The Pomp Podcast - #838 How Will The Market Respond To Russian War? w/ Darius Dale

Episode Date: February 25, 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." To see the video of the interview, 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. ======================= The Pod Pro Cover by Eight Sleep is the most advanced solution on the market for thermoregulation. It pairs dynamic cooling and heating with biometric tracking. Go to https://www.eightsleep.com/Pomp to check out the Pod Pro Cover and save $150 at checkout. Eight Sleep currently ships within the USA, Canada, and the UK. ======================= 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,

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I feel much more refreshed, and I have better energy. You want to know how I have relentless energy every single day? It's because I sleep on an 8sleep. Seriously, go check it out, 8sleep.com slash pomp today. This episode is brought to you by DeFi Technologies. DeFi Technologies represents what's next in the digital economy. They're providing simplified, trusted access to crypto, decentralized finance, and Web3 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. DeFi Technologies is currently listed on the U.S. Exchange at DEFTF

StockTicker and the Canadian NEO Exchange at DEFI. For more information or to subscribe to receive company updates and financial information, visit their website at defi.tech. 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. We happen to not only have me and John here today talk about this, he has not been sitting here the entire time. He just got here to make that clear. He was not just looking at us monologuing for 30 minutes. I have been for 30 seconds. I'm impressed. But we have Darius here with us. A lot of stuff going on. Dude, lots going on. You know, let's, obviously, let's just start by saying, you know, like we talked about last week, we have a lot of stuff to be thankful for and grateful for in this country. You know, kind of just seeing, you know, the American flag behind John, just kind of really thankful for our military. Like, we don't have to worry

about this kind of stuff. Obviously, with the people Ukraine are going through right now. It's terrifying and our hearts and prayers are out with them. So, you know, it's just going to be a tough situation for a while because it doesn't seem like Putin is of the mind to acquiesce and use diplomatic measures to accomplish his goals. When you think about the financial market impacts, let's start maybe, we talked a little bit about oil before you got here, over a hundred dollars a barrel. Obviously Russia's making money by being one of the largest oil producers. What's the impact on Americans? Should we just expect gasoline prices to continue to explode it's up 50 year over year unfortunately the media is incorrect in that them claiming that

inflation or high gas prices is because of ukraine uh the ukraine crisis started you know maybe the last 60 days so uh the two years before that obviously did have an impact um but i do think that it would be fair to say hey moving forward a material increase in gasoline could be attributed to this situation in combination with kind of Russia and Saudi Arabia not increasing production? Is that kind of your read on this? Yeah, for sure. Absolutely. So there's a lot to unpack financial markets-wise. So I'll start with gas. The fact that crude oil is up as much as it is today, it was up at 8% this morning,

or up 8% this morning when I checked, could be up more or less now, but tells you that there is this sort of concept about a geopolitical premium baked into the oil price, and it very clearly is rebutting that today. There was not a geopolitical premium baked into the oil price, otherwise you wouldn't see the kind of price action that we have today. Number two, it's very likely to be persistent to the extent that we continue to have geopolitical conflict. And as I said earlier, there's really no exit ramp for this conflict anytime soon because it strikes me that Putin's goals are directly at odds with the Biden administration. So somebody is going to have to blink, and usually it takes a lot more pain for these major powers to blink, unfortunately. One thing I thought was really interesting, to me the most interesting thing that's happened in the last 24 hours is the big decline in the real interest rate here in the U.S.

This morning is probably the biggest one-day decline ever if I had to go back and look. But the 10-year TIPS yield, which is Inflation Adjusted Treasury Bond yield, declined 25 basis points day over day. It was like a 40% move in terms of the percentage change of the move. And it's directly at odds with what happened yesterday. So yesterday we saw bond yields rise because the sort of specter of war would tax the sort of the already depressed productive capacity of the economy. You could actually see more inflation as a function of this. But then today, I think the market is sort of realizing, oh, no, wait, this is actually bearish because we're going to talk about $100 oil. going to $110 oil, going to $120 oil,

and ultimately the negative impact that that's likely to have on the U.S. consumer and, by extension, the global economy. When you start to think about the Fed, let's go there. Your favorite topic. Yeah, well, because I do think that whether people like it or not, the Fed is ultimately the decider of what happens to asset prices right now. 100%. And you could argue that that's always been true,

