The Pomp Podcast - #830 How Will Russia & Ukraine Impact The Macro Economy w/ Darius Dale

Episode Date: February 18, 2022

Darius Dale is the Founder & CEO of 42 Macro, the leading macro risk manager adviser. In this conversation, we discuss the macro economy, what's happening in the financial markets, how Darius is looking at various metrics, and what you should be considering as you're investing your capital. Darius joins us every Thursday on "The Best Business Show." This week, he joined us in our Miami studio. To see the video, go to "The Best Business Show: LIVE" YouTube Channel. ======================= Exodus is leading the world out of the traditional financial system by building beautiful and user-friendly blockchain products. With its focus on design and user experience, Exodus has become one of the most popular and loved cryptocurrency apps. It’s supported on both desktop and mobile, allowing you to sync your wallet across multiple devices so you can have access to your funds anywhere. You can instantly exchange around 100 different cryptocurrencies straight from your wallet. Interactive charts let you view an asset’s price history and your portfolio’s performance over time. And maybe the best part, Exodus is integrated with the Trezor hardware wallet - making advanced security easy for everyone. Visit exodus.com/pomp for your free download or search Exodus on the App Store or Playstore. ======================= Today’s episode is sponsored by Abra. Based in California and backed by top VC firms, Abra is an all-in-one simple, secure app that allows you to trade over 110 cryptocurrencies, get 0% interest loans using your crypto as collateral and earn interest with up to 14% APY on stablecoins and 8.15% APY on Bitcoin. Join nearly 2 million users by downloading Abra from the Google Play or Apple App store. If you download the app today, you will get $15 in free crypto once you fund your account. You came, you invested — now conquer. ======================= DeFi Technologies represents what’s next in the digital economy -- providing simplified, trusted access to crypto, decentralized finance and Web 3.0 investment opportunities. Institutions and investors can gain diversified, secure, compliant, and easily tradable access to a diversified set of industry-leading equity products and protocols, through a single stock purchase on a regulated exchange. Currently listed on U.S. (OTC: DEFTF) and Canadian (NEO:DEFI) exchanges. For more information or to subscribe to receive company updates and financial information, visit our website at defi.tech =======================

what's up everyone this is anthony pompliano most of you know me as pomp you're listening to the pomp podcast simply the best podcast out there now let's kick this thing off darius dale is the founder and ceo of 42 macro the leading macro risk management advisor in this conversation we talk about what's going on in the macro economy what's happening in the financial markets how darius is looking at various metrics and also what you at home should be thinking about as you invest your capital. I really enjoyed this conversation with Darius, and I hope you do as well. Before we get into this episode, though, I want to quickly talk about our sponsors. Today's episode is brought to you by Exodus, the world's leading desktop,

mobile, and hardware crypto wallet. They offer beautiful user-friendly blockchain products that sync across all of your devices, making it easier to send, receive, and exchange over 150 or more crypto assets in one place. And with world-class customer service available to you 24-7, Exodus always has your back. But the fun doesn't stop with staking and trading. They recently launched a new NFT marketplace where you can buy and sell your favorite NFTs on the Solana network. By partnering with the popular NFT platform Magic Eden, they're offering the full Monty on verified collections, with more added every single day. Ready to check it out for yourself? Run, don't walk, over to Exodus.com slash POM for your free download today. Again,

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I'm really excited about what these guys are doing. I've become an advisor to the business and I highly suggest you go check them out. Go to their website at defi.tech today. All right, let's get in this episode. I hope you guys enjoyed this one. 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 all right as you guys can hear we have another guest in the studio now he literally couldn't

keep quiet like sometimes i gotta just say the truth he's 98 years old no you're neurologically proven is here yeah i am here what's up boys in the studio live and in charge man uh it's good to be here what do you think about charlie munger's bullshit yesterday i you missed it earlier i said he's just talking that shit like he was just he was on television talking shit and then like yeah i said that shit i said that i said fiat currency's going to zero it reminds me of like the like the tupac biggie beast where like it just got more and more ridiculous and so i'm guessing uh he's gonna fire back he's gonna clap back at you i literally think somebody should create a uh a diss track of charlie munger and then like pay no and then

listen and then pay to go to lunch because i think i know you can pay to go to lunch with buffett i'm assuming you can pay to go to lunch with munger as well for like charity or whatever and then just literally go to a restaurant and have them play it over the speakers the whole time. Dude, for 25 bucks, 25,000 a song, I'll do a diss track for anybody. I was going to say, if someone wants to go to lunch with me, I'll do it.

