GOLD PRICE Explosion, So What? (Uncut) 02-14-2025

GOLD PRICE Explosion, So What?! Looming MARKET CRASH | Darius Dale

And then for commodities, for gold, it’s 94%. I know that’s really important for your client base as well. And then for crypto, which I would argue is a commodity, it’s a digital commodity instead of a physical commodity, the upside capture ratio there is 108% and 136%.

So Dr. Mo’s incredibly good at making sure that you are there to participate in the bull markets for these assets and not there when the bull markets are not there. And so that obviously increases your risk adjusted returns as well because you’re not wearing the returns during these high volatility drawdowns. Hello, and welcome to Sora Financially, a channel where we discuss the macro to understand the micro.

My name is Kai Hoffman, I’m the EJR Mining Guy over on X, and of course, your host of this channel. And I’m looking forward to bringing back Darius Dale. He’s the founder and CEO over at 42Macro.

And he’s Mr. Positive, in my opinion. Like he’s somebody, he’s like when we had him on back in October, 2023, who was super excited, that was positive about the markets, things are trending up, the economy is doing well, we’re seeing wage growth. Don’t worry about it, don’t worry about the headlines.

And I have to say he was right. We talked about the time when the S&P 500 was around 4,100 points. We’re now at 6,000 points.

We’re actually almost higher than that. So we’re almost 50% higher. So I think there was some truth to what he was saying.

And we’re gonna get a temperature check from him now, like see where the markets are at, how well is the economy doing? I just listened to the Senate Banking Committee meeting here or testimony of Jerome Powell as well. So interesting tidbits, like what the perception is out there of the economy and what is going on. And I’m curious if that is mirrored by our guests today.

Before I switch over to Darius, hit that like and subscribe button, helps us out tremendously. It’s a free way to support this channel, means a lot to us and we thank you for that. Now, Darius, it is great to have you back on the program.

It’s good to see you. Thank you so much. It’s wonderful to be here, man.

I really appreciate that super kind introduction and I thank you so much for that. Well, you gotta give credit where credit is due, right? So we always come from the negative side. We’re always looking for markets to turn around and coming from the gold side, of course we’re always doom and gloom looking for crash scenarios, but we keep forgetting sometimes that there can be money made, that you can make money the other direction as well, right? So, and today’s like, let’s reassess that market again together.

Let’s get a temperature check from you, Darius, and maybe to kick us off and kick the conversation off, Darius. Like what’s your current assessment of the economy and the financial markets? Well, I’d say we’re still pretty bullish. Certainly cautiously optimistic.

If you go back to where we were in the fall of 2023, we were making the claim back then that this is as bullish as I’ve ever been. When you combine our quantitative risk management signals, as well as our fundamental research outlook, essentially coalescing on the fact that there’s unlikely to be a recession over a medium term time horizon. We had to get a lot of investors out of the hard landing camp and associated positioning into our soft landing end or no landing camp.

And in our opinion, we think that catalyzed significant performance in risk assets since then. And so again, appreciate the really warm introduction because the truth is the truth. In terms of where we are today, a lot of those positive economic dynamics are persistent, but they’re not getting better at the margins.

They’re now starting to get worse at the margins. So that’s a little bit less of a positive dynamic when we think about for performance of asset markets from here. But again, when we look at our risk core risk management signals, generally still quite bullish.

I don’t expect them to remain bullish throughout the course of the year. When we think about our fundamental outlook, we have some catalysts developing, if you will. Many of them are likely to kind of coincide around mid year that could potentially cause a significant correction or crash.

But up until then, we could continue to see markets generally trend higher, not grind higher as a function of some of that, a function of the persistency of the resilience of the economy. So we can kind of unpack any of that. Actually, before we do unpack any of that, I do think it’s always a good point to start with our fundamental research summary.

This is kind of where we’ve been from a thematic perspective. And some of these themes, kind of the net, when we formulate fundamental research themes, I think it’s important for your audience to understand this. When we come up with a fundamental research theme, it’s really just a function of where are we on the cycles that matter? Growth, inflation, monetary policy, fiscal policy, and liquidity.

Those are the five cycles that matter most to asset markets. And if we can identify where we are on those cycles, and more importantly, project with some reasonable accuracy, reasonable degree of confidence where we might be over a medium term time horizon, then we’ll have enough conviction to create a theme. So the first thing, these things are organized when we introduce them to our clients.

So we introduced our sticky inflation theme back in January of 2022. The key takeaway from that theme is that we don’t really think we’re, we don’t think inflation is going back to a durability of 2% without a recession. And so at some point, we’re gonna hit the bottom of the inflation sign curve and start to cycle higher here in 2025.

Our resilient economy theme, we authored that in September of 2022, back in the summer of 2022. And the real key takeaway from that theme is that the economy is resilient. There’s a lot of factors that are supporting the resiliency of the economy that remain persistent even to this day, two and a half years later.

And until those factors dissipate, we’re probably gonna have an economy that is a ways away or well off of a recession for the foreseeable future. The third thing that we have that is still active is our J1 to soft landing theme. We authored that at the beginning of November of 2023.

It’s essentially what a lot of the Senate Finance Committee is grilling Jay Powell about now, which is, look, man, you accomplished a soft landing. And our view on that was that, he was going to implement policy. The Fed were going to implement policies that were consistent with trying to achieve a soft landing.

We’ve seen a decent amount of that since then, and that remains ongoing, albeit to a much lesser degree than we had seen prior to the December 18th pivot. And then finally, the most new theme, the theme that may have the potential to cause the most problems here outside of our sticky inflation theme is our SSSS theme. And the key takeaway from our SSSS theme is that when you think about the President Trump’s economic agenda, there are five things that are sort of pretty front and center that they want to have accomplished.

And two of them are negative and three of them are positive. And the size, sequence, and scope of the negative relative to the positive could potentially cause problems in asset markets. So you think about the things that they want that are negative for the economy and asset markets, that’s tariffs and securing the border, which both represent negative supply shocks to the economy.