but I think right now when you get uncertainty, when you get chaos when you get uh complexity in the system yeah and you're looking for signal a lot of times if you just zero in on where does the chain of events start the fed usually is the uh originator of a lot of action not all of it but a lot of it totally asset prices especially risk assets have sold off over the last four months or so because everyone thinks the fed's going to raise they're going to raise the interest rate they're going to raise the interest rate as much as i think jp morgan said nine times uh over the next year obviously i think that was probably a little aggressive tripping over themselves

like literally i feel like that's what's going on right all right so nine i think people are like all right that's the extreme uh upside uh but i do think that if you went and talked to most people no raise to 50 basis points in march was kind of the the aperture of like reality and i do think that most people would say 25 basis points to 50 basis points as a raise in march 48 hours ago i literally think that's what people thought i don't know if a lot of people think that now in 48 hours with you know literally the move you know kind of the chess move of russia saying hey, we're going to go invade Ukraine. Does that change or do you still think that they have to raise in order to still address the issues here in the United States? Oh, no, the Fed's hands are

very much tied in terms of monetary tightening for a couple of reasons. One, you know, there has not been a big enough feedback sort of mechanism in financial markets in terms of tightening financial conditions for the Fed to suggest that somehow they're going to achieve their inflation mandate or somehow they need to defend their maximum and inclusive employment mandate at this particular juncture. We have not seen enough carnage. Credit spreads are at 400 basis points over on high yield, roughly thereabouts. They could double before you actually start to see a real big hit to economic activity as a function of that. So that's number one. And then number two, and this is something that I think is the second order thinking, which

is if the Fed does not raise, just given all the tightening that's been priced into Ford's curves, then they effectively amount to easing, which I'm not sure that the central bank wants to send a signal that they're easing at this particular juncture. You know what I mean? Because it's already priced in, so you almost have to do it, right? If you don't do it, then the markets will take it out. And that's how markets will function and respond to that. So they're already on the path to losing their credibility if they haven't already.

certainly they've lost it with a large pocket of investors. They might lose it with all of us if they don't, if they don't at least try to start normalizing monetary policy. I'm going to read you a portion of a DM. I got a, I reached out to somebody and I said, Hey, what do you think about this yesterday? It's somebody who has a very unique kind of intersection. They understand some of the geopolitical stuff.

They understand some of the macro economy stuff. They understand Bitcoin, et cetera. And he sent me back a number of really intelligent points. I don't want to say who it is because I didn't ask them. But one of them says, Putin's making a play on collapsing the dollars because he can see the massive spread between CPI and fixed income yields

and driving energy prices higher will put the ineptitude of the Fed and ECB on full display right to the moment they were going to pretend to raise rates. And I actually think that it's a pretty astute identification of uh there's other things going on but one of the impacts or one of the reasons to take these actions is to basically just say like no you're not you're not we're gonna raise rates like everything you just said is not gonna happen yeah is that kind of like what you're anticipating now like do we get a interest rate raise in 2022 now like did we go from nine as the extreme to zero

Some poor analyst is going to get fired for publishing 11 today. No, I know what you mean. So let me start by saying, whoever wrote that is an extremely astute investor. That's been my take on this the whole time, which is Putin, being the sort of thug that he is, but a very educated, smart thug, understands the pain points, right, across the global economy, pain points in the global financial system. And why would you not wait until inflation's at a 40-year high to invade Ukraine and cause trouble in financial markets? Because you know, at the bare minimum, you're going to put the Fed in a conundrum.

At the bare maximum, you're going to expose them and cause them to lose their credibility. And so, you know, this is this is, you know, it's sort of like I can't even think of a good analogy, but it's it's the it's the former KGB operative in him that chose to wait until now, you know, just on the eve of the Fed's normalization agenda. Because, again, their credibility is at stake here. Bullard said as much a couple of weeks ago. Obviously, the data would suggest that the credibility is at stake as well. So I think Putin is really enjoying himself right now because, quite frankly, he's got the upper hand. When you think about his position in the world, most people, I think, were kind of just like, oh, I was told not to like Vladimir Putin, so like, you know, bad guy, right? if you start to learn about russia um one of the books that probably has had the most influence

