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- [00:01]
Darius Dale
This episode is brought to you by Google Chrome. You think you know a browser, but Gemini and Chrome, that's new. It can help you with practically anything on the web, like restoring a vintage motorcycle from a 50 page restoration block. Or finally break down that long article
- [00:14]
Pomp (Pompomp)
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- [00:17]
Darius Dale
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Pomp (Pompomp)
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Darius Dale
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Pomp (Pompomp)
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- [00:55]
Darius Dale
Jobs the job of the Fed is to boil us alive without us hopping out of the pot. If we hop out of the pot, then we have financial stability concerns and then we have all sorts of issues that cause problems in the real economy and asset markets that the Fed that will be worse than just having sticky above target inflation. And so this is the lesser of two evils in the context of the fiscal dynamics that we continue to highlight in the US Economy.
- [01:17]
Pomp (Pompomp)
What's going on guys? Today we got a great conversation with Darius Dale. He's here in person and we talk about what's going on at the Federal Reserve. Kevin Ward stepping into the leadership role. You should think about inflation expectations in relationship to actual inflation. What does this mean for your portfolio for public stocks? Or how should you actually think about the impact of AI? On top of that we dig into the affordability crisis that is hitting millions and millions of Americans. We talk about some anecdotal examples of exactly what it means. I literally look up live some prices of items that are going to shock you. And Darius explains some of his life experience and where he's actually started to meet people and what he's learned from them. All of that and much more in this conversation with Darius Dale. All right, Darius, Kevin Wurst now has taken over the control of the Federal Reserve. He's the big dog at the central bank and he seems to be wanna run the place a little bit different. What's your take on his original press conference and kind of what he's doing differently than his predecessor?
- [02:06]
Darius Dale
Yeah, look, before we even get started man, I just wanna say thanks for having me Love this set man. And this studio is gorgeous. I feel like I'm part of history in here, man. So let's make some history today. I'll say the first thing I'll tell you is that we think Kevin Warsh is a dove in hawk's clothing.
- [02:26]
Pomp (Pompomp)
What does that mean, a dove in hawks clothing?
- [02:28]
Darius Dale
Someone who ultimately wants to have easier monetary policy, maybe because of his relationship with the administration, but I doubt it. I think he genuinely believes that AI has massive disinflationary potential. However, he has to wear the armor of a hawk in order to create the scope, the landing space for, for the Fed to get to that outcome. And so ultimately what we think we're gonna have to do here over the next, let's call it 2 to 3/4 perhaps is the Fed has to either tighten monetary policy or use this communication tool to signal to the markets that it may tighten monetary policy or both in order to create that scope for a much more.
- [03:05]
Pomp (Pompomp)
Why do you think it needs tighter monetary policy? Like if you look at inflation expectations, maybe over the last couple of weeks it started to come down. Do you think that that changes that need for them?
- [03:14]
Darius Dale
Yeah. So what I'll say on inflation expectations, we've done a big statistical analysis on the drivers of infl inflation. The things that lead and lag inflation and inflation expectations have very little statistical relationship with future inflation outcomes. What has a meaningful impact on future inflation outcomes are things like the monetary drivers of inflation. So the rate of change of money supply, the expansion and or contraction of the money velocity, that's important. There are policy drivers of inflation, most notably deficit spending, the Fed's monetization. And then to the extent that there's meaningful deregulation in the banking sector, which there currently is, the credit growth cycle can be a leading indicator of inflation. And then there's ultimately these sort of, I don't necessarily agree with them. There's these sort of output gap drivers of inflation. To the extent that the economy's growing above potential or the unemployment rate is below the nairu, the non inflation accelerating rate of unemployment, those are all the kinds of things that kind of lead inflation. Nothing perfectly leads inflation. But when you put all those things together unnet, they are sending a very hawkish signal to policymakers into the markets that the Fed has to do at least a little bit of something to get this.
- [04:26]
Pomp (Pompomp)
Because these signals, you're basically saying these signals are saying hey, inflation is going higher according to these different data points. And therefore if inflation goes higher then they're going to have to act.