The things that they want that are positive at the margins, tax cuts, deregulation, accelerated energy production, those things represent positive supply shocks to the economy. And so ultimately the net results of all those policies are either gonna give you a stagflation as a net result, or we’re gonna get something that looks like Goldilocks. Our general take is that it’ll probably be Goldilocks, but the path to getting there from an asset market performance perspective could be wrought with some volatility just as a function of the sequence of it all.

So we’ll see. I’m just taking notes still here, Darius, just to make sure that we cover all the points and in particular, dive into some of those topics into a bit more detail. Why don’t we go through it top to bottom here? Let’s talk inflation, Darius.

You mentioned the 2% inflation target seems unreachable right now. We’re sitting at 2.9%. The trend is reversed again. The 2.9% inflation is ticking up higher.

I’m curious what your thoughts are on the inflation thematic. Like A, why is it ticking higher? Maybe we can discuss some of the fundamental reasons. Also, what is your outlook? You touched on tariffs.

Here’s what your thoughts are there. How are they factored in here? And what other factors are pulling on the inflation number right now? Yeah, absolutely. So I’ll start by saying that we performed a big deep dive empirical study on the business cycle, trying to identify which indicators were leading indicators, lagging indicators, so that we could better focus our daily research process on the indicators that actually matter, that are predictive.

And we learned a lot from that empirical deep dive study of which we analyzed all 12 of the post-war US business cycles, not in analog format, which is how most people analyze data, but we actually decided to look at it in terms of stack of the business cycles on top of each other to identify what the median path that each of these indicators takes, late in the business cycle, early in the business cycle, et cetera. And when it comes to being late in the business cycle, and I think we can all agree that we’re somewhere, I wouldn’t say at the end of the business cycle, but certainly later than earlier, just judging by the level of the unemployment rate and other economic statistics, valuations of the equity and credit market, et cetera. When you look at how the business cycles historically worked, there’s this kind of this real cadence to it.

And one of the key takeaways from that, understanding that cadence, is that inflation is the most lagging indicator of the business cycle. It is historically broken down on a median basis, 12 to 15 months after a recession has started, zero being the start of a recession in this analysis. And again, each of those plots in that chart on the left represents the median path that that particular indicator takes late in the business cycle, early into a recession, and well, and on the other side of a recession.

And so what we know is that, even from performing that analysis, we know that there’s never actually has not been an outcome in the US economy where inflation broke down durably below its trend prior to a recession. And so us having the view and really having authored the view going back to the summer of 2022, when everyone was concerned about a US recession, we authored the view that there was not going to be a recession anytime soon and that the US economy was resilient for a variety of reasons. That view still persists.

And so if you kind of layer that view along with our outlook for inflation, if we don’t have a recession over a medium term time horizon as a high probability event, we should not expect a durable breakdown below trend and inflation, which is what’s required to get inflation back to 2% on a long run mean basis. And so if you understand this, then we understand that what’s most likely to happen at some point in the US economy is that we are going to wind up with inflation that hits the bottom of its sine curve and actually starts to cycle higher again, which is exactly what our model is forecasting here going into 2025. We have core PC inflation bottoming at 1%, or it’s not bottoming at 1%, bottoming in Q1 rather, my apologies, bottoming in Q1 and then starting to meander higher from there throughout the course of the year.

Now, we’re not gonna have a significant acceleration sort of projected, but it is a meaningful and durable uptrend in inflation that is very counter to what a consensus is expecting, which is a persistent downtrend in inflation, in our opinion. If we’re right, the blue line is correct, which are our projections, then there’s some upside risk to bond yields and downside risk to equity valuations and credit valuations as a function of that over the medium term. Yeah, we’ll talk to bond yields and the bond market in a minute as well, because it’s quite interesting like how the development of the 10-year or the 10-year yield has been over the last, just a couple of months actually, how it’s been reacting to issues and to thematics coming out of the White House, right? So we’ll talk about the bond market here in a second, but you mentioned earlier that the economy is showing signs of still, like we’re still showing signs of resiliencies and you mentioned the factors, you only said factors and you didn’t really explain what those factors are.

When you look at, I just wanna break that down a little bit when you say that the economy is resilient, what are you looking at and what factors are actually resilient? And then maybe part B of the question we’ll get to, maybe I’ll ask it separately again, is like there are clouds starting to form on the horizon that you see coming up and we’ll get to those maybe as part B of the question, but for now, like what factors are showing some resiliency here? Yeah, well, so the economy at large is showing resiliency. We continue to see consumer spending tracking in an above trend rate of change. I wanna say in the most recent month in December, and if you look at the PC report, PC, personal consumption expenditures on a real basis were tracking north of 4% versus a pre-COVID trend of about two, two and a half percent.

So we are well north of pre-COVID trend type levels in consumer spending growth. And that makes sense because we continue to be slightly above trend on a real disposable personal income growth basis. And we’re well above trend in terms of nominal disposable personal income growth.

So the factors that are contributing that we identified back in the summer of 2022 that are contributing to the persistency of our resilient US economy theme are fivefold. Number one, we have a historically strong household sector balance sheet. You know, just a key highlight from our household balance sheet analysis, one of the most important things that we identified back then that is persistent is this high level of liquidity on household sector balance sheets.

Right now, we have about $9 trillion of cash on the household sector balance sheet when you combine checkable deposits of currency and money market fund exposure. That’s about 5% of total household assets. You got to go back to 1950 something to get to such a high share of liquidity on overall household sector balance sheet.

That $9 trillion is up from about $3.5 trillion prior to the pandemic. So, you know, almost a tripling, if you will, in terms of the amount of cash that’s on household sector balance sheet. So that’s obviously super supportive of a continuation of our resilient US economy theme.

We have similar dynamics on the corporate sector balance sheet. So I would argue the household sector balance sheet when you factor in cash and you factor in the amount of debt, the pace of debt, the terming out of debt, the debt service ratio, all the kind of factors that we look at in our balance sheet analysis, in our sectoral balance sheet analysis, those factors are about as good across the board as good as they’ve ever been with data going back to the 1940s. If you look at the corporate sector balance sheet, they’re not quite as good as they’ve ever been, but they’re close across a lot of those metrics.

