The Pomp Podcast - #1464 Darius Dale | Bitcoin & Stocks Are In For A Wild 2025

Episode Date: January 6, 2025

Darius Dale is the Founder & CEO of 42Macro. In this conversation we talk about a strong US dollar, impact on stocks, bitcoin, many other assets, why international investors own so much of US assets, and what could possibly happen if they decide to sell.  ======================= Xapo Bank, the world’s first fully licensed Bitcoin-enabled bank, offers military-grade security with an unmatched blend of physical and digital security, as well as pioneering regulatory oversight, so your funds are always protected. Beyond secure storage, they enable you to grow and use your Bitcoin. Earn daily interest in Bitcoin, spend with zero FX fees using a global card, and make instant payments via the Lightning Network for unrivalled access and convenience. Visit https://www.xapobank.com/pomp to join. ======================= 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. He's the founder and CEO of 42 Macro. Darius is one of my dearest friends, and he continues to bring the heat with all types of economic analysis.

This conversation is no different. We talk about a strong US dollar, what the impact would be on stocks, Bitcoin, many other assets. Then we talk about why international investors own so much of US assets and what could possibly happen if they change their mind and start to sell. This conversation will give you a peek into the future of what could happen, but not necessarily is guaranteed. So I hope that you enjoy it. 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 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 Zappo. Picture this. Every time you trade Bitcoin, the spread determines how much value stays with you. That's why securing top-tier Bitcoin trading fees is key to growing your Bitcoin wealth. But what if I told you that there's a platform that lets you save up to 90% on your Bitcoin trading fees? Now, here's the kicker. Not only do they save that money, they also are dubbed the Fort Knox of Bitcoin.

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more of your Bitcoin stays where it belongs, in your pocket. Whether you're trading big or small, every move you make is designed to boost your gains and fuel your financial future. Head to zappobank.com forward slash pomp to join. That's X-A-P-O-B-A-N-K dot com slash pomp. All right, Darius, new year, new us. Let's talk about global liquidity. This is the kingmaker of financial assets. Global liquidity determines so much in the financial markets. Help us understand first, what is global liquidity? And then we're going to get into a lot of data and

charts about what's going on right now. 100%, man. Happy New Year, brother. It's good to see you. So before we get started, I got a bone to pick with you, my friend. You tweeted on December 23rd that you were unaware of a single organization that was accurately bullish on the stock market last year, and I'm going to hold your feet to the fire. No, no, no, no. That's not what I said. What I said was nobody accurately predicted

the exact percentage of the stock market performance. Oh, gotcha. Yeah, fair enough. You were bullish. You get credit for that. You're bullish. No, no, no, no, no, no. I wasn't just bullish.

I said in December of 2023 and in January of 2024 that this was the most bullish I had ever been in my 15 plus year career on Wall Street. And you're right. So I will take a bow. And you're right. I will take a bow. So anyway, go back to this topic of global liquidity.

So you're saying global equity is the key maker of assets. Yeah, it's certainly one of the most important dynamics that you need to figure out as an investor in order to get asset market performance right. You know, there's no official data, if you will, that sort of tracks global liquidity. And what we really mean by liquidity is really balance sheet capacity to absorb the creation of new financial assets, you know, to facilitate the purchases of financial assets. And so it's on us, folks like myself and others who've done a lot of pioneering research on this subject to essentially create indicators that allow us to track and forecast, quote unquote, global liquidity or global balance sheet capacity among the global investor sector. So one of the ways in which we've done that here at 42 Macro for our clients is the lens of our global liquidity proxy.

That is the aggregated sum of the major central bank balance sheets, plus their borrowed money supply in each of those economies, plus the FX reserves in each of those economies minus gold. And so these are all three pockets of sort of capital, if you will, that can be used to buy assets at any given time. And then we actually add a bond market volatility overlay to our indicator to simulate the impact of contractions and expansions in the repo market upon this sort of balance sheet capacity, if you will. So is it fair to say global liquidity is the equivalent for an individual of like, how much money do I have in my bank account? How much cash do I have? And if you take a bunch of different people and put it together, it's like, how much cash do we collectively have? That's really what's going on at the government level. Essentially, 100%. That's exactly what it is. It's how much money do we have that's available to purchase financial assets?