in terms of my view of how some of the financial markets uh was read notice bill browder's whole book right um about the financial markets and kind of american investors russian investors he mentions putin in there as like just like a competitor basically in the market and the next you know because president china seems to be like uh oh somebody just put like more pieces on the chessboard and um there's obviously the concern that like china says like oh well if russia can invade ukraine and like you guys are just going to sanction them like taiwan come on over right um and so like whether that happens or not what remains to be seen but it does feel like those two countries and they explicitly are talking about it they want to get off the u.s dollar

they're starting to work together more etc like is there a world where we just get a bifurcation and it's literally like for better or worse terminology i'll say like western world and Eastern world. And basically in that bifurcation, literally there's circular, there's two separate circular economies or insular economies that maybe are like frenemies. So maybe there's some crossover or, you know, selling of goods and services or whatever. But for the most part, like Russia and China, you know, try to produce and consume each other's goods and networks. And then the Western world does the same thing for themselves. And we don't have this like globalization happening?

100%. I mean, this has been happening since 2014. Yeah. You know, sort of Luke Groman over at Force for the Trees is kind of an expert on a lot of these types of topics, him and Jeff Snyder. And, you know, but they'll tell you, both of them, you're really going back five, six, seven years, which is the world splintered. Jeff Snyder would say, hey, the world splintered in 2007 with the breaking of, you know, sort

of the Eurodollar network and the credit creation therein, or at least the former way of doing things. And Luke Garman would suggest that the global monetary system splintered in 2014 when the rest of the world really stopped sterilizing our debts and deficits by stopping the accumulation of foreign exchange reserves, dollar-denominated foreign exchange reserves. And so since 2014, I would argue, I'm probably more in loose camp on this. Since 2014, that drive, it's a realization amongst emerging market and amongst other kind of eastern, if you will, central banks to say, hey, look, this system isn't working for us. The cost of capital is too high. The availability of capital is too scarce. We're not able to grow and meet our development needs, our goals to bring folks out of poverty and things, all that good stuff quickly enough because the supply and price of dollar dominated credit, which is the global, obviously global, most credit is denominated in dollars globally.

It's too hard to obtain. And so I think we're very much on a path. I've always thought we were on a path towards bifurcated monetary systems. It's unclear at the speed of which, you know, if that's all going to happen at once. And these things tend to happen like slowly, slowly, slowly. There's an event here, an event there, an event here. And then there's usually a big event that sort of catalyzes the big change. I'm not convinced that this is the big event that catalyzes the big change.

But I am convinced that both Putin and President Xi of China are well aware that this is the path that we're on. And they're going to take every liberty to sort of perpetuate this because ultimately it is a better outcome for them, which is to get off from underneath the sort of the foot of the dollar system. So while we've been talking, Putin's made some more comments. Oh, my hand is on fire today. Which is interesting because I think exactly what you're saying, they've publicly talked about this, right? I remember we pulled it up yesterday. In 2018, I wrote a piece, and it was like Putin was at a conference. He basically was like, the U.S. dollar system sucks.

It's too expensive. It's dangerous. We've got to get off this thing. He wasn't hiding anything, right? He was saying it right there in the conference. But he just said, Russia remains part of global economy. uh we do not plan to damage the system that we belong to uh and he says that his partners or russia's partners should understand that and should not push them out from the system

so again we get into this i'm gonna call it gamesmanship that might be too uh positive of a word but i don't mean in a positive way as much as uh maybe maybe geopolitical chess is a better way to describe it where you get like what are they saying what does it mean and then what are they doing yeah and it feels like this like constant don't kick us out from the system we're part of the system we we we want to be part of the uh u.s dollar based you know financial system like it's all the right things to say but it seems like they've positioned themselves for a different world i have a great analogy for this all right let's hear it so good So one of my guilty pleasures of being an engaged man now is watching Vanderpump Rules on Bravo with my fiancée.

And this is so reminiscent of Jax being a total asshole to Brittany because he wants her to break up with him. So he's not the bad guy for breaking up with her, this like total angelic sweetheart. And finally, he just snaps and breaks up with her. Yep. And like and so this to me, it seems like he's like kicking and screaming, trying to hopefully gets pushed out of the system so he can finally say to China, hey, look, we need to advance this pretty aggressively. Right. To me, one thing I also think in terms of this bifurcation process, it's not going to come without the loss of human life. It's not going to come without, you know, great financial and economic costs. Right. It's, you know, stasis is generally preferred if you're thinking about generating profits.