- [04:34]
Darius Dale
Yeah, well, what it's saying is two things. So it was saying inflation is going higher. It may be saying inflation's starting to peak, but peak at very uncomfortable levels and trends at very uncomfortable levels. What they're currently saying is that we're not at all on a credible path towards disinflation and certainly not on a path towards achieving the Fed's 2% target anytime soon. So let's unpack some of those drivers of inflation like we just started. We'll start with the output gap. Nairu. The output gaps at about 110 basis points, usually at about 200 basis points. You're talking about a Fed that has to tighten the economy into recession. So we're halfway there, basically. A little bit more than halfway there. Nairu. We've seen the unemployment rate get meaningfully, more meaningfully below Nairu. It's currently about 20 basis points below Nairu. You get it to about 100 basis points below Nairu, which I'm not sure we're going to do in the context of AI, but that's when the Fed typically has to tighten the business cycle into a downturn on the policy drivers of inflation. You look at the year over year rate of change of Fed deficit spending that's grown at about 8%, well above trend. You look at the yearly rate of change of Fed monetization, that's growing at about 7, 8% year over year, well above trend. And then you look at bank credit growth, which is also growing at about 7% year over year, well above trend. The growth rates of these statistics are very inconsistent with a 2% inflation environment. And so ultimately. And you also have the lagged impact of 175 basis points of rate cuts that are flowing through the economy right now, based on our business cycle model, which confirms that there's about an 18 month lag between changes in the policy rate and outcomes in the economy.
- [06:06]
Pomp (Pompomp)
You think they've given up on the 2%?
- [06:08]
Darius Dale
Oh, for sure. You and I have been talking about this for almost half a decade. At least. At least six years. Almost. Yeah. Now, the Fed doesn't want 2% inflation, but the Fed has to signal to the bond market that it wants 2% inflation, otherwise it's going to lose control of the long end of the curve in a way that will be counterproductive to their dual maximum employment and price stability mandates. So ultimately, we've been saying for years at our company 42 Macro to our global investor community that look, we're all frogs being boiled. Alive in a pot of financial repression and monetary debasement. The job of the Fed, Kevin Walsh, in my opinion, I think he's a pretty credible Fed chair in terms of doing this particular job. This aspect of the job, the job of the Fed is to boil us alive without us hopping out of the pot. If we hop out of the pot, then we have financial stability concerns and then we have all sorts of issues that cause problems in the real economy and asset markets that the Fed that will be worse than just having sticky above target inflation. And so this is the lesser of two evils in the context of the fiscal dynamics that we continue to highlight in the US economy.
- [07:07]
Pomp (Pompomp)
Now when we look at the Fed right now, inflation is hanging in there, right? It's higher for sure, but it's not like it's significantly at least some of the signals telling us it's going to accelerate from here. PCE came in though and I think people are looking at that and they're saying wait a second, this is a little bit higher than I thought it was going to be. And the market sells off and there's some concerns there. So it almost feels like there's different data points telling us different things, which means that it's coming complex. It's confusing for a lot of folks. Is that why the Fed is just saying we're not going to do anything, we're not going to hike, we're not going to cut, just keep kicking the can down the road, let the complexity work itself out and let us get a clearer picture before we make a decision?
- [07:41]
Darius Dale
Yeah, I think that's part of it. You're spot on about the complexity theory and you've seen you get our research. It's never one data point. I've been doing this for almost two decades and tried to build every model. If there was an Occam's razor way to pinpoint to the decimal what inflation was going to be at every parent or what the non farm payrolls print would be at every print, then we'd have figured that out by now. I mean if we can build AI, we can certainly figure out what the non farm payrolls number is from a statistical standpoint. But the problem is is that the variance and the standard error on all these time series, these often revised time series is too wide. So you have to have a mosaic approach when you're approaching financial markets and modeling the economy. It's never just one data point. What it is is an amalgamation of data points that are sort of moving together like a swim of fish. Or a pattern.
- [08:28]
Pomp (Pompomp)
A flock of birds. Yeah, yeah. Swim of fish.
- [08:31]
Darius Dale
Yeah, totally. 100%. And so that swim of fish in my op is sending a message to the Fed alongside the financial markets that, hey, your policy is not restrictive. Certainly stop thinking your policy is restrictive. That was step one. I think the Fed has gotten that message. We know the Fed has gotten that message. According to the latest summary of economic projections in the dot plot, the next step in our opinion, and this is not consensus yet, the next step in our opinion, is that the Fed might have to take a step further than that in terms of actually tightening monetary policy or signaling that they're going to tighten monetary policy in a meaningful way that is making a big pivot with their balance sheet, which we can talk about or kind of ratcheting up for guidance through the dot plot because we know Kevin Morris doesn't like the actual talking. Yeah.
