The Pomp Podcast - #1526 Darius Dale | Trump Tariffs Will Destroy 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 going on, guys? Today, we've got an amazing episode with Darius Dale, the founder and CEO of 42 Macro. We talk tariffs. What's going on with risk assets? Was it a mistake?

Starting point is 00:00:38 What's going to happen next? And Darius, he lays it on. Is this the blue collar industry versus Wall Street? Who's going to win? We got it all covered today. 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.

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Starting point is 00:03:24 with crypto before you invest. He was on the floor of the factory on CNN, holding up a basket, saying Trump is going to level the playing field. And he seemed really excited. What is going on here? Why are there two different factions? Yeah, great question. And thanks for having me as always. Great to be here, especially during such a trying time. The reason there are two factions is because we were exiting a game, a paradigm whereby the winners of the game were people who most benefited from globalization and that geopolitical world order. And we're likely headed to a paradigm where the winners of the game are the people who benefit from more regionalized, localized factors of production. And so that's why you see this sort of debate between Wall Street and Main Street, because Wall Street exists to find profits, to find productivity.

Starting point is 00:04:39 And ultimately, the best way that they figured out, quite possibly in history, was globalization, right? You basically reduce the largest input cost for most production, which is labor. You found a way to spread those costs around the world and ultimately lower costs and create a significant positive shock to corporate profits. My favorite chart, which you guys will put up while we're talking, is the chart that shows labor versus capital. It has corporate profits as a share of gross domestic income up at 14% relative to a long

Starting point is 00:05:10 term mean data back to the 40s or 50s of about 9%. And then we have labor share of national income, which is somewhere around 51, 52% compared to a long run mean of about 56, 57%. Now, the deviations from those means doesn't sound like a lot. It's like 500 basis points. But 500 basis points effectively equates to about $1.5 trillion of lost income that's going from the household sector to corporate profits every year. That's about, let's call it 11% of the median, 13% of the median income.

Starting point is 00:05:41 And it's roughly about $11,000 per private sector employee. So basically, every American household with two working people is losing about $20,000, $25,000 a year as a function of globalization. and that's why the entire electoral college map was red from sea to shining sea. Now, I agree with that. And I think that Wall Street doesn't understand it. I, for a whole different reason,

Starting point is 00:06:03 have spent the last two years talking to a lot of people in the industrial manufacturing space. I've gone to these businesses. I've walked the factory floors. I've met the workers. I've met the CEOs, all this stuff. These people do not care

Starting point is 00:06:14 if your Wall Street portfolio is going down and people say, oh, they're 401k, all this stuff. Listen, the people who are working in these businesses, I'm not talking about the CEO who's got stocks and stuff like that. I'm talking about the people. I went to a electric harness, electrical harness business in Michigan. And there's a bunch of people and they were literally assembling electrical harnesses that go into cars and different electrical products, right?

Starting point is 00:06:38 These people are sitting there assembling these products with their podcast or their music playing in their headphones. They're doing it all day long. They don't even know the stock market is going down. They're trying to go to work, make a living, go home, enjoy their life, and make a better life for their kids than they had for themselves. That's their goal. And so the investors, though, they do have investments.

Starting point is 00:07:00 They do care about the stock market. I knew that this was going to be a very important chart because I have never seen you draw on a chart before. And when I saw the drawing, I said, my boy was in the lab cooking. So before we put this chart up, I want everyone to take that wax out of your ears, put your glasses on if you got rec specs you know with the elastic band for sports put the rec specs on darius hit us with what's going on in the risk asset chart you got here yeah look man this thank you for saying all that man and by the way i agree with you you and i both have very humble

Starting point is 00:07:32 beginnings to where we've gone to today uh we i think we you and i understand the plight of the common man of the folks who've been left behind by globalization much more silently and much more real tangibly than the average person on Wall Street, the coastal elites who comprise Wall Street and Palm Beach and San Francisco and all the stuff that's going on in Hollywood. You know, at the end of the day, what we're trying to do is educate them as to why President Trump feels so compelled to stick with this fourth turning transition. And so that takes me right to this chart here, which is when you think about how markets behave in a quote unquote normal regime, a non-fourth-turning regime, where we have these massive, huge geopolitical, social,

Starting point is 00:08:15 institutional changes. In a normal regime, you just have your kind of standard bull-marketed stocks. They go up, they go down as a function of the business cycle, and that's pretty much it. When we're in a fourth-turning regime, you have all these very powerful forces pulling and pushing on each other, much like a sumo wrestler or an officer of a defensive lineman in the trenches. There's so much force that when the tide changes even a little bit, you have these massive melt-ups and melt-downs in markets. Can I throw a stat at you, Pump? I'm going to throw two stats at you. One's going to shock you to your core.

