Macro & markets analyst Darius Dale returns for Part 2 of our interview with him. Darius thinks stocks could run up through the rest of the year, and bonds fall, before these trends reverse in H1 2024 as a recession finally arrives.
Darius Dale 0:00
Stock market is always extremely buoyant heading into a recession. You know, what we find is that the median Return of the s&p 500 in the year leading up to that peak is plus 16%. Wow. Yeah, plus 16%, with an interquartile range of 14 to 29 plus 16%. So like more than double the mean, the median Return of the equity market on a yearly basis, and you were trying to see since the turn of the century, or not turn, turn.
Adam Taggart 0:23
So basically, the party gets really good right before the cops show up.
Darius Dale 0:28
And and I mean, real good, right before the cops show up. I’d be there’s some stuff going on upstairs. And so like, if you look at this plus 16%, median return again, interquartile range of 14 and 20, half of that median return comes in the final three months leading up to a recession. final three months,
Adam Taggart 0:49
like Well, wait, wait, wait, wait, so So 9%, meaning over 50% of that 60% return? Yes, it’s right at the end. Yes, exactly. Wow.
Darius Dale 0:59
So the market not only is very boy like basically you get twice as much return you typically get in the equity market in the year leading up to recession. And more than half of that twice as much return comes in the final three months.
Adam Taggart 1:16
Welcome to Wealthion. I’m Wealthion founder Adam Taggart. Thanks for joining us for part two of our interview with macro analyst and market researcher Darius Dale, if you haven’t yet watched part one of our discussion with Darius, in which he explains why stocks are likely to go on one last surge before recession hits in the first half of 2024, head over to our channel at youtube.com/wealthion. And watch it there first, it sets the context for the investment themes we discussed in this video. Okay, let’s get started watching part two of our interview with Darius Dale, let’s try to bring it down to kind of the next. Let’s say six months, 12 months, whatever, maybe six months, more so people who are saying okay, look, you know, Darius is saying that, you know, looks like things are going to hold together for the near term here. But there’s a recession lurking out there on the horizon. Maybe now it’s going to hit more in the sort of April 2024 type range. As I’m looking at different types of strategies or assets to consider, you know, Darius, what are some of the things that 43 macro? You guys have your eyes most closely on here?
Darius Dale 2:27
Yeah, absolutely. So I’ll start by saying kind of our general take on the market. Now use the stock market as the as kind of the the the lowest hanging fruit here, I still think this right to rest of pricing in the equity market. And the reason we say that is because what we found is, you know, again, remember, I made the call, we made the call in May, early May, right after we recorded it early, maybe we you know, we did this research and said, Hey, look, I think the stock market’s going to run away from bears to the upside, and the bond market’s going to run away from bears to the downside and price. Obviously, again, both of those calls are extremely right, you get about 1800 basis points of performance, just out of that relationship
Adam Taggart 3:00
below. But gonna very good call at that time. Yeah, well, this
Darius Dale 3:03
is the point I’m making go back to, you didn’t have to pivot bullish in mid January, when we did, you could have easily just pivoted, bullish in mid May and actually saved and salvaged your year, if you were doing the proper research at the proper time. And this is why folks pay for research. You know, I’m not saying people need to pay for my research, I think you should just go find whoever is good at producing research and add them to your investment toolkit. We obviously appreciate those who check out 42 macro. But getting back to this. Getting back to this to this discussion, what we’ve discovered in that in that timeframe, which helped us make that call, which is stock market is always extremely buoyant, heading into a recession, you know, what we find is that the median Return of the s&p 500 in the year leading up to that peak is plus 16%. Wow, yeah, plus 16%, with an interquartile range of 14 to 20. Enough plus 16%. So more than double the mean, or the median Return of the equity market on a yearly basis. And you were trying to see since the turn of the century, or not turn turn it.
Adam Taggart 4:00
So basically the party gets really good right before the cops show up.
Darius Dale 4:04
And and I mean, real good, right before the cops show up. I’d be there’s some stuff going on upstairs. And so like, if you look at this plus 16%, median return again, interquartile range of 14 and 20, half of that median return comes in the final three months leading up to a recession. final three months,
Adam Taggart 4:25
like Well, wait, wait, wait, wait. So So 9%, meaning over 50% of that 60% return? Yes, it’s right at the end? Yes, exactly. Well,
Darius Dale 4:35
so the market not only is very vulnerable, like basically you get twice as much return you typically get in the equity market in the year leading up to recession. And more than half of that twice as much return comes in the final three months. And so talking about a recession that could start in, let’s say, the second half of our forecast horizon, which by the way, we’ve maintained that forecast horizon since since November of 2022. Hasn’t changed, if it comes in the second half of that Six month interval, you’re talking about a market that can easily run away from folks into year end. And the reason why I think that’s a very legitimate risk in this particular business cycle is because we’ve not seen Wall Street Misbah rally to this degree ever. This was just the least at least in terms of recorded data. So what about really, really, this is the most missed rally, at least according to this particular statistic. We have other statistics that might confirm that to a lesser degree, but this is one statistic that is potentially confirming that. And so what we’re showing here is the s&p 500 of the red line, the blue line, this chart shows their year end, s&p 500 target. And what we’re showing here is the spread between their their red line and or your an sp found a target. Obviously, there’s some some heteroscedasticity in this in this relationship, so ignore the level. But just in terms of the integration of the amount of time that we spent with the market being above the year end target, is we’ve never seen this ever in the history of the time series. You know, it’s about been about like seven months thus far, the low of the previous long was I want to say in the middle of 2020, when the market was rallying prior to the vaccine news was the market, you know, it’s been about five months ahead of the ahead of the year forecast. So you know, and then you get the vaccine news, you see it in the chart here that the urine forecast pops up on the vaccine news. So we have not seen Wall Street broadly sort of miss a rally to this degree before at least going back to the 1999, which as far back as we get this data, we also know that the positioning cycle was very, very, you know, very, very, very, very light throughout the year. One thing I’ll show you here, in terms of the positioning cycle is the one thing we track is aggregated on noncommercial net length as a percent of total open interest across all the major asset classes. And what we find is that you know, US equities which are currently in the 