The Pomp Podcast - #1340 Darius Dale | Inflation Is Sticky & Bitcoin Will Skyrocket?!

Episode Date: April 9, 2024

Darius Dale is the Founder & CEO of 42Macro. In this conversation, we talk about the probability of different economic outcomes, why "no landing" might happen, what that means, inflation, optimism index, small business survey, and outlook on asset prices. ======================= Buy and sell cryptocurrency in a tax-advantaged crypto IRA with iTrustCapital. Enjoy 24/7 access, lowest fees in the industry, and tax benefits for your retirement. Open an account today at ⁠www.itrustcapital.com⁠ ======================= Get the freshest price feeds free for 12 months. Join Supra’s early integration program for zero-cost access to the fastest oracles and dVRF across 50+ blockchains: ⁠⁠https://supra.com/pomp⁠⁠. Earn $1,500 by referring Web3 projects to use Supra services. The projects get the fastest services for free, and you earn $1,500 for every referral. Learn more at the link above. ======================= 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 42 Macro. In this conversation, we talk about why there might not be a hard landing or a soft landing, and maybe the actual

outcome that we should expect is no landing at all. And then we get into things like the optimism index, the survey results, and what is going on in terms of people's psychology in the economy. I always enjoy talking to Darius, and he did not disappoint in this conversation. It brings up a number of different data points that I had not considered before, and also allocates a lot of time to speaking on what could be driving some of the data points that you see in the economy. 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 iTrust Capital. Are you buying crypto on an exchange because you're excited about the bull run? Well, I hope you're reporting your crypto gains to the IRS because they want you to pay your taxes. That's right. When you buy and sell crypto on an exchange, you need to pay the government taxes when you make profits. That sounds pretty taxing. There's another way you can buy and sell crypto without worrying about taxes. At iTrust Capital, you can buy and sell

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They can get the fastest Oracles for free for 12 months and you get $1,500 for every referral. Visit supra.com slash pomp to learn more. That's S-U-P-R-A dot com slash pomp. same page here. So soft landing, in our opinion, is a period of trend or below trend GDP growth that allows inflation to come back to a trend over time. Hard landing is a period of significantly below trend GDP growth that usually results in a contraction in the labor market that ultimately causes, you know, real incomes to decline, et cetera, et cetera. That's a recession. And then a no landing scenario is a period of trend or above trend economic growth that allows

inflation to decelerate, but unlikely to allow inflation to get back to its 2% target over time. And that's sort of our, at least over with respect to the next 12-month time horizon, as this first chart indicates, we believe that is the highest probability scenario over the next 12 months, if you look at our projections. So we run two separate models to predict inflation, specifically predict. I would say we have a third model that allows us to anticipate inflation just using the qualitative inputs in the economy. But specifically with respect to forecasting inflation. The median of those two models is effectively saying we're going to continue to see immaculate disinflation over the next couple of quarters. But by the time we get into Q4,

we're very likely to bottom at a level with respect to inflation that is inconsistent with the Fed's 2% target. In our opinion, that's likely to cause some problems for asset markets. Now, you've got the second chart that says a no landing in the economy equals a no landing in headline CPI. And so is this something where we just like kind of stay in the threes, We never get down to two and three becomes the new two. Like, how does that work? Yeah, so that's something we've been talking about. I think I've talked about our secular inflation model on this program over the last few years.

And that's the key takeaway from that deep dive analysis that we did with respect to our secular inflation model. So we do think three is the new two. We ultimately expect the Fed to acquiesce to three being the new two. And they certainly, in our opinion, started that process as most recently as the March FOMC meeting. it's not going to be a linear straight line process, but ultimately we think, you know, if you're looking back two, three years from now, the Fed will have rather have accepted 3% inflation versus 2% inflation and a recession in our opinion. So that's obviously structurally bullish for asset markets, structurally bearish for bond markets. So getting to this chart.

So one of the things we wanted to highlight in this discussion today ahead of tomorrow's CBI print and Thursday's PBI print is helping investors actually understand where we are with respect to inflation, where we are just in the economy in general. I think a lot of investors, particularly when they get on programs like this, spend so much time talking about where they think things are headed and not enough time helping investors understand where are things today so that we all have a very deep understanding of what the base rate is so that our forecasts are much more accurate. So getting back in this chart, we're just, you know, these next few charts, we just want to highlight where we are with respect to the inflation trends across a variety

of different metrics uh the uh the chart here just shows uh the no landing and headline cpis we're starting to see if you look at the three month annualized rate of change of that those blue bars in these charts uh we popped up to 3.9 percent we're kind of trending sideways now in terms of the red line which is the year-over-year rate of change of headline cpi at around three percent now again we expect that to start to decelerate again but again it's very unlikely that we decelerate through two percent in a way that allows the mean of the time series to be two two percent on a full cycle basis so that that's an issue now you also have charts here that show pce and core uh as well and kind of a no landing and so is this something where like basically the