Starting point is 00:08:51 The first one won't, but the second one definitely will. The first one is every year since 2015, the market has either gone down 20% or up 20% in that calendar year. this, I mean, we've been living in a nuts timeline, right? Every year for the past decade, the market has either gone down 20% each year or up 20% each year. Like that's more than double what a normal market return is. And that's what we're trying to suggest is that the fiscal largesse that you tend to see as a function of populism in a fourth turning, as well as the monetary policy response to that in terms of, you know, gobbling up bonds and trying to, you know, force financial repression onto investors. These are the kinds of dynamics

Starting point is 00:09:32 that basically cause us to go from up 20 two years in a row to down 20 the next year, maybe up 20 a couple of years in a row, the down 30 or 40 the next year. This kind of very volatile setup is a function of the fourth turning and all those dynamics. And one thing I'll conclude with, go back to the folks in that manufacturing plant in Michigan that are just trying to provide a better life for themselves and their kids, and hopefully that their kids can live a better life than they did. Those people definitely don't own stocks. Did you know, Pump, that 88% of all financial assets in this country is owned by the top quintile of investors? It's crazy. The top 20% of human beings of households in America own 88% of all financial assets. That means the other

Starting point is 00:10:20 12%, we got to divide that with the 80% of us have to divide the other 12%. And so you no wonder no gives a damn about if the stock market's down because of tariffs this is a real institutional societal shift transformation that's happening and wall street is incentivized not to report it they're incentivized to fight it and ultimately they're incentivized to lose money because of it because ultimately they they have to lose the game in paradigm a to facilitate the transition to paradigm b it makes uh it makes a ton of sense you've got a slide in here talking about the journey is more important than the destination what's that mean yeah yeah 100 so this uh one of of my favorite charts i've ever created in my almost 17 year career on global wall street now

Starting point is 00:11:01 this chart helps explain what i think is the most misunderstood but very important one of the most important concepts in all finance the average retail investor does not understand this chart but everyone feels this chart especially as you get older uh in in life so what this chart essentially explains the impact that volatility drag has on investor portfolios and volatility drag is if you look at the far right of the chart where it shows portfolio size after year three, look at the bars. There's $338 in the blue bar and $200 in the red bar. Volatility drag is the spread between those two bars, or essentially it's the spread between those two bars as a function of the path that the assets have taken to get there. Both the red bars and the blue bars in

Starting point is 00:11:45 this chart feature identical 50% average annual returns. However, you wind up with more money if you take the path that the blue bar takes, which is a more smooth ride to building wealth as opposed to a more volatile ride for building wealth. And this is what we try to coach investors on is that you can build wealth by participating in assets like Bitcoin, a huge Bitcoiner, you're obviously a Bitcoiner, but you also need to be respectful of the fact that if you buy the asset or overly exposed to the asset at the wrong time in the investment cycle, you will suffer volatility drag and you'll ultimately wind up with less money over a longer period of a longer time horizon so i think 2025 is a great year to re you know reintroduce investors to this very

Starting point is 00:12:28 important concept now asset prices are crashing and inflation was crashing if you look at things like true flation um the fed emergency rate cut odds are up like 25 to 30 percent but you're saying yeah i mean which still means they're not likely to do it uh people forget how odds work 25 basis points gonna do pop come on the uh labor market that you think is too robust you think that they can't cut explain this this is the problem this has always been the problem with the fed they anchor on lagging indicators the fed only fed only eases policy for three reasons one we have a miraculous disinflation which almost never happens in the history of the data so you can kind I rule that out, especially in the context of, you know, going back to before Smoot-Hawley and tariff prices and tariff tax rates to the labor market comes unglued, which the labor market is a lagging indicator.