- [09:12]
Pomp (Pompomp)
What's interesting to me is he got rid of forward guidance, which he might as well just say, hey, we're going to stop bullshitting. Right? Bullshit. And by the way, that's okay, because the market was like, hey, everyone kind of sort of knows this isn't real, it's guidance. But we got to listen to them because another data point they're giving us. And so almost in a weird way, by subtracting that data point from the market, they're trying to be additive, I get the sense of. And clear up some of the complexity because they're taking away a thing that really had no standing in terms of accuracy. And so by taking it away, does that help investors?
- [09:45]
Darius Dale
It won't in the medium term. I think over the long term it will in the medium term, removing the fans hand holding of the bond market, you're essentially taking off the training reels. And so ultimately what that means is that there's going to be a wider range of probable outcomes with respect to the expected path of the policy rate, which should push up the term premia. And there's going to be a wider. And as a function of that wider range of outcomes, the bond market's also not going to know how serious the Fed is on inflation to some degree. It's going to pull back on that. Ultimately you wind up with a higher real term premium, a slightly higher inflation risk premium. So it should inflate term premium in the bond market. But the benefit of that, of going through that pain, because this is not a costless exercise, but ultimately there is some good on the other side of this, the benefit of that, as Kevin Warsh alluded to last Wednesday in that FOMC statement is once you take the training wheels off of the bond market, the financial markets can get back to do what they're supposed to be doing, which is pricing risk and assigning units of risk in return. Once the financial markets get back to doing that, then the Fed can actually start to lean on financial markets as a forward looking signal of what they should be doing from a policy standpoint. Right now, if you're sitting at the, you're one of the 19 members of the FOMC, you have to be sitting there going, should I tighten monetary policy because the two year went up or is the two year going up because it expects me to start talking more hawkish right now? You don't know what the chicken or the egg is. And so if you cut off the communications channel, you create more of a clear distinction between what the markets are signaling and what the Fed may or may not do, which allows the Fed to then tap into the collective wisdom of the crowd, which we all know is much better than any committee.
- [11:24]
Pomp (Pompomp)
What about energy prices like those spiked, obviously, now they've come back down. We even saw below $70 a barrel for a few hours, I think in the last couple of days. If energy keeps staying somewhat muted or even falls further, does that put less pressure on inflation and therefore that would be good for the American consumer?
- [11:42]
Darius Dale
Yeah, of course it is. And we saw that in some modest resilience in the PC report today. I think we accelerated. We have a weak positive impulse in real personal consumption expenditures to a slightly below trend rate of 2.1%. Return is about 2.5%. But again, this is coming at the context of having a massive inflationary surge and ultimately in the context of real disposable personal income down about 1.5% through month, annualized well below trend. The fact that the consumption is only slightly lower than trend and we have a sharp decline, sharp contraction in the income, real income tells you that the consumer is being very resilient. Which is something I first called out, I think, on your program in the summer of 2022 and everybody was talking about recession. Recall that on this program in the fall of 2021, I said, hey, there's going to be something that nobody's talking about that everyone's going to start to talk about over the next, let's call it 12 months. I said the R word. And then by the summer, by the fall of 2022, I said everyone needs to stop talking about the R word because the economy's going to Be resilient. They're talking about the wrong R word. And so we think all this data really does support our resilient US Economy theme, which ultimately gives the Fed a little bit more scope to tighten monetary policy. Not meaningfully, but they can.
- [12:50]
Pomp (Pompomp)
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- [12:53]
Darius Dale
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- [13:10]
Pomp (Pompomp)
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Darius Dale
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- [13:16]
Pomp (Pompomp)
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- [13:19]
Darius Dale
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- [13:21]
Pomp (Pompomp)
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- [13:45]
Darius Dale
Your number one job is to educate yourself, and Fountain wants to help educate you.
- [13:55]
Pomp (Pompomp)
Now, when we go and we look at what's happening in the economy, obviously asset prices have taken off once again. The American consumer is resilient, yet they're all complaining, saying that everything's unaffordable. And my take is that all three of those things are true. Like, it is unaffordable because of how much price appreciation has happened over the last five or six years. But we live in an economy where, oh, the Knicks going to the finals. Like, I get a ticket, right? Oh, this is. Person on Instagram just bought this thing. I need two of them. Oh, this trip is going. Yeah, that looks cool. Let me get the photo. Right. Like, that is the economy that we live in. And so then the question kind of becomes, do we just live in a world where everything is about output? As a consumer, I want to output capital into investments. I want to put output into consuming material goods. Like, is that just the new normal?