measurements and the economy in general kind of has like we're at the bottom now right like almost think of it just like we went up we went down are we bottoming now and then like we should expect a re-inflation type event? Yeah, yeah. I mean, now, so bottoming now, no, we believe the bottom is likely to be in some time in Q3, and we'll start to re-accelerate again from a level that is inconsistent with 2% inflation in Q4. Again, you have to go through 2% for the mean of the time series to remain 2%. Otherwise, if you bottom at 2% and start to re-accelerate from 2%, then you're talking about a mean of the time series that's going to be higher than 2%, probably close to three, which is what it's kind of tracking at right now. So just if you look at

slides three, where we show no landing in economy because no landing in core CBI, we have core CBI accelerating to 4.1% through methanulize. That number, our bottom five, six months ago, if you look at the bottom panel in this chart in core CBI, we accelerated to 6.7% through methanulize. We've been trading sideways for about a year now almost in terms of a super core, that's core services x housing inflation at 4.3%. So these are obviously problematic trends on some very key data sets. We're also seeing problematic trends on slide four, where we show the no landing in the economy resulting in a no landing in the core PC deflators or in the PC deflators rather. So headline PC popped up to 3.4% through

methanulized. That's the second consecutive month of acceleration. The middle panel shows core PC deflator. That number popped up to 3.5% through methanulized. That's the second consecutive month of deceleration. And then the super core PC deflator popped up to 4.5% through month annualized. That's the second consecutive month of acceleration. All three of these numbers, 3.4%, 3.5%, and 4.5% are significantly higher than the longer term trend. And it's significantly higher than a number that is consistent with 2% inflation. So again, we suspect this is a transitory backup in inflation, reported inflation. However, we do suspect this is a preview of what we're going to be dealing with as investors, most likely,

once we get into Q4 and into Q1 of next year. Now, when we start thinking about this kind of inflation, like where's it coming from, right? So it's one thing to say like, hey, here's what we expect to happen, but like what is driving it so much? And there's a bunch of manipulation that can occur in terms of, you know, housing or energy or kind of all these different things that people can take in or out. The joke is like, well, if you don't have food, house or energy, then of course, everything's fine, just the things you need to live. But like, when you guys think about kind of the why behind some of this analysis, like what is driving it? Yeah, it's a great question. So it's a variety of things. I mean, actually, as we show on slide five, where we show

no landing in the economy equals a no landing in the underlying inflation. To me, I think this is one of the broadest, you know, kind of things that is being missed in the discussion around inflation, because it's very natural for us to say, okay, where is it coming from? But the reality is the most unacceptable answer from the perspective of policymakers and investors is everywhere and that's exactly what we're seeing uh so in this this chart here in the underlying inflation chart we show uh the cleveland feds median cpi and trim mean cbi statistics so the median cpi is just the median change of all the different categories of inflation i want to say there's about 400 different uh subcategories within the cpi uh report and then the same statistics we show

for the median pc deflator and the trim mean pc deflator uh and trim mean just just it's slopping off the bottom and top eight percentiles of those data points so it's essentially what you know irrespective of the weights are what's happening in the in the in the economy that's you know from a broad base perspective uh and we're seeing a lot of inflationary pressure there as well so if you look at median cpi we're at five percent that's you know basically twice its pre-covered trend uh you look at uh trim mean cpi on a three-month annualized basis of 4.3 that's more than twice its pre-COVID trend. If you look at the median PC deflator at 4.1% through methanoglize, that's essentially twice its pre-COVID trend. And then lastly, the trend

mean PC deflator, it's at 3.7% through methanoglize. That's more than twice its pre-COVID trend. So we are just, again, this backup that we've seen in inflation over the last couple of months is extremely broad-based. And in our opinion, it's a preview of what we're likely to experience as investors later this year within in terms of inflation bottoming at a level that is inconsistent with two percent now as we go and we look at uh kind of the chart here on uh six the march new york fed inflation expectation survey was supportive of the immaculate disinflation theme so does this mean people are maybe confused no no so it's again in my opinion i think it's it's a it's a it's confirming exactly what we think is going to happen which is you know

we probably have one to two more quarters of trending deceleration in inflation, which is positive for asset markets because it ultimately means the Fed and Treasury are likely to continue implementing dovish forward guidance and dovish net financing policy. By the time we start to see evidence that inflation is not going to sustainably stick at 2% or bottom at a level that is inconsistent with 2%, which I don't think we're going to get data that can really truly confirm that it's looking for at least according to our models that is when we suspect we're going to have some problems in asset markets so right now we're looking at leading indicators leading survey data like in this chart university of michigan's uh consumer sentiment index their