And one metric where it certainly is about as good as it’s ever been is on the liquidity side. If you look at corporate cash, it’s about $3 trillion up from about a trillion and a half prior to the pandemic. That’s also 5% of corporate assets that you’ve got to go back to the mid 1950s to see such a high share of liquidity on the corporate side.

And corporate debt service ratios are not quite as low as the household debt service ratio, which is at an all-time low currently still. But corporate debt service ratio is much lower than it had been and kind of latent in other business cycles that are prior to recession. So that’s number two.

Three of the five would be, we have this income-driven business cycle where we’ve consistently seen income and GDP growth on a nominal basis outpace the growth of credit. And as a function of that, we continue to see a very limited exposure to the policy rate. As long as we have an income-driven business cycle, what the Fed does with the policy rate, which influences the credit cycle, has very limited influence over the broader U.S. business cycle.

Another way we can kind of track that, or two metrics we can track that with are, if you look at the share of private non-financial sector credit that’s on bank balance sheet, that’s somewhere around 30%. That which means the other 70% is coming from the capital markets, which obviously remain quite open and buoyant. Just pull up a chart of the S&P 500.

That’ll tell you everything you need to know about capital markets. So that’s number three. We have this income-driven business cycle that is reducing our exposure to the policy rate broadly.

And that’s something that is persistent. Number four, we’ve limited exposure to the manufacturing sector. And the fact that we have this limited exposure to the manufacturing sector, means it lowers the probability of having a recession in the U.S. economy, right? If you go back and you study the post-war U.S. business cycles, and we have 12 to study, there have been manufacturing, this manufacturing sector has accounted for a median 98% of net job losses during U.S. recessions, median.

So, I mean, that just tells you that whenever we have a recession in the U.S. economy, most of the decline in employment comes from the manufacturing sector. And now that we only have 10% of GDP and 14% of employment being in manufacturing, as opposed to, I wanna say, a high of around 25% and 50% respectively, going back to the 1940s, you just have less cyclicality in the U.S. economy. The services sector is not as cyclical.

It’s being driven by things like population growth and migration, as opposed to things that are much more cyclical, like interest rates and the dollar and all this other stuff. And then finally, the fifth dynamic that is persistent, that is supporting the persistency of our resilient U.S. economy theme is what we call our West Village Montauk Effect. You know, I don’t have time to write, you know, lengthy economics textbooks, but if I did, you know, I would go down in history as someone who discovered this thesis, which is because we have a high stock of savings on the household sector balance sheet, we have a low flow of savings in terms of the monthly, you know, kind of savings rate statistics.

Right now, I wanna say the personal savings rate declined in the most recent month to somewhere around three and a half-ish percent, which is well below the pre-COVID trend of about six plus percent. And the reason we have such a low savings rate, which other investors have mistakenly, you know, kind of characterized as the low-income consumer being tapped out, which by the way, I grew up very poor, on the bottom 1% of the income spectrum, we are always tapped out. Newsflash, Wall Street people, we’ve been tapped out the whole time.

So that’s a faulty analysis, to say the least. But the reason the West Village Montauk Effect has been so supportive for the U.S. economy is because there’s a very large stock of savings, large stock of cash that we’ve identified in the household sector balance sheet is allowing consumers to spend a greater share of their, you know, weekly or monthly income into the economy, because they don’t have to save as much because we have this gigantic stock of savings on an aggregate basis. And so final thing I’ll say is just when you analyze the economy, you’ve got to think about it in aggregate terms.

There’s been far too much analysis on the distributional effects of some of these dynamics. And the reality is the distributional stuff makes for good talking points. But if you want to get the economy and asset markets right, you’ve got to think about things in the aggregate.

Yeah, absolutely. There are some fantastic points you made there. Absolutely.

I want to follow up on a couple here, maybe just to clarify. The consumer spending, like there always needs to be confidence that the consumer is like, when I spend, I need to be able to find, be able to finance theoretically and afford it, right? Even if I take out a loan, I need to be able to pay back that loan. That would be the initial, like that’s how you’re supposed to do it, right? Like you buy a car, you know, of course you can’t put up 100 grand or whatever you spend on a car, 50 grand, 40 grand, it doesn’t matter what the price is.

You know, you’ll have to pay it back. That’s how you should go enter it. So you’ve got to have some confidence that you’re able to pay it back.

So that confidence seems to be pretty high. But I do have a couple of like detailed questions, meaning like where is that wage growth coming from? Like 5.7% is quite a bit. And I’m wondering if it’s just government spending, like is it productivity increases? Like where’s that wage growth coming from? Yeah, well, there’s been a lot of chatter around the, you know, the labor market as it relates to the sectoral composition of job growth.

We’ve obviously seen the share of jobs that are to government, that are from government employers and from, you know, kind of non-cyclical sectors like healthcare rise in recent quarters. In my opinion, part of the reason they’re rising is because we’re seeing a declining share of jobs in the more cyclical manufacturing sector, not necessarily a faster pace of growth in those particular sectors. But the reality is that it’s broad-based.

You know, when you look at something like the private sector employment cost index, you know, we accelerated to, I want to say around three and a half percent in the most recent quarter in Q4 from, you know, kind of a cyclical low of about 2.9%. And so both of those statistics are, you know, kind of well north of the kind of two-ish percent type trend level that we observed prior to the, you know, prior to the pandemic. You know, another, you know, we look at our, you know, when we study the jobs market, we pretty much only look at private sector dynamics in the jobs market because the public sector, public sector is helpful for understanding the overall spending impulse, but it’s not a meaningful share of the job market. And more importantly, I think as investors, we should care more about the private sector because it has a more direct influence on company earnings.

But when we look at private sector labor income growth, which is the frequency adjusted productization of private sector employment, private sector average hourly earnings and private sector average weekly hours, we actually accelerated to a, you know, well above trend rate of 6.6% in the most recent month. And so, you know, I want to say that’s about double what we used to track prior to COVID. So, you know, whether it’s, you know, we can, again, we can continue, we can argue about the distributional impacts of these statistics until the cows come home, but the reality is it won’t detract from the key takeaway, which is the labor market is incredibly resilient.