All right. So you've got this global liquidity monitor, and you were mentioning a bunch of the different kind of inputs to that. When you look at this, how sensitive is it to changes? If China decides to change their monetary policy or the U.S. decides to change it, can that have a profound impact on the overall global liquidity? Or do you need kind of a regime change where a bunch of the central banks decide to go and become more tight or more loose? Yeah, well, it's both, right? I mean, if you have a significant program in a country like China that has a significant influence on global liquidity, China, Europe and the U.S. in that order, sorry, China, U.S. and Europe in that order in terms of the global liquidity. Yes, you could see, you know, sort of these

idiosyncratic one-off developments from a central banking perspective or economic boom perspective have a significant influence. But a lot of times what we tend to see is the monetary policies makers of the major economies are generally speaking rowing the boat in one direction or another. Right now, they're rowing the boat in the direction of globally coordinated easing, but it's not necessarily showing up here in our model. So if you look at this table where we show the leading indicators of private and public sector liquidity across growth, inflation, and policy for all these economies, when you look at the columns on the far right where we show the individual country liquidity proxies underneath the global liquidity proxy, they're all actually

trending lower. Those red arrows in that column there indicates that global liquidity is trending lower globally, but also across most of these major economies. And so that's something that should have your eyebrows raised as an investor. Now, when we go and we take a look at this global liquidity, a lot of people just say global liquidity is increasing or decreasing. I'm guilty of that. I say that all the time. But you think that it's not just a directional thing. You have to be more precise than that. Explain. Yeah. Well, look, if it's increasing, generally speaking, asset markets are co-integrated with global liquidity for obvious reasons, as we talked about. And so if global liquidity is increasing, you should be expecting,

generally speaking, asset market performance to increase the market capitalization for all these various asset markets to be going up and vice versa. If it's going down, you would expect the market capitalization of all these assets to generally be going down. But in terms of forecasting where markets are heading, because that's what you need to do to make money as an investor, you need to understand the drivers of global liquidity over various time horizons. And so what we show here on chart two is the three and six-month leading correlations between a collection of indicators relative to our global liquidity proxy. And so what we find is that based on our analysis, we know what leads global liquidity. We know it's the market cap

of stocks and crypto. We know it's things like the dollar and currency volatility. We know it's things like global interest rates and bond market volatility. We know it's global growth, global inflation, and global unemployment. These are all different things that either lead private sector liquidity or public sector liquidity. And so based on that analysis, if you look at slide three, we can actually determine what the medium-term outlook is for global liquidity. And right now, the key leading indicators are currently aligned in a way that suggests that you should be expecting a modest decrease over the medium term. So we already have this sort of meandering lower trend in global liquidity that's developed over the past couple of months. And our model is

suggesting that global liquidity probably needs to catch down to where the leading indicators suggest that they currently are over the medium term. So that's something that is obviously a negative for asset markets. It doesn't mean asset markets have to go down. It just means this is not a supportive dynamic for asset markets. And if you're leaning on this as an investor that you certainly should probably do something different in your portfolio if we were projecting an increase. Now, we know that the dollar being strong has had this profound impact on global liquidity. Donald Trump, the incoming U.S. president, he is very much a pro-strong U.S. dollar. He wants the dollar to be the best, etc. How does that stuff play in? And how do you think

about what are we currently seeing intersecting with, hey, there's a new political regime that may be changing here and could that actually change something very rapidly? Yeah, great question. To me, the dollar is the number one thing we need to get right as investors in 2025 because I think it's ultimately going to have one of the more significant impacts on global liquidity and broader asset market performance. So in this chart on slide four, we show the year-over-year rate of change of our global liquidity proxy. That's the black line in both of those charts. In the chart on the left, we show the year-over-year rate of change of the dollar's real effective exchange rate value. And then the right chart, we show the year-over-year rate of change of the Deutsche