Right. And then we have big change and it makes the whole thing kind of slow down and grind to a halt. And so it's a lot to lose for all parties involved to make this transition. But the reality is that I think the folks that are sort of on the wrong side of the dollar system, if you will, Russia, China, a lot of emerging markets. I think they're real. They're getting they've gotten to the point where they're like, there's a lot to lose if we stay. Right. And so they're you know, they're kind of kicking and screaming, hopefully to get dumped so we can go really transition at a more expeditious pace. that is that and more importantly explain it to their citizens right they got to market this to chinese citizens to russian citizens that say look see they kicked us out of the swift system the global dollar system we got to transition you got to deal with this pain for now but we

got to make this transition and i think they're looking for political air cover to do that but who knows if we'll give it to them at this particular juncture again i'm going to start asking about stuff you may not know about so feel free to just uh there was a great tweet this warning uh from a wsb chairman who said um if you invested ten thousand dollars in the russian stock market yesterday today you'd have five thousand it went down fifty percent right yeah and so uh how do the stock markets trade in these uh situations i saw somebody else i forget who tweeted it um and you know you can judge whether people should tweet not tweet whatever in these situation certain things but uh i saw a tweet yesterday that basically went back and looked

at the gulf war desert storm iraq afghanistan um and i forget there was one other one maybe crimea or something and uh it was basically like by the invasion right like basically when something like this happens stocks take off and like buy the stocks even if there's some short-term price decline uh because ultimately it ends up being like a pretty good financial decision again serious situation people's lives are at risk but if you're looking at it from a financial market standpoint uh that's one perspective yeah for sure same time russian stock market right now 50 and so like how if at all do you have thoughts around like the stock market of the countries involved versus like u.s based assets in these types of environments what do you mean by u.s

based assets u.s stocks uh u.s commodity markets etc yeah so i mean look the i think the problem is is we're sort of we can't we can't sort of narrow risk management down to this one singular catalyst, right? Like there's this geopolitical concerns that may or may not get resolved over short to medium term time horizon. There's the growth concerns that, you know, we don't think are being respected enough, broadly speaking, irrespective of geopolitical concerns. I mean, $100 crude oil, consumer confidence on a 10, 12 year low, you know, all these sort of things are telling you there's problems, you know, mostly through the real income, declining real income front. Those are problems that are, you know, would be here without Putin. And there's obviously

the 40-year high in inflation and then what the Fed's going to do about it. So there's sort of four kind of buckets to bucket these all in. Geopolitical concerns, obviously, none of us is sort of, you know, Putin on speed dial. And I'm not sure if we had Putin on speed dial, we'd actually be getting good information because this guy's a chess grandmaster, right? And so, you know, the reality is you're probably right. I think you're isolating that variable, that factor, geopolitical concerns. You're probably right to buy the invasion most, you know, nine times out of 10. The problem is, is where we are in this current market cycle, this current market environment, we're still coming off some pretty aggressive valuations, just looking at equity and

credit market valuations, both domestically and abroad. Mostly domestically, we're a lot more overvalued than our peers globally here in the US. That's an issue. Obviously, the policy normalization agenda is an issue, particularly in the context of the growth outlook. I said this, you know, saying the sun blew in the face. This is the latest the Fed has ever waited to start tightening policy in any business cycle. Like in terms, at least by the, by the letter of the law, in terms of the level of the unemployment rate, which is how economists date the business cycle was whether it starts going up or down. And so it's, it's just a weird set up, you know, it's a gross setup. As I said yesterday, it's gross. You know, everywhere you look, there's a

headwind and this is why stocks are going down. This is why Bitcoin, Ethereum, crypto are going down. This is why NFTs are finally starting to crash. It's not a good setup for taking risk. There will be a good setup for taking risk at some point in the medium term once the Fed realizes the growth outlook has become so challenged that they have to back off. I just don't know that we're there yet. We haven't seen enough data. We haven't seen enough of a tightening of financial conditions for them to credibly back off of tightening. They can back off of tightening at any point in time, but I fear that they fear they're going to lose their credibility if they do so so uh sam bankman freed had this whole thread uh last night about stocks bitcoin war