Starting point is 00:13:23 It lags the economy and the stock market by about two quarters. So it's too late if you're going to do that then as a function of labor market. And then there's financial stability concerns, which, of course, it'll be too late in market price terms, may not be too late labor market terms. You know, they eased policy in September of 2019 in response to financial stability concerns and it prevented what may have prevented, we wouldn't know, obviously COVID is a kind of factual, but it may have prevented a recession then. But the reality is we had already crashed in Q4-18 and the credit market froze up. So the reality is, is the Fed is a, I think I talked about this a few years ago in 2022, which is the Fed's like a janitor, right? You don't see a janitor sweeping the mop and broom over people's shoes when they're working or partying at the event.

Starting point is 00:14:06 The Fed comes in after with all the trash on the floor and sweeps it into the dustpan and mops the floor, right? And so ultimately, as an investor, you need to be aware that you can't be so myopically focused on the Fed to bail you out because they're usually going to be too late is what I'm essentially trying to say. And right now, the labor market is too robust, as evidenced by nonfarm payrolls growing 345,000 since Trump took office. i mean this is a labor market i mean granted you can take an issue with this data and i do take

Starting point is 00:14:34 issue with this data to some degree but even when you look at hyper high frequency data like jobless claims or some of the indeed survey data or leading soft data it still says that the labor market is still reasonably robust and that's a problem for investors now the fed what can they do obviously they're not going to cut where they you and i've talked before are they going to raise the inflation target are they potentially just going to say screw it we messed up uh i mean I mean, they're behind the ball. They're lost in the sauce, right, frankly. What do you do?

Starting point is 00:15:04 Jerome Powell's just like, I'm not going to listen to Trump. Trump's tweeting at him. What happens? Yeah, look, I think this is why you play nice in the sandbox. And Trump's going to regret being so mean to Jay Powell over the past, you know, what, six, seven, eight years. You know, Jay Powell, if he was on board, would probably have already cut interest rates and probably have already signaled, hey, we are prepared to use our balance sheet to tone down volatility in financial markets. That's what a good – I'm not even saying J-PAL is a good or bad central banker, but I think a proactive central banker would be doing that by now because they ultimately understand that whenever you have contractionary fiscal policy, in order to keep an equilibrium level of economic activity, you need to have equally expansionary monetary policy, and they're doing the exact opposite of that in terms of sitting on their hands and maintaining what they believe is a restrictive monetary policy setting.

Starting point is 00:15:50 That's wrong, in my opinion. And you and I have talked about this slide here, our secular inflation model slide, many times over the past few years, which is our model continues to suggest that the equilibrium core PC inflation rate in the US economy is around 3%, somewhere in the high 203s, can't be more specific than that. But the Fed is targeting a 2% inflation target. And as long as they're targeting a 2% inflation target, that means they're sort of forced to sit on their hands and keep monetary policy, at least according to their metrics, restrictive until they feel very confident that inflation is going to return to 2%. And based on our model, if the equilibrium inflation rate is 2%, if 3% or somewhere

Starting point is 00:16:27 thereabouts, then the only way you're going to feel very confident about that is in a significant breakdown in the labor market. And what I'm trying to argue is, if they just acknowledge the fact that the inflation is running hotter in this business cycle, we wouldn't have to suffer through all that needless job loss as a function of the policy mistake they're currently making. do you think that they can get back on the ball like is it possible for them to catch up is it possible yeah so yes but they've already kind of hinted that they're not going to so they have a monetary policy review this year every five years the federal reserve conducts a deep dive study on what they got right what they got wrong what they might need to change about their

Starting point is 00:17:05 entire policy framework and what's conspicuously missing from that monetary policy review is the 2% inflation target. Don't forget POM. We got that thing from some random central banker in New Zealand. Like, why are we managing the world? I heard it's part of the Ten Commandments. It's part of the Ten Commandments, obviously. I would prefer to come from the Ten Commandments. As a Christian man, I would much prefer Moses have come from Mount Sinai and said inflation needs to be 2% or else than some random guy in New Zealand. Nobody even knows his name, right? The Federal Reserve is making a monetary policy mistake that's going to cost investors trillions of of capital destroyed in the stock market and crypto market crashes and and also millions of

Starting point is 00:17:45 people are likely to be put out of work as a function of their inability to get you know to to acknowledge the changes in the economy that our model has been signaling since january of 2022 and just accept the fact that we're running a hotter inflation economy if it's three percent then you can start easing a lot sooner which could potentially offset this fiscal contraction that we're hitting and by the way fiscal contraction is a big deal we're talking tariffs, right? Everybody can see tariffs. I mean, you just take your head out of his hand and see tariffs. You can go to your local downtown. There's probably people protesting. But people have already forgotten that Doge is aiming to take a trillion dollars out of annual federal