one-year cpi expectation that same statistic with the conference board in the middle panel and then we have the same statistic for the new york fed survey so what we're looking for here are leading survey data that can give us confidence uh in the durability of the immaculate the disinflation theme. When you look at these data points, all three are essentially giving you confidence in terms of, A, two of the three are actually ticked down in the most recent month, but all three are actually getting close to their pre-COVID trends. Now, that might be the bottom for a lot of these statistics, and that could be an issue. But again, on the lag, we would expect the PCE deflators to chase those down back to those levels. And if we bottom at those levels,

then that's going to be a problem because you have to go again. You got to go through the level to actually create a mean of 2%. Now, the Small Business Optimism Survey seems to be showing a lot of the same type of thing. Actually, the opposite. So we got this data point this morning unpacking the NFIB survey, which has been a decent leading indicator

for some of the inflation trends as well, at least the inflation components there. We saw the prices component tick higher in the month of March. That moved in the wrong direction. We saw the price plans next three months data point move higher in March. That's in the wrong direction.

We saw the compensation plans, compensation and compensation plan readings both take up in March. So, you know, when you're trying to build a piece of the puzzle together from an economic standpoint, you want to rely on as much data as possible and particularly rely on as much, you know, data that's highly correlated with the stuff that really matters as possible. And these are the kinds of data points that, you know, you've got to kind of roll up your sleeve and get out of the reports to figure out. But once you do that data, once you do that analysis, it's pretty clear to see that, you know, not all of the leading survey data are continuing to confirm the immaculate disinflation theme as they had been for most of the past, you know, kind of several quarters. And so that's that can be an issue. Got it. And so when we look at some of these survey and optimism data, one of the things that always cracks me up is I went on CNBC recently and I said, you know, hey, people have lost hope. and then somebody who will go unnamed uh posted a chart and was like well the consumer sentiment survey says that uh things are looking up and i went out and i was like i'm pretty sure that if

i remember correctly the methodology on this stuff is like ridiculous and so i went and i looked at specifically the consumer sentiment survey uh they call 500 people on the phone and they're and they ask them questions that just sounds funny right they call 500 people on the phone who are you calling what questions are you asking and like oh by the way people lie They'll tell you things look great and then they're literally buying meme coins for lottery tickets, right? And so like, how do you kind of balance

when you evaluate markets and kind of asset allocations and stuff? Like we have data points, right? And again, like sometimes they're just the best data points we have, even if they're flawed. At other times, maybe you don't put as much weight on it. And so like, how do you think about, you know, the methodologies of some of these?

And like, are there certain ones that when you wake up and you're like, all right, I want to analyze this, you put more weight on rather than others? Yeah, that's a phenomenal question, my friend. you are one of the world's best at that. So there's a couple answers there. So for starters, the most important thing you can do as an investor is not put too much stock in any one data point or any one model to drive your investment decision making. It's about building a robust process that has a bunch of different data points, a bunch of different models that are all that create

orthogonal signals. Look that up if you need to look that up. It's a very important word if you're trying to talk institutional finance. You want models and data points that are coming from different methodologies that give you the opportunity to respond to orthogonal signals in real time as an investor. And so this is why when we come on here, we don't just say, hey, this one super secret data point that I know that no one else knows and you got to pay me for this says this. That's not what investing is about. And reality is anyone who's telling you that is a charlatan. The reality is we have to create, we got to piece the puzzle together with as much robust data and robust data analysis as we possibly can, which is why we do so much work

for our clients at 42 Macro. And so for another example of this is on slide eight, where we show the ISN PMI surveys, they were mixed on the Immaculate Disinflation theme. So going back to your comment on the Consumer Sentiment Survey, the second answer to your question specifically is that when you analyze data in rate of change format, the methodology becomes less relevant. But now if the methodology changes over time, then you're going to have some issues like, you know, for example, the CBI or not. But even then, you know, as long as it's not changing all of the time, then you're getting clean signal from the delta.

You know, is it accelerating or is it decelerating? Is it above its trend, the most recent trailing trend, or is it below its trailing trend? Those are, you know, hard quantitative statements that, you know, that institutional investors are looking to make with data, you know, whether the data is good or bad or, you know, that's that's more of a subjective data uh discussion and we do not have to focus too much time on that so getting back into this chart the ism services prices uh component take down to the lowest level we've seen in four years it's now below its pre-covered trend that's positive at the margins uh in terms of uh in terms of uh you know sending a leading uh signal that inflation is likely to

continue turning lower over the short to medium term uh we saw the ism services the percentage of respondents reporting slower supplier delivery times that number take down to four a year low It's actually one of the lowest levels we've ever seen in that time series. So you're thinking about the services side of the economy, which is creating a lot more inflation for investors. You know, if you look at the core services, CPI is running at six percent, which is 200 basis points higher than core CPI itself right now. So clearly, this is where a lot of the inflation is coming from. And this leading indicator is saying we are starting to see better outcomes there. But when you look at the bottom panel of that chart on slide eight, the manufacturing is