Consumers are generally a tremendous amount of income growth. We are in an income driven business cycle. So, you know, the level of the policy rate, the fact that the Fed policy is quote unquote restrictive, which we disagree with, but the fact that they think their policy is restrictive, it’s really not, it’s really not much of an influence on the broader economic activity.

Yeah, like talking about impact on economic activity, I think the interesting part, like I wrote down as well, we got to talk about the impact of higher interest rates on the economy and the economic activity based on what you’ve been saying. And I hope I’m summarizing this correctly. It’s like, there weren’t really any effects felt.

And you know, there’s always lag effects anyway. Like when you put in a higher rates or cut rates, it doesn’t happen. You don’t feel the effect tomorrow.

So I’m curious, like, what do you see? Like, and how do you track those impacts? Yeah, well, one of the reasons I don’t think we saw many effects is because the share of assets that the private sector owns, sorry, the ratio of private sector assets that reprice with the policy rate. So if you think about the amount of cash that we have and check with the pots, the currency and money market fund exposure, the share of that sum of assets, you know, is roughly on par with the share of liabilities that reprice the policy rate. So one of the metrics that we created to track this sort of a dynamic, you know, this is kind of a Warren Moser-esque dynamic, if you will, which is, okay, you know, are we actually getting more net income from the level of policy rate than we are paying? And I would say it’s getting pretty close to a one-to-one ratio.

In fact, that share, that ratio between those two household assets that reprice the policy rate relative to the household or to private sector liabilities that reprice the policy rate, it’s almost a one-to-one ratio now. It’s 0.94, 0.94. And so, you know, obviously there’s, again, the sectoral composition is in the distributional aspects of the data can be argued, but what can’t be argued is the fact that we’re receiving just as much cash from interest as we are paying it out at this point. And so I would argue that the level of policy rate from this starting point has kind of moved.

It will matter, and it certainly has, you know, it certainly is restrictive for certain borrowers. The more you are, the less assets you have, and the more you are feathered to the bank lending market for credit growth, which the, you know, median to lower income consumers are, and both of those satisfy both of those categories, and small businesses satisfy both of those categories as well. The more you’re in that cohort of economic agents, you’re going to be billing restrictive monetary policy, but that is offset, more than offset by people who aren’t in those categories and businesses that aren’t in those categories that are, you know, getting credit from the capital markets and have a lot of assets that are receiving interest.

I asked you earlier, like to clarify, like sort of the clouds that you start to see forming on the horizon here, like we need to talk about that. Like where are they coming from? You mentioned like tariffs and immigration could be like negative supply shocks to the economy here, but tariffs are difficult to grasp because they’re announced one day and then they’re taken off the table the next. Like how do you factor those into your model? And what are some of the like, let’s call them concrete indicators that you’re looking at, right? Like not just, you know, headline indicators.

Yeah, no, totally. To me, tariffs, particularly for the US economy, tariffs are a sideshow. We’re a relatively closed economy.

They’re very likely to get a lot of math on this. It’s just, they’re not big enough. Even the ones that, even the most draconian tariffs President Trump’s proposed are very unlikely to have a significant negative impact on the US economic activity.

It will be negative, but it won’t be as bad. It will be as bad as it would be for the rest of the world. Significantly worse for the rest of the world, just given that, you know, their exports as a share of GDP are much higher.

You know, we are kind of the end source of demand for a lot of their industries, right? You know, we’re not the end source of demand for a lot of our industries. We, you know, they are. Or sorry, we are the end source of demand for their interests.

But when it comes to tariffs, to me, the number one thing we need to be focused on as investors is not the impact that it’s gonna have on the US economy, which is less than the impact that it’ll have on the global economy. To me, it’s the impact that it’ll have on the US dollar. Because ultimately, historically, what we found is that tariffs have historically been offset in the currency market by the country that gets the tariff levied upon them.

You know, we’ve seen this in previous tariff episodes. If you go back to 2018, 2019, China, throughout that, you know, kind of US-China trade war, devalued the Chinese yuan by, I wanna say, about 12 or 13%. And the issue, as it relates to the broader strength of the US dollar, is you typically see sympathy devaluations when a country is big and is connected from a trade flows perspective as China devalues its currency.

So we saw, if you look at it on a DXY-weighted basis, the kind of inverse dollar index, if you will, like the euro, the British pound, Japanese yen, et cetera, Swiss franc, Canadian dollar, those countries on a DXY-weighted basis depreciated their currencies the same percentage that China devalued the yuan in that particular US-China trade war back in 2018, 2019. And the reason this is important, throwing up a slide on the screen here, you know, when we study global liquidity through the lens of our global liquidity proxy, which is the aggregated central bank balance sheet from the 10 major economies and the 10 largest economies in the world, their global broad, their broad money supply and their fiat FX reserves, you know, that metric, that R42 macro global liquidity proxy has been very much inversely correlated to the US dollar and has been very inversely correlated to currency volatility, which tends to rise whenever you have an appreciating US dollar. And so, in our opinion, if we got a significant, you know, kind of advent of fresh tariffs, like, you know, right now we’ve seen, you know, kind of President Trump paying, you know, kind of hot potato or double dutch with these tariff announcements, but the reality is we’ve been on tape for months now saying that because they’re likely to use the reconciliation process here to extend and expand the Trump tax cuts, they’re going to have to find revenue offsets and expenditure reduction offsets to offset the deficit impact that expanding, expanding the Trump tax cuts would have relative to the baseline of current law.

And so, you’re talking about a situation where you could have a significant dollar strength, you know, from this point forward, obviously we’ve seen a lot priced in in terms of anticipating tariffs in the currency market, but I don’t think we, I don’t think the full impact of it is yet to be felt because we probably haven’t seen, you know, trying to meaningfully devalue the yuan in anticipation of, or in response to tariffs yet. And as a function of that, we have not seen those sympathy devaluations that we were warning about. And so if we did see all that, at some point we’re talking about a significant reduction in global liquidity.