- [14:38]
Darius Dale
It's been the normal since we outlined that resilience economy theme back in the fall in September of 2022. Pomp, you're a parent of four Beautif Beautiful children. You and Polina tell me this. Is there a median or average statistic that you could use to describe and set policy for all four of your children?
- [14:55]
Pomp (Pompomp)
No, of course not.
- [14:56]
Darius Dale
Exactly. And so when you think about that from the perspective of the broader macro economy, you have to recognize that we look at aggregate statistics because they are useful for forecasting financial markets and policy responses. But there's really nothing homogenous about those aggregate statistics, and they're very heterogeneous when you start to break it down. So our analysis in terms of the research we've published to our global investor community, highlights the K shaped nature of the economy through two channels on the low end of the K, we see that delinquency rates 90 day plus delinquency rates heading for charge off for credit cards, auto, student loans are either exceeding or right near the peak rates that we saw at the height of the global financial crisis and Great Recession. Right now, right now, even with reasonable consumption growth, stock market booming, the economy growing well above trend on a nominal basis, and earnings growing at a level that's historically unprecedented in an economic expansion, a multi year economic expansion, we have basically global financial crisis level delinquency rates on an aggregate basis, which tells you how bad it is for the households at the bottom of the K. At the top of the K, we obviously you can very killing it. We're killing it. Look, I hate to say it, we're killing it. And one of the core drivers of that is something we talked about last time I was in your program, the West Village Montauk effect thesis. You and I have some remind people
- [16:18]
Pomp (Pompomp)
about this thesis, some boots on the
- [16:20]
Darius Dale
ground knowledge on that. So the key takeaway from the thesis is when you have a high stock of savings, you don't need to save as much as you don't need to save as much of your income. So you have a low flow of savings from a savings rate perspective because you already have a high stock of savings. And how I arrived at that conclusion was just B.O. boots on the ground research out in Montauk and West Village over the past 10, 20 years. What I noticed is that the people at these well established places, hard to get in places like a surf lodge or a common ground. The people who spend the most money at those places aren't necessarily the people with gray hair, balding hair and folks like you and me. It's the people who are in their mid to late twenties who have rich parents. And it's not pejorative. I'm not saying this in a pejorative manner, but what I'm saying is that but because they don't have to save for retirement for a rainy day to take care of their parents like many people do, they then can go spend a greater share, greater proportion of their income into the economy month after month because they don't need to save. And so taking that same lesson from my personal experience and applying that to the macro economy, we see that the stock of cash checkable deposits plus money market fund exposure on the aggregated household sector balance sheet in the US economy is up to just shy of $12 trillion from a starting point of $3.5 trillion just prior to Covid. So we've grown about $8 trillion in cash.
- [17:49]
Pomp (Pompomp)
That's crazy.
- [17:51]
Darius Dale
More than tripled in terms of the amount of cash on the household sector balance sheet since just prior to Covid. And so you apply that same West Village Montauk effect thesis to the whole economy. Now the folks at the households at the top part of the K have all this cash they're sitting on on an aggregated basis, which means they can take savings rate down and down and down. So no matter what happens to income, they can always dip into those savings to continue to support consumption. That's exactly what we see. We have a strong negative impulse in the personal savings rate. I think the three month average rate on that is somewhere close to 3.5%. The pre Covid trend was somewhere north of 5, maybe 6%. And so that's exactly what's happening. That's exactly what we continue to see.
- [18:27]
Pomp (Pompomp)
And I guess part of that is not only are they spending on all goods, but you can only spend so much money on groceries, you can only spend so much money on gas, right? What ends up happening is you have the excess savings that you're going to use for consumption. It starts to trickle towards things that you frankly don't need. And so that's where you see luxury prices exploding, experiences exploding. I mean, it's just crazy to see. I use sports affordability as a very weird dynamic. I saw Frank Michael Smith recently had a, a video that he put out and he talked about the idea of like private equities now starting to participate in these different sports leagues. What do they do? They need to flip this thing in three to seven years. So guess what they're going to do? They're going to start to degrade quality and increase cost so they can extract more profits. And as they do that, that means that valuations go up and that's how they make money. Whether you like private equity or not. They've been doing this for decades and decades and decades at the same exact time. The pool of people who have capital, I mean, when the Knicks finals happen in Madison Square Garden, you have a city full of 9 million people. That doesn't even include Knicks fans all around the world who then say, wait a second, I think MSG's got like 20,000 seats. There are 20,000 seats that go to this thing. Let's say that there's a couple thousand that are not going to be sold. They're going to give them away or whatever. Okay, so maybe you got, I don't know, 16,000 seats. You put them in front of 9 million people. Some who have been waiting 50 years.
