variables that tend to drive consumer confidence readings, particularly the University of Michigan numbers that we're going to get on Friday at 10 o'clock. And so the key takeaway is there is that Biden, which is now demonstrably trailing Trump by four percentage points in betting odds,

Starting point is 00:11:08 whether you look at the predicted numbers, that, in our opinion, is likely to increase pressure on the Oval Office and on the Treasury Secretary Yellen to continue buying votes with accommodative policy, whether they be with spending, accelerating, you know, authorized spending into the economy from some of the acts like the CHIPS Act or the Inflation Reduction Act, or it could be on slide eight with Yellen continuing to implement a net financing policy that drains, that effectively drains the reversible facility balance. It's currently at just shy of $500 billion. And oh, by the way, that $750 billion target for the treasury general account balance at the end of Q2 could easily be revised lower to something that looks like $500 billion, which effectively means there's about $500 to $750 billion of sort of untapped

Starting point is 00:11:54 and likely soon to be released liquidity, U.S. liquidity into asset markets over the next one to two quarters if they really start to panic at those odds and how Biden's chances of reelection are trending. When we look at the liquidity globally, obviously the United States has been trying to contract. Politicians, again, they missed the memo.

Starting point is 00:12:13 They've been just spending like idiots. We look in ECB and BOJ, they've been contracting. PBOC, they've been expanding. What do you expect for global liquidity over the next 12 months or so? Is it something that it doesn't really matter what the U.S. wants to do because they're going to get overpowered internationally? Or should we actually try to understand a little bit better about each one of these central banks and some of the nuanced decisions that they're making? Yeah, great question, man. So in our opinion, we think the latter.

Starting point is 00:12:41 You want to understand all the moving parts of the calculation so that you can understand when things are going to start to accelerate or decelerate in a way that could change the broader global liquidity picture. One thing that's been very positive for global liquidity, I think we talked about this a few weeks ago on the program, is the real aggressive liquidity provision that we continue to see out of China vis-a-vis the People's Bank of China. They have very aggressive economic targets for 2024, 5% GDP, plus 12 million in terms of our urban job creation, 3% CPI up from, it was deflation a month and a half ago. So in our opinion, those very aggressive policies, which are effectively calling for it at eight percent nominal gdp growth in a country where last year they grew five in our opinion we think the pboc is going to be forced to keep its foot on the gas pedal and

Starting point is 00:13:28 continue to promote uh easing financial conditions in the mainland economy which continues to promote the rising the uptrend and in global liquidity so this is something we've been all over we've been calling for that uh for the past uh few months since right around mid-december and anticipating that uh the chinese authorities would uh front oh policy support uh early in calendar 2024 and that front-loaded policy support has come to fruition but it's our expectation that it's going to remain in place uh over the median term uh in light of these uh incremental figures so that's when one of the key drivers of the positive uptrend in global liquidity or that we've been calling out uh and these vr research uh since right around mid-november uh and then

Starting point is 00:14:05 we also have some of the key counter-cyclical drivers of global liquidity uh supporting liquidity creation in the private sector you know there's something you and i've been talking about for years now which is the the central banks aren't the only you know entities in the world the agents that create liquidity you know commercial banks create liquidity non-bank financial market participants create liquidity corporations create liquidity when they generate profits workers create liquidity when they earn money and and keep some of it in savings so all these things create you know zero duration assets that get funds you know that gets transferred around and and and and and and changed into you know liabilities throughout the um throughout the

Starting point is 00:14:40 the global banking sector so in our opinion you know those kind of kind of those key counter cyclical drivers of liquidity like uh the us dollar like bond market volatility like currency market volatility all those things you know have been in trends that support uh the liquidity creation in the private sector and in our opinion those things are likely to remain in place over at least the next quarter or two but what's going to cause all that to end in our opinion uh is when the the narrative around immaculate disinflation really starts to erode and and gets replaced by what we think will be sticky inflation at some point in the second half of the year once market participants really start to sniff that out all those key kind of cyclical drivers of global

Starting point is 00:15:16 liquidity from the perspective of the private sector will stop going and stop trending in the direction they have been trending and perhaps start to trend in a in the opposite direction which will cause a private liquidity start to start to contract but that in our opinion is a quarter or two away and interest rates play a piece of this um can the politicians trump the federal reserve though like if we get more fiscal stimulus for an election year there's all kinds of crazy stuff that could still happen between now and then um there's opportunity we obviously have uh proxy wars with the southern border we have immigrant crisis like there's a bunch of things where the government could step in and provide lots of funding um and so how do you measure

Starting point is 00:15:55 maybe like that the weight you put on what the federal reserve is doing with liquidity and what the politicians are going to decide to do with some of the fiscal stuff yeah i mean it's it's important and i and really the reality is is the policy rate has very little to do with the liquidity creation here in the us and if you think about uh uh the the amount of um the amount of assets the amount of uh private non-financial sector credit that is on the bank balance sheet here in the us is only 33 of the total so the other 67 is being created by non-bank financial market participants which means that they which are more reactive to changes in you know broader market conditions than they are to changes in the policy rate the banks themselves