And the reason that’s a headwind for markets is because, you know, not the reason it’s a headwind for markets, we know global liquidity, a significant reduction in global liquidity would be a headwind for markets. We can just see this, right? Global liquidity is a key driver of asset markets. This chart shows Black Line as the year-over-year rate of change of our global liquidity proxy.

Blue line in this chart is global equity market cap. The Bitcoin orange line in this chart is the Bitcoin market cap on a year-over-year rate of change basis. And as you can see, the blue line is highly correlated to the Black Line in the chart on the left, and the Black Line is highly correlated to the Bitcoin orange line in the chart on the right.

So we know that if we have anything like significant dollar strength weighing on global liquidity we’re talking about a significant decline in global liquidity that may ultimately cause a significant decline in broader asset markets. And that’s kind of the key risk that we see with tariffs. And in my opinion, that’s something that we’re gonna have to deal with at some point in 2025, likely in and around mid-year.

Yeah. You know, the US dollar, I think is key in a lot of things. And the question is like, how strong do you want the dollar to get the second you announce a tariff, a new tariff, the Dixie ticks up? So you have to be very careful because you don’t want the dollar to get too strong because then nobody will buy your exports.

Because they can’t afford it. So the question is like, where do you find that balance? Like, do you have an idea for us? There is like, where is that fine line? Like, where is the balance? Cause I think actually Trump wants a weaker dollar so you can export more and close that import export gap here. Yeah, in my opinion, I don’t think there is a equilibrium line or a threshold line to me.

I just think it’s the momentum in these time series that really matters. Eventually you gather enough momentum to change, you know, investor positioning, right? You know, liquidity declines enough over a long enough period of time, you’re going to cost investor positioning to change. And that, in my opinion, is what really matters.

So I, you know, if there is a magic line in the line, I’m not smart enough to determine that like Fante. But I do know that if we move for a long enough period of time in the wrong direction, some of these key metrics like liquidity, that’s when you start to see it unwind of credit bullish positioning. And on credit bullish positioning, Kai, I think it’s important to kind of highlight our positioning model, which has been signaling some credit bullish positioning in recent months.

If you look at, so how our positioning model works is we’re tracking, I want to say, yeah, tracking about 15 different time series, long-term time series that have, you know, daily data going back multiple economic and market cycles. We’re tracking them on a percentile basis relative to how those time series scored these major bull market peaks or these major bear market drops. And how the model works is if, you know, we have enough, you know, kind of, we have enough signals of essentially crossing, breaching major bull market peak type levels or enough signals breaching major bear market drop type levels for those respective indicators, then we’ll say, hey, you know, we’re due for a significant reversal, significant reversal or significant unwind of crowded bullish or bearish positioning.

And then a secondary sort of consideration for this model is, you know, there are indicators that move, that are more volatile and tend to unwind, build and unwind faster than others. And those ones to the left there, we tend to correlate those positioning indicators with what’s likely to happen over a short to medium term time rise in asset markets. So let’s say over the next one, three months, these indicators, they’re more stable, they’re more sticky, they’re less volatile.

They tend to build and build and build up until you get to a critical level that is historically consistent with major bear market peaks or drops. And when you look at those indicators, most of them are already breaching levels that are consistent with these major bull market peaks, you know, August 87, July 1990, July 98, March of 2000, October of 07, April of 2011, September of 2018, February 2020, and January of 2022. The AI stock allocation is already breaching its median value that has historically been observed with those major bull market peaks.

The AI bond allocation has not breached to the downside, but it almost is, basically right there. AI cash allocation surveys already breached the downside, that the median value that’s observed with these major bull market peaks. We’re not quite there in terms of realized volatility as a proxy for systematic fund exposure, but we’re about, we’re getting there.

If you look at implied ball correlations as a proxy for market neutral hedge fund exposure, we’re in the second percentile. So market neutral hedge funds have about as much, you know, gross market exposure as they possibly can have at this juncture. The S&P 100 valuations in the 96th percentile also breaching the median value we’ve historically observed at these major bull market peaks.

And then investment-grade credit spreads, their third percentile breaching the median value that we’ve historically observed at these major bull market peaks. So the key takeaway is that there’s a lot of crowded structural bullish positioning in the market by, you know, the kind of the slower moving participants in the market. And, you know, you start to see things like anything that could potentially cause, you know, some of these key drivers of asset markets like global liquidity to decline significantly and persistently could really start to cause this crowd of bullish positioning to unwind.

So, you know, going back to your original question, when I think about tariffs, to me, it’s about how strong is the dollar going to get? How much is that going to weigh on liquidity and how much is a decline in liquidity going to cause the crowd of bullish positioning to unwind? That, in my opinion, is a reasonable probability risk, you know, kind of starting in Q2 or Q3 of this year. Like you’re talking about asset class that you just touched on, like we’ve talked about the US dollar, we touched on the bond market a little bit, but we need to talk commodities as well. How are they impacted? For example, I’m looking at the copper price right now.

And, you know, since the start of the year, copper has shot up 60 cents from $4 to $4.60 a pound. Make sense of it a little bit, because especially when I’m looking at gold, we’re trading at $2,900 right now an ounce, $2,905 to be exact, while the Dixie’s at $108, $109. So fairly strong, and they’ve been going up together more or less.

And I’m curious what your thoughts are there and how are they impacting each other these days? Yeah, 100%. You know, so historically, commodities have been inversely correlated to the US dollar. That’s something we can very clearly observe in statistical analysis.

However, they’re not always inversely correlated to the US dollar. And so, you know, in my opinion, I think what we’ve seen certainly in this sort of post-COVID period is we’ve seen supply dynamics really have a significant influence on commodity markets, say like crude oil. We’ve seen demand dynamics have a significant influence over commodity markets, say like for copper and the AI trade, et cetera.

And so I think one of the things we have to do as investors is first and foremost, figure out what’s driving a particular commodity market or a segment of the commodity market. Like, you know, what is the, is it supply or demand right now? And it is not always static, as you know, Kai. Sometimes the market really cares about supply dynamics because there’s, you know, there’s some significant variance anticipated there or the market really cares about demand dynamics because there’s some significant, you know, stimulus or something or contraction anticipated there.