now starting to move in the wrong way. Now, manufacturing is a much smaller segment of the economy. It's only about 15% of GDP and 20% of total employment. So just be aware of that. But we are now starting to move in the wrong direction. So again, kind of just wrapping this whole discussion on inflation up, the immaculate disinflation theme, which is one of the most supportive themes out there in terms of creating positive outcomes for asset markets, for crypto markets, for Bitcoin, for a lot of different

assets, that theme is on the ropes because we are starting to see evidence of sticky inflation. What we're arguing here today is that some of the leading indicators are saying that immaculate disinflation is likely to continue. Some of them are starting to say, hey, it might be time to head for the exits on this theme. We're not so sure that it is time to head for the exits, but we certainly want to have that discussion because the data is telling us to have that discussion in real time. And we want to put ourselves in a position to respond to these critical inflections faster than the average investor, which allows us to take money from them. Now, when we're looking at a lot of this data, it feels like the Fed and specifically

Jerome Powell kind of confused as to what to say. And he knows his words carry a lot of weight. And so he's looking at all this data. Let's say that he's reading 42 macro. He's like, oh shit, we're kind of in a doozy right now. How do we get out of this situation? We started the year off seven rate cuts, I think was the estimation. We're down now to like two or three. I'm starting to hear talk of zero. I think even one of the Fed presidents said maybe zero. What do you what do they do?

If you're Jerome Powell today, like what do you do to get out of the situation? I mean, I don't know if they're ever going to get out of the situation, right? The Pandora's box, that is forward guidance and constant communication from Federal Reserve officials. You just you can't put that back in the box, right? know i'm sure if they went backwards in time they probably would like to but it is what it is and and by the way this is jay powell's a federal reserve uh official that believes in the power of forward guidance he believes that uh the power the channel for guidance in terms of asset markets pricing in what they want what the fed wants in the price end is a powerful tool in the fed's

toolkit now that tool can be manipulated by market participants as we obviously saw where seven eight rate cuts were priced in at the beginning of the year now we're talking you know something closer closer to two uh at this current juncture and that's the right in my opinion that's probably better uh than being oh you know just aggressively surprised at some point in the mid-year you know as a function of a function of a lack of poor guidance but that's neither here nor there but from my perspective in terms of what you know what what the markets are pricing is is quite appropriate in terms of pricing out rate cuts from 2024 and even pricing out rate cuts from 2025 and 2026 because the reality is uh one thing that has been persistent uh since we authored it back in

in the summer of 2022 is the resilient U.S. economy thing. And the economy, a resilient economy does not require rate cuts. Now, this is a Federal Reserve that believes the neutral rate is significantly lower than the current policy rate today. So they want to get started understanding that monetary policy works with long and variable lags. They want to get started on trying to, I guess, normalize policy. They're not trying to ease policy. They're just trying to make policy, quote unquote, less tight. But in our estimation, policy is really not that tight. I mean, none of us knows where the neutral rate is, but we can obviously observe through the financial conditions. We can obviously observe through the evolution of economic data and both on the growth

and inflation side, that policy must not be very tight. And so in our opinion, the markets are moving in the right direction in terms of pricing out rate cuts, pricing volatility into the fixed income markets, but sparing the risk asset markets like equities, credit, and crypto, because this is a resilient economy that does not require monetary easing. Got it. And then my last question for you is, asset prices relationship to interest rates and inflation to some degree, pretty much have done the exact opposite of what we expected it to do. Like interest rates went up, stock market's at all time high, Bitcoin's at all time high, meme coins are going crazy. Why is that happening?

Great question, man. So in our opinion, this is exactly what you would expect to happen in a reflation market regime we're currently in reflation reflation is long risk assets short defensive assets you know the the riskier the riskier the better generally uh you want to be short uh things like treasury bonds want to be short things like the dollar in our opinion if you look at the current constellation of volatility adjusted momentum signals across all the major asset classes in the world and even the major factors within those asset classes it looks and smells and tastes like a reflation market regime and so this sort of um this this expectation that uh bond yields going down or sorry bond yields going up bond prices going down has to equal

stock prices or crypto prices going down in my opinion is a flawed assumption uh that's inconsistent with market history there's plenty of market history of reflation regimes and our clients are currently taking advantage of the current one where can we send people to find you on the internet or find out more about 42 macro i appreciate you man i always love having these discussions brother uh so welcome check us out 42 macro.com as we say you know we do a lot of high-end institutional content but we we turn that content into actionable uh investment signals uh for retail and ra investors as well uh namely through our kids portfolio construction process which uh is making a lot of folks a ton of money in recent months you got it my friend we'll

definitely do this again in the future always a pleasure my friend thank you abby appreciate you