The Pomp Podcast - #1416 Darius Dale | Will The Port Strike Crash The Economy?

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. What's up guys? Today we've got Darius Dale. He's the founder and CEO of 42 Macro and he brings the heat. He has so many great charts that you guys are going to want to watch this

Starting point is 00:00:38 entire thing. We talk about why Republicans and Democrats are both responsible for the national debt. We talk about inflation, what's going on with all the strikes in the ports, how long is that going to last, what is the economic impact going to be, and then we get into why do both political parties practice socialism. One does it for the rich, one does it for the poor. That is what Darius is here to talk about is politics, economics and the big strike at the ports. You guys are gonna love this one. Here's my latest 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

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Starting point is 00:02:29 Go check out Zappo Bank today. What's up, guys? Bang, bang. I've got Darius here. Darius, I hear that there are strikes at the port. What is going on? Is the U.S. economy going to be screwed or not? How do we unpack what happens with these strikes?

Starting point is 00:02:42 Hey, I appreciate you. Thanks again for having me on. So yes, it's likely to have a transitory impact. Let me take a step back and remind investors that the bulk of the goods that come into the country are coming in through a lot of these ports in the Gulf Coast and the East Coast. Obviously, we have the Port of Long Beach as the big port out on the West Coast. But we are going to have a transitory stack inflationary impact as a function of the shutdown in these ports. And so in terms of how best to monitor that and the impact on overall

Starting point is 00:03:12 inflation, what we show here on chart one are the ISM manufacturing and services PMIs. They both contain sort of a sub-index called the percentage of respondents reporting slower supplier delivery times. So the higher that number goes, the slower and slower those supplier delivery times are going to go. And as you can see, the red line and the blue lines in that chart greatly shot up in the pandemic and in the post-pandemic economy. And then they shot up again once we dumped another couple trillion dollars in the form of the Biden stimulus in early 2021. They've since retreated, And we've seen core inflation and inflation broadly retreat, but we are very likely to see as a function of the shutdown and increasing those metrics, which would contribute to the stickiness that we are currently observing in inflation. Now, one of the things that I saw online is the video of, I think, like the head union guy.

Starting point is 00:04:04 He seems like he means business. He was like, they know what I want. He don't exactly seem like he's the type of guy who's showing up with slicked back hair. He actually had no hair, but he had, you know, tattoos and chains and he looked like he meant, you know, real business, which tells me that he seemed pretty dug in. There might be a lengthy negotiation process here. And so the longer this goes on, what's the impact? Yeah. So the longer this goes on, it's going to disrupt the problem. It's going to lower the probability of a soft landing.

Starting point is 00:04:31 We don't think it'll make the soft landing not the modal outcome, but it will, at least on a transitory basis, disrupt some of these positive side dynamics that we have observed that have been contributing to what we believe is an elevated probability of a soft landing in the economy. So in the second chart here, we show in three panels, non-FARP productivity, the growth rate of that on a quarter over a quarter SAR, six-month annualized and year-over-year rate of change basis. And as you can see, we have above-trend productivity growth currently. what we don't have right now, which is good, which is above-trend unit labor cost inflation, which is the second panel, currently tracking at 0.4% quarter-over-quarter annualized on a year-over-year basis. It's quite depressed as well. And then if you look at the bottom panel there, where we show the private sector employment cost index, as you can see, all these metrics started, particularly with the private sector ECI, it's been persistently elevated relative to

Starting point is 00:05:22 its pre-COVID trend, which is the light blue dotted lines in these charts. We've been slowing in recent quarters, but the reality is we still are comfortably above the longer-term trend in terms of private sector employment cost index. And so, in our opinion, what we're seeing right now in the economy, and this is something we've been calling for since January of 2022, which is we have this sort of fourth-turning style sort of economy where the folks on the bottom part of the K in this very top-heavy, K-shaped U.S. economy are, for lack of a better word, they're just pissed off. They've been left behind by economic development. They've been left behind by raging bull markets and tech and Bitcoin. And they themselves have not experienced a lot of the