But literally, him saying that fiat currencies are going to go to zero, my favorite part of the whole thing isn't even him saying it, him talking shit, him giving the stare down. It's the guy who responds and goes, well, that'd be a different environment. He hit him with, wow. He was like, damn, bro, you really mean that shit? guy takes out his phone and starts trading like shit um but no i think joe's point about

you can't really uh take these guys uh their advice on technology seriously is uh uh is pretty fair right well you also have this happens in finance a lot right you you people talk their book a lot in finance and so you always have to sort of evaluate what folks are saying and the advice they're giving you through the lens of how these people make money and it's not to say that they're nefarious you know a lot of people are actually you know you're making money but you know you're also trying to help people and establish their long-term financial health but there's sometimes there's people who are just trying to do it to make money and so you have to be able to have that filter and apply that um going forward all right what what uh what's our

take on uh russia and ukraine does this have any impact on fed policy decisions or the financial system or any of this stuff or is this like more of a geopolitical thing and not really finance-related? Well, I'll start by saying if this goes awry, it'll be impacting everything. It'll be impacting how you and I live our lives. But the reality is most geopolitical conflicts are exogenous events, and markets tend to price those in very quickly and move on. What markets care about are trending rates of growth and trending rates of inflation and trending direction in monetary and fiscal policy. And so to the extent that this Russia skirmish has any impact on that that's what will impact markets but it's my view that it won't um it's

also my view that this is just a big game for putin to get the west to the table to get them to back off their sort of eastern expansion with respect to nato i think that's pretty clear i feel like putin is just sitting there he's like he's fools like he's like he thinks he's playing like uh what is it a risk right or whatever where he's like all right i'm gonna get people up closer to the border i'm gonna move them back nope they were never there like and and i'm sure there's a whole bunch of nonsense that we don't even know about right so it's like hard to underwrite like how serious is it how much is it propaganda whatever like it just feels like a game you know what he's doing he's we've all been there like you have an ex-girlfriend i haven't put my

military troops on the border yet but no no i'm bringing it back to layman's terms so how putin is behaving right now is that like ex-girlfriend who's constantly talking about her new boyfriend on Instagram and constantly taking photos and pictures of them just to make you jealous. So like Kim Kardashian? Basically. Putin is behaving like Kim Kardashian right now and

ultimately it's likely to be proven effective because right now, neither the US nor Germany, really the broader West, can afford to have a military skirmish develop obviously out of this because we're already dealing with a pretty rapid expansion in crude oil prices and if we take it

WTI above $90 a barrel to 100 110 120 dollars a barrel you're that's a recession automatically in the u.s economy yeah it feels like uh we're only scratching the surface of the game they could play yeah like this whole like oh we may invade ukraine we may not what was what were they doing a couple years ago there was like uh was it ukraine or was there another uh small jurisdiction where like i remember there's like a cnn reporter and he was like in the snow and they were like oh we're like fortifying the position or something whatever was going on and i remember being like oh damn that might be real and then like if you actually think about uh over the last five years trump was in office

we almost went to war with iran like world war three was popping on twitter totally and then he was tweeting little rocket man at north korea right like it feels like this game gets played a lot but for some reason i think that the uh americans look at this and like yo putin is a different yeah thing here like you know what's going on did you ever read a red notice the book uh uh bill browder no i'm not talking about oh yeah you gotta read it uh it's not necessarily like a educational book like and you're gonna learn about trading or investing or anything like that uh it's more so um it's a true story and bill browder was an american who uh in the 80s i believe went to russia and uh he um found that a lot of the companies were not exactly

reporting accurate numbers and so it looked like they were much smaller than they actually were and it's unclear uh at least from my reading of it was it for taxation purposes was it to prevent the government from coming in and confiscating their assets or whatever but he basically started to buy up stock in the companies and they'll be like yo they actually did 20 times more revenue than they said they did right and the stock prices would explode he would make a killing yeah so kind of like activist investor-esque but he was just doing it in you know uh russia it's actually interesting that the opposite i read there's a book called uh red capitalism about china's financial sector and it's a it's basically the opposite of that which is you know

they've grossly exaggerated um their size and might and and sophistication of the financial this is going back you know 10 years ago i think the book came out in 08 or 09 obviously they've taken significant leaps forward um and developing you know their capability since then but it was sort of a kind of casting a cast casting a bit of a doubt on what had become the only growth story in town you know really throughout the early 2000s and into the early part of the 2010s yeah so what happens with him which is uh uh i don't know why some people downplay some people overplay there's probably a lot of nuance in there is that he uh he ends up becoming wealthier and wealthier and wealthier and wealthier and at one point he's talking about everyone from putin to other

investors etc and he's just talking about him like you know it's like hey you got a hedge fund i got a hedge fund right like whatever yeah but then there's like the consolidation of power all this stuff and so long story short is uh he literally gets to the point where he's scared for his safety and uh he leaves the country and at some point uh according to his you know kind of telling of it um the government the police whatever go to his lawyer's office lawyer's russian and they basically confiscate documents and you know illegally right in terms of uh they just walk in and they basically beat him up and take it and they arrest him they end up killing his lawyer uh in the book sorry to ruin it for who those haven't read uh but his lawyer's name was uh sergey um