You know, when it comes to each of these individual commodities, you know, we tend to think about commodities as an, we think about every asset class as a momentum asset class, by the way. Our entire risk management process is designed to identify inflections in broad market momentum and then using the inflections in, you know, sort of momentum at the factor level to actually generate, you know, investment recommendations at the asset allocation and portfolio construction level. And so looking at our latest refresh of our Dr. Mo model here on slide 14, we see that Dr. Mo is currently recommending a long max position in ag right now.

And part of the reason for that, the reason for that is we’re in a risk on reflation market regime in which ag has historically performed well and ag itself has bullish from the perspective of our volatility, just a momentum signal. So it’s its own individual bullish momentum condition is, you know, properly coinciding with the current market regime in which you should be long ag to begin with. And so right now Dr. Mo is suggesting you should be long the max position in ag commodities.

It’s suggesting you should be long the half position in base metals and industrial commodities because those are only neutral from the perspective of their own individual band signal, even though you generally would actually would wanna be long those things in a reflation market regime. Broad commodity exposure, they actually broke out today to a long max position. They were neutral.

So they were a long half position, but today they broke out to a long max position. So investors should be aware of that. And then what else in the commodities? Crude oil is currently a long half position, but I got to imagine that they’re probably on the precipice of breaking out to a bullish bias there.

So, you know, I think there’s so much going on in the commodity market. I don’t wanna pretend like I have all the answers on the supply and demand fundamental side, but I think, you know, even trying to stay abreast of the supply demand fundamentals for all the individual 19 components in the CRB index, to me, that’s a full-time job that most people are probably gonna do poorly. So I would, in my opinion, I think you would do well to rely on more quantitatively oriented signals like this.

And we know Dr. Mo works, right? You know, you look at our back tests on commodities, if 237% of the cumulative performance of the CRB index is January 1998, it’s come when Dr. Mo was telling our clients to be long commodities. So for example, if you would have made, let’s say the CRB index was up 100 percentage points from January 1998 to now, obviously that’s wrong, but like just use it as a stylized example, you would have made 237%, just being long commodities, the CRB index, whenever Dr. Mo was telling you to be long, that upside capture ratio is about 157%. And then for commodities, or for gold, it’s 94%.

I know that’s really important for your client base as well. And then for crypto, which I would argue is a commodity, it’s a digital commodity instead of a physical commodity, the upside capture ratio there is 108% and 136%. So Dr. Mo is incredibly good at making sure that you are there to participate in the bull markets for these assets, you know, and not there when the bull markets are not there.

And so that obviously increases your risk adjusted returns as well, because you’re not wearing the returns, you know, during these high volatility drawdowns. If you were to go back to the commodity slide that you showed us that you circled a few things, because you didn’t touch on gold. And I just quickly want to follow up on, not this one.

Oh, Dr. Mo. Yeah, the overview here, that one, there you go. Because you didn’t touch on gold and it says long max position.

Can you explain to me what that means? And why is the RSI in red? Yeah, well, the RSI is in red because gold is wickedly overbought. So in this table, it just flags RSIs that are above 75 on the overbought side and below 30 on the over, no, sorry, below 25 on the oversold side. And so it’s just really trying to help clients identify, okay, even though Dr. Mo suggests this is a, you want to have a long max position, if you’re brand new to 42 macro today, and you’ve never seen the fact that we’ve had a long max position in gold for the better part of a year and a half now, that you would have, this might not be the best day to go long max position.

Maybe you want to leg into that. So that’s what the RSI indication, that’s what the RSI signals is for. But the broad key takeaway is that, if you are long these assets, when you’re supposed to be long these assets, and emphasis on the word when, you’re supposed to be long these assets, you can maximize your returns in these asset classes without having to ever truly understand supply and demand dynamics to the same degree that the folks who are, a lot of the folks who are operating in these markets understand the supply and demand dynamics.

I think it’s important to understand the supply and demand dynamics, because they help you decide, okay, do I want to be long ag, base metals, commodities, crude oil, or gold? How do you determine between those particular factors? But the real key takeaway is that the broad risk management signal of when to be long and when not to be long is a much more thoughtful and much more lucrative way to approach asset markets than just saying, oh, the supply and demand dynamics or the fundamentals are bullish or bearish. Because the fundamentals, again, they can help you determine which assets you like versus other assets that you may not like, but they’re not going to be, fundamental research, fundamental analysis is not helpful for market timing. If your goal is to have good market timing, which we’ve shown is possible if you have the right signals and the right tools, good market timing increases your nominal returns, but it also increases your risk-adjusted returns.

And that’s what we do, that’s why when we do what we do here at Fortitude Macro. No, fantastic. Darius, really appreciate you clarifying that.

And maybe I want to come back to one last, maybe theoretical question. We briefly touched on it, but we haven’t covered the topic yet. It’s really like the role of Jerome Powell and the Fed and whether they’ve actually done a good job managing whatever it is actually that we’re steering through right now.

It’s really difficult to even put a finger on it. Like I don’t want to do Jerome Powell’s job quite honestly, just being sitting there in the chair getting grilled twice a year by the Senate Banking Committee. It doesn’t sound like fun at all.

It doesn’t look like fun at all either, but they were quite chummy apparently, like from what I’ve seen, like I haven’t paid full attention to it, but I’ve written down one thing that Mr. Senator Kennedy said, I forgot which party he’s from and what state he’s from, but he said, yeah, like we’ve experienced a soft landing and he called it a soft landing and he’s giving it Jerome Powell a lot of credit for it and he’s asking why Jerome Powell hasn’t taken any credit for it. So the question is like on a theoretical set, A, has Jerome Powell done a good job? B, like you touched on it very early on in our conversation, like the soft landing scenarios, like are we in a soft landing scenario? And do you agree with the actions that Jerome Powell and the Fed have taken? Well, again, do you agree with the actions depends on what is the goal. If the goal is to engineer a soft landing, then yeah, I think they’ve done a masterful job of trying to engineer a soft landing.