20th percentile of their longer term time series budget data, if you go back to the s&p futures, NASDAQ, futures and options, etc, Russell 2000, Dow, you know, mid caps, we aggregate all that stuff. And I think as far back as the data goes, is around 1995, or 1998. We’re the 29th percentile now, after people have capitulated to the upside, we were tracking in the 10th, the 13th percentile the entire time, the market, the buy side, and you know, the NOC, the speculators have been net short this market and they continue to be because that 29th percentile reading is actually still net short. They’ve been net short this market the entire year. Wow, painful, painful, so yeah, so the point we’re making is that even though we have this recession view, in terms of November to April, was when it might start when you know, you’re not gonna get the red bar until the year after that, when it you know, if we zoom that we have this view where the markets probably going to crash at some point the first half of next year, I still think there’s right tail risk to price in to the upside in the equity market here. Throughout the year and into much I still think there’s downside to pricing in the fixed income markets. One thing we talked about in terms of wrapping up this, just this particular discussion on the in the near term market
Adam Taggart 7:52
outlook is you’re finding that let me just, again, just over emphasize, beat this analogy to death. But it sounds like what you’re saying is is you know that the party gets at its best right before the cops show up. But it sounds like, you know, that wasn’t here yet. The cocaine and strippers come out as the cops are pulling up into the driveway, right? It’s like right there at the end where it just goes bananas. Right? And you’re basically saying, we haven’t seen that that happened yet. Right. And to your point that maybe you know, a lot of the folks at the party had been leaning against the wall as a wallflower, you know, for most of the party and are now getting to the point where they’re like, Well screw this I’m gonna have some fun, right? So we have that kind of rager element to the party potentially ahead of us if history is any guide.
Darius Dale 8:39
Yes. Your words not mine. But
Adam Taggart 8:43
I’ll own those your your blameless. Yeah,
Darius Dale 8:46
fantastic analogy. I can’t come up with a better analogy myself. So that is spot on. We still think the cops haven’t gotten there. And the wallflowers you know, they’re looking around going, I’ve been sitting on this wall for a while, I might need to get off the wall. In terms of in terms of the bond market, we still think there’s a decent amount of volatility pricing in the bond market, we talked about why there’s going to be longer term volatility in the bond market, why we think we’re in a secular bond bear market that could get very ugly before the Fed is forced to change its policy in both regulatory in terms of commercial banks, but also explicit policy in terms of Yoker control. We think the both of those things are coming at some point in this decade. But in terms of the cyclical outlook for bonds, like the next few months, the medium term, I still think we have this negative real scary thing that we need to do concern about, which is the evolution of Japanese monetary policy. We saw the kind of you know, the vol market volatility that we, you know, we experienced in back in June and July, July, particular July in August, with respect to the change in the yield curve control, we think they’re going to continue to have pressure to change Yoker control. And here’s why. Japan, this is the top 10 economies in the world economy across all major statistics, growth, inflation policy, and then we use those informations to construct systematic trade ideas. As you know, every time we say something about the market, it’s generally systematic. In terms of what we should actually be doing with your money, Japan is the only major economy the top 10 economies of the world in the world economy itself, that has above trend, not real GDP growth. This is 0.6 Sigma relative to Australia to your mean. We have an above trend composite PMI reading, we have an above trend headline inflation rate. And we have an above trend course CBRE is the only major economy in the world with that particular condition right now. And yet, it’s the only central bank that really hasn’t tighten monetary policy. Yet, its currency continues to depreciate day after day after day, week after week after week. And now you have $95 Brent crude oil to deal with in terms of you know, the the negative real wage growth that Japanese consumers have been mired in for almost 18 months now. So in our view, the pressure on the Bank of Japan to eventually do an about face pivot on your curve control and really materially revising that is actually quite high heading into the fall. In the context of everything. We started the conversation about Adam, about, you know, the transition from immaculate disinflation to seeking inflation here in the US, you layer on the volatility we could potentially experience out of the Bank of Japan in the fall as well. And I think we are probably got, you know, we’re due for like one more squeeze up in stocks, maybe to the final highs that we experienced prior to the recession. And we’re due for one more leg down in bonds that we might experience prior to you can actually start really getting long bonds in terms of putting on the recession playbook. So that’s our baseline view, you know, we’re going to be very Bayesian, all these tables, everything you see in this process gets refreshed day after day after day, week, after week after week, month after month after month in our daily morning note, our weekly webcast and our monthly webcast. And if something changes, we’re going to be very loud about changing that to our clients. But unfortunately, you got to be a paying subscriber to get that information.
Adam Taggart 11:39
Got it? Good. All right. So, again, you anticipated my next question, which is sort of okay, how much more room to run Do you think we have in these areas? Sounds like you’re saying in stocks, we could get back up to kind of previous highs, we have some people out there beating the drum of a massive melt up, right, like like 6000, s&p and whatnot, I don’t get the sense that you’re, you’re expecting something is super dramatic like that. And on the on the bond side, won’t hold you to this, but just kind of like, what wouldn’t surprise you to see on the tenure as a yield?
Darius Dale 12:16
If do we get the worst possible outcome from the respect of the Bank of Japan? By 475, five, don’t just for tinkering from the Bank of Japan for 50 Seems very reasonable, or 50. Seems very rare for 50 to 475, we just moderate tinkering in the bank in terms of the Bank of Japan, and just you know, the transition from stick immaculate to sticky inflation, if we get a very, you know, shocking transition from immaculate to sticky inflation. And then ultimately, the Bank of Japan comes out in shocks, because let’s say Brent Crudos instead of $95, it’s $110, then we’re talking about 475 to 5%. On the 10 year, I think that’s very reasonable in the context of what we talked about in terms of term premia and inflation expectations. Why not? Like, why folks thought it was unreasonable for the Fed funds rate to get to 550 A year ago, um, that maybe not a year ago, but 18 months ago, they thought it was unreasonable. And guess what, the economy evolves, status changes, you have to be Bayesian throughout to make sure that you’re constantly putting yourself giving yourself the best opportunity to be successful in these markets.
Adam Taggart 13:13
Okay. All right. So let’s say that happens, right? And you’ve given us lots of reasons to suggest that that that definitely within the realm of possibility, if not probability, we got a 4.75% tenure yield. We got a lot of indicators saying that a recession is coming, I guess first question is, is when you think it’s more likely that the recession just sort of arrives based upon kind of business as usual? Or does something really break? Right? That’s a lot of people elected been worried about that when the tenure was below 3%? You know, that there was when the Fed funds rate was below 3%. They were just like, the Feds not able to get much higher than three because something’s gonna break. Well, here we are, you know, five and a quarter. So what is more likely here? Do you think that, again, the organic arrival of recession, or is it more likely that we really have some new crisis because the economy just really start stumbling into this high cost of debt?
Darius Dale 14:12
Excellent, excellent question. And from my perspective, what I think is more likely is the economy just devolves into a recession, you have these mundane business cycle processes where corporations can’t make money. So they got to the only lever they have left the they’re going to run out of pricing power eventually, because ultimately, we know that the consumer is going to get incrementally constricted in terms of its ability to finance to finance consumption. One we know that income and total aggregate income growth is slowing. It’s albeit it’s still you know, kind of at a slightly above trend pace. But as we move forward in time, and we went from a way above trend, pace and income growth to a slightly above trend pace, and you just roll the clock for one or two more quarters, we could be below trend in terms of income growth, and this has been an income driven cycle. This is not a been a credit driven cycle. In fact, I got one chart to show on that. It’s probably gotta find it first. But this has been a very much income driven cycle and so If we start to construct incomes through the lens of you know, things like commodity prices, to the lens of interest rates, you know, that can be, that’d be something that can obviously, you know, really push us into a recession. But again, this is not going to be your granddaddies, big GFC type recession. You know, we know that’s not that’s very unlikely. And the reason we say that, it’s because we have limited credit cycle vulnerabilities that, um, in this particular business cycle, you know, what I’m showing in this chart is shows the private sector, a credit to GDP ratio, it’s a, you know, 152%, but it’s been declining throughout this business cycle, and really hasn’t gone anywhere, really, for the past, you know, kind of 15 years. And so we now have these negative z score of minus 0.7. And on the terms of trailing five year basis, which is very anomalous heading into a potential recession, which tells you that recessions probably going to be very light, because typically what happens in recession is you get the confluence of adverse selection and capital misallocation. Because you grew credit too fast, you start extending credit to less creditworthy borrowers towards the end of the business cycle, and then you get some tightening of monetary policy or fiscal policy or both. That causes you know, that that pain to really come home to roost, and we’re getting the tightening of policy, you look at the five year Z score, the debt service ratio, but it just not, it’s not lining up with the capital misallocation story. So, to me, this is more of an income story. And the income story is going to come from corporations looking on the future saying I can’t make money with this type of cost structure and this kind of productivity growth, right, maybe that chart we showed in terms of productivity, growth, less wages, less productivity, growth, relative to inflation, and they’re gonna say, I gotta get rid of some labor, because I can’t continue to push costs on to consumers without losing market share. And that’s something that, again, I have no idea how to say what’s when that’s precisely going to happen. But we do have a great idea of what to look for in real time, in terms of some of the leading indicators that give us an opportunity to say, hey, look, I think it might actually be starting to happen. So let’s be booking gains and getting to the sidelines. And ultimately, going back to that global macro risk management process that we talked about, the market is going to be somewhat forward looking not very forward looking, as we talked about with our house party analogy, but it’s going to be somewhat forward looking, you’re going to see some flashes of COP sirens, you know, either window, you hear the cop sirens, you know, coming down the block. And so that global macro risk matrix will transition to a risk off regime ahead of this process might not be at the top of the high of the market. But if you sell the market down, I don’t know, three, four, or 5% from the high. And it ultimately goes on to crash 24 or 25%, which is the median decline decline that you typically see in recession, then you did a good job of managing risk. And that’s all we’re trying to do here is consistently stack, good results, good process and, you know, ultimately, good outcomes for ourselves and our families.
Adam Taggart 17:29
Okay, so for stocks, yes, you the strategy is sidestep, the, the decline that you typically see in recessions, for bonds, there are a lot of people that are saying that bonds are a great buy right now, with given this outlook, because you’re getting paid historically high yield, least, you know, past 20 years high yield to be in these instruments, they’re very low risk. And if what you say may happen in the Fed, well, we go into recession, presumably when I’m talking about this, but presumably the Fed will then step in to try to start reducing cutting rates and maybe stimulating again, who knows. But basically, if you’re expecting rates to come down, well, then you get the price appreciation in the bond as well. So is that is that a strategy that you guys are looking at?
Darius Dale 18:20
Yeah. So again, we we all of our investment recommendations come through the lens of our systematic kids portfolio construction process. My assumption is that by the time we get to that point in the process, the process will start to allocate systematically towards bonds, and gross up exposure to bonds, once the volatility gets the momentum signals for those securities change. You know, we can spend a whole hour talking about how that process works. But that’s the general gist of it. And I think
Adam Taggart 18:41
we did a little bit. So folks, if you’re interested in understanding how that model works, go go look at the previous interview that Darius and I did in this channel. But so to your point there, there’s because I remember you saying this, you’re like, what’s great about the model is it doesn’t really matter what I Darius, Dale, think when I wake up in the morning, the model is actually going to tell us when it’s time to start, you know, really beginning to think about making decisions about making these allocations
Darius Dale 19:05
100% 100% Absolutely. And so, just just a quick, just a quick summary on like how that process is gonna work systematically. Right now we’re in a Goldilocks regime, Goldilocks is where growth is accelerating on a trend basis and inflation is decelerating on a trend basis. We so we allocate based on Goldilocks and you don’t want to be long treasury bonds, and Goldilocks you want to be long, you know, riskier instruments, in terms of you want to be long spread products in the fixed income market. Hi, you agree credit bank loans, leveraged loans, you know, stuff like that. So that’s what the model is currently long. If this barrel starts inflecting down, then it will take us to a deflation regime. That’s when you do actually want to get long you know, treasury bonds meet you know, mortgage backed securities and things like that investment grade credit, anything that has duration, in the in the in the treasury bond space, because again, we that’s that’s going to be that’s going to tell us what the want from a factor exposure perspective is not going to tell us how much of the factor exposure we should actually be long. That process comes through our bottom up risk management overlay, this is our top down risk management overlay. And again, that’s through our voluntary Justin momentum segment. If you know the model says we need to be long TLT, but TLT is bearish, we will have a 0% position to it. If TLT is neutral, we’ll have a 5% position to it. If it’s if it’s bullish, we’ll have a 10% position to it. So again, it’s a multi step multifactor process that’s ultimately designed to help us kind of chop off the left tail of the return distribution by not being long things that are breaking down and are exhibiting, you know, kind of dangerous volatility characteristics, because typically, volatility is a leading indicator for big changes in price. So that’s how that process works. Again, it’s very sophisticated, very wonky. But you know, again, it’s that’s that’s how we help 1000s of investors worldwide kind of manage in a really outperforming the market. You know, I’d probably say that we have done that for the last couple of years. Really since we started the firm. Just answer your question on bond specifically. You so bonds are a great asset class when you’re heading into recession. And right now, there’s a big dive divergence between what the Fed is effectively forecasting, they’re going to do an interest rate policy, which is cut 312, three to 13 basis points between their terminal Fed funds rate. And what they think is their kind of longer run neutral estimate rate until they think that number is 2.5%. Still, that may change tomorrow in terms of FOMC, I doubt it’s going to change, based on what fed Powell said in Jackson Hole. So the Fed thinks over the yield between now and the end of their cutting cycle. Whenever that may commence in however long it may take, they’re gonna cut about 312 basis points. Well, the markets only pricing in about 168 basis points, so roughly about half of that. And so there is money to be made on the loan side of bonds, when the market starts to get concerned about the recession playbook. And it’s starting to push the Fed to actually start to flex its balance sheet and flex. It’s on its policy rate setting. But we are, in my opinion, a long way away from there in terms of just time and price. And so I’m very concerned that we might see again, another leg down in fixed income, another leg higher in stocks
Adam Taggart 21:50
before this movie is over. Okay, so you are you’re not piling into this trade yet, obviously.
Darius Dale 21:56
Very much would be I wouldn’t, we told people to pile out of it in the early May, in the right call.
Adam Taggart 22:04
So you’re you’re staying out until you see whether this further download happens or not. Yeah. All right, guys, Darius, I could I could do this all day long brother. This is this is such a such a great guy to delve into all this data with. Okay, so we talked a bit of high level about stocks and bonds, both in the long term, long, long term, next 15 years, and also in the relatively short near term until potentially recession arrives. I want to talk about two assets when you’ve mentioned when you haven’t mentioned, you mentioned in the year long 15 year fourth turning arc, that owning Bitcoin, you know, looks good. I think when we ended last time, I said, Hey, I was gonna let you talk about Bitcoin, and we just haven’t any time to do it. So if you could, if you could talk about your general thoughts on Bitcoin, why you think it’s a good thing to be in for the long fourth turning haul. And then if you’ve got any particular, you know, Outlook, shorter term outlook to map to what you just told us with stocks and bonds in terms of how you think Bitcoin is going to perform? We’d love to hear any or all of those.
Darius Dale 23:14
Yeah, absolutely. Great question. And I’m so you just terms, our general thoughts on Bitcoin, it’s probably going to struggle, because we’re not going to have the liquidity conditions that support Bitcoin between now and let’s call it the other side of recession, at which point, Bitcoin could easily get cut, you know, Bitcoin could go down a lot in price, you know, prior to, you know, prior to, you know, getting to its ultimate lows in a recession, right, stocks go down 24% on immediate basis of recession, bitcoins going down something that looks like double that, if not more than that. Bitcoin, we also have this negative trend in our global liquidity proxy. So what this what this model is, is the aggregated some of the global central bank balance sheet, plus global borrowed money supply, plus global FX reserves minus SCO, and that’s what you can see is that this model was extremely cointegrated. With asset markets, it’s not always perfectly correlated with asset markets, although the correlation, you know, is typically tight, you know, particularly in small, you know, small intervals. But we know that this this line is likely to continue headed lower over the medium term and may actually accelerate to the downside in a recession, because you’re going to be losing the private sector liquidity creation components of that of that model of the in terms of using the private sector liquidity at the margins in terms of what could happen in a recession, while in a recession, where we’re starting with the starting point above trend, inflation, sticky inflation recall, if we start with sticking inflation, the public sector liquidity components are going to be an issue as well. So it’s probably not going to do very well between now and let’s say, the end of whatever recession we may have, but assuming that our forecasts for when to start, you know, most likely in the first half of next year, started, you know, first first quarter first, let’s call it by spring of next year is just kind of the key headline of that. I don’t know that Bitcoin is going to do particularly well we have the halving so we know the halving is quite positive for Bitcoin we know the Fed is going to eventually pivot, most likely at some point in the middle or the second half of next Fear. And that’s how you’re going to get to extremely explosive move higher in Bitcoin in the back half of the year. But right now it’s the back half of this year, we are not in the back half of next year. So you know, if you’re gonna be long Bitcoin throughout that entire process, you need to be managing risks in terms of your dynamic position sizing, when bitcoins bullish from the perspective of our volunteers momentum signal, you can have that full position size on when it’s neutral, you can cut that position size in half. And this is what our clients do is what we tell our clients to do, and why they’ve made a lot of money printing Bitcoin and Aetherium over the last couple of years, and when it’s bearish, you don’t have any position on and right now Bitcoin and Aetherium are both bearish. And so we don’t have any position there, despite kind of currently being in that Goldilocks regime. That’s the bottom up overlay versus management over the kicking game. When we think about the longer term outlook for Bitcoin in terms of the Zimbabwe occation of America, the Turkish, you know, America turning into Turkey or Venezuela from equity market perspective, and, you know, kind of financial assets standpoint, I think you still have to go through the path of perdition. First, we’re not going to get 1 million Bitcoin and 10,000 s&p without first having the Fed panic, as a response to what’s happening in the fifth sovereign debt market, very similar to what we saw in the fall of 20,022. So I think, you know, for the markets, the Fed will panic and give us Yoker of control, and they will panic and give us all the financial repression and thinks we need to capitalize this, you know, the kind of asymptotic rise that we’re going to see and in public debt over the next decade or so. But they’re not going to do that out of nowhere. You know, I use this analogy, maybe we may use this analogy last time we talked, but have you ever seen an atom, a firefighter, get in a fire truck, turn the sirens on and go put out a fire without there being a fire to put up? No, I haven’t either. So I made the mistake of saying we’re combined 100 and last podcast, but we’re probably combined at you know, but that’s neither here nor there. But in 80 years of both of us being alive viewer, we’ve never seen a central bank or panic for no reason. They don’t get in that fire truck and take that hose out and spray the burning house down unless there’s a burning house to spray down. And so ultimately, you’re not going to get you know to the to the to the rainbows and puppy dog outcome of asymptotic Bitcoin asymptotic. s&p until we actually have the big problem in the sovereign debt market that actually causes the Fed to capitulate on its 2% inflation target that causes the Fed to capitulate on you know, not having yield curve control and instituting Yoker control and ultimately instituting some severe forms of financial repression allow what we saw in the 1940s in the previous fourth turning.
Adam Taggart 27:27
Okay. Yeah, makes makes great and total sense. All right. So sounds like you’re saying Bitcoin. No real compelling reasons to be loading up on it right now. Maybe some very compelling reasons to own it. Once the Fed like completely capitulates with, you know, it goes into full blown rescue mode. But you’re saying, don’t get too far out ahead of that. Because if you do, Bitcoin, and obviously many other risk assets are going to get probably hammered in that path to perdition that you talked about right within the pain that we’re going to have to take, before the Fed decides to put in its firemen hat and ride to the the ultimate rescue there. Okay, I’m glad you brought up that chart that you had there that was liquidity driven, because and I’ve forgotten to mention to ask you this, when we talked last time, this was actually a bell that you were ringing was that liquidity was drying up? And we went through a whole bunch of reasons for that. We don’t need to spend a ton of time on it. But you you it sounds like what you said is is what I took from that chart there is you still have those same concerns that liquidity on a net basis is declining. And you could you could see some catalysts that could force it to dry up pretty substantially.
Darius Dale 28:47
Yeah, absolutely. So, let’s kind of give you a few quick slides on liquidity before we wrap up. So liquidity is is driven by a connoisseur who go and pursue factors private sector creates liquidity and central banks and finance industries create liquidity, we know that the public sector particularly central banks have seen declining liquidity really for months now. The private sector is very modestly declining liquidity, the global effects reserves are very modestly building liquidity. But when you kind of aggregate all that that sum here, we find that began blue line here with the US of the 42 macro global liquidity proxy. Red Line is global equity market cap here. For the past four or five months. We’ve had a negative liquidity impulse and we you and I talked about this in late April. Yep, said liquidity is turning negative. And it’s been negative since then. And this is why we’ve seen stocks diverge from crypto. Crypto has sucked when since April, by and large because the Quiddity situation is has has has gone is a very divergent view. There’s folks out there Michael out of the world who does way better work on liquidity than we do. I think we do. Probably the second best work out there on liquidity but you know, folks, folks, obviously I tip my cap to to Mike Wow. But he and I are very different paths here. He sees he continues to pound the table on it. liquidity is rising, liquidity is rising. Our model data has shown the Quiddity been in a negative impulse in a negative state, really, since really since the spring of this year. In our opinion, this is why the digital assets base has really sucked win this year, despite the fact that we’ve seen, you know, kind of this big bull run higher and equities, again, since we made that call in May.
Adam Taggart 30:18
So this is interesting. So, so I interviewed Michael, probably not that long after I interviewed you there. He’s awesome. Yeah, he’s great. And, you know, his, his his liquidity thesis has had a lot of explanatory power this year is, you know, stocks powered higher, after a terrible year, last year when everything looked really dark. You guys both seem to have said that. Yeah. At the end of q4, there was a big net increase in liquidity. And that’s probably what what yanked the s&p out of its doldrums in late October and gave us at least the first surge in the markets this year. Well, it’s interesting that like you said, and I haven’t talked to Michael recently, so so I could be wrong here. But But it sounds like you said he still says liquidity is increasing. So what is it about his model in your model that is different in measuring liquidity in the second half of this year.
Darius Dale 31:10
And I have no idea what makes this model I’m sure it’s got a lot more factors. In our model. As I mentioned, we are global central bank balance sheet was global brought money supply, plus global FX reserves minus gold. This model has a point nine 7% R squared with the s&p since going back to the beginning of 2009. So I don’t know what’s in his mind, I respect his work a tremendous amount. I’ve learned a lot from him over the years as an investor and hold them in the highest regard. But again, it’s okay to have divergent views. When you have divergent research processes and start with our own research. You’re 42 macro, and guess what models been right? We’ve been right on this discussion. This debate Bitcoin peaked the day we said so cut your Bitcoin position to have their minimum in mid April, when we sought Moody’s analysis to set the liquidity impulse was turning negative. And I think he sort of asked sort of, why has it diverged from stocks? Well, the reason it’s diverged from stocks is because liquidity is not the only thing that matters to the equity market. And one of the things we keep track on on a daily basis in our leadoff morning note, amongst many things, in terms of our quantitative risk management signals, is this sort of multifactor correlation study to actually identify what’s actually driving markets right now. And what we know is what’s driving markets on a trend basis, the the feet the macro feature that’s driving the s&p right now, which cyclical growth expectations as proxied by Frogmouth copper futures, what was the driving Bitcoin on a trend basis, Bitcoin, particularly lower origin basis is the rise in the terminal Fed funds rate, the rise in the floor Fed funds rate and the rise in the real tenure tips yield EZproxy, social growth expectations as proxied by the real tenure tips yield, so you have to understand what actually is driving these markets to ultimately forecast where they’re headed. And obviously, you need to remain Bayesian throughout that entire process, when you have positions on to understand how this stuff is evolving, and how it’s changing. And ultimately how those changes need to kind of cause you to do something different from a portfolio construction standpoint. So again, these are all models that we refresh on a daily basis, six times a week, according to macro winters are a leadoff morning, no, and around the horn, and then sometimes seven times a week, we put out our monthly macro scouting report presentation. So to answer your question, you know, I have a lot of respect for Mike and other investors out in the world, but I really don’t care what they do with their models say I care what our models say. And ultimately, that’s what we’re gonna be communicating that to our clients around the world.
Adam Taggart 33:15
Right, great. Well, fantastic, fascinating. I’ve just wrote myself a note here to schedule reach out to Michael to see if we’ll come back on so we can get an update from him to see what he has to say. That last chart you just hit on those correlations. Those are statistical correlations, right? Are you running regressions to get those correlations? Yeah, these
Darius Dale 33:31
are these are daily log price change correlations between I just love
Adam Taggart 33:35
the fact that you’re that Steve in the data that is really cool to be able to see that.
Darius Dale 33:40
And, of course, man, again, we keep this model up daily. Like right now, like, we understand that, hey, look, when the cycle growth expectation tide turns, when the market really starts to get concerned about growth, you is assuming this the state could this condition stays the same, you’re gonna have problems in the equity
Adam Taggart 33:53
market. We go back to that chart you were showing earlier that basically showed the the rosy analyst expectations going out from here. So you’re basically you’re saying is, once those guys start saying, oh, wait a minute, maybe we’re a little bit too enthusiastic, you know, that’s going to impact the s&p, because right now, that’s the biggest driving factor
Darius Dale 34:13
100% 100%. And this is why I still think we have right to raise the price in the equity market, because I don’t see that the growth being an issue between now and the right now inflation between now and year might become a real big issue. Like right now, cyclical inflation expectations really have no correlation to the market, on a trend basis. Let’s say this, you know, three months from now is now you know, the dominant driver, the same minus, I don’t know, 30% or something like that. That means Brent crude oil has gone up a lot. The s&p has gone down a lot because inflation has wrestled the baton from sickle growth expectations in determining the you know, kind of the direction of the equity market. But for now, as long as we still think the economy is resilient in our models, going back to early part of discussion suggested the economy is likely to remain resilient for at least another three to six months. Perhaps that’s it, you know, you know, that’s my that’s probably it, in our opinion. I think that’s going to be it. Uh, you know, but as long as it can remain resilient, at least until this year in dynamic because again, Wall Street is behavioral just as much as it is economics and fundamentals and quantitative, you know, as the Wall Street Mr. Rally, you know, the buy side Mr rally, and the closer you get to your in, the more they’re going to have to participate in the rally if they want to, you know, kind of salvage to some semblance of performance for 2023 and ultimately support their career. So, again, I think there’s a behavioral dynamic in the market ahead of us, you know, I still think we continue, Cavs have some sort of a blow off top and equities, a blow off bottom in bonds in terms of price. Now, before we ultimately those trends reversed on a structural basis.
Adam Taggart 35:35
Okay, and that that run to the end of the year. That is Ben has been echoed very recently on his channel by several other experts here. I’m sure you’d like to hear that because as you said, you’d like to deal with a preponderance of evidence. So just know that there are others that are making similar arguments, looking at maybe some similar but probably other different bits of data or doing different analyses. But can I ask you a quick question, what would
Darius Dale 36:01
you say? Is their number one? Or what was the best argument for that particular outcome that you heard across the various experts?
Adam Taggart 36:09
Ah, best argument. Hard to pick best. But I’ll tell you what, what spent Henrik, who again, is the technical analyst, and he said, Look, this isn’t even ta said, it’s just basic averages. But he took the the average performance of the s&p every year for the past 20 years and just came up with a composite. And it is so it’s basically shows you sort of average seasonality of the s&p. And he says, I don’t normally like trade off of this. But he said, if you look at how it has performed this year, it is the script that the markets have been following. You said For better or worse, I just, I’m just shocked at how well this has actually charted the Ark of markets this year. And it shows generally, you know, on average, the past 20 years, you see kind of this, this, you know, pretty decent surge from October through December in the end of the year. So he’s just basically saying, look, as long as this correlation holds, this is what we should expect going forward.