uh miniskov i think is how you say it i may have it uh or minitsky i think is actually how you say it um and so people in the united states may have heard of uh the economic sanctions the minitsky act and that's all because bill browder went to u.s politicians and was like hey pay attention to this and did all this work got john mccain a bunch of these politicians to actually go ahead and levitate sanctions but what's crazy about the whole story is he now still to this day he writes in the book like he goes into a restaurant he goes in the kitchen and watches them make his food wow because he's so scared that whatever and so red notice is like uh kind of like america's top 10 most wanted but uh the interpol has a red notice which is like you're an international

fugitive and so at some point russia convinced uh interpol to release a red notice on him and then he's able to basically say well hold on a second here like that's in fast and the furious too is it oh my god i think that's a true story as well not to not to uh shift gears but like to me what you just described is is one of the reasons i i you know personally tend to be very anti, you know, corporate tax evasion. And, you know, cause you know, it's one thing to run a business and obviously we're all trying to turn profits as business owners, but part of, you know, operating in this wonderful country that we live in is understanding that there's a rule of law and there's, you know, you don't have to worry about the government, you know, beating you up

and murdering you and taking documents and things of that nature. You don't have to worry about thugs, you know, doing the same thing. And so ultimately, you know, we're paying for that. We're paying for that with our military. We're paying for that, you know, with our judicial system. We're paying for that with everything. And so ultimately, you know, to me, I think when companies try to take their tax burdens to zero, yet they want to sell goods and services to American consumers on American soil. To me, I think that's very unpatriotic. Yeah. The other piece of this whole thing, it feels like, is there an argument that we ended the war in Afghanistan and like, this is, hey, how do we create more economic growth? It's like, where can we go to

war next? Like how much do you put a weight into the like war generates economic activity, economic growth. And therefore we're a country that given, you know, debt to GDP and kind of all the challenges that we have, that we have to constantly be going to war with somebody. Yeah. So I would look at it from different lines. I generally agree with your sentiment in the sense that there is a underlying motive to constantly be engaged in military conflict. Now, this kind of military conflict, kinetic conflict tends to be less valuable, certainly at this particular point in the time-space continuum. Right now, our military conflict is, and Dr. Pippa Malmgren is kind of the world authority on a lot of this, so I'm just parroting some of the things she said in

recent publications, but, you know, we're having this big cyber warfare that's kind of going unnoticed, you know, in mainstream media, and that's where a lot of the sort of development and spending that governments are doing with respect to military spending, that's where that's going so i it strikes me that the risk reward for getting into a kinetic skirmish um if you think about crude oil going from 90 a barrel to 120 plus dollars a barrel to me that's a poor trait a better trait would just to be to dump money into the cia and and uh ride around in submarines so oil what is it 40 bucks u.s uh producers become uh become unprofitable i think somewhere in that range yeah so i mean that number is martin number changes uh fluctuates with the

price of energy prices and so you know last estimates are somewhere between 50 60 dollars a barrel now as long as we stay above that at the current yeah they're making tons of money they just don't want to drill yep and so when it goes to 100 120 dollars this is the whole argument of like uh what was a couple months ago the u.s uh was talking about we might have to tap into our strategic reserves because russia saudi arabia a number of other countries around the world were slowing down the pace at which they were uh producing oil and that seemed to be also a geopolitical game that was going on exactly yeah no tapping into the strategic petroleum reserves is equivalent of peeing in the ocean yeah we've all been there i mean it's you're not making a

dent it just feels like uh sometimes our solutions that get said you're just like look up by the way i'm not an expert right so like i don't know sure like it sounds strategic right yeah um all right And then what about the situation going on in Canada? We've been talking a bunch about this. What are your thoughts there? So you need to fill me on that. I tend not to concern myself with non-market moving events until they move the market.

So I think this is my view on it. The reason why we're so interested in it is years and years ago, one of the first really big inflection points for Bitcoin was WikiLeaks came under an absolute shit storm And a lot of financial organizations sort of shut down their bank accounts, freeze payments, kind of all the financial censorship stuff that we now know that they can do and will do. And when they did that, WikiLeaks said, hey, well, we'll accept Bitcoin. And I believe it's Satoshi. Let me make sure I don't want to misquote here.