Starting point is 00:18:22 expenditures. Now, you and I very much agree that Doge is a necessary, painful medicine that this economy needs to take to prevent a fiscal crisis. But again, emphasis on painful medicine. If you try to do it, it's going to hurt. And it may, in fact, you know, create a trigger, a technical recession, if not an actual recession, when combined with the net impacts of tariffs. You had this thesis called the kitchen sink thesis. What's the latest on that? Yeah. The latest is that Wall Street is, they're still washing their hands. Like, President Trump yanked the sink out of the wall and is like walking out of the office with the sink, right? Wall Street is still standing there over what used to be a sink, rubbing their hands

Starting point is 00:19:02 with their hands doused in soap, they don't realize that everything you and I have been talking about with respect to this transition from paradigm A to paradigm B, how the globalists and the corporate fat cats of Wall Street have to lose in order for those folks on that factory line in Michigan to finally start winning again. They don't realize this, and they're very reluctant to take down their estimates to acknowledge this. And part of it, right, I don't think they're incentivized to say where we're going, right? Because it's saying, hey, I have to lose, right? Nobody's incentivized to raise their hand and say, yeah, we have to make a lot less profits going forward in order to make the American worker happy, right? Because that's where we're going,

Starting point is 00:19:43 right? If President Trump and his Trump administration can stay the course with respect to their policy path, and they may or may not be, I'm not even making an argument about that, but if this is where we're going, then ultimately the numbers on this chart have to go down. What we're showing here, S&P 500 index sales estimates with respect to the broader index technology sector and then X technology. As you can see in the chart on the left, there's a linear acceleration in revenue growth projected as of today for S&P 500 companies, both technology and X technology from the low in Q1 2025 all the way through high to 21 2026. How in the world is revenue growth going to accelerate from 4% to 7% over the next four

Starting point is 00:20:24 quarters in the context of everything we can already just see on the tape without having to do any empirical econometric analysis. Moreover, we have this back half of the year hockey state projected where you got earnings growth accelerating from about 7% to 11%, 12% in the back half of the year. At the same time, the economy could very well be in a technical and or actual recession at that point in time. And so to me, I continue to see a great deal of resistance among my colleagues across Global Wall Street in acknowledging this fourth turning transition from paradigm A to paradigm B. And ultimately, that reluctance, in my opinion, insulates the downside. It doesn't insulate, it accelerates the downside in asset markets. Markets are not

Starting point is 00:21:05 going to be able to bottom until we have a serious conversation about what the economy is going to look like two to three quarters from now and how we can start to build up from that base. But we got to actually have a serious conversation about that. The Republican Party, one of the promises they've made is they want to make a big tax cut, but not for the rich. They want to do it for people making $150,000 or less. Sounds great. A lot of people will be very happy. I don't think they're gonna be able to cut federal income tax level to zero, but I do think that they can have a cut. But it would be backstopped or paid for with debt is kind of the plan. Describe a little bit as to what this plan is. And does that just mean like all assets go up if we're going to keep

Starting point is 00:21:42 on taking debt? Well, that's a phenomenal question, Pomp, as always. You're one of the best in the world at this. The Trump administration will tell you that it's not going to be financed with debt, by the way. They'll say the tariff revenue is coming. We have tax spending cuts offsetting that in terms of what they're likely to legislate, at least with respect to the House bill. That's the table on the left there in that chart. And then they have the tariff revenue, the spending cuts and the doge cuts they think this is all going to wind up with lower deficits over the long term uh i take great offense to that we've done a tremendous amount of econometric analysis but you know analyzing you know all these relevant time series to demonstrate that

Starting point is 00:22:24 there's been never in history has there been a an administration that certainly not the post-war u.s economy that has you know paid down the debt uh and grown its way out of the debt so we don't think we're going to start now especially with our starting point of a of a positive um output gap 1.6%. Recall that the output gap was minus 0.3% when they launched the first TCJA and we got a positive shock to growth then that ultimately wound up with still the deficit declining, getting worse. It went from minus 3% in 2017 to minus 4% in 2018 to minus 5% in 2019. So we had deficit expansion then with a negative output gap. With a positive output gap plus tariffs, plus Doge, plus a Fed that has got a too tight monetary policy setting for everything