Now the reality is this soft landing maybe is according to what we talked about earlier in the context of our staking inflation fee, a soft landing is going to, over the course of the next couple of quarters, in our opinion, based on our analysis, going to morph into a no landing. And that could be an issue for asset markets in the context of what’s currently priced, but that’s either here or there. But if the goal was to engineer a soft landing, then they’ve done a marvelous job of engineering a soft landing.

We’ve got employment growth, kind of nominal income growth, it’s tracking at an above trend level. We’ve got consumer spending growth tracking at an above trend level. We have GDP growth up until Q4, we’re tracking at an above trend level.

And we’ve had inflation persistently decelerating on a trend basis since mid-2022. That’s about as good as it can get. So I mean, yeah, you should take a victory lap for achieving those outcomes.

Now, the problem with it is that the interpretation of what’s actually happening is always changing, right? The more we go forward in time, we can move from having a soft landing to a no landing. So when I think about kind of the Fed’s influence on broader asset markets in the economy, I think it’s important to show a few slides here. So I’ll start by saying, the Fed, they’ve done a great job of convincing cohorts of market participants that their policy is restrictive.

And the fact that they’ve done a great job of that is really in our opinion, because that was untrue, the fact that we’ve had businesses and investors both have to come from the hard landing camp to the no soft landing end or no landing camp is what catalyzed incremental growth in the economy, incremental growth and appreciation in broader asset markets. In fact, this is the Fed kind of bearing its head in the sand. You can kind of say like, hey, this is the economy and this is asset markets.

They’ve been broadly ignoring the fact that the economy in aggregate and asset markets in aggregate have been very much rejecting of their view that policy is restrictive. In fact, if you think about where the Fed is right now, the Fed still thinks the neutral rate is about 3% compared to a Fed funds rate of about four and a half percent. And so with a neutral rate down at 3% and the Fed funds rate at four and a half, this is a federal reserve that even today thinks that its policy is still 150 basis points above neutral.

And so they’ve had this bias to ease, they’ve pushed through 100 basis points of rate cuts starting in September, despite the fact that inflation was above target, well above target in many cases. And so in our opinion, we think that it was indicative of the asymmetrically dovish reaction function that we identified at the beginning of November of 2023. We said, hey, it looks like they wanna, they’re gonna have an asymmetric response to incoming growth and inflation debt.

If labor market deteriorates at all, they’re gonna be cutting and easing. But if inflation does not, if inflation stops going down, they’re probably not gonna be hiking. And, you know, kind of identifying that condition, you know, allowed us to generate that theme, which was part and parcel to one of the reasons why, you know, our clients did such a good job of taking advantage of the rangeable markets we’ve seen since going back to the fall of 2023.

And then the final thing I’ll say on, with respect to the Fed’s policy, this chart here shows the Fed funds rate, the top panel shows the Fed funds rate minus the baseline Taylor rule estimate. So that’s the spread area chart there. We never got in this particular business cycle, in this tightening cycle to a positive value, which means according to the Taylor rule, the Fed never got the policy rate to a restrictive setting.

Now, that’s pretty remarkable in the context of them having A, already cut 100 basis points from the peak rate, and more importantly, cutting with core PC inflation, you know, 50 to 100 plus basis points above their 2% target. So, you know, if I showed you one chart or one panel from one chart to tell you everything you need to know about the Fed, it’s probably this, is that these guys are unwilling to do what it takes to get inflation durably back to 2%, which is in our opinion, that goes back to what I said at the beginning of this conversation is, I’m not sure that that’s what they want, right? In order to get inflation durably back to 2%, if the underlying equilibrium rate of inflation is higher than 2%, you’re going to have to push the economy into recession. And I don’t think Jay Powell wants a recession.

I don’t think even members of the FOMC want a recession. And so ultimately what they’re doing is kind of forcing us as consumers, businesses, and investors to accept a higher trend level of inflation, which, you know, all things being equal, keeps the economy, you know, operating, keeps the financial markets, you know, valuations continue to expand. And ultimately, you know, it just keeps the system in the game going for longer than, you know, a lot of their poor purveyors are allowed to communicate.

Yeah. No, Darius, my camera just died real quick. I’ll restart it, but I’ll ask my question from the off here.

And it’s my last question to you as well, Darius. But if you were the Fed chair, March 18th, you wouldn’t have to consult with any of the other Fed members. You wouldn’t have to, you know, report to like Senate committee or anything.

Would you, what would Darius do? Like if you were the Fed chair, March 18th, would you hike, stay neutral, or would you cut? So Darius Dale, I’ve been in the view, since we authored our sticky inflation thing back in September or January of 2022, we’ve been on the view that the Fed needs to increase its inflation target. And I can explain why we think the Fed needs to increase its inflation target, but increasing its inflation target will ultimately allow the economy to, you know, grow for a longer period of time. It’ll allow asset markets to appreciate for a longer period of time.

And, you know, what we found through, you know, distributional studies like the New York Fed has done a study, Chicago Fed has done a study. You know, I want to say the Federal Reserve Bank of San Francisco has done a study. What we found is that the longer the business cycles take, the more the gains start to accrue to the lower income parts of society, to people who have historically been disadvantaged, like, you know, African-Americans, you know, Latino Americans, women, you know, you tend to see more inclusive growth the longer business cycles last.

And so ultimately understanding that the, at least according to our model, that the equilibrium rate of core PC inflation is now in the high twos and low threes. If you’re trying to guide us and implement policy to get us back durably to 2%, you’re ultimately going to wind up with shorter business cycles than you otherwise should have if your goal was to promote maximum employment, not just employment amongst certain people, but maximum employment and maximum wage inflation for the broader, you know, kind of US population. So let me explain this chart real quick.

Oh, this table. This table is our secular inflation model. We introduced this in January of 2022 when we offered the theme and the key takeaway from the analysis is that the equilibrium inflation rate of core PC inflation is in the high twos, low threes.