um but the uh the quote that satoshi had um was yeah so uh satoshi at some point um said wiki leaks has kicked the hornet's nest and the swarm is headed towards us and i believe that was one of the last things that satoshi said and and it from the analysis that people have kind of looked at is it was not just wiki leagues it was just like bitcoin's becoming too popular too quickly it's not necessarily built for this we're going to attract a lot of law enforcement and nation state you know intelligence etc uh this may not be what we want to do yeah now obviously we've got to the point that we've gotten to but that was the first like mainstream hey what is bitcoin why is this important what is this wiki leasing whatever i feel like there's

been many between now and uh between then and now but this is another massive one where people are like wait a second whether you agree with the protesters or not you're telling me that the banks can freeze the payments you're telling me that the banks can confiscate the uh crowdfunding uh platforms can literally confiscate the money like what is going on so so fill me in what's the what's the 22nd like headline so long story short is uh there's a couple of truckers that became a lot of truckers that became literally now the uh a 70 kilometer long convoy and they're blocking the major road where most of the 70 kilometers drove across canada to ottawa yeah they filled the streets of ottawa with trucks and they're not moving so they basically gridlocked the city

and then there is a specific uh i think it's a bridge uh and kind of highway that is a major trade route between canada and the united states they're basically uh if not blocking making it very difficult to get uh transportation and goods across and so of course there's two different perspectives right the most extreme versions are uh these are people who are protesting vaccine and mask mandates they don't believe that their government should actually come after them 90 percent of truckers in canada reportedly are vaccinated so it's not a we don't want to be vaccinated it's just you shouldn't tell us and our fellow citizens uh and so we're going to do something about it we're going to basically make you uncomfortable and we're going to you know go

and protest the government argument is these people are uh terrorists and uh the canadian government has literally come out and said uh if you are participating if your uh vehicle is used in the protest we are going to uh cancel your insurance on your vehicle we are going to impound the vehicles uh if you try to send more than 25 to these people we will freeze your account we will confiscate your phone like what bad nasty nasty this is bad it's trudeau's he's taking hell on this there's no chance he's gonna get away with this of course what do they do like and people go back in you know social media history and he said all the right things years before things like you know hey we shouldn't try to crush dissent uh you know any government

tries to crush dissent loses its moral i stand with hong kong's right to protest all the things that made people believe canada was a liberal democracy and now all of a sudden he is just acting crazy and so literally it's gotten to the point where i saw a clip yesterday from uh i i think it's called parliament canadians will correct me immediately if i got that wrong yep um but the the parliament is kind of wild in canada where like the two political parties are on either side and somebody stands up says something and there's kind of like a i don't know what the guy is but he's like the presider like kind of like the judge yeah and so he's like okay your time's up okay you know uh uh respected you know uh prime minister

go ahead what do you have to say and yesterday uh some woman just took him to town like she was just going after him wow and uh you know her whole side was i was clapping and everything and he stood up and goes while the conservatives would like to stand with people with swastikas right and they all start screaming at him like it's like a free for it's like crazy this is borderline comedy if it wasn't so serious so like that's like my python as comedy now as uh people are saying that they also do the yelling and screaming in england as well only in america do we actually just have a bunch of old people who write papers right like in these other places they're like i would love to see somebody duff out mitch mcconnell can you imagine like mitch mcconnell

and nancy pelosi just yelling at each other on the maybe oh my god national television right totally so uh the reason why all of that is uh is interesting to me uh is there's a freedom aspect to it i think it's important um but when we think about it from a business standpoint we think about it from an investing standpoint one is uh you have businesses that have been hurt already right by a lot of these mandates here in the united states we saw tons and tons of businesses because of government lockdowns etc that they couldn't make it etc then you get the opposite argument which is no the vaccines and all this stuff allowed for people to go back to work they allowed for economies to open or whatever okay but then you got ottawa where like you want to support people's

right to protest but like there's some people who can't get to work because literally the the city's locked down well i think the problem so like there's a lot of nuance here that's a lot more nuance and i think the problem now too is that canadians and people within the protests are claiming that the bridge is clear the city is no longer gridlocked they're protesting in front of parliament right and they're still issues and they're saying hey we should be allowed to do this and then you got the people you know they see one guy with a nazi sign which is everyone knows that's not cool but then they all get labeled oh yeah they're nazis you gotta well it could be a government plant yeah it could be anything is my point but uh they're saying now

the city is much more clear but they're still having problems yeah so people are saying you now can uh move around freely it's no longer gridlocked like like you can actually move which obviously is heading in the right direction where that takes away the argument against totally the protesters um and so i think that one of the uh the other aspects is bitcoin people started to say themselves like man i thought canada was chill yeah right like like everyone's just like okay these are cool people whatever now they're like well i saw one tweet that was like if this happened in canada this happened anywhere yeah and so people start to think about bitcoin censorship resistance like all it just you start to realize like oh this is all more intertwined

with business and investing more so than just like, there's a protest or public health or whatever. Yeah. Yeah. The ban on sending them payments is pretty aggressive. That's a big overreach. And that's scary. Imagine them labeling people terrorists.