etc he basically talked about you know it makes sense that stocks are down in the kind of very immediate term uh bitcoin as well people are selling things to get cash uncertainty liquidity all of that liquidity etc um but he also talked about let's start with destabilizing eastern european currencies uh and the eastern european financial systems uh which means that they might look for alternatives uh if you were in ukraine right now where would you trust your money it's like that was one of his like early points uh and i think this is really fascinating because ultimately uh we usually think about people seeking alternatives to their local currency because of undisciplined monetary and fiscal policy your currency's failing shit i got to

get something else i want dollars i can't get dollars for whatever reason my bank's gonna confiscate it it's dangerous in the black market it's expensive whatever totally screw it what's on the internet let me go do something there or let me get physical gold hope somebody doesn't confiscate it as i'm leaving whatever yeah yeah totally when you start thinking about it from a war perspective when you start thinking about it from literally a uh is my government gonna be around there's reports all morning that uh russian forces are trying to literally take the government they're trying to install new leadership they're trying to take over uh the chernobyl plant like I mean, this is like an invasion of,

on the invasion scale, this is like true invasion, right? This is real, yeah. This isn't like, hey, we like shot some rockets and like, did we do something? No, no, he drove tanks to the Capitol. Yes, correct. And so it does beg the question of like, okay, if you're one of the thousands of people

that we pulled up that are literally leaving Kiev, what do you do with your wealth? Do you leave it in a Ukrainian bank? Do you put some gold in the trunk and hope to God no one stops you? do you hope that you have enough physical cash to put in your pocket and that you prepared for this situation like these are real things and if you're sitting there thinking about this like it's not that oh i'm gonna get rich with bitcoin like whether it's stable coins bitcoin whatever

asset there's like a very real consequence to having these assets now and earn advantage to having them yeah so starters um obviously digital assets are a cheap and if not cheap uh certainly an effective solution for people in these trying times. I'm not sure that everybody in Ukraine at this particular juncture has the ability to remove their money out of banks and put them in digital asset space. But to the extent that you're already trapped in that financial system, buy stocks. Like the blue chip Ukrainian businesses, and that may be an oxymoron, I'm not too familiar with how rock and roll in Ukraine's economy normally is. But to the extent that there are blue chip businesses, you know, like the best grocery store in Ukraine, you know, the Uber of Ukraine, you

You know, all those kinds of companies, they're not going anywhere. They're still going to operate and exist. They might be under different leadership. They might be under Putin's buddy running the company in six months. But, you know, they're still going to be generating capital, generating profits, and ultimately servicing the Ukraine economy. So if I was, I would be much more concerned about having money in physical Ukrainian dollars.

What's their currency, Ukrainian? Slotny? Mm-hmm. Yeah, so yeah. I don't know how the hell I knew that. That's ridiculous. It's because you're smart. Yeah, I'm such a nerd. Anyway, but no, like you don't want your money in the local currency. So clearly stocks tend to inflate when there's a hyperinflation episode, which again, hyperinflation in my book or in a lot of economists books is defined by a loss of confidence in the currency, not necessarily by a certain level or threshold of inflation, but rather an absolute collapse in the currency.

And you could see a collapse in the currency if the regime was to change or if there was this fear that the regime was going to change, right? And so you're definitely going to buy assets that Russians themselves with Russian rubles would want to buy. That would be the best trade. John, before you ask your question, John Kerry gave an interview, I guess, this morning. And he said, I hope that Vladimir Putin helps us stay on track for our climate goals. I was like, wow, geez louise, man. That wasn't on the bingo card. What questions do you have?

I agree that like Ukrainian businesses, the infrastructure will be there no matter the leadership. Like they will eventually come somewhat relative back to normal, whoever's in power, the country itself that will operate. Yeah, totally. What do people around the world, we're talking about US, Ukraine citizens, Russian, obviously everyone's very fearful right now, right?