- [19:51]
Darius Dale
50 plus.
- [19:52]
Pomp (Pompomp)
No wonder the get in ticket price is $7,000 for the nosebleed seats.
- [19:57]
Darius Dale
Shocked it wasn't higher. I'm actually shocked it wasn't high.
- [19:59]
Pomp (Pompomp)
And so you look at this dynamic of you have so much capital that is trying to chase these things now that's sports and somewhat unique scarce live events, you know, etc. But that's playing out all across the economy. And that's why you start to see some of these price points of different items that come out is crazy. And I've even talked about diapers. I mean, you are in the heart of being a parent of a young
- [20:20]
Darius Dale
child, changing them every day.
- [20:22]
Pomp (Pompomp)
And I talked to Planet, she's like, yeah, I spent, I bought two boxes of diapers off Amazon, 150 bucks.
- [20:29]
Darius Dale
I don't know how people buy diapers.
- [20:31]
Pomp (Pompomp)
You crazy.
- [20:32]
Darius Dale
Their stickers shocked us. So we make tons of money and no offense, but like, like it's ridiculous. How do people afford to have kids in this country?
- [20:39]
Pomp (Pompomp)
Well, it's horrible. That's the whole thing is they're, they're not. And then the other piece that I, I saw recently is, you know, one of the data points they're now pointing to as to why people aren't having a third kid. Gotta get a new car, right? So if all of a sudden you gotta get a new car, then go look at car prices. If you go look at, pick 10 cars that have been around for a while and go look at how much they cost, it's crazy. They make it, it's insane. Go to the luxury side of the market. So if you're a family and you say, okay, I want to have something that's super nice and I want to be able to put my kids in it. So if you go and you look at New York, there's all these private drivers all the time. They got Escalades. It's probably one of the most popular cars they use, right? If you go look, a brand new escalade is like 130, $150,000.
- [21:25]
Darius Dale
Wait, what?
- [21:27]
Pomp (Pompomp)
It was crazy, right? Without exaggeration, I'm pretty sure that when I was in like elementary school, middle school, a Ferrari was like 200k.
- [21:38]
Darius Dale
Yeah, right.
- [21:39]
Pomp (Pompomp)
Maybe 175 to 225. Somewhere in that range was probably 20ish 25 years ago. That was a Ferrari Escalade SUV. These things are super, super nice, right?
- [21:51]
Darius Dale
They are.
- [21:51]
Pomp (Pompomp)
But even if you go on the lower end of a large vehicle for a family that's got multiple kids, et cetera. You're still talking about 70 to 100 grand for a brand new car. And so you start to look at this and you say to yourself, like, dude, what is going on? This is crazy.
- [22:07]
Darius Dale
Yeah.
- [22:08]
Pomp (Pompomp)
Too.
- [22:09]
Darius Dale
Thanks for sharing that, because that breaks my heart. I mean, I think I've talked. I'm sure I've talked about this on your program. My very humble beginnings. It's been many a year in homeless shelters and waiting in food bank lines. And I had a rough 0.001 percentile kind of upbringing prior to going to Yale. And that breaks my heart what you just said, man. I think the greatest sin that we've seen was the policymakers convincing us that the Fed's $7 trillion balance sheet is not inflationary. What a sin. I've long had this core principle which allows me to kind of see the world from a political standpoint and a social standpoint and ultimately an economic standpoint at a very high level. And I'm about to share this with you guys. I strongly believe that all money is, is just a transferable unit of human time. And so you think about the devaluation of money, of purchasing power. What you're really doing is you're devaluing someone's lifetime, their time, their precious time that they have here on this earth. You're devaluing that. And so you have to work more and more hours just to be able to afford a car that can fit you and your wife and your three kids in just to make your ends meet. And it breaks my heart. Obviously, the government's been highly incentivized to underreport inflation in terms of the cost of living, adjustments for things like Social Security and Medicare. So we know they're under reporting inflation. But we can just see, going back to those statistics that I highlighted, we have all time high delinquency rates at credit card, auto and student loan, all time high. The same kind of levels that we saw in the height of the Great Recession and global financial crisis on an aggregated basis. So we must be twice as high if you're thinking of only focusing on the lower end of that. K. And so this goes back to where we started the conversation, which is we don't ultimately think the Federal Reserve is serious about 2% inflation, but they have to at least pretend that they're serious about 2% inflation for two reasons. One, you're gonna lose the long end of the curve in terms of the bond market if you don't. And more Importantly, come on, can we give the folks on the bottom of the kids a break?