That's what they said they're going to do. It sounds like, well, this issue here does not have enough sort of stuff in it. There's not enough smoke around this particular issue for us to get there, but you could see where we're going with this, right? I mean, five, six, seven, eight, nine years later, with the next crisis or the next two crises,

we're going to have governments that take drastic measures like that. That's not to be alarmist. It's just being realist. We can see the bouncing ball. Yeah. One of the other data points that recently came out, switching gears a little bit here,

is U.S. citizens in a self-reported study have now said 24% of U.S. citizens say that they have a crypto account. Only 23% say that they have a savings account. So more people now say they have crypto than savings. and so i started to dig into okay well how many people go back go back you said only 23 percent of people self-identified as having a savings account as in a certificate of deposit oh gotcha oh yeah your traditional savings yes correct not only just hey do i have savings at all

but actually is having like a traditional savings account gotcha and so uh buffoon have a savings account there's no rates i started to look at it right and so uh 25 of americans uh say that they have no savings at all for an emergency payment right and then 26 of americans said they have some emergency uh payments but not enough for 90 days so basically over 50 of americans say basic they couldn't make it 90 days or whatever right and so when you have that as the background like okay only 23 saying that they have like a traditional savings account makes a little bit more sense but 24 of americans saying that they have a crypto account to me it was like oh this whole like this digital thing is going to happen well capital chase is it flows to places where

it's treated right right where it gets the highest rate of return whether that be through the actual interest rate or that they'd be through uh you know speculation and and rise in market cap so that to me makes a ton of sense in the context of having you know this ridiculous policy out of the federal reserve yeah what do you think the fed's going to do in march oh they're definitely going to hike uh the question obviously is the 50 basis point hike it's getting incrementally priced in and so it's kind of a 50 50 shot you think 50 is like the over under yeah well i guess it'd be 37 and a half right um if you want the over under yeah i i i'd sit out i'd sit out this bet you know and here's why i'd sit out this bet right like the fed has become you know sort of

They keep saying that they're data dependent, but as evidenced by their sort of, you know, still ridiculous, ridiculously easy monetary policy. You mean the 0% Fed's fund rate when we have 7.5%? They're still doing QE right now to this moment. I think they stop at the end of this month. Like they're still buying, expanding their balance sheet right now. Well, just in case.

I read somewhere that the last time we had a 7.5% print, it was like 40 years ago or whatever. The rates were at like 10% or higher at that point. We're at zero. Yeah. And so just remove the one in front of the zero and 10 and then you get zero. It's easy. I mean, it's just math, guys. So so here here's why I think that this is probably a different a difficult bet. And maybe the next bet is probably where investors should be focusing their their mind share in their capital.

This Fed has very clearly proven itself to be not data dependent. It's proven itself to be forecast dependent, which Jay Powell has allegedly said many times that he doesn't want to be forecast dependent. But obviously, they are, as evidenced by the policy relative to inflation. So if you think about their forecast, one, they have inflation returning back towards trend by the, you know, kind of gets effectively the early part of next year. But more importantly, the yield curve continues to flatten. And I think the yield curve, just Jay Powell being the markets guy that he is, and Clare, although he just left, you know, kind of established that legacy in the Fed to really be

focused on markets, the yield curve is telling the Fed and telling all of us investors that the economy is going to slow down and perhaps perhaps materially so and so to me i think the fed might get spooked by that and say hey let's not do too much too fast let's just do what the markets want us to do which is get going on tightening let's not try to spook or shock or surprise the markets because we are starting to get signals that you know we're going to be effective at whatever we do in terms of slowing the economy down yeah and so if we get 25 or 50 basis points. Like at this point, do you think that either one of those surprises people? No. And here's why. So one thing we look at, we track interest rate markets and what they price

in, you know, various tenors in terms of a Fed policy. You know, the markets have not repriced higher in terms of what they think the Fed funds rate is going to get to in this tightening cycle. All that's happened since October, since November, really, is that we've pulled forward more hikes from the future into today. And so if you look at one thing we track regularly, our overnight index swap forwards, those are just swap contracts on the Fed funds rate. And so where those forwards are pricing, they're starting to invert around 18 to 12 to 18 months, anywhere between 18 months and two years, the curve is actually inverted, which implies the market expects the Fed to be cutting rates at that moment in time or starting to cut rates at that moment in time. And so you

think, okay, where will we be 18 months from now, you know, middle of next year, sometime mid to late next year, that's effectively saying the Fed is responding to a recession, right? Why would the Fed be cutting rates? You know, and that's our central thesis is that if the market is already starting to see a recession in the second half of 2023, I think it's more likely that it starts to arrive in the first half of 2023. So this is my general thought process. I'm not nearly as well versed as you are in terms of when exactly will happen or some of the intricate kind of nuance uh but my general sense is uh they are going to wait as long as they can which probably is march to start to raise interest rates they'll start doing some of the tapering etc the response is