Buying, they don't know what's going to happen in the future with the stock market. Is it right to be fearful or is this the time where, hey kind of be greedy when others are fearful and vice versa like is it's okay to be fearful fearful right now or what are your thoughts around that uh i tend to think that fear and greed are two emotions that cause you to lose the most money in financial markets um so generally speaking if you can obviously it's impossible because we're all human right we all make more decisions that we need to make in terms of you know risk managing our portfolios

and things of that nature. But I think it's best to just make calculated bets based on where we are in the various cycles. Again, there's geopolitics, which is hard to ever truly handicap and gauge. But you can understand where you are in the growth cycle. You can understand where you are in the inflation cycle. You can understand where you are

in the monetary and fiscal policy cycles. And then also you can understand where you are in the valuation cycle. And most, all of those cycles right now, all five of them are moving in the wrong direction. And so to me, I think if you're saying sort of, there's blood in the streets by yeah over a long enough time horizon risk assets you know stocks crypto all this stuff goes up in price over time one because there's an expansion of the money

supply but more importantly there's an expansion of the human supply and obviously we're going to create economic activity and economic growth just as a function of you know having babies and you know being alive and advances in medicine and so that stuff if you have a long enough time horizon it's always a good enough a great time to buy an all-time high is a great time to buy if you have a long enough time horizon. But the problem is most people, particularly people at or near retirement, cannot afford to suffer material drawdowns. And this is where the whole concept of risk management comes into play. It's not about people who can huddle Bitcoin for 20, 30 years, which is what most people should be doing, obviously. It's about the people who,

the reason we see selling ever is the people who cannot afford a big drawdown, get nervous about their asset allocation and start to make decisions that broadly impact financial markets. And so that's what we're dealing with now. That's what we'll be dealing with for the rest of human time until we have some sort of universal, I'm not, again, I'm certainly not advocating this, so don't shoot me, some sort of like universal retirement program or basic income or, but obviously we're probably, you know, that's many, many, many, many, many, many years away from occurring in the U.S. if ever. So have enough money to weather the storm essentially, right? And time. Yeah. And most people do not, right? The average person does not, right? The average

person a lot richer than they were prior to the pandemic. But I think inflation has taken a real big bite out of that for the median to below median consumer from an income perspective. So I think we're probably, for a lot of people, we're worse off than where we started. And for a lot of people, we're slightly better off and getting less better off by the day in terms of declines in asset prices. Do you think inflation goes up from here? Yeah, I mean, so it's not scheduled to. Let me let me answer this question in the most stupid wonky economist way possible there's a high probability that it decelerates and starts to decelerate um we're starting to get to the point in the process particularly once you get to march where inflation the base effects really start to

kick in and so you need to see a substantial acceleration in the current trend growth rate of inflation the sequential rate of inflation to maintain the same level of inflation on a year-over-year basis. Now, that doesn't necessarily mean that once inflation starts coming down on a year-over-year basis, that inflation is under control. You could be sort of maintaining the same very elevated level of inflation, sequential momentum. It's just that the year-over-years are going down because we already did it last year, basically. And so I think that is a high likelihood of occurring. There was also, there was a prior to today and prior to oil, you know, basically going from $90 a barrel to $100 a barrel in one day, there was a high probability that we were

going to lose inflation momentum. So not only were we going to win on the year over year, we were going to win on the sequential and the momentum. And the Fed would be able to say quicker sooner that, hey, look, we got this thing under control. Now it's a function of this moving commodity prices because it's not just crude oil. And more importantly, what a war could do in terms of taxing the productive capacity of the economy. We might not be sending a ton of the troops there. What if Germany and France send a bunch of troops there? You know, what if Ukraine mobilizes and Russia, you know, mobilizes more? I don't know. There's a lot of things that could happen that could actually, you know, sort of really become an additional tax on the

productive capacity of the global economy. And if that occurs, then we're likely to see, you know, something that looks more like what we saw kind of in the fall of this most recent year, which is supply chain disruptions. And so if that continues to happen, then we're going to have a big problem on the inflation front, that would be a secondary problem relative to what we already have. Inflation, I believe, if we continuously kind of step in, go to war, I think it will get worse based off the amount of money that we're going to have to print.

But for the Fed, it seems like they don't have to raise rates, right? Like they would have, I guess, right? So they were expecting everyone from three to nine interest rate hikes. But it seems like it's almost being priced in. Everything got overvalued a little bit. It's kind of coming back to normal as what we're seeing now. Right. So are they are they going to still raise in March, you think? Yeah. No, I think again, I think the Fed is at the worst.