- [24:20]
Pomp (Pompomp)
No. You want to know why?
- [24:21]
Darius Dale
Why?
- [24:21]
Pomp (Pompomp)
I just looked up, what do you think a 20, 26 Honda Civic costs?
- [24:25]
Darius Dale
I hope not more than 15, 20 grand.
- [24:27]
Pomp (Pompomp)
Okay, 29 to $32,000.
- [24:30]
Darius Dale
Wow.
- [24:31]
Pomp (Pompomp)
For 20, 26 Honda Civic. Now they got, you know, hatchback, sports sedan, sport, all these kind of different variations, but 29 to $32,000. What I'm seeing just by googling Honda Civic. Now, let's say that that's New York, right? And the surrounding areas. Okay, what does that mean? What is it in, you know, the middle of Missouri or Iowa or, you know, in Arizona? You think it's that different? Probably not.
- [24:54]
Darius Dale
Probably not, right?
- [24:55]
Pomp (Pompomp)
And so you start to say, okay, hold on a second here. You know what's interesting? The poverty line in America is still officially $15,000 for a single person. 30, I think 30 or $32,000 for a family.
- [25:07]
Darius Dale
Try to go to McDonald's and eat for 365 days a year with $15,000, you're going to run out of money by August.
- [25:14]
Pomp (Pompomp)
It's crazy, right? So then you say to yourself, okay, well, hold on a second. That's a brand new Honda Civic, right? So some people may say, well, I don't necessarily want to do that again, I just googled Honda Civic. The first used car that I see show up in the sponsored section is in Jackson Heights. A 2022 Honda Civic. $21,000.
- [25:33]
Darius Dale
Are you kidding me?
- [25:35]
Pomp (Pompomp)
So you start to look at this and again, people can play, you know, anecdote versus anecdote all day long, but we're talking about pretty simple things. A car, diapers, gas, groceries, all this kind of stuff. So then the question becomes, okay, if that stuff is continuing to tick up, then I think a lot of people in the economy have basically convinced themselves the only way out of this thing is I got to invest. I actually agree with that.
- [25:58]
Darius Dale
I agree with that.
- [25:59]
Pomp (Pompomp)
But then they're faced with, hold on a second. These AI stocks are flying, but every time I turn on the tv, all these people are telling me the end is near, a big crash is coming, the bubble, all this crazy stuff. And so I think a lot of people are, wait a second. I know what I'm running from, right? I know I got to get away from the affordability stuff. And hopefully they got enough common sense and their head screwed on, right, that they're not turning looking at the crazy extreme socialism nonsense and saying that's the solution. They're saying I, I got agency. I'm going to go and fix this with my portfolio. How do you look at the equity market? And AI is this amazing thing, but also there's people who are really scared and they're like, you know, watch out below.
- [26:37]
Darius Dale
Yeah. Look, man, I think you're asking the question which is, you know, you need to participate, right? Everyone, you have to participate. If you're not trying to put yourself, align your income and wealth creation with the income and wealth creation activities of the folks on the top part of the K, then you're going to be left behind. You're going to be suffering from a historic Cantillon effect. That's, in my opinion, I think that's the number one cause of the political angst that we see in this country, is there's a Cantillon effect.
- [27:05]
Pomp (Pompomp)
Oh, you mean the richest counties in America are all around Washington, D.C. yeah,
- [27:09]
Darius Dale
well, that's, that's part of it.
- [27:10]
Pomp (Pompomp)
How did that happen?
- [27:10]
Darius Dale
That's part of it, huh? 100% bipartisan sucking from the teat of big government.
- [27:15]
Pomp (Pompomp)
You want to know another interesting stat I saw recently? This one blew my mind. 89% of people over the age of 65, they are in support of raising taxes on young people so they can continue to get paid their benefits.
- [27:29]
Darius Dale
That's wild.
- [27:31]
Pomp (Pompomp)
My question, how is it not 99%?
- [27:35]
Darius Dale
Well, some people care about their grade.
- [27:39]
Pomp (Pompomp)
Only 11% is 89%. 99% of people over the age of 65.
- [27:43]
Darius Dale
Well, they're probably suffering from the same dynamic in terms of everything we're talking about from a Cantillon perspective. The rapid increase in everyday items that you actually need to survive, they're suffering, too. A lot of these folks are on fixed or limited income, certainly relative to where they were midlife. And so I understand their angst and I empathize with them and I support their desire to improