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cover of episode Tariffs: The Ultimate Stagflationary Shock? | Darius Dale on "Liberation Day," DOGE, Gold, and the Global Debt Refinancing Air Pocket

Tariffs: The Ultimate Stagflationary Shock? | Darius Dale on "Liberation Day," DOGE, Gold, and the Global Debt Refinancing Air Pocket

2025/4/2
logo of podcast Monetary Matters with Jack Farley

Monetary Matters with Jack Farley

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Darius Dale, CEO of 42Macro, discusses his bearish outlook on the market, comparing the current situation to previous market corrections in 2018 and 1998. He highlights the significant economic transformation underway, the asymmetry in market positioning, and the challenges in resetting medium-term expectations for growth, sales, and earnings. Dale anticipates a potential market bottom once the Fed or Trump put is struck.
  • Bearish outlook on the market due to economic transformation and market positioning
  • Comparison to market corrections in Q4 2018 and summer 1998
  • Expectation of a market bottom upon Fed or Trump put

Shownotes Transcript

The ECB is ready to do whatever it takes to preserve the euro. And believe me, it will be enough. Thank you. Let's close this f***ing door.

Very happy today to be speaking to Darius Dale, founder and CEO of 42Macro. Darius, welcome to Monetary Matters. Jack, it is a real pleasure to be here, man. I'm really excited for you and the growth of your new show, man. You're a great guy, great host. I've learned a lot from you and your guests over the years, so I just want to wish you all the best of what you're building here.

Thank you so much, Darius. I've learned a lot from you and I know I'm going to learn something today. How are you thinking about markets? So much is going on. I think we're, you know, kind of early to mid innings of a bear market. I can kind of, you know, say it quite frankly. You know, I think, you know,

What's driving that is I believe there's a pretty significant economic transformation going on. We believe that the Trump administration is following the guidelines that we laid out last fall in the sense that they're going to have to kitchen sink what has been a very robust U.S. economy, but largely propped up by the government and spending from upper income cohorts to an economy that's more balanced and much more driven by the private sector.

Ultimately, that is probably going to wind up with good outcomes economically and good outcomes in asset markets. But the starting point in terms of the run of growth that we've been on, the asymmetry that we saw in the positioning cycle, particularly at the all time high in February, the starting point for undergoing such a significant and dramatic change.

was not good from the perspective of prospective market risk. And so I think the markets are essentially doing is kind of rebasing and resetting their medium term expectations lower from a growth, sales and earnings perspective

And in resetting their medium term inflation expectations higher and ultimately what the Fed can and can't do in response to all this. And that process, again, just given the starting point of the asymmetry we saw in the positioning cycle a couple of months ago, you know, it's just not going to be a very easy process to digest for markets. And so ultimately, you know, we continue to think like a Q4 2018 or summer of 1998 is a very good market analog.

to think about the market risk we see. Maybe you have a one to two quarter pullback that gets you somewhere down 20% in SPY terms. Obviously, any asset that has a higher beta, that's going to be down more as we saw already seen with the MAC-7 stocks. But ultimately, I think you buy that dip. On the other side of this, we obviously have the extension and expansion of the Trump tax cuts. We have what's likely to be a pretty significant deregulatory push from the Trump administration.

and you might ultimately have just better prices for investors to start to allocate assets to in that scenario. But again, I think it's a process, so we just got to be patient. And how severe of a decline do you think we could have on, let's say, the S&P? I think we're roughly about a 10% decline. Yeah, well, I'll chop off the left tail and say I highly doubt this is a 2008 or even a 2025 type scenario. In 2008, I want to say S&P was down 57% peak to trough. 2022 was 25%.

what we saw on Q4 2018, what we saw in the summertime of 1998 was, you know, rough peak to trough down 20%. But most importantly, I think in those market analogs that we're highlighting is that, you know, these were, you know, sort of reset expectation type pullbacks. I mean, they were crashes, you know, down 20% peak to trough in SP terms is a big deal, but there were subsequent recoveries or, you know, in terms of the, the max stride on recovery was, were pretty, pretty quick.

And they were aided and abetted by, you know, monetary policy pivots. You know, the Fed put was struck in 98, you know, with LTCM. It was struck in, you know, kind of in Q4 2018 with the bond market, the credit market completely froze up. And you had the power pivot in early January of 2019. So, you know, that's the kind of outcome we're expecting in 2025 or here in 2025. You know, we could be wrong on it.

any or in all of that. But generally speaking, we think the left tail risk will be contained because ultimately what we've been communicating and coaching our investors for, you know, really better part of three quarters now is that

2025 has arguably the widest distribution of probable economic outcomes I've seen in my career, which began back in 2009. Just so much stuff on the positive side, but there's also a lot of stuff on the negative side. And it really was a function, going back to the marriage call we made at the beginning of March, it really was a function of, hey, let's

the starting point from a positioning cycle standpoint is suggesting that a lot of the right tail risk that we identify and continue to identify from a medium to long-term perspective has been priced in or at least adequately positioned for whereas the left tail risk the size of the left the area under the curve on the left side of the distribution was not really being seriously entertained and i would argue even right from today it's not really being seriously entertaining you have guys like mike wilson from morgan stanley who's come around to our kitchen singing view uh that we authored last fall

But when I listen to sales side strategists, when I talk to institutional investors, we have clients across the global buy side. Folks really aren't here yet. And so you said early innings. So you think that when do you think the market could bottom? I mean, you said... Do people answer questions like that? I'm not smart enough to answer that.

Answer that? It's hard enough trying to figure out where the market's going, let alone be specific with dates of actual peaks and troughs. And quite frankly, I'll give you guys a public service announcement. Anybody that answers questions with that kind of specificity doesn't know what the hell they're doing. That's true. If you know what you're doing, you understand you have the amount of humility to proceed cautiously with respect to answering questions like that. Look, I'll tell you.

the market's going to bottom when it decides the Fed put has been struck in our opinion or the Trump put. But in our opinion, we think the Trump put strike price is lower than the Fed put strike price because we ultimately see much more degradation coming to the labor market over the next couple of quarters than what's currently priced into their expectations, but what's also currently factored into market-based expectations. And so ultimately, you're probably talking about a financial stability issue

uh here uh in 2020 and that's exactly what we saw in q418 that's what we saw in summer of 1998 these were financial stability concerns that were born out of i

either over positioning, a confluence of over positioning and a significant and sharp slowdown in growth. And so that's kind of our general takeaway. If something else comes out of left field, we have to digest as investors, we'll do our best to incorporate that into our fundamental framework. But I think it's a fairly robust framework. Again, this is the widest distribution of probable economic outcomes I've seen in my entire career. At the beginning of the year,

I could have credibly made a case for a 20% return in the S&P 500 to the upside and also made a credible case for a 20% crash in the S&P 500. We might get both this year. I'm serious. We may get both. The market might crash and recover 20 plus percent from that crash low. And so I need investors to be aware of that.

But trying to trade this or be a hero with specificity, I think folks are going to get chopped up. I want investors to be aware that if you're in a bear market where expectations just have to get revised lower,

you know that's a process you know this isn't like you know some sort of you know one-off event like volmageddon you know it's going to be okay it's you know we probably stand an entire economic restructuring in like a 10 correction which happens every year by the way you know i don't think we priced an entire restructuring of the us and global economy with the 10 corrections five and i might be betweening i might be being too generous with the 20 expectation but the reality is if this is a bear market

bear markets are twice as hard to risk manage as bull markets are easy. So for example, like if you don't want to scale from one to 10, making money in a bull market, a raging bull market, like the one we've been on the right side of for the past couple of years, that is, you know, let's call that a five.

On the flip side of it, risk managing a bear market is about a 10 hard. You know what I mean? And so investors need to be aware that you're going to have these multi-week, even perhaps multi-month periods where you're perhaps rallying because you're not seeing the degradation enough happen to occur fast enough economically. But ultimately, you have to have your eyes on the prize of where we're ultimately going. We do expect an

enough degradation to happen economically to cause a wholesale write down of GDP estimates, a wholesale write down of sales and earnings estimates for companies, and ultimately a wholesale write down of market valuations and wider credit spreads. That's where we're headed. And the process could take a few months. Process could take a few quarters. You know, I'm not smart enough to tell you exactly when it occurs, but I am smart enough to give you all the signals to be paying attention to along the way and for the ultimate level.

And of the administration's things that you think could on the short term be negative for growth, tariffs, immigration, and then Doge, which do you think will be the most significant in impacting, either taking growth down and earnings estimates down or inflation up? Yeah.

That's a great question. So in our view, we think Doge is an underpriced risk. So I think answering the question is probably more helpful for investors to answer what we don't think is currently in the price. And so I'll start by saying, I think when you look at our estimates for Doge, one of the things we continue to see from the Trump administration, particularly Elon and his team over at Doge, is they continue to confirm

our estimates of what's likely to occur from that perspective. And so, you know, going back to the fall of 2024, you know, we put out an estimate that Doge is probably going to cut $500 billion to a trillion dollars in the deficit. You know, we were very amenable to the top end of that range, but we didn't see much scope for us to go beyond that.

and the part of the reason for that is that the class of politically protected categories within the context of the u.s federal budget you know didn't leave enough room to cut more than that you know we have things like medicare and social security uh obviously national defense has become politically protected medicaid has become politically protected as well by uh you know members from both chambers of congress as well as the president himself and so you're talking about

you know, 95% federal expenditures when you put those things together, there's really not much else to cut. Right now, we recognize that there's a, obviously, what we're finding, you know, with the Doge team is there's a tremendous amount of fallout, race and abuse in every aspect of the federal government, including these categories. But the reality is, is that these categories still account for the lion's share of spending in the federal budget. You know, it's, you know, right now, if you put those categories plus Medicaid together, it's

It's about twenty sixty nine percent of total federal expenditures. And that's currently accounting for about one hundred and six percent of federal expenditures. And so, you know, what we learned from Elon of the past several times over the past few weeks is that they're on track to cut a trillion dollars out of federal expenditures now.

When we throw around words like trillion and, you know, this stuff doesn't really mean anything to anybody because, you know, we're all so numb to it. But putting this in context, you're talking if they cut a trillion dollars of federal expenditures, you're talking about wiping out about 14 percent of federal expenditures. And then there's really not much else. There wouldn't be much else to cut just given, you know, what those politically protected categories are. And if we wiped out 14 percent of federal expenditures in a conservative estimate where, you

the drawdown in federal expenditures is commensurate with the drawdown in total employment on the federal level. You're talking about an unemployment rate that goes from 4.1% to 4.4%. In a moderate scenario, so that's our conservative scenario analysis. In a moderate scenario where we're talking about there's a two to one decrease in federal employment

relative to the percentage drawdown in federal expenditures, you're talking about getting up to 4.6%. And the reason you could make such an assumption is that, you know, the academic literature has consistently shown there's about a 1 to 1.5 to 2.5 ratio of federal workers to federal government contractors. And we do believe that the federal government contractors are going to be an underappreciated side of this story that will become more

you know, obvious as the year goes on over the next, let's call it a couple of quarters. So you're talking about, you know, let's call it a 40 to 50 basis point shock to the unemployment rate. And obviously that's going to get, if this happens before the end of the year, because don't forget the Fed's calling for a 30 basis point shock to the unemployment rate by December. If this happened before December, then you're talking about a Fed that's, you know, obviously cutting rates again and likely doing QE and ultimately, you know,

We've been of the view that the Fed needs to do QE here in 2025 to stave off what we call a global debt refinancing air pocket. There's two things I would say I'll highlight on that. So one, we've consistently highlighted that a global debt refinancing air pocket is the number one risk for investors to focus on in 2025. Not tariffs, not doge, not any of this other stuff. It's the global debt refinancing air pocket.

So this is a very important chart. I want to slow down and explain it because I know I talk fast. What we show in this chart is the blue line is the year of re-rated change of our global liquidity proxy, which is the aggregated sum of the world's 10 largest central bank balance sheets, their broad money supply from their economies and their FX reserves minus gold. It's essentially all the liquid capital you can use to capitalize assets globally.

The blue, sorry, the red line in this chart shows the lagged non-financial sector debt, the year-over-year rate of change of the total non-financial sector debt globally. We lag it by four and a half years to kind of simulate the earliest wave of the refinancing cycle, somewhere between, let's call it five and six years. So, you know, you see companies and software start to roll that stuff, or really mostly companies, they start to roll like a year, within a year ahead of time.

So what we see here in 2025 is this sharp acceleration in the lagged growth rate of total non-financial sector growth. This is essentially lapping the all-time low in interest rates that we saw back in the summer of 2020. And so that's kind of what we're coming up against here in 2025. And historically, when you have these significant accelerations in the red line, which is the lagged growth rate of financial sector debt, the amount of debt that needs to be rolled over and refinanced, but you don't have a commensurate acceleration in liquidity, much

much like what we're currently observing, you tend to all help since the break loose in asset markets and pardon my French, but there's really no other way to say that. And so this is a risk that we've been highlighting to our clients for about six, nine months now in our research as the number one market risk for 2025. And so going back to this Fed commentary, this puts the Fed in a very precarious situation. Do they abandon their kind of 2% inflation target in

in order to facilitate a smooth debt refinancing cycle? Or do they commit to this ridiculous 2% inflation target that they got from some random central banker in New Zealand, of all places, and retroactively give us the QE after the market crashes? And right now we're on a track for them to retroactively give us the QE, and that's a problem.

So you actually believe that the Doge could cut $500 billion to a trillion dollars in an annual year. So the current government budget is like six to seven trillion. You think, okay, wow. So you are a real believer in that.

I frankly am not, and I know you're a very quantitative guy, so I'd love for you to make that case. Because I'm looking at the government budget. Okay, 600 is Social Security, 400 billion Medicare. That's not going to be touched. National defense, there is a lot of waste there, but...

We'll see net interest, obviously you can't do anything about that. Where is this? It may be true, Darius, that there are a lot of people working in the government who if they got fired, nothing really would change.

I totally agree with that. But here's my claim, that firing those people is not going to cut anywhere close to $500 billion or a trillion dollars. And admittedly, I haven't looked very closely into the Doge math, but I've seen other folks like The Wall Street Journal have severely doubted the math that the estimated savings is $140 billion per Elon Musk and the website. And The Wall Street Journal admittedly a few weeks ago had a

amount that was in the single digit billions. So make the case, how can the Doge be significantly cutting the government budget deficit by not just hundreds of billions of dollars, but $500 billion or even a trillion dollars? Make the case. Yeah. Well, I don't have to make the case. They've already made it. According to what they're tracking, at least their tracking estimates, based on the

The fraud, waste and abuse. And this goes I'm genuinely citing what they've outlined. Go back. Last Thursday, they had a big kind of doge powwow on Fox News Thursday night. And I watched the whole thing. And it was actually quite eye opening in terms of the very specific content.

you know, things that they were highlighting in each segment of the government where they were like, yeah, we could get a hundred billion from that, you know, 50 billion from that six, you know, the, the numbers they were throwing around in terms of correcting some of the, you know, procedural kind of, uh,

get lapses in the government in terms of systems talking to one another, this and that. It was pretty compelling in terms of what they could actually cut. So obviously we can't see the independent line items of everything that the government is spending on. We can only observe it by category. So it's hard for us as in the private sector to

you know, actually come up with credible categories. But when you think about, okay, what can these guys actually cut? If you look at the politically protected classes, Medicare, National Defense, Social Security, Medicaid, and then throw in obviously net interest, which they can't control, you know, they can lobby for net interest to go down, but they can't really control that.

Those things are about 69% of the federal budget. So about, you know, a little bit more than two thirds of the federal budget. That leaves plenty of room to cut in terms of, you know, right now we're annualizing at about $7.4 trillion on a calendar year to date basis, dated through February. So you're talking about multiple trillions of dollars left of cuts in order to get that. And Elon said, hey, you know, we think we can get about $7.4 trillion.

15% of total cut. Now, Elon, I don't think Elon was paying attention to the annual rates of these categories. And that's something else we'll talk about because ultimately, I think the headline is that even though Doge is going to cut a lot, we're still not going to wind up with significant deficit reduction. They're just going to wind up with significant expenditure reduction when you layer on the tax cuts. But going back to Doge, before we pivot to that, you know, if Elon said specifically, hey, I think we can cut 15% of the federal budget. And he said, quote, you know,

you know, that's about, you know, we're right around $7 trillion. I think we can get to $6 trillion. Cool. He said it.

And so, you know, obviously we're annualized a little bit faster than $7 trillion. So maybe we get to the $6.4 trillion or $6.5 trillion. But the key takeaway is even if you exclude the politically protected categories, which when we initially put out our, you know, $500 billion to trillion dollar estimate, we said, hey, they can't cut much more than that because at the time, you know, the politically protected categories were X. Now, when you look at the space between the politically protected categories and everything else, you know, there is ample space to cut that.

And we expect him to cut that. Elon has confirmed that himself several times over the past couple of weeks. Now, they're not going to cut it all in a matter of weeks or even a matter of months. It could take

over the course of a year for them to find all of these savings, but they believe that they're on track to find 15% of federal expenditures worth of savings. So that is, you know, until further notice, you know, I think we have as good a handle on these dynamics as anybody. And, you know, we continue to get, you know, from the horse's mouth that our estimates are on track. And if our estimates are on track, going back to that labor market analysis, you know, there's no way, we don't see any, we see no way

indication, particularly in S&P type company sales and earnings estimates of, you know, you know, 40, 50 basis point rise in unemployment rate. Obviously, you're talking about significant slowdown, the consumer spending, significant slowdown in consumption, which, by the way, we already have in February already. Real PC growth was 0.8% on a three month annualized basis. Obviously, you know, hundreds of basis points below the trend.

So we're already seeing the slowdown show up in the hard data. It's probably not going to show up in the jobs report on Friday yet. That is what it is. But ultimately, we expect it will in the coming months if those numbers are correct. But again, don't forget, it's not just Doge.

It's steepening base effects. Recall that we have two plus years of compounding, three plus percent in real final sales growth, which is pretty, I wouldn't say historic, but it's a really good number for the US economy. We have historically elevated policy uncertainty. If you look at the Baker-Bloom and Davis Index, in fact, put this chart on the screen, because I really want people to contextualize what I'm about to say. We have the highest levels of policy uncertainty in the history

outside of the global financial crisis and the COVID crisis. And so, you think about what happens when there's this much policy uncertainty in the economy,

When you think about making big ticket purchases or companies start thinking about CapEx or hiring or increasing their budget for this or that, they put those plans on hold. Now, they might not be shelved indefinitely, but when a large swath of the economy, particularly the folks who spend the most money or the businesses that invest the most, kind of tap on the brakes, you can go from an economy that finished last year at 3.5%, 2.5% rather,

a real GDP growth to economy that's well south of two, perhaps even south of one. And that's something we continue to highlight as a high probability risk. In fact, if you look at Bloomberg consensus estimates, which are the red line down there, our estimates are the blue line. Up until last week, literally up until Saturday when I refreshed the chart,

The red line was just hanging out here. So you're starting to see some compression by Wall Street Economist Consensus to the estimates that we've been publishing since last summer. And you're starting to see some compression with respect to their inflation expectations as well. Don't forget, when we started the year, Bloomberg Consensus had real GDP growth basically literally meandering lower to about 2%.

in 2025, that core PCE meandering lower to about 2% in 2025. Now, both of those numbers have been revised. Their growth forecasts have been revised down towards ours. Their inflation forecasts have been revised up towards ours. And we don't think our growth forecasts are

are low enough. You know, we use auto-regressive process to project growth. And so ultimately what's likely to happen over the course of the year is that, you know, as growth gets reported lower, our estimates will just, you know, kind of transpose themselves down lower and while keeping the same shape of that curve. So that's kind of, you know, that's kind of our general take on growth. But again, that policy uncertainty is a big deal. Don't forget, we also have the tightening of the border with respect to immigration policy.

You know, we got illegal migrant crossings are down 88% year over year in February after being down 66% in January. Now,

Now, that's great politically. That's a political win for the Trump administration. But it's a loss on the side of the labor market and the labor supply growth that we were very much blessed with in the past several years. And so that's a headwind as well. And then finally, in Doge. Yeah. So, yeah, Doge, immigration, the policy uncertainty and the base effects. Oh, and by the way, this thing called tariffs, which Liberation Day is tomorrow.

Yes, liberation days is tomorrow. Darius, in terms of the job market effect, you said a 50 basis point shock to the unemployment rate. How much of that is going to come from, do you think, the federal workforce going down versus people that work at private companies that are contractors to the government, like some high profile consultants that have, you know...

high 90% of their revenues come from the government. I do think there is some could be some some waste there. So there, by the way, with the military, are you talking about, you know, like a million people who will exit the labor force as they let go? Maybe not. Exit the labor force. Don't start looking for jobs.

Yeah, our labor market is not as robust as it was from that perspective. I mean, if you look at the, you know, Jolt's total job openings are much lower than they used to be. You know, I should put this chart on the screen where we show Jolt's total job openings divided by total unemployed workers. You know, we peaked at it around, you know, to that ratio back in, you know, this March of 2022. We're down at

1.1 now, which is basically a pre-COVID trend type level. The highest rate is a below trend level of 3.7%. So we have a labor market that has been demonstrating this historically unusual phenomenon called labor hoarding. And I surmise that if the economy slows by 150 basis points in real GDP terms and corporate profits go from being up 7% year over year to maybe down 7% year over year,

labor hoarding might not be a phenomenon anymore. So I think we have to be aware of these risks. You know, we're not forecasting an actual recession, you know, the NBR type recession where you see a broad based decline in consumption, income, production, investment in the economy. I don't think that's the highest probability outcome because, again, we have positive catalysts immediately following this rate cuts, QE, tax cuts, deregulation. There's a lot of stuff that's going to happen on the positive side of this. But again,

I don't think we've reset the expectations bar low enough. People don't realize how far down we're going to go, which ultimately means that they don't understand how far up we're going to go on the other side of that. So I think there's going to be two pretty interesting trades here for investors to have to digest in 2025. And what about tariffs, which are set to come in tomorrow, April 2nd? How do you think they will impact growth, the economy and markets?

Yeah. So, I mean, obviously, tariffs are a stagflationary shock to GDP and positive shock to inflation. You know, I want to say Bloomberg Economics had their tariff model estimates out yesterday. They basically rely on the Fed's model that they published back in 2018. And, you know, if you take their maximalist tariff scenario, which I don't think is the highest probability outcome, I don't think they're going to lead with maximalist tariff policy.

It's one thing to do the art of the deal, but if you blow up the entire world of the economy, no one has an incentive to play it nice. So they're probably going to get something that's between minimalist and maximalist, maybe called mediumist tariff policy. But even if you just assume you have the maximum tariff policy,

You know, they are essentially forecasting a 400 basis point hit to real GDP over the course of two to three years. And I want to say it was like a 2.5% shock, positive shock to core PC over two to three years. Now, that's not going to happen. Those aren't both.

Trump's not going to take us to smooth holly, you know, certainly not in one fell swoop. And so it's very unlikely we see those types of hits. But could you see a hundred hundred fifty basis point hit the GDP growth over the course of the next couple of years? Could you see a positive hundred basis point shock to inflation over the next couple of years?

years, yeah, I think that's a reasonable probability. And one thing we'll argue with respect to our secular inflation model, which I believe I've unpacked with you several times over the past few years, our secular inflation model is consistently pointed to an equilibrium inflation rate in the US economy. If you can draw this on the screen, Jack, an equilibrium inflation rate in the US economy, that's somewhere in the high twos, low threes. Right now, it's currently projecting somewhere 2.9 to three. But over the course of the last few years, we refreshed this model

every time one of these major data points comes out for our clients and our Mac and Scott reports. But, you know, with the low end of the model, essentially, if you think about the equilibrium level of poor PC inflation in the US economy, which is this horizontal line, you know, we cycle around that horizontal line. But if you're saying it's low twos, high threes,

We're living in an economy that is obviously being dealt with some stagflationary pressure from a tariff perspective, and that obviously that's not even factored into this model. We have the decline in globalization that's contributing a positive, a meaningful inflationary impulse in terms of the sacred Libyan level of inflation. But one of the things I think is misunderstood with respect to tariffs is

you know tariff implementation that is it is a i don't believe they're inflationary i think it's smart the smart people i talk to don't believe they're inflationary either but they do cause a one-off shock to growth or sorry my apologies a one-off they do cause a one-off shot to grow they're just lower the one-off shock to inflation is higher but the problem with the way we've been rolling out tariffs this kind of slow bleed roll out uncertainty don't know if it's coming this month or that month or what the number is it's going to feel like inflation

which may inflate inflation expectations and ultimately cause companies to feel like they have more confidence to pass on price increases to consumers at worst possible time from a labor market income perspective. So again, that's also another headwind to growth, obviously, and acceleration and inflation is just a direct drag from real GDP growth. So this is a really negative setup.

And I would be much more bearish in terms of the time horizon if we didn't have the positive stuff on the other side of this. But again, I still think we have to do the first half of the V before we do the second half of the V. And we say it won't be inflationary. You mean the dictionary macroeconomic definition of inflation, a sustained rise in prices. But prices will go up. It will be a one-time shock.

You could just have a series of one time shocks based on the way he's rolling out President Trump's side to implement terror files.

And also you have a section 232, 308, all these different reviews that come and hit the tape at different times. Again, it's going to feel like a bunch of price hikes in succession. And if that takes a long period of time, you're also you're risking an increase in inflation expectations amongst consumers and businesses. Now, I'm not a big believer of the inflation expectations or the driver of inflation. I don't know where the heck the Fed got that.

from, you don't see that. I can't reproduce that empirically. And I obviously make thousands of charts for a living. But what I do believe in is that if you have a monetary impulse with the Fed, whose monetary policy has been consistently loose, certainly for the top part of the K and the large businesses, they might feel confident pushing new price increases because they're going to get margin pressure, right?

you know if you if you if you knew you're going to get margin pressure you know which is part of the reason we're getting margin pressure we have a slow down in nominal gdp growth you know we had productivity growth which is growing at a really robust rate up into the first half of last year that is now back to a kind of trend or below trend rate you got as a function of that partially unit labor cost inflation is back you know to a trend or slightly above trend rate so they're getting they're feeling the pinch from all sides in our opinion feeling that you can respond one of two ways when you feel the pinch as a business

You eat the margin, you eat it and take down your numbers, sales and earnings, or you try to pass it on to consumers. Some companies will feel confident passing on to consumers, particularly if they're in industries that are a little bit more robust from a growth perspective, but other companies will just eat it. And the key takeaway is that none of this is good, right? So we're talking about a slower, a faster slowdown in growth that ultimately drags down all sales and earnings expectations for the index and for the index constituents. Or we're talking about just more margin compression broadly that

that is totally not factored into consensus estimates for sales and earnings. And so until we see a reset for consensus estimates for sales and earnings, which, you know, actually I'll show you this chart. I find this chart to be absurd given everything I keep hearing. This chart is absurd. Put this on the screen, Jack. If you look at S&P 500, and again, this is the latest data. If you look at the bottom-up sales, so this is bottom-up index aggregate, you know, for all the S&P 500 constituents, and then S&P X-Tech, that's the light blue line,

at linear acceleration it projected sales growth all the way through q1 2026. they have earnings growth accelerating q2 and then hockey staking uh in the second half of the year i mean why aren't the the lines this way going down you know like to me based on everything i've been talking about for the past 30 40 minutes why aren't the lines going down wall street

Hey, Wall Street economists, Wall Street analysts, are you paying attention to anything the Trump administration is saying with respect to the period of adjustment, a little disturbance, detox period, economic restructuring from Biden's economy? These are all quotes that I'm using from the key members of the Trump administration that are signaling their intent to do exactly what we authored last fall, which has now become the rage on global Wall Street, which is catch and sink the economy so that we can ultimately transition from paradigm A

to paradigm b yeah it's it earnings expectations are still really high and it's funny that they actually accelerate you know in q2 q3 it should be safe that's

But the chart of how the tech bit Magnificent Seven's earnings, big tech's earnings, will grow higher than the rest of the market. That has been happening, as you know. Those companies, particularly Nvidia, has been remarkable. So yeah, how much do you think tariffs will impact, for example, Google, Microsoft and the rest of those companies? Is it possible that actual median business earnings will go way down? But

the Magnificent Seven, which make up so much of percentage of the S&P actually will be, you know, broadly fine. Yeah. Do you know what a problem guys? Yes. Yeah. I don't know what culture it comes from, but I all my Jewish friends practice it. And so I assume it's a Jewish thing. It's like basically martial arts of, you know, people who may not have the size and strength advantage, but it's very effective. It's incredibly effective. And so what I'm thinking with respect to the rest of the world, because obviously they have all the trade, you

you know, surpluses. We have the trade deficits. You know, we can't they can't out tariff us. You know, a trade war ends poorly for them. It ends poorly for everybody, by the way. It was a trade war that ended well. But a trade war ends more poorly for them than it will for us. So in my opinion, I think the number one thing they're going to do is hit us where it hurts. Going back to this Krav Maga dynamic, where can they hit us the most where it hurts?

It's the Mag7 type companies. We can start slapping penalties on them and restricting their access to markets and really doing it. Because again, we don't really sell anything. We don't make anything. We don't sell anything in America. We consume a lot. A lot of debt and deficit finance consumption.

but the reality is we don't really consume anything or sorry, we don't make anything. So they can't really hurt us from a trade policy perspective, at least not to the same degree. So in my opinion, their natural response, you know, the, the, the leg kick, the sweeps, the kick in the, you know what, that's going to be, let me go attack the max seven. Cause that's where we can hit them where it hurts in any sort of retaliation, retaliation type scenario. So I think you got to be concerned about, you know, their earnings outlooks, just given the share of their income that comes from the rest of the world. Now, again, I'm not making a,

a company call i don't know anything about exactly what segments or what geographic segments are driving each of these companies but i know that everyone owns them they still own a lot of them and the rest of the world might start playing a lot less nice with respect to their access to their markets and so again this is all stuff that is not you know the end of the world

It's just stuff that hasn't been appropriately factored into consensus sales estimate, GDP estimates. And then until it does, you still have market risk that's biased to the downside, irrespective of if you have a multi-week rally for this reason or that reason.

And Darius, tell me if you think there is a phenomenon of the following variety where actually you're and I agree with you that the logic of the Trump administration, you can be strong on terrorists because we are the giant trade deficit country and the rest of the world has massive trade surpluses with us. That actually gives us an advantage in trade. We can hurt them more than they can hurt us. Although I agree with you, we will be hurt and everyone will be hurt.

But that is, Darius, in the real world of cross-border transactions of goods. And in the opposite world, the reflection of that is the financial world. And it's the exact opposite. And if we are really tough on the rest of the world, we hurt them more than they hurt us economically. But financially, in terms of capital flows, the lower the trade surpluses is that China has, for example, the less...

It can have a capital deficit of exporting that capital to the rest of the world, to US treasuries, to S&P 500, private equity, real estate, private credit, and the like. So that actually, yes, we can hurt the rest of the world economically, but financially, it will be US financial assets that hurt the most.

Oh, my goodness, Jack. I want to go through the screen and give you a hug because you just pitched me something. I've been I've been making the rounds across global Wall Street trying to explain this dynamic to them. They get it. But I don't think people are aware of it ever changing. It's almost like, you know, like the the the.

the counterfactual, the next regime is so negative for them and their businesses that they can't, they won't even allow themselves to imagine it. So let me throw this chart on the screen. So this is, thank you for bringing that up because this to me is one of the most important charts in the world. It's one of the most important dynamics impacting global asset markets and ultimately the global economy. And to your point, if it reverses, you know,

one, it's not going to feel good, at least the early innings of that. And two, it's going to require a significant change in how investors think about asset allocation from a long-term perspective.

So this chart shows the net international investment position of the United States, the black line, the red and green bars are showing that on a quarterly basis. And what you see is that, you know, if you look at the last five years, just the last five years, we've more than doubled our net international investment deficit to $24 trillion. So what that means is that foreign creditors, foreign investors,

own a net $24 trillion of our assets. They own a gross much larger than I want to say, probably 50, 60 trillion, but the net is 24 trillion. And again, it doubled

in just five years. Now, again, this is a time series that starts in like 1975. And in the last five of those 50 plus years or whatever, 50 years, it doubled. That's obviously created a significant bull market in the US dollar in terms of chasing US assets. Obviously, our net international investment deficit to GDP ratio at 67% is out to lunch relative to the rest of the world. So

There is a lot of capital internationally that has been allocated to US assets, not just in the last five years, but obviously it's grown sixfold since 2009, chasing this US exceptionalism theme of which we've had a couple of factors that have really contributed to that relative to the rest of the world. Number one, we've talked about briefly,

which is this explosive growth in US debt and deficits relative to the West of the world. We've had a significant, just we will have that much more fiscal largesse in the US relative to China, relative to Europe, relative to all these major economies in the world, including Japan. And that's helped us grow at an above trend and level and with positive spreads relative to the rest of the world. But we've also had the development and proliferation of our tech industry

uh social media giants that now the ai trade things that europe and asia just don't have and certainly not to the same degree at least not yet and so you know when i think about you know kind of how this could all potentially play out from a longer term perspective you know if we're

doing things that piss people off internationally. Yes, we can't lose a trade war against our trade surplus, trade deficit trading partners. But what we can lose is a capital war. And I think we've already I do believe we're early innings in the loss of that capital war, which may deepen just given the fact that some of the pillars of U.S. exceptionalism are now starting to come unwound. If you look at the fiscal retrenchment and the slowdown in U.S. growth, the resulting slowdown of U.S. growth, though

Those things are combining to reduce the spread between U.S. growth relative to the rest of the world. But you also have the accelerated development of AI in China, which is making kind of the case for paying, I don't know, 50 times sales for a U.S. AI company less robust. It's a lot less of a robust trade. So I kind of land this plane in saying, hey, it wasn't just the rest of the world. It was everyone.

Everyone was max along the U.S. exceptionalism theme

not even two months ago at the all time high of the SPY in February. So what we do in our position model, we refresh this daily for our clients is we sort of look at the positioning cycle indicators that are sort of course correlated to the short term. That's kind of these are if I drew a line down here, it's everything to the left of there. And then when you look at the positioning cycle indicators that are more correlated to the long term, these are the ones that are more stable. They tend to build over the course of time as the market cycle builds, the rest are a little bit more cyclical.

The ones that are less sickle, the ones that have more doable performance, all of them, with the exception of the bond allocation survey, which is right on the threshold, were signaling or were breaching values that were consistent with major bull market peaks. You know, August 87, July 1990, July 98, March 2000, October 07, April 2011, September 2018, February 2020 and January 2022. You know, these were major bull market peaks before the market crashed after that.

And we were already at values at the all time high in the SPY for pretty much every single indicator that would sort of suggest that was a high probability of a crash from that starting point. And right now we are in that window. So we had international investors overly allocated to U.S. assets. We had U.S. investors overly allocated to U.S. assets. And ultimately this crash.

changing war order, this transition from paradigm A that we've been talking about to paradigm B that is starting to become consensus across global Wall Street, but certainly not fully factored into sales and earnings and GDP estimates. This transition

You know, it's just not going to be smooth when the starting point was everyone is on one side of the trade, period. And where is everyone on the side of the trade now, Darius? Yeah, it's certainly better than it was, but it's certainly not, you know, we're not signaling the same kind of prospective risk. But again, don't forget, we're still in the window.

Right. So if you look at where we are on this side of trade now, we've kind of taken a little bit off the boil. You only have two of these seven indicators that are currently flashing red, which is just a whole time high of a high risk of a crash from this starting point. So we've come off the boil, but we have not. You know, we're not down here in terms of signaling values that are consistent with major bear market troughs. You know, we are kind of signaling that for the AI bulls bear spread, but that's a tactical thing.

indicator. That could go back to signaling high risk of a crash within a matter of weeks or months. Again, these are the ones you got to focus on just based on our empirical observations and our statistical analysis. Those are the ones you have to focus on when you think about, okay, is the market going to crash or have a sustained bull market recovery? And right now, all we've done was take a little bit of steam off the pressure. But again, we were signaling high risk of a crash over the medium to long-term time horizon, which in our risk management of a clature is three to 12 months.

at the all-time high of the spot on February 19th. So until we get to February 19th, 2026, you know, we're still in that window, by the way. So I want investors to be aware that that was the precondition for a lot of this, you know, great institutional and economic change. And, you know, I just don't think it got priced in and in their 10% correction, period.

And then, so you share with us your macro thesis for why you are bearish. In terms of the technicals like momentum and trend, are they quite unfriendly to this market as well? And does that also inform your bearish view? Basically, the more the market goes down, the more it's likely to go down? Yeah. I mean, so as you know, we were very systematic with respect to our asset allocation and portfolio construction recommendations. In fact, I think we've been talking for almost 45 minutes now, and we haven't had any...

We haven't really talked to anything about how we're advising clients to be positioned right now. We look at our case portfolio construction process, which is the 60-30-10 trend following approach that we use to help retail clients stay on the right side of market risk. We've been 0% allocated to stocks since the beginning of March.

And so, you know, until the top down and bottom up risk management overlays that we feature in that system, you know, actually, can you put the system, can you put the chart in the screen? You know, until the top down and bottom up risk management overlays tell us to start buying stocks again, and they're incredibly effective at helping investors maximize upside capture bull markets. In fact,

We have thousands of clients around the world that were high-fiving each other for the past couple of years because they've been maximizing upside capture as opposed to the folks who came in way too late and bought the all-time highs in the MAG7 names a few months ago. Right now, if you look at where we are with KISS, we're at 67.5% cash. We're at 0% of our maximum exposure of 60% in stocks. We're at 100% of our maximum exposure of 30% in gold. And we're at 25%.

of our maximum exposure of 10% in Bitcoin. And so again, this is a completely systematic process. Nothing I say about growth, inflation, liquidity, monetary policy, fiscal policy, trade policy, regulatory policy, positioning, the weather. Nothing I say from a fundamental research standpoint impacts these allocations or impacts any of the signals that we send to our clients from a

portfolio construction asset allocation standpoint. Everything we do as it relates to staying on the right side of market risk is purely systematic. We found that that produces much superior results, not just across the global buy side, but for our clients as well. And so everything else we talk about on these podcasts, talking about growth, inflation, liquidity, policy, et cetera, that's just to help

investors kind of understand. When I talk about that stuff behind our paywall to our clients, I want them to understand what the full distribution of probable outcomes is so that when our system pivots, you have from being maxed on equities or some version of that for most of the past two years to 0% equities, they feel comfortable and confident to just passionately execute the change in their portfolio. We don't want them saying, hey, well, why is this happening? You make such a big dramatic pivot, you need to have investors feel confident enough to make that change. So

That's why we do fundamental research here at 42 Macro. And I recognize that's very different than how most people that may join your program or programs like this invest. But I'm totally fine with that because that's not how the world's best investors invest. The world's best investors invest a lot like what we're doing here, which is an infusion of fundamental and systematic and ultimately allowing that to guide their asset allocation and portfolio construction. And again, as I mentioned, it produces superior results. It's really, really, really, really effective.

And the systematic allocation, thank you for sharing that with us, that is informed by your outlooks on growth and inflation that we've talked about, right? No, not at all. No factor, nothing at all. So let me explain how our systematic process works from a... So there's two overlays in the system that determine the allocations. Keep the charts back up.

So there's two overlays in here. One, the top-down risk management overlay. We use our global macro risk matrix to incorporate volatility targeting to the strategy. So that's one of the hallmarks of what you see in institutional finance. Vol targeting is one of the great things that a lot of our top end hedge fund clients do to manage risk from a top-down perspective. And so how we infuse volatility targeting into our strategy, we do it through the lens of our global macro risk matrix.

our global macro risk matrix now cast the market regime. And so what the market regime is, is essentially how is the market behaving? Are we in Goldilocks, reflation, inflation, or deflation? Goldilocks is a risk-on regime with a disinflationary bias. Reflation is a risk-on regime with an inflationary bias. Inflation is a risk-off regime with an inflationary bias. And then obviously deflation is a

risk-off regime with the disinflationary bias. And so how we do that, we are now casting the 42 most important markets to pay attention to from an institutional macro management standpoint through the lens of what we call our volatility-adjusted momentum signal. I'll give you a quick snapshot of that when we get to the dynamic position as a component of that. But how this model works is we're scoring each of these markets through the lens of what the current signal is, but also relative to how the market is historically traded.

So, for example, the S&P 500 is bearish on the side of those volatility just momentum signal. That bearish signal is currently contributing one point to inflation and deflation, the two risk off regimes in the framework. Right now, gold is bullish, so it's contributing a point to Goldilocks reflation and inflation, which is the regimes that is historically performed well in.

and so what we do is we sum each of those you know regime signals on a daily frequency uh you know with data going back to jan 98 um to determine what the regime that has the highest sum and share of confirming markets are which is the bullish and bear signals in this model so you know what we found is that you know really over if you study it like a 3 5 10 trailing 20-year basis there's about

Two material pivots a year to actually have to risk manage in your portfolio. So if you're in a bull market, that's like going down into a correction and coming out of the correction. If you're in a bear market, that's like, you know, you know, going into a dead cat bounce and going back out of a significant debt cap bounce. And essentially what we're saying are what our empirical analysis determined is that roughly twice a year.

there's a big enough correction to you you know if you're in a bull market you're going to want to you know try to manage risk and and book some gains ahead of that correction so that you can free up some dry powder to buy the dip into or if there's a big enough recovery in the middle of a bear market you're going to want to participate in that certainly not remain short because you're going to you know wind up on on the beach as a buy sider so that's what that's how we infuse volatility targeting uh sorry i think uh but you know

what the markets tell you about the regime, inflation, reflation, deflation, Goldilocks, I was asking about that and that informing your asset allocation view. Correct. Yeah, yeah. So that's what I was asking about. Okay. Not like your personal views on tariffs. Yes.

Yeah, no. So I'm answering the question. Yeah, this this process, this market regime now casting process of which there's about two meaningful pivots a year is how we incorporate volatility targeting into the strategy that we just have this strategy, how we incorporate dynamic position sizing, which is another hallmark of institutional risk management into our strategy is through the lens of our volatility adjusted momentum signal.

And so you can sort of see what the VAM signal looks like, let's say for the S&P 500 here in this chart here. The green obviously is bullish, the orange is neutral, and then the red is bearish. As you can see, we've been kind of in a bearish VAMS condition really since the beginning of March. You can kind of see this for Bitcoin as well here in the chart on the left. And then you can see it for gold, which is the third feature in that system here in the chart on the right. So that we're essentially incorporating what I believe to be the two of the most important

you know, kind of institutional risk management frameworks into our system. You know, and again, what I think about growth, inflation, monetary policy, liquidity, et cetera, none of that has anything to do with this system. The system, if I'm accurate about forecasting growth, inflation, policy, liquidity, et cetera, will get us into the proper allocations faster than I'm capable of, you know, actually making those changes myself as

as a human investor the market is much smarter than darius dale and i think i'm pretty smart um and so what i found is that you know just listening to the market and respecting the evolution of the market regime respecting the evolution of those bam signals that we just highlighted you know if you just respect those things and dispassionately execute the you know two to three pivots a month that you kind of have to make to stay on the right side of market risk in this system

You're going to do much better than the average investor who's trying to piece all this stuff together with the fundamental research framework and trying to allocate assets that way. I think it's just much harder. And quite frankly, I think most people are not as good at it, including myself. I'm the worst investor when I use fundamental research to dictate my asset allocation portfolio construction than I am when I use systematic systems like volatility targeting and dynamic position sizing.

So momentum sounds like it's a key input into your asset allocation process. Yeah, this is a trend following process by nature. Absolutely. Absolutely.

And the trend is negative, it seems. For stocks. For gold, it's a raging bull trend. That's why it's maxed out. What's your view on bonds and fixed income? Yeah, bonds, like I said, you and I were talking in the preamble. Bonds are a really interesting asset class here because if you piece together all of our fundamental research views,

bonds should trade higher in price, lower in yield. And quite frankly, we're expecting that over the medium term. It's very likely that investors will start to seek the perceived safety of the treasury bonds in the economic outcome that we're kind of projecting over the next two to three quarters. So that seems to be a high probability outcome. However, when you get to the other side of that or towards the low end of the V, I think you're going to want to sell bonds perhaps permanently.

I'm not even advocating, as you can see in our case for construction, we don't even have a slot for bonds. It's 60% stocks maxed out when it's maxed out, 30% gold when it's maxed out, and 10% Bitcoin when it's maxed out. I think bonds are just a horribly mispriced asset class, Jack. Throw a couple slides on the screen for why we believe that.

When you look at term premium in the bond market, which is the excess return you get as an investor for taking a liquidity risk in the bond market, as opposed to rolling over short rates for that same time horizon, what we found is that there's still a significant gap between where term premium currently are relative to where they historically have been on a mean basis. We're a little bit over 100 basis points shy of the long run mean of term premium.

And I can make I'm going to make a credible case of why term premium probably should be wider than the long run mean shortly. However, but so even if you just, you know, just said, OK, we put a normal level of term premium in the bond market by subtracting the deviation from that mean you're talking about a 10 year treasury yield where the fair value is about five point two one percent versus the current value of about four point one five percent.

So in my opinion, there's more than 100 basis points of risk in the bond market just to get to a normal level of term premium, which again, I'm about to argue, it should be more than normal. So if you go and you look at one of the things we've been studying pretty closely is the evolution of the process by which Congress is using to extend and expand the Trump tax cuts. We have this kind of dual track.

budget resolution process happening right now. Ultimately, they're going to have to come together to figure out what reconciliation looks like to pass that into law. And they're just kind of, the House and Senate are pretty far apart in terms of what they want. The House kind of wants this kind of $4.5 trillion of tax cuts with a $2 trillion price tag for spending cuts. The Senate haven't really been very specific, but

it's pretty clear that they don't want as many spending cuts and are going to want more tax relief as well. And so you're talking about adding an additional potential $5 trillion of tax relief if you gave President Trump everything he's kind of campaigned about on the campaign trail. Now, he's not going to get everything he wants. That would be dead on arrival in terms of, hey, here's $9 trillion of tax relief, et cetera, to add to the U.S. public sector balance sheet. But, you know, if the Senate gets its way, which is, you know, kind of adopting this

current policy framework whereby it allows them to essentially mark the price of extending the trump tax cuts to zero and so which frees up you know essentially four and a half trillion dollars to to get these goodies uh in the package you're talking about a u.s debt to gp ratio that will go from 117 117 percent uh and 20 uh by 2034 marketable treasury debt to 130 percent uh

That's a problem. And so one of the reasons why we continue to believe in our kitchen sinking thesis, which again has become popular across global Wall Street now, is if this is the path that they ultimately choose to take,

You know, you're going to need to catch a sink the economy to get bond yields down, to get investors demand for these treasury securities much higher than it currently has been in order to kind of pass legislation like this without completely creating a list trust type moment in the U.S. treasury market. And then I'll end on this and, you know, because I do have to run for another meeting. But the.

This is one of the most important charts in the world. And in fact, Jack, I think I was on Real Vision with you in late 2021 when I said the Schoolyard Broly is going to come and take our lunch. Do you remember that? Yes, I do. This is that chart. And this is my last Real Vision video. Yeah.

Yeah. I said in like the fall of 2021, I said one of the things that people need to realize is that because you have all these different cohorts of investors that are now starting to divest their treasury exposure and will do so on an accelerated timeline pace over the coming quarters. What's ultimately going to happen is us, the private sector, we're going to get a bunch of bonds dumped in our balance sheet. And as a function, you're going to wind up with, you know, significant repricing of the treasury market check.

you're probably going to have a significant pricing of the equity market because you're changing the four term structure of interest rates check that also happened in 2022 as well so you know we're right as rain on that and this is where we wound up you know we're not the new the the private non-financial sector globally now owns 57 of the market for marketable u.s treasuries that is up 2 100 basis points from when you and i had the conversation back in late 2021 and so you know when i land the plane on bonds it's

If they're trying to extend and significantly expand the Trump tax cuts using the current policy framework that we just highlighted? I think you have to be very concerned about the Treasury market, which is currently mispriced from a term premium perspective, because ultimately it means you're talking about trillions more debt being added to the U.S. public sector balance sheet at a time where we're potentially spooking global capital allocators out of U.S. assets from a trade policy and geopolitical signaling perspective. So

That's my longer term risk from the bond market. But again, I think this is a multi-step trade. I still think yields will probably buy us lower alongside risk asset prices over the medium term as a function of the market kind of having to reset expectations from a growth and sales and earnings perspective. And ultimately we will get the Fed put strike price. The Fed will be doing QE