going to shock them and they're going to return back to zero percent interest rate environment pretty quickly and be like oh shit we have an economy that literally is dependent on us at this point. And if we don't do this stuff, then we're screwed. Yeah, that's a great call. I mean, so this is what happens in hedge fund meetings. I've been to several thousand of them throughout my career. We have these debates and discussions about the second and third order effects of those things. So what you just said is, hey, if the Fed pivots dovishly early in this process as a response to asset markets going down and things like that, is that positive for bonds or bearish for bonds i would argue that's probably bearish for bonds i don't buy bonds so i don't know

but i can tell you bitcoin's going to the fucking moon that'd be the best quote ever i don't buy bonds i don't know yeah i literally don't know i mean what do you think no so so so bonds usually go up in price down in yield when the fed is being dovish uh or sort of the fed is reacting dovishly to something bad that happened right and then once they do the dovish thing, the bond still going down in price and up in yield. And so my assumption would be that, you know, a dovish pivot out of the Fed would actually fan the fames of this sort of inflation fear that we have in the economy, right? We're right at these critical thresholds, whether you look at long-term inflation expectations in the market, you know, like

forward inflation swap rates, or if you look at long-term inflation expectations based on consumer confidence measures and things like that, you know, we're kind of right at the threshold where we can call this a cyclical, a very elevated but cyclical sort of impulse in inflation, if we start to go higher from there in terms of both of those metrics, this is no longer a cyclical impulse in inflation. This is a unhinging of inflation expectations

that could really start to feed on itself. So the Fed will be playing a very dangerous game if they think that's on a part of the playbook. Is there a world where 2% isn't the target anymore? Like we reset to 3%, 4%, 5% inflation. 5% seems to me to be extreme. But like, could you see a world where their actual stated goal moves higher in an attempt to kind of reset expectations in the market of like, hey, now the new normal is we're going to live with three and a half percent inflation, not two percent? Yes. And yes, and it will. And it's not that will happen.

Yeah. Well, so we built a large dynamic factor model that tracks all the different variables in the economy that really influence inflation. And that model, this has spit out the stationary mean on an out-of-sample basis that said, hey, look, inflation should have been around just shy of 2% on average in the 2010s decade. Well, guess what that average was? It was around 1.8%. It was 1.8%. That model is now saying that that stationary mean should be somewhere between 2.4% and 3%. So let's just take the upper boundary of that range. 3% is not quite a doubling of where we've been in the last decade, but it's a pretty big, big shift higher. So based on everything that's developed, where you look at the changes in automation, so this model is measuring change in some of these variables. We look at change in

automation, change in the Fed balance sheet, change in money supply, all this stuff. There's 16 different factors in the model. And we publish this monthly, so anybody can just go to our research and find it out. If that stuff comes to fruition, if that model is anywhere in the area code of accurate, the Fed won't have a choice. Inflation will be higher. And so they're going to have to say hey look we're going to revise up our inflation target because guess what they won't be able to do anything about it without you know crashing the economy yeah it just feels like there's a couple of um there's a couple of big inflection points of things that they're going to have to do at some point whether it's six months from now or six years from now uh that

folks who understand some of the nuance and intricacies are like oh shit they're gonna have to do that uh the bitcoin community is like that's gonna be a validation like yep we told you oh yeah uh but even though people see that coming like the day they're like okay we are officially going to move our inflation target from two percent to three percent i feel like people go fucking crazy on the internet yeah no people are like yo what that's what i was gonna ask what do you guys think the impact of that is well downstream it starts with what causes them to do that is it a depression or is it an inflationary episode right is it them capitulating and saying look, man, we can't keep inflation under control? Or is it them saying, you know, it could be

something like where we're headed today, which is we only did a little bit of tightening, but we wind up in recession anyway. And so the reality is they might actually have to, in order to allow the economy to grow in this particular decade where there will be more inflation, they almost have to allow their inflation mandate to be higher because if they keep reacting to a lower mandate, they're going to be tightening sooner and faster and more than the economy can allow they have various intervals yeah somebody is saying i don't know if this is true or not you might know uh the stated goal already changed the fed said two percent average oh yeah no i'm saying beyond that yeah like like saying right now it went from two to their cap of two to an average

around two i'm saying it could go to an average around three yeah yeah so that's what i'm talking about as well uh but i think what the idea of a cap of two to an average of two uh there's a lot of methodological uh well they could also just keep changing the cpi calculation right yeah well exactly they're just going to keep messing with all the numbers and doing all this stuff and so i keep coming back to like somebody asked me uh recently so what do i actually think inflation is and i said some will look there's a whole bunch of different ways you could look at calculating you could look at it just simply if you look at the price of a good over time that you know call it 1980s methodology of cpi uh calculation we'll put it at you know low teens right if you look at