Bank currency volatility index. And what you can see is that both the dollar and currency volatility are very obviously inversely correlated to fluctuations in the global liquidity cycle. So the strong dollar is already weighing on global liquidity, as we talked about in the previous slide. And so you have to think about President Trump. One, tariffs are obviously strong, very supportive for dollar strength, which is something we'll talk about in a couple slides. But number two, if we had, you know, sort of a significant pro-growth reflationary policies that caused the Fed to have a less dovish monetary policy outlook than what's currently priced in and certainly relative to the rest of the world, then that's something

that could create trending dollar strength from here as well. And obviously, as we're talking about this analysis, if we get trending dollar strength from here and trending currency volatility from here, because those two things tend to be correlated, then you're talking about an incremental headwind to global liquidity on top of what's already being, you know, sort of projected by our leading indicators. Now, when I take a look at the strong U.S. dollar and it's sucking this like liquidity, right? You have this chart here that says the U.S. dollar strength tends to suck liquidity out of the global financial system by inflating debt service and refinancing costs. Well, the national debt is exploding. The costs obviously have been

exploding as well. We now spend more on the interest rate payments than we do on national defense. So is this kind of like a double whammy where like the debt exploding plus the U.S. dollar strength is actually creating more of a problem? Yeah. Well, it's less so for us because all of our debts dominate in dollars. And for obvious reasons, that's not the currency markets don't really matter for us when we issue debt because we're at the top of the global capital structure, at least for now. That's something that could change in the next 10, 20 years, who knows. But going back to this chart, so the reason the dollar strength tends to... The reason the dollar and currency volatility are inversely correlated to global liquidity is because when the dollar

goes up, everyone else's currencies go down. And when their currencies go down, you're talking about debt service costs inflating. 60% of all cross-border bank lending is denominated in US dollars. And again, this is bank lending between countries that don't have organic access to dollars. And so that's denominated in dollars. And then 70% of the international bond market is denominated in dollars. And so again, you're talking about with tens of trillions of dollars of global debt outstanding, international debt outstanding, if 60% to 70% of that is denominated in dollars and the borrowers whose currencies are depreciating in value, they're going to struggle to service that debt.

And their inability to service that debt obviously means that they have less balance sheet capacity to acquire new assets. So you obviously have a depressing impact on global liquidity. Let's talk tariffs. It seems like they're coming. I don't know how severe they'll be. I don't know how many there will be. There's obviously some portion of the tariff threat is a bargaining chip, a kind of a negotiation tactic. But he put in tariffs last time he was president. So you got to think he's going to put some in place again. How does that impact the dollar? Yeah, that's a great question, man. So today we actually got news out of The Washington Post, which leaked sort of this conversation between Trump and his aides about him potentially being sort of amenable to a less aggressive tariff plan or tariff package than what he talked about on the campaign trail. So that would be an incremental negative for the U.S. dollar. Dollar's down almost a percent today on the news. But historically speaking, what we've seen with the advent of tariffs is a stronger U.S. dollar.

So in this chart here on slide six, on the top panel, we have U.S. customs receipts indexed to the end of March of 2018. So if you go back to 2018, March of 2018 is when the first sort of U.S. trade, Sino-Trade War began when Trump started to levy tariffs against China. So we had a customs receipts double from basically from the end of March of 2018 all the way through the end of 2018, December 2018. And so if you index the performance of the dollar and the S&P 500 to when Trump announced those tariffs, the dollar was up around 7%, 8% from that point in March in 2018 all the way through the end of 2018. The S&P, I think, declined right about 8%. But inclusive of that 8% decline, we actually had a 20% crash in the stock market here in the U.S. in Q4 2018. So it's our belief that one of the things that we tend to see, and this is not just with the U.S.-China trade war in 2018. This is centuries of data. What you tend to see is when new tariffs tend to get offset, right around two-thirds of new tariffs get offset in the currency market.

So let's say we add a 10% tariff against China, then you would expect to see 6% to 7% depreciation in the Chinese yuan offset that. And that's exactly what we're seeing on slide seven. When we saw that devaluation, I see here that it had a max drawdown of 20% in the S&P 500. How much impact do these other currencies really have on U.S. stocks? Yeah, so that to me is the this is why we said earlier in this conversation that the dollar is one of the key lunchpans for 2025. Because, again, if we saw incremental tariffs levied against, say, a country like China, which clearly the U.S. has a is an economic rival of the U.S., then what was going to happen is historically is what happened. And what's very likely to happen is the Chinese yuan gets devalued in 2018, 2019.

We saw 13 percent devaluation of the Chinese yuan. But again, the rest of the world's economies are not going to sit there and watch China siphon 10, 15, 20 percent competitiveness from them. So they what tends to happen are these sympathy devaluations of the euro, of the Japanese yen, of the Swiss franc, et cetera. And so the sympathy, those sympathy devaluations cause a significant up move in the U.S. dollar. And that strength in the U.S. dollar has a depressing impact on global liquidity and global balance sheet capacity, which ultimately has a depressing impact on global asset market performance, you know, for a couple of reasons. One, we just talked about dollar and currency volatility are inversely correlated to global liquidity. But also, don't forget, you know, this U.S. S&P 500 is a multinational index. You know, more than 50 percent of the company or for the S&P 500's profits come from abroad.