Trump put may be struck as well if they cut too much from a Doge perspective or if the trade policy is too onerous. But ultimately, you know, I still think I still think V is probably the most likely outcome down 20, maybe up 20. Exactly when that bottom of the nadir, the V is, if anybody gets on this program and tells you they know exactly when I would run for the hills. Darius, so.

the correlation between the debt outstanding and interest rates. 'Cause I go to 1980, less than a trillion dollars of debt,

the federal government. It's, as you know, exploded since then, 36 trillion. Have yields gone up? No, they've gone down. They've gone from like 15% to less than 1%, and now 4.6%. Japan, huge debt, huge debt to GDP, also very, very low. Like, are you telling me that if the 10-year's at 5% and we were in a

quasi recession, I mean, let's say inflation of 2% and growth of 2%, nominal growth. So real growth would be zero. You're saying you wouldn't be a buyer. You wouldn't back out the truck at 10 years trading well above nominal growth. Yeah. No, if you gave me those conditions, I'm not, I'm just, I don't accept those conditions to be persistent or even, or even accurate. So,

So one of the reasons we've seen bond yields track down for such a long period of time, despite growth growing higher, I think you have to reverse the order of operations. The reason debt has gone up so much is because we've had a structural down sift in the nominal growth rate of the economy.

partially because of demographics. If you look at the working age population growth over the past couple of decades, or sorry, over the past couple of generations, we went from 2% to 3% working age population growth annually to like 30 basis points. So that we've taken a lot of growth out of the economy from that perspective. We've seen a long-term secular decline in productivity growth from kind of 3% to 5% to

one to two percent that's taking some growth out of the economy we went from with the all-time highs and bond yields and interest rates back in late 70s early 80s that obviously coincided with you know the all-time highs in inflation at least on a in the modern u.s economy and we've obviously come down significant amount in that regard so we've had a lot of stuff

that was very bond positive over the last, you know, call it 30, 40, 50 years that has occurred that a lot of which, at least according to our second inflation model that we highlighted earlier, is moving in the wrong direction. And so when you think about it moving in the wrong direction, you have to be concerned about the supply and demand imbalance in the treasury market, particularly in the context of a Federal Reserve that has a stupid and I will say stupid

2% inflation target. I mean, they got it from a central banker in New Zealand. Has anyone ever been to New Zealand? Why are we dictating my U.S. monetary policy based on central bank views in New Zealand? It seems ridiculous to me. But because the Fed has a 2% inflation target and the 42 macro cycle inflation model continues to signal that the equilibrium rate of core PC inflation in the U.S. economy is high twos, low threes, that means the Fed has

as the lender of last resort to the treasury market, don't forget these guys have a six, $7 trillion balance sheet now won't be able to be in there buying the way they have been. And so this is a Fed, again, we continue to pound the table that the Fed's gotta revise its inflation target higher, which will ultimately allow them to expand their balance sheet the way they used to, which ultimately was contributory to that long-term broad basic client term premium. If they don't,

and they maintain this 2% inflation target, you're talking about a huge source of demand that is permanently removed from the bond market, while we could be also removing a huge source of demand in terms of global international creditors, in terms of what we talked about from a capital world perspective.

Those are two huge sources of demand that could potentially missing from the treasury market. At the same time, the Trump administration and the congressional Republicans are about to dump another four, minimum four and a half trillion, perhaps four and a half to $9 trillion of incremental debt on the public sector balance sheet in the middle of a fork turning, which by the way, it could also create some problems from a geopolitical perspective in terms of the demand for US treasury assets. So to me, the bond market is a big supply demand mismatch from a long-term perspective,

which is why we made the wise decision last year i want to say in october of last year we completely pivoted our kids portfolio construction process from bonds to gold and that's obviously worked wonders i want to say gold's probably up 15 since then bonds are probably flat if not down since then so that was the right call and we think that was the right call to set our clients up to have you know sustained success and investing our performance over the long term

Thanks for that. Darius, real quick. So do you expect the Federal Reserve to cut interest rates to zero in order to do quantitative easing? Because my understanding is that the Fed used QE as an extraordinary measure that it only does when interest rates are zero. No, the Fed's ambidextrous. The APAL Fed is very much ambidextrous. We saw that in 2019 when they started doing a balance sheet expansion again. In fact,

That seems like the most likely outcome, right? Imagine if we got low enough on growth, low enough on inflation, low enough on, you know, in terms of labor market dynamics. You know, if we had a big enough, sharp enough slowdown in the economy, you're talking about a Fed that will have

political air cover to ease the transition in terms of extending and expanding the Trump tax cuts for the Trump administration. If I was Jay Powell, I would take that political victory. If you get the economic conditions to support what Donald Trump is going to do, I would take it because you know you're going to get

get banged over the head if you don't. So if you're listening, Jay, that's what I would do. Well, I certainly think you're right there that the administration welcomes a dovish Fed. Darius, so glad we got a chance to speak to you. People can find you on Twitter at Darius Dale 42. Thanks. And until next time. Yeah, absolutely. 42 macro.com. I think that's the real place to find me. If you want to know, like, again, like, I'll take one final PSA.

I can talk for six hours about growth, inflation policy, monetary policy, liquidity, but none of that will have any bearing on what our clients feel in their portfolio from an asset allocation and portfolio construction perspective.

That is purely derived from our systematic institutional grade risk management processes. And those processes are much better than what the average investor can experience in their own portfolio. Certainly trying to trade all these, this wide distribution of probable economic outcomes. I can't even trade it. I've been doing, I'm on wall street for 16, 17 years meeting with the world's top hedge funds and institutional fund pension funds and insurance funds and, and also, and family endowments and family offices and the like, you know, this is the kind of conversations I have with them. And I still always point them to say, Hey,

This is how we want our clients to be positioned because I'm not smart enough to navigate this, all these cross currents, you know, just fundamental research alone. And so if you take any signal from that, it's probably that you probably aren't either. And there's no there's no harm in saying that it's OK to be humble as an investor. It's not OK to be arrogant. And that's the problem.

Definitely. Yeah. Humility is good investing as well as in life. People watching, please find us on YouTube. Like and subscribe. A shocking like 70% number of people who watch our stuff actually are not subscribed. So please do so so you can stay updated.

up to date with the channel. And then of course, we are on Apple Podcasts, Spotify, and anywhere else podcasts are found. So please leave a rating and a review if you feel so inclined. I actually believe we did get a review from someone who claimed to be a former Bank of Japan governor, who I looked on Wikipedia, passed away in 2012. So I think they were probably just a fan of the show who was just messing around.

Let me tell our audience, Team 42, can you support my man, Jack? He's done a tremendous amount for me and our business over the last few years since we launched our business back in 2021. So hop on, subscribe, give my man a review, retweet the episode when it comes out. Spread the love. The world needs more love. Let's hate more love. I agree. Thank you, Darius. And yeah, to the people of 42 Macro, I mean, the skipper said it. You got to listen to the skiff, right? All right. Until next time. Thank you. Just close this door.