it uh compared to asset prices stocks are up 30 last year bitcoin's up 65 real estate's up 20 something percent right so you get some bigger numbers uh but regardless of how you look at it i think everyone's like it's not seven and a half i think that's pretty widely accepted yeah in a world where inflation expectations come back down so let's say sub five percent i don't know two three four whatever it is if asset prices continue to go up at an incredible rate i actually wonder if the market just starts to say look like who cares about what your inflation number is the only number i care about is the asset uh price inflation yeah because that's ultimately going to be what affects my portfolio but also it's the clearest signal that i have against your

manipulated data that continues to change like i have no ability to continue to calculate percent changes because underlying the basket's changing, the goods are changing, the methodology is changing. And so like, well, just how much does the house cost today? How much does it go next year and the next year? And like, that's not my inflation measurement, whether it's better or not. It just gives me confidence. Totally. That I can use that. And this is why we focus on rate of change in our research. Rate of change is statistical fact. It's not methodological driven. It doesn't, you know, it's not going to be influenced by whether or not the Fed is or the government of BLS is making cosmetic changes

to the methodology at any given interval, like a positive impulse or one or two standard deviation impulse relative to the trend is a fact. That's a mathematical fact. And so this is why, again, our research anchors on that because, again, we don't want to get into too many of these debates because I think you're going to miss out on a lot of alpha and beta along the way. It's not to say that these debates aren't good.

But I just think at various times, I think today is a great example. In our opinion, we're nearing the peak of the inflation sign curve. Now, I don't think 7.5 is the right number. It's probably 15. But we're peaking at 15 and heading back down to some number that's lower than 15. And so to me, what I care about is the 15 to 10 or the 7.5 in realized terms to 4. That's all that matters. All right.

We've got time for one more thing. and then we've got David Mercer who's going to join. Election season is on the horizon. It's already here probably. How much of the Fed is independent is true and how much of, oh shit, we got to get inflation down. We got to get, you know, kind of everything under control going into the election is being politically driven

versus monetary policy needs. Well, there's two answers to that question, right? So the first answer is, are they officially or even unofficially being politically motivated? Probably not. Right. I mean, there are, you know, for the most part, they don't have any real recourse for anybody to punish them if they don't do what they want. Right. We saw this with Trump and Powell in 2018, 2019. You mean when the president was tweeting about our currency? Tweeting he's an idiot and all that stuff. Yeah. But I do believe these are human beings and they have their own political biases and they have their own theories on how the world works and how business should be operating and how the economy should be supporting that through policy.

And so, you know, you think about a guy like Powell who probably leans Republican, probably leans a little more free markets, you know, versus someone like a Yellen who probably leans a little bit more Democrat, a little bit more hands on as it relates to, you know, affecting economic outcomes. And so I think you have to understand that these are all humans and it's less about the political pressure that they're getting from the White House or D.C. It's just really more about their belief system. Yeah, it's interesting because I do wonder, would we be better off with, let's say, Powell's position, right, as the chairman, being an elected position or an appointed position? and the appointed position i think the reason being that like do we really want our central bankers like you know campaigning right like that'd be kind of weird yeah at the same time to your point who holds them accountable like if we have high inflation for two more years who fires them like i guess the president could fire them mid like term right replace them and

and bring somebody else in, but that would be highly irregular and might cause more fear than, you know, not. So it's almost like it's an unaccountable position other than every couple of years and you're only accountable to the president. This goes back to everything I keep saying about the Fed. It's preposterous that people sit around a room

and determine the price and quantity of money. We have the ability, either through blockchain or other, you know, traditional technologies to vote this in or to, you know, to do a better solution than just having a bunch of elected or unelected officials determine that. So to me, I think there's a better solution regardless.

What do you think? I agree. I think we're going to look back in decades from now and laugh and laugh out loud. Yeah. Then people were sitting in a room. There was a guy getting read at a press conference talking about the price and quantity of money that he was going to infect.

Like that's preposterous. Yeah. Yeah. Well, if you remember that they were day trading at the same time. Oh Christ. No comment. Next question.