Right. So if you're talking about dollar strength to that degree, you're going to have a significant negative revision cycle amongst sales and earnings forecasts that could also weigh on the index. Let's talk about international investment. Anytime that I see that we are doubling our investments and we're getting to trillions, let alone tens of trillions of dollars of deficits, etc. I just throw my hands up like, of course we are. Talk a little bit about what you're seeing here. Yeah, totally. So this is not this deficit is not as bad as the deficit that you and I tend to be concerned about as fiscal hawks to some degree. And but this is really important, given the starting point of what could potentially be a refinancing air pocket that I want to say we talked about maybe in our previous conversation. So if you think about the U.S. So what our net international investment deficit is, is just the what an international investment position is, is the sum of all of your foreign assets minus your foreign minus the assets that foreign investors own of yours. And so foreigners own $20 trillion more US assets than we own of theirs. And so that deficit went from roughly $10 trillion of a deficit to a $20 trillion deficit over the past five years. And that, in my opinion, is a pretty dangerous indication of the kind of selling pressure that could occur if foreigners deem that the dollar is getting too strong. we got to start liquidating U.S. assets in order to preserve our ability to extend and or refinance

and or service debt. So if you think about this as a starting point, you know, again, this is an economy that's been around for almost 250 years. We doubled our net international investment deficit in five years. So in our opinion, that's a lot of hot money that could potentially come out of the U.S. economy and U.S. asset markets over a short period of time to the extent that the dollar gets too strong for foreign investors to service their debt. Now, what's interesting to me is Donald Trump one time famously said, we're going to win so much that you're going to get tired of winning. And it feels like international investors dumping kind of US assets because the dollar is too strong. If we want a strong dollar, but it's too strong, it's like too much winning

that actually can be hurtful as well. And so talk about these international investors liquidating the assets in this chart you've got on slide nine. Well, that's, I mean, I love that you brought that quote up. That's exactly what we're talking about here. If we win too much, it implies that everyone else is losing, right? You can't win unless there's someone else losing. So that's kind of the problem. If they lose in the form of a dollar that's too strong, that is threatening their ability to service and or refinance their international debt obligations, then we're talking about the need for them to liquidate those assets. I use the first three quarters of 2022 2022 as a clear indication of what could potentially happen in this situation.

Go back to that time period. We saw the dollar rally around 18%. We saw gold decline 10%. We saw stocks down 25%. Saw bonds down 31%. Saw Bitcoin down 60%. And then again, this is just in the first three quarters of 2022. Now, again, we're not saying you should expect a repeat of this performance. This is obviously very exaggerated by the fastest monetary policy tightening cycle that we had seen in the U.S. economy in over 40 years. So that won't be repeated. But again, it's a very similar cycle of what could potentially happen in the context of the advent of new tariffs. The markets are celebrating right now via weak dollar that tariffs could potentially be less onerous than what we're all fearing. They could actually wind

up being more onerous than what we're all fearing. The Fed might actually wind up with an economy that requires not only not cutting interest rates, but potentially talking about hiking interest rates again at some point in 2025 or 2026. And so you think about this from the perspective of the global currency market, there's more ways to win if you're long dollars. And the more the world gets long dollars, the less the world will be able to get long of everything else in the context of global liquidity and in the context of where S&P 500 sales and earnings come from.

When you look at kind of the incoming administration, there are two specific individuals that have been chosen. One is Scott Besant. The other is Paul Atkins at the SEC. How do you see, let's maybe take Scott first, the changes, right? Everyone, I think, kind of looks at it and they say to themselves, okay, well, there's lots of it's going to stay the same, right? The US dollar is going to be the global reserve currency, blah, blah, blah, whatever. But there are going to be changes. Are there specific things that you're looking for in 2025 as that change occurs? Yeah, 100 percent. This is one of our key themes for 2025, or we authored the name a couple of months ago, which is our triple S's theme. And it's regarding the size, sequence and scope of pending U.S. fiscal and regulatory policy changes. Right. You know, there's a way in which you could implement a lot of the Trump policies in a way that has very limited impact on asset markets and potentially a net positive impact on asset markets. But by the same token, there's a way in which you can implement those policies in a way that has a significantly negative impact on asset markets, particularly from this very asymmetric point in the positioning cycle, right? Recall that, you know, everyone's on one side of the boat right now in terms of the positioning and sentiment,