Starting point is 00:23:05 that's happening from a fiscal policy setting. I don't see how you don't want to expand the deficit, but that's neither here nor there. On the right side of this table, we show the Senate plan. The Senate plan essentially is you're going to use this, what we call this current policy baseline, which assumes the cost of extending the Trump tax cuts does not cost anything, which allows them to dump a bunch of extra goodies onto the bill, like no tax on tips, no tax on social security, et cetera. That would be very debt financed. They're not calling for much, if at all, a deficit reduction in terms of spending cuts. So ultimately, you're talking about a potential net debt growth of about $7 trillion if the Senate, you know, kind of won

Starting point is 00:23:43 this debate. It's unclear to me if Trump will have the political cachet as he currently does now in order to sort of whip the House Republicans in to get them the fiscal hawks down in the House in line with what he wants because he supports the Senate bill. But we'll see. But the reality is We're not going to grow our way out of it. They're going to tell us they're going to grow our way out of it. And ultimately, we're going to wind up with a lot of debt, a lot more debt. Do you think the tariff is a mistake? Do I think the tariff is a mistake?

Starting point is 00:24:10 No, I don't think the tariff is a mistake because I support the transition from Paradigm A, which is a K-shaped, you know, top heavy economy, you know, that is, you know, built up top fiscal largesse, but most importantly, built the top very regressive fiscal largesse. the, you know, we have a 25% government expenditure to GDP ratio. Clearly, it's not going to the people who turn the entire electoral college red from C to signing C. It's going to the rich people who've been scamming the government. I mean, I know people personally that took PPP money and bought private jets with it, right? This is where the fiscal largesse has gone. It's to the top part

Starting point is 00:24:47 of the cake, to the asset owners, to that very narrowly concentrated subset of the United States society that has been you know eating high and living high on the hog at everyone else's expense and so yes i do support this transition from paradigm a which is that to paradigm b which is this more egalitarian e-shaped economy where everyone on you know the upper class the middle class lower class i don't know if you can say class anymore i have time to be politically correct now but everyone is just rolling the boat in the same direction whether it be up or down as opposed to the k where the winners win and the losers lose i very much support that as someone one who grew up very poor and on the outside looking in and very supportive and sympathetic

Starting point is 00:25:24 to the cause of Main Street. Do I support the way they are implemented? But quite frankly, Fisher Price math? No. Do I support the order in which they were implemented? And, you know, you can't really fault them for the order because they only have about a year to get this stuff done because we know Congress is going to flip hands again. It flips hands every single midterm election and has done that for like a decade. So we know he has a very narrow window to get his policy priorities enacted. And so I would have launched a tax cut and deregulation program simultaneously with this, see how we shook out in terms of negotiating the deals, then layer Doge on top of that in order to hit a negative shock to the demand for capital in

Starting point is 00:26:03 the economy. At the same time, you're asking everybody to build factories here. That's the order of operations that I would have chosen, but I don't know that you can do that in the context of the midterms. Darius, where can we send people to find you? Oh, I appreciate you, man. Thanks again for having me, man. I love catching up with you, brother. 42macro.com, come check us out. Everything we talk about is very helpful for investors,

Starting point is 00:26:22 but the number one thing we do for our investors is time markets and systematic quantitative risk management overlays. So 42macro.com, come check those out. And then you can find me on DariusDale42 on Twitter, where I kind of talk about all this fundamental stuff. I call it fundamental stuff because at the end of the day,

Starting point is 00:26:38 the real part of it- The best on Wall Street. The best on Wall Street. That's what I tell people. I don't know about it. I'm definitely not the best. I'm definitely, I'm working hard to become the best. And I think we've done a really good job

Starting point is 00:26:48 for our clients this year. Did a really good job for our clients last year. Did a really good job for our clients in 2023. Did a really good job for our clients in 2022. Did a really good job for our clients in 2021 when we lost the firm. So that's four years in a row of doing a fantastic job for our clients.

Starting point is 00:27:02 And we fully expect to continue that run. I love it, man. Thank you so much. We'll do it again soon. Appreciate you, brother. We'll be right back.

The Pomp Podcast - #1526 Darius Dale | Trump Tariffs Will Destroy The Economy?!

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