I still just don't understand how that wasn't a bigger story. We know the Fed, it's a three-letter organization. Again, another scam. We talked earlier about the IOC, the International Olympic Committee, and they basically screwed over this young snowboarder. She had a Prada snowboard, and it was cool for one competition, and they made her cover it up, like color over it, but it's the bottom of the board and so she ended up something went wrong she got hurt

and she was like well yeah you guys made me put something on the bottom of my board yeah right or whatever and they were like well that's not like a uh that's like not a real brand that does sports they claim they're not predominantly a sporting goods company she's like well who cares yeah i would do my school would probably be gucci or something you know the real counterpoint was that they they allowed a russian athlete who tested positive for banned substance to continue to compete and everyone was like well that's kind of two different issues that should be my favorite shikari richardson she she tweeted she was like can someone please explain to me what this is what's going on here i was like damn i respect that

it was getting high she's making her heart get more blood it's a double entendre troll please explain this to me oh man that's good before we let you go what's your thoughts on Miami so far oh love it man it's expensive as all hell

down here but I assume that's just a function of the inflation that we're all dealing with I do think that Miami was just named the most expensive let me pull it up Miami just overtook New York and LA and the Bay Area as the nation's most unaffordable housing market. It makes a ton of sense. I got a bunch of buddies down here who's saying their landlords are pushing through rental increases off schedule. Like not, not when the lease was up. Have you

heard of that? Oh, wow. I haven't heard about that. Another basically like threatening, like, Hey, when your lease is up, if you don't take this increase now, we're not going to renew you. You know, like basically you, Oh, so like midway through the lease, midway through the lease. Yeah. Like I've, I haven't even heard of that. So, I mean, clearly there's a- Damn, Miami landlords are gangsters. Well, I mean, look around, man. Like it's just, it's just telecommuting thing.

If, if it sticks and I think it's going to stick, like why in the hell would you live in New York? Why in the hell would you live in San, there's good parts of San Francisco, but you know, there's obviously not great parts as well. Like there's going to be a great mass migration that is not just, you know, a pandemic thing. It's going to last for years and potentially a generation.

Myself and multiple friends I've talked about on here before, They saw 20, 25% increases in rent when the leases came up. When the leases came up, yeah. So I'm sure a lot of landlords are like, damn, I ain't waiting six months to do that. Yeah, totally. I'm going to do that. The other thing, real quick, hold on.

Sounds like I should start, you know, hitting up my landlord. How you doing, man? Getting like a tray of pastries every morning. Mark's birthday on the calendar. So here's one more thing very quickly. It is a friend in New York sent me their energy bill, their electricity bill. And previously, it was $54, 55 bucks, right?

The last one was $243. Come on. And so you use more energy in the winter, obviously. In January, December, yeah, of course. And so forget about how much. Actually, you actually use it the most in the summertime for AC. I was going to say for AC. So they used to pay 6.68 cents per kilowatt hour.

So six and a half cents, give or take. Now they're paying 19. It's a tripling. Come on. Come on. So like when stuff like that goes on, by the way, like that's not just a New York thing that's going to happen across the country in a lot of areas, whatever.

But like when stuff like that is happening, people also say like, Hey, where else can I go so that I can. I say recession and crash on a near daily basis now. And I didn't have the confidence to say that maybe three or four weeks ago, but everything I've heard in the last three or four weeks in terms of data, consumer confidence metrics, statistics like that, you know, like tripling of people's, you know, utilities and all this stuff. Like, man, like this is how you squeeze the hell out of the U.S. consumer. And there's a lot of people out there hurting. You know, wages are up a lot, but they're still not keeping pace with inflation. And so people's standard of living is going down

and their ability and or willingness to take on discretionary consumption is likely to continue to wane as we go throughout this year. So a lot of economists are going to be very disappointed with some very aggressive growth expectations this year if this keeps up. I could not agree more.

I appreciate you. Where can we send people to find you on the internet or find 42 Macro? Absolutely. So 42macro.com, come check us out. We publish some world-class research for everybody to come check out. The best research.

the best business show the best research thank you the best research um and i'm in twitter at 42 macro detail so come holler at me 42 macro.com yep for all of you uh you people who are lazy in the chat like me i just put the link in the chat you can just go click the link and then you're uh and check out the uh sample reports too see if this for you it's not for everybody but uh you know the work the work we produce is it's really good for the people who like it and then uh if It's not for you. That's all good. Darius is forever a goat showing up in the sofa.

Sure. John's so mad. He's not here. I know. It's all right. He's traveling. He's traveling. Oh,

good for him. Yeah. It's good life. All right. Thank you so much for coming today. Catch you guys next week, man. See you good.

We'll see you next Thursday. Thanks so much for listening to today's episode. I really hope you guys enjoyed this one. Make sure you're subscribed on Apple, Spotify, or your favorite podcast player. And if you're looking to try to transition to get a new job in the Bitcoin or crypto industry, we've got you covered.

Head over to palmscryptocourse.com. We've developed a curriculum with the top teams across the industry. It's a three-week intensive training program with over 50 events packed into that three-week time period. Go to palmscryptocourse.com to learn more, and I'll meet you guys for the next episode.