very bullish. Everyone's expecting very positive outcomes. And so if we don't get a sequence of positive outcomes you're talking about, we could have some problems. So I've known Scott for almost a decade now. He's been a longtime client and, you know, not a client anymore, obviously. But, and so, you know, he'll, he won't have any issue with me saying this, but he's been, in my opinion, inappropriately critical of Janet Yellen's, you know, net financing policy. It's been hypercritical of her preference for relative preference for bill financing. So on the margins, if we started to shift away from bill financing towards coupon financing, that is negative at the margins.

So that's kind of number one. If you think about it from the perspective of the deficit, he's calling for 3% budget deficit. It's very hard to get it. I mean, we've done as much math on this as anybody. If you've seen our analysis, it's very hard to get to 3% budget deficit to GDP ratio without taking a significant weed back or to the entitlement spending. And that's very much a third rail. It's still a third rail for most politicians down in D.C.

So I doubt he'll be able to achieve that that that dynamic. And then with respect to growth, he's calling for three percent growth. Maybe that that is something that we could potentially do and sustain. But it's going to require a lot more legal immigration than I think that, you know, the sort of median MAGA vote is probably comfortable with, because we don't have the kind of labor force growth in our economy that supports, you know, having three percent growth in perpetuity. No matter how much we deregulate, you still need bodies to produce things. And so maybe we get a big productivity boom. But betting on a government-sponsored productivity boom seems like a silly thing to do in the context of our innovative U.S. economy. So that's – go ahead.

I was going to say – continue. What is this? No, no, no, no. So I was saying that's all kind of the – those are some of the things that could go right and some of the things that could go wrong with respect to Scott Besson. So, another question that I have is the southern border being porous, kind of having this pouring in of illegal immigrants, obviously has a lot of concerns. There's a lot of people who, rightfully so, are calling for that to stop and we should secure the border. The only positive thing that I have ever heard anyone mention, and I'm not even going to say that they're right, but just the one positive thing was it brought cheaper labor into the economy that helped to quell some of the inflationary concerns and potentially had some economic impact in a way that we might not otherwise have. Again, I don't think there's a single economic argument you're going to make to me that we should open up the border, right? So kind of put that aside for a second. The border should be closed, obviously. but if trump comes into office and does what he says he's going to do and he's going to close

that border and he's going to deport a lot of these people what do you think the economic impact of that would be well it's it's that inflationary right and this is something we've been talking about our research for a few months now as well which is one of the benefits of opening the border and having millions of illegal immigrants pour into our country is that we had a significant deceleration in wages we had you know let's for example if you look at the private sector employment cost index, that peaked to somewhere around 6% in 2022. We're tracking it around 3% now. So we basically got a halving of the private sector employment cost index, which is the broadest measure of wages and salaries that we maintain here in the US of A.

And then so as a function of that, we had unit labor cost inflation decelerate to from, let's call it 6%-ish in late 21, early 2022, to basically 1% now. And so we've had a significant deceleration in unit labor cost inflation, which in my opinion was causal to the persistent above trend growth of corporate profits. So just stopping that at the margins would cause the economic growth to slow down because we're going to run out of incremental bodies to hire in non-farm payrolls terms. But also just stopping that, you're probably going to have less of a disinflationary impulse upon wages, which ultimately, and if that starts to reverse, and we just have a tighter labor market here in the US, then you're going to have faster wage

growth, fast unit labor cost inflation. And if you don't have an acceleration in productivity growth to offset that, you're going to have a slowdown in corporate profit growth. That's just how math works. Where can we send people to find you or find 42 Macro and the great research you guys do? Look, man, I appreciate you. I love having these conversations. You ask phenomenal questions, brother. If folks are sleeping under a rock, come check us out at 42.com, 42macro.com. I apologize for that. But as always, we're really just grateful for this partnership and look forward to our next conversation. Thank you so much for doing this.

I learn something every time. You got beautiful charts and even better insights, my friend. So we'll do it again next time. I appreciate you, Bob. Thank you, brother.