Starting point is 00:16:34 are a lot more tethered to the changes in the policy rate but again it's only about a third of private non-financial sector credit uh here in the us which is one of the lowest shares in the major world so we definitely believe that you know as market participants you know really um you know assess and reassess their expectations for fed policy that has more of an influence on liquidity creation and the trend in liquidity vis-a-vis its impact on broader financial market conditions like credit spreads, volatility, the valuations of the equity market. Those types of things matter more to private sector liquidity creation here in the US than the actual policy rate itself, even though the policy rate is important. And if we get into the latter half

Starting point is 00:17:15 of this year, the Fed does start to cut rates. Seems to be that people still believe that, but maybe that's like waning on a daily basis. It's our world where we get no rate cuts or actually rate hikes. And so we're talking about liquidity and easing and all these things. But could we actually have a tighter financial situation going into the election? Yeah. I mean, it'll feel like rate hikes when it comes along. They may not actually implement rate hikes. But again, the monetary policy isn't driven by the policy rate. It's driven by expectations around the policy rate. That's why the monetary policy really started to impact asset markets and really started to impact the economy very early in the rate hike cycle in 2022. Don't forget,

Starting point is 00:17:56 the Fed didn't finish getting to the terminal policy rate until July of 2023, but we were already done with the market crash and the economic slowdown and all the associated negative impacts because the money markets, the US dollar money markets and global money markets front ran the actual changes in the policy rate. So what is likely to happen is we experience rate hikes from the perspective of what's priced into Fed fund futures and from the perspective of what's priced into overnight index swaps. These are key money markets, the key money market instruments that investors use. And so that will feel like rate hikes. And if we do happen to go into that scenario, which again is our modal outcome expectation with respect to two to three

Starting point is 00:18:32 quarters away, that will represent a tightening of financial conditions that is likely to cause what is currently a Goldilocks market regime to morph into something that's more risk off, which would be inflation. And then if you had to look at kind of end of year, stock market is up pretty big, Bitcoin's up pretty big. Are all asset prices up through the end of this year? Or do you think that there's some risk that NVIDIA is so much of the stock market return that if that thing comes down, then actually the stock market could be flat to down? Or how do you think about maybe such a hot start to the year and how we could end the rest of the year? Yeah, it's going to be very hard to have a down year, one, just given the starting point of

Starting point is 00:19:13 being up pretty significantly year to date for most major risk asset classes. But that's not to say that we can't have a significant correction entry year. I mean, it's our expectation that, again, once it becomes clear to the most astute market participants who are doing the kind of, you know, granular research that we are doing here at 42 Macro, once it becomes astute to them that immaculate disinflation is over, and more importantly, if we're correct on our forecast, that immaculate disinflation is probably going to end at a level that is unplowable from the perspective of the Federal Reserve, if those two things become true, we will transition from a risk on goldilocks market regime to a risk off inflation market regime and that transition is

Starting point is 00:19:49 probably going to create some significant volatility and deep corrections in asset markets now does that mean that the markets are going to be down here today on december 31st probably not but it it does mean that there's a lot of you know positioning that could change that could take you know change hands and and ultimately you know to get investors more right sized in terms of the forward-looking risk from that point forward because again in our opinion a new landing scenario was the highest probability outcome with respect to the economy and and until that changes you know we got to believe that at some point immaculate disinflation is going to run out and once it runs out if it stops at an unpalatable level we're going to have

Starting point is 00:20:22 some problems in asset markets now again that doesn't mean you need to have a crash markets crash for three reasons you have a sharp and or unexpected slowdown in growth you have a sharp or unexpected acceleration in inflation and or you have a sharp or unexpected tightening of monetary or fiscal policy and or both and so we without any of those things happening you know it's very unlikely that we have the actual crash but again you can have a deep correction in the stock market you very easily see a 12 to 15 correction in the stock market in the context of what we're talking about could easily see a 30 40 50 correction in bitcoin uh would you know would you take it back to you know levels that are very high still you know so in our opinion you know trying to you know

Starting point is 00:20:58 play pin the tail on the donkey on december 31st you know that's that's that's a that's a that's a kid's birthday party parlor game you know in our opinion we're trying to manage real you know institutional financial risk where can we send people to find you on the internet i'll appreciate Appreciate that. So, yeah, obviously, come check us out at 42 Macro if you want to stay on the right side of market risk. And if you do not want to stay on the right side of market risk, God bless you. We'll catch you back here in a couple of weeks. I appreciate it. We'll do it again in the future. Absolutely, brother. Cheers, man. Thank you.

The Pomp Podcast - #1325 Darius Dale on Bitcoin, Stocks All-Time Highs: Remain Bullish?

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