Darius Dale 37:05
Interesting. Interesting. There’s good analysis is good. I would personally pull it back a little further. In fact, we have analysis, I want to say you’d pull it back to 1800, I’m sure. Yeah, yeah. So we pull up our Econometric Analysis back as far back as we can the data, particularly for that for turning study, we pulled it back as as far as the back to 1800. Because once you start getting past 1800, you’re going to run into some squirrely statistics. But the one thing I’ll say on seasonality that is a little bit, not a little bit, a lot of it on the other side of spins view, which I’m not, I’m not even saying I disagree with it, because I still think we’re going to experience a blow off top in the equity market. But our empirical analysis on seasonality says it actually tends to be quite poor in the second half of the year. And so we looked at, we took all the data in the s&p 500, that we have, we have data going back to 1928, only seconds as far back as I can find the data in Bloomberg. And what we found is that when the equity market has in advance in the first half of the year, that’s greater than or equal to the 16%, advanced that we experienced your June 30 of this year, you took negative medium returns in the equity market, and negative and q3 and negative throughout the entirety of the second half of the year. Now there is a range of outcomes, like there always is, and he’s statistical analysis. So, you know, we could be making a new 200 percentile reading here. You know, I’m not saying that, you know, again, I don’t trade with seasonality. Personally, I just need to know what other people think about seasonality. And it’s thank you for sharing that about spin, you know, in terms of his analysis, but again, our analysis, which is a little bit more robust in terms of the time series that we study, it suggests that seasonality is actually quite poor. You know, when you start the year off, tests are quite hot started, like what we started this year,
Adam Taggart 38:36
right? And I can’t speak specifically for Spanish, but my my guess is, is he didn’t have the filter you had here where you your looks like you’re looking at the years that were had a big first year rally, right, which is really comparing apples to apples much more than just the past 20 years. So you know, I can understand your logic here. But it’ll be interesting to see. And again, I’ll spend was saying was just like it or not, this has been the path that’s been following. So if that correlation holds, we’ll see. I
Darius Dale 39:01
don’t disagree with it.
Adam Taggart 39:02
I don’t disagree with Alright, so last question, and then we’ll wrap it up here. So I mentioned there was an asset you had mentioned and an asset you didn’t mention, the one you didn’t mention was gold, gold. And I’m just curious in this sort of fourth turning, you know, world where you expect pretty substantial, both volatility but also, you know, real damaging of the purchasing power of the currency. Yeah, I totally get bitcoin in that scenario. Would you include Golders or reason that you’re not mentioning gold?
Darius Dale 39:34
Oh, no, sorry, I’m just I’m a millennial. So Bitcoin is gold for me, but maybe if I was you, I’m an old millennial. So like, if that was like maybe two years older, I’d be genetics and
Adam Taggart 39:45
if you had if you had a little more, you know, like a Grow a beard,
Darius Dale 39:48
it’d be great but the size of my hair. I can’t grow beard so that’s neither there but yes, in my head, gold and Bitcoin and same thing goes. Bitcoin has high vol gold in my opinion, and wow, it’s historically true. At least in in recent years, hasn’t always treated that way, you know, and kind of the infancy of Bitcoin. But really since it became a, I wouldn’t say institutional asset class, but kind of an asset class that we’ve all participated in to varying degrees, really since 2018 2019 2020. It’s traded very much in lockstep with gold, obviously, with a lot more volatility. So think about transpose everything I said about Bitcoin being a very positive asset longer term, but probably has to go through not one but two problem sets. One, the recession that’s likely to commence next year, and to the longer term problem set of structured elevated inflation, ultimately causing a problem in the treasury market that the Fed has to fix. It’s the fixing the problem that causes gold Bitcoin stocks to go asymptotic. But we actually experience the problem first, and again, this is the why we said the fourth turning challenges is going to be the fourth turning crisis is going to want to be the biggest challenges we ever face as investors, because we’re talking about some severe ups and downs, very volatile, you know, just you know, explosive moves in our portfolios. And if you’re not positioned with the timing and good risk management to deal with that, throughout the entire process, you will struggle as an investor to handle this, because we’re talking about some of the highest volatility and economic statistics that you’re ever going to experience in your life, and some of the highest volatility and financial market outcomes that you’re going to spirits as a result of that.
Adam Taggart 41:14
Okay, so you’re in great company, when I interviewed Felix zulauf, at the beginning of this year, he looked down to the next decade and called it the decade of the rollercoasters and said, it’s going to be very much like this, and it’s going to be largely kind of lurching from policy change to policy change, you know, in response to a lot of the instability and, you know, ups and downs that you’re talking about. Being in company with Felix zulauf is always a really great place to be, I was just about to say,
Darius Dale 41:44
thank you. Because I feel like there was like a list of people who I like very much valuable research, and I would put Michael Holland in the shortlist of people, which is when they say something, if I disagree with what they’re saying, I need to be damn sure that my research is correct, right, like at the level, the threshold that I have to publishing stop doing something in front of our clients, if I’m on the wrong side of a guy like Michael, how a guy like Felix zulauf, or a woman like Juliette de Klerk, you know, you know, like those types of people. I’m like, I need to make sure I’m right. So I have a lot of respect for those types of investors. And so I’m glad to be in good company that.
Adam Taggart 42:17
All right, great, well, so what he was saying, which is I hear you saying the same thing, which is, look, we’ve gotten spoiled, lulled into complacency, whatever, by the era that we’ve come out of coming out of the global financial crisis, where we had QE one through, you know, infinity. And just, you know, going along, buying the dip was all pretty darn easy. Sounds like you’re saying, Look, those those days of a nice, easy passive ride are over. And active management is going to be much more important going forward and risk management is going to be really important going forward, because there’s going to be some great and putting words in your mouth. So feel free to change them. But there’s going to be some great opportunities to have some some tremendous return potential here. But you got to not get wiped out to be able to play those
Darius Dale 43:07
million percent. That’s if they take away one thing from this to our discussion, Adam, it’s you need to have proper risk management systems in place to make sure you don’t get wiped out from the success of volatility that we’re likely to experience. Now, again, it’s not all bad. You hear the word volatility is investors, particularly retail investors, they think bad, but volatility can be very good for you if you think about Bitcoin, or the NASDAQ of the 90s, to the upside. And that’s what we’re effectively arguing. It’s just that the path to getting to that is going to be extremely volatile, and extremely fraught. And there’ll be a lot of dead bodies, both institutional and retail, who folks who just trade the cycles wrong. And ultimately, you don’t have to, I would say, hire someone like me or hire someone who you think is better than me to help you universe manage that process is because if you’re a retail investor or investor with out a lot of resources, you will struggle in this decade.
Adam Taggart 43:55
All right, so I’m gonna say you need a you need great intelligence, and you need a great team. So I’m gonna let you talk about the intelligence part first. So there is for folks that have really enjoyed this discussion, would like to learn more about you follow you and your work, where should they go?