And how we determine that is that we study the movement of these key indicators of core PC inflation, at least according to our analysis and other reviewing other academic literature. And so we look at it on a Delta Justice E-score basis relative to the prior regime. And so we can effectively try and identify, okay, how much have these indicators changed structurally, not necessarily significantly, but like, are they just significantly, are we in a new area code as it relates to the values of these indicators? And if you look at the model on an unweighted basis, it’s suggesting that the equilibrium rate of core PC inflation, which would be the horizontal line in this stylized diagram is something around 2.9%. On a weighted basis, based on our analysis of the indicators that, you know, probably have more salience in this particular business cycle, on a weighted basis is the horizontal line there in the stylized diagram somewhere around 3.1%. You know, we refresh this model every single month since we introduced it back in January of 2022 for our clients.

And, you know, on the low end, we’ve seen probably somewhere around 2.6, 2.7%. On the high end, we’ve seen somewhere around 3.2%, 3.3%. So we know, even if it’s might not be 2.9 or 3.1, it’s somewhere in the high twos or low threes, especially when you look at on a weighted basis, things like fiscal policy. If you look at the latest fiscal balance and GDP ratio of minus 6.9%, you know, that’s essentially a record non-war, non-recession budget deficit. It’s contributing, you know, some positive uplift to the equilibrium rate of core PC inflation.

De-globalization, if you look at the decline in the imports and goods and services, the percent of GDP is only 14%. It’s contributing some, you know, structural uplift in that equilibrium rate of core PC inflation. If you look at the shortfall in housing supply, if you look at the household formation divided by its existing home inventory ratio, the latest values, 0.3 or 1.3, you know, it’s contributing a tremendous amount of inflation to the equilibrium inflation rate, core PC inflation rate.

That 1.3 is basically double where it used to trim prior to the pandemic. You know, we just have a structural shortage of housing now in the U.S. economy relative to the growth rate of household formation. If you look at productivity and technology, these are factors that are offsetting the hawkish influence that most of the changes in the economy have been contributing to this equilibrium level of core PC inflation.

Productivity growth has accelerated and we’re now contributing, you know, we should be having, it’s having a disinflationary impact. The proliferation of technology throughout the economy is having a significant disinflationary impact on the equilibrium level of core PC inflation. And then finally, wages are currently tracking at 3.8% on a year-over-year basis in terms of the private employment cost index.

That’s contributing a significant amount of hawkish influence over the equilibrium rate of core PC inflation. And then lastly, we talked about earlier the West Village Montauk effect. If you look at checkable deposits and currency as a percent of total household assets, that’s about 2%.

That 2% is about as high as we’ve ever seen and contributing a, you know, just a gargantuan amount of underlying inflation pressure in the U.S. economy. I mean, this is money that can be spent into the economy at any point in time, just based on consumer confidence. So when we net all this stuff out, again, we’re talking about an equilibrium level of core PC inflation that is in the high twos and low threes.

And if you’re trying to get us back to two, which I don’t think they’re trying to do, by the way, I think they already positively revised their inflation target. I mean, telling us you’re not gonna get back to 2% inflation until like 2027 or 2028. In 2024, in my opinion, is a very clear indication that they don’t really care about 2% inflation for anyone who’s like me, who’s paying attention.

If you’re paying attention, you know that the Fed doesn’t care about 2% inflation because they’re not even trying to get us there. But if they do start to try to get us there, if that is their goal, then you’re talking about economy that has to run much tighter monetary policy consistently and durably, not just in this business cycle, but in subsequent business cycles, because the underlying equilibrium level of core PC inflation is now much higher. But if you just accept the fact that it’s much higher because of dynamics that the Fed has no control over for the most part, they have almost no control over most of these dynamics, just accept the fact that we have more of a hotter economy, then you can kind of let the economy run a little bit hotter, run a little bit looser monetary policy than you otherwise would if you had a 2% inflation target.

And ultimately you start to see the benefits of a durable business cycle where they start to accrue to the people who’ve been kind of on the outside looking in for a long period of time. Yeah, no, really appreciate it, Darryl. If I was the Fed chair.

Yeah, no, okay, no, I really appreciate that, Darryl. It’s like, you know, there’s so much going on, of course, so many factors to consider. It’s usually not a simple answer, of course.

So I do get that. Darryl, it’s like, you know, we do have to make a cut here. We still have a lot of topics that, you know, we should have touched on.

We have barely touched on the bond market, for example, right, and how that is developing. But we do have to make a cut here because I know you have a card off, I have a hard cut off as well. But Darryl, super insightful.

Like where can we send our viewers? Where can they find more of your work? Of course, man, 42macro.com can check us out. Obviously that was only a tip of the spear in terms of the analysis and the solutions that we provide to our clients. So hopefully you guys can come check us out if you wanna get our views on the bond market and things like that.

Absolutely, Darryl, really appreciate your time. Thank you so much. It’s great to catch up with you again.

We’ll have to get you back on very soon again and see if those clouds are forming and whether they turn into thunderstorm clouds or whatever you wanna call it. Like I’m not an expert. I’m not a meteorologist.

So meteorologist, that’s the word. So Darryl, thank you so much. And to everybody else, thank you so much for tuning in here to Soar Financially.

I hope you enjoyed this conversation with Darryl Dale. I have tremendously appreciated his time and his knowledge, what he’s been sharing with us and what kind of indicators he’s looking at. Very data-driven approach.

So like you said last time, forget about the headlines. Look at the data. And the data is telling us that the economy is resilient.

We’re doing okay. And that trend will continue in the foreseeable future, meaning for me, the next six months. I don’t dare looking any further ahead.

It’s almost impossible to make any predictions these days, actually until tomorrow. So we’ll have to take that into consideration. But if you haven’t done so, subscribe to our channel.

We tremendously appreciate it. We have some phenomenal guests coming up in the next 30 days. We’re doing a bit of a YouTube challenge.

It’s the first time I’m mentioning it, meaning we’ll have 30 videos coming out in the next 30 days starting February 17th. So make sure to follow us for that and don’t miss a single upload by even hitting that notification button. So thank you so much for tuning in.

We’ll be back with lots more. Thank you.