Starting point is 00:06:01 positivity that we've experienced broadly as investors. And they're asking for their fair share of the pie and they're going to get it. Now, one of the things I've talked about a lot and got a lot of heat from kind of the political class and or central bank class is, are we just going to move the inflation target from 2% to 3% and then claim victory over inflation? You have here that maybe there is something to this idea of like 3% being the new 2%. I don't think you're saying necessarily that it's the target that moves, but describe a little bit how you guys are looking at inflation, some of these changes. Yeah, great question. This is something you and I talked about two, three years ago now, in terms of our views on inflation, when we first published

Starting point is 00:06:39 our secular inflation model at the beginning of 2022, which was then calling for a gravitation higher on the underlying trend of core PC inflation. So what this model does is it interpolates the normalized change of all these key leading indicators based on our research on the underlying trade of core inflation. And it tries to, I guess, sort of essentially forecast what the new underlying trade of core PC inflation based on the change in the, you know, the sort of devolution of these different variables. And what we find is that if you look at the 2010 to 2019, sort of the 10-year run rate of core PC inflation in that period, it was 1.6%. If you look at our projections for 2020 to 2029, our projections are calling for either 2.7% on the low end to 3.1%

Starting point is 00:07:24 on the high end. Now, those numbers don't sound particularly different from 1.6%. But you know, you think about it, it's sort of like a 50 to 100% change. And most importantly, those both of those numbers, even our low end forecast is comfortably above the Fed's 2% stated 2% price stability target. Now, we've been of the view that the Fed does not want 2% price stability with the Fed wants more than 2% price stability is financial stability and economic stability. The inflation mandate has been the third mandate relative to the other two. And we continue to believe that this is a Federal Reserve that will accept a higher trend level of inflation. They will eventually accept 3% inflation as the new 2% inflation. They may never officially

Starting point is 00:08:08 ratify that in terms of their price stability target. But what they're going to do, and what they've been doing, by the way, is allowing inflation to run persistently hotter than two percent on a foreseeable basis. Again, they already are cutting interest rates by 50 basis points going back to September 18th. They are already cutting interest rates by 50 basis points and core P.C. inflation is right around the low end of that range that we've been calling for for the past few years. So it's our belief that all is going according to plan with respect to our structural views on the Federal Reserve, which is a Federal Reserve that is sort of hell-bent on engineering a soft landing and perpetuating financial stability at the expense of price

Starting point is 00:08:49 stability. Now, one of the impacts of this is that you guys foresee more populism. And then you also think that both Republicans and Democrats practice a form of socialism. It's just a different target audience. And so explain these next two charts. Yeah, 100%. And so it's, you know, obviously the upcoming elections, Kamala Harris, Donald Trump's kind of the top of the ticket, but it's more than just a top of ticket race it's really about how is the next sort of um if you will the next the next batch of populism is going to be administered is it going to be administered in uh you know socialism for the richer socialism for the poor but we're going to see more populism in the coming uh in the coming years as a function of the starting point of the sort of the the sort

Starting point is 00:09:28 of social contract in america has been broken and sort of started to get broken uh back in the early 2000s you know i remember being a child in seattle and there were some big wto riots when they were trying to um try to allow china into the world trade organization obviously folks really the folks at the time were you know protesting and there was some violent protests the folks at the time really understood the structural impact of allowing china uh with this you know very large at the time very large uh sort of excess labor supply uh into the world trade organization which is we're going to ship all of our jobs to china

Starting point is 00:09:59 and we're going to have a hollowed out middle class well that's exactly what what this chart shows. The blue line in this chart shows employee compensation divided by national income. The red line shows corporate profits divided by national income. The horizontal dotted lines correspond to the mean of those time series from 1960 all the way through 2000. As you can see, the blue horizontal dotted line is way higher than the red horizontal dotted line in that time period. But over the past 20 to 30 years, we've seen a complete reversal in that relationship. Corporations are now making way more profits and taking a much higher share of the

The Pomp Podcast - #1416 Darius Dale | Will The Port Strike Crash The Economy?

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