Darius Dale 44:11
I appreciate him in this I love connecting with you, Adam, you’re one of the most prepared interviewers I’ve ever experienced in my life, man, and obviously comes back from your, your institutional finance background. So I just wanna say thank you for having me again, on your platform, obviously, do this again, and provide an update at the proper time.
Adam Taggart 44:26
Welcome, it is a true joy, brother, so don’t worry. I appreciate you, brother. Thank
Darius Dale 44:29
you. So for those who you know, kind of like what we’re doing. And again, as I mentioned, all this research is very Bayesian, we do the same things every day. We update the same models and presentations on a daily weekly monthly basis here. 42 macro comm check us out for each america.com You know, my Twitter is Darius Dale 42. That’s my full name. 42 is my Twitter handle. We try to put a lot of educational content out there on the Twittersphere. But the reality is, we rarely talk about portfolio construction and asset allocation beyond our payroll that’s reserved for our paying clients bill. Want to support our business? Um, you know, African American man in a country where a lot of us don’t have businesses, I grew up very poor in this country. So, you know, I want to say that I’m very grateful to be here and have an opportunity to connect with this platform and your audience and theirs was a come check us out, you don’t have to subscribe. But definitely come check us out. 42 macro.com.
Adam Taggart 45:15
All right, great. And Daris. When we edit this, we’ll put up both the links to your Twitter handle and your website there on the screen, so folks know exactly where to go, folks will also be links in the description below too. So it should be real clear how to go follow Darius. And I just want to say, you know, I say this on every video, but I think there’s you just really helped me drive the point home, which is, you know, most people, especially a lot of people watching this video, but just most people out there, it’s easy to get overwhelmed with all the different permutations of what can happen here. It they have real lives, right, they’ve got families to take care of get jobs to get a focus on, they don’t have the ability to watch the markets as closely as you do and be able to pivot when conditions change, just like you pivoted after you were on the channel the last time that we spoke, right. So highly recommend that folks work with a good professional financial adviser who takes into account all of the issues. And the data that Darius and I talked about here. And I’ll tell you, there aren’t that many on a percentage basis that do this. So many of them have been conditioned by the ease of the past couple of decades that they just say, you know, what just stocks for the long haul just remain fully invested, the markets gonna take care of you, right. And in the type of environment that there is now we’re just talking about that can be a recipe for destruction, where you get wiped out before you get a chance to be right. So I highly recommend you work with a really good financial advisor to do that. If you’ve got it when he’s doing it great. Stick with him. Like I said, they’re rare. If you don’t, or you’d like a second opinion from what it does consider scheduling a free consultation with one of the financial advisors that Wealthion endorses. To do that just fill out the short firstname.lastname@example.org only takes a couple of seconds to do that. These consultations are totally free. There’s no commitment to work with these guys. It’s just a free public service. They offer a great complement to subscribing to dairies as revenue, there is service getting great intelligence, and then getting a an advisory partner to say great, how do I put this into action in my own portfolio, given my own personal needs, goals, risk tolerance, etc? Let’s I’m going to hand the baton back to you here Darius because you’ve got something interesting to talk about here. It looks like
Darius Dale 47:24
no sorry, I didn’t mean to interrupt or hijack that that was a great a plug, I definitely agree with everything you just said the one thing I’ll say is, you sort of mentioned one thing, we put together this information to talk to the most sophisticated institutions in the world, we just happen to sell it to retail investors and our investors. You know, we seem to have a very loyal, passionate fan base of folks who want this information, they want to challenge themselves to learn about the economy and financial market cycles. But the reality is, if you don’t want to do that, or if you don’t have time to do that, you will never ever from 40 to macro research ever have more than five positions to match our kids portfolio construction process is a 6030 10 approach that’s designed to take equities, fixed income and macro asset classes based on the regime that we’re in, and ultimately help you manage that, you know, through you know, flexing your liquidity flexing your cash position. So at any 100% of the time, you will never have to worry about oh my god, well, he said this. So how do I do this? Or who set this? How do I do this very specific risk management, very specific position sizes and allocations and portfolio construction guy and it’s from us, and it’s never going to have more securities on this page than we currently have right here. So just want to say we do simplify everything we just said for you know, for retail investors who maybe early in that learning journey.
Adam Taggart 48:37
I love that yeah, if you are, you know, DIY want to do it yourself want to but stand on the shoulders of you know, a great expert who’s doing all this, this looks like a fantastic resource for that. And again, to get access to this, they just go to 42 macro, it’s part of a subscription there,
Darius Dale 48:53
absolutely 42 macro.com as part of all of our subscriptions, but we primarily focus on the portfolio construction updates in our around the horn subscription. But obviously, a lot of the information that is informing that from a systematic standpoint is coming through each of our subscriptions earlier morning note and our macro scouting report, what we just what the presentation we went through today was our macro scouting report with some supplemented charts from earlier money notice more.
Adam Taggart 49:15
All right, fantastic. Well, look, there’s, it’s I see here, it’s been two full hours. Thank you for giving us so much time, it went in a flash, which is the sign of a great interview. Folks, if you’d like to have Darius, come back on this channel again, particularly when his models start telling us that you know, there’s a new update to his outlook. Please encourage them to do that by hitting the like button, then clicking on the red subscribe button below, as well as that little bell icon right next to it. I’m Darius again. As always such a pleasure. Thanks so much for coming on, buddy. I’ll let you have the last word here.
Darius Dale 49:48
Now Adam, you’re you’re wonderful man. I just want to say thank you for all that you do for our community. I just wanna say thank you for having me on and I want to say thanks for everyone for tuning in. You know so we we take for granted us talking heads. You know the audience stet we build but no, we have to earn that audience daily. And I just want to say thank you for everyone who continues to allow me and Adam and all of us to continue to earn your trust daily because that’s what we’re trying to do.
Adam Taggart 50:10
Appreciate you can’t say it better myself. All right, thanks so much. There’s really appreciate it brother, everyone else. Thanks so much for watching.