Again, I think I said this last week, though, the U.S. economy is already sort of on this slow, but in my opinion, deliberate road towards recession. We've had persistent, real negative, real income growth for on a per capita basis for months now. And so, you know, how you can have a economy growing on a real basis at all in the absence of stimulus with that dynamic is beyond me and beyond the math of anybody operating Excel or Python or any other program. And so, you know, if the Fed did nothing, it was likely that we were going to have an economy sort of just decay naturally on its way to recession until we got inflation under control, until we had a more better realignment of demand with the productive capacity of the economy. The Fed is, in order to control inflation, is effectively trying to speed that process up, right? You know, they think they have the ability to sort of get us right to the brink of recession, just enough to get inflation under control, but then to make this perfect pivot and, you know, get us a stave off recession and make sure that the labor market doesn't take it on the chin. The history is very, very unkind to the Fed and their ability to do that. And I think they probably get better every time, right?

They're more responsive. There's more data. There's more people. There's more Twitter. There's more everything. there's more information, right? So they're probably going to be better at it than they have been historically. But that doesn't mean they have the ability to turn the US economy on a dime, to turn the global economy on a dime. There's all these dynamics that happen in terms of credit

creation, off balance sheet, in the shadow finance sector, non-bank entities, that the Fed doesn't necessarily have a real true control over. They have signaling power over, but they don't necessarily have true control over. So I just, it's kind of wrapping this up. I think the key risk here is that we could slide into recessions, albeit on a slower pace, if the Fed does nothing and loses its credibility in the process, or we could slide towards recession or even into recession if the Fed does something to rein in inflation. To me, I think the first outcome longer term is much worse because once the central bank loses credibility, S&P goes from, I don't know, $4,000 to $1,000.

Like right now, so much of the S&P 500's valuation is a function of the Fed having credibility, right? And if the Fed just loses credibility on inflation and its ability to control the business cycle, then I think there's a lot of valuation premium in U.S. assets in particular that is at risk. We've got another guest that's going to join us here in a second, so I'll give you one last question,

and then we've got to move on. Yeah, no worries. Um, the central bank of the United States has been the pristine lighthouse on the hill. If other countries begin to add other assets, move off of the US dollar, et cetera, does that make them, their job easier or harder in the sense that one argument would be the more people that hold dollars, the more people that are holding assets that are impacted by dollars, the harder it is to essentially manage the monetary policy for billions and billions of people around the world and all these different economies. If in the most extreme

example, we just became an insular economy and they just had to manage the US actual geographically constrained economy, is their job easier then? Their job is easier, but everybody else's job is harder. So this sort of reliance on this global dollar system artificially depresses our interest rates, you know, kind of relative to what they probably should be based on our credit metrics, you know, and the same thing is happening in Europe with, you know, the periphery in terms of Italy, Spain, all that stuff. So, you know, this dynamic where, you know, the US dollar is the dominant currency, the global dollar system is the dominant monetary system is really beneficial for us. And this is why I do believe that, you know, going back to my earlier comment,

a transition to a sort of dual hybrid, you know, Western versus Eastern monetary system, which, Oh, by the way, it's in the book of Revelation. Go check that out. You know, this transition is, you know, it's not going to be easy for anybody trying to usurp us because we, I think, our politicians and our people who control our military understand how important that is.

Where can we send people for 42 Macro? Absolutely. Are you dropping data today? Yeah, oh, tons of data, man, absolutely. So I'm on Twitter at 42MacroDDale and then come check us out at 42Macro.com. we uh we specialize in helping make sure people don't lose all their money it's like the pitch of all pitches like hey uh maybe we can't make you rich but we never can

prevent you from losing all the money yeah maybe a lot of the way you might make some too totally there's half the time you just lick your finger in the air and buy the highest beta security and you'll make money and the other half the time you need to pay attention to people like me and not lose all your money so you can go back to the party when the party starts again that is uh that that is incredible the other thing real quick uh i saw a tweet that said uh well if we go to war we should send the vaccinated first all the troops are safe we're still doing that oh man it's one of these things like i appreciate that people are trying to find some like you know some humor in a time that is obviously very a lot of people are very stressed out but still it's

just like come on absolutely well boys i'll catch you back here next week man thank you guys next thursday i'll see you buddy see you this weekend all right oh this weekend 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 pompscryptocourse.com to learn more and i'll meet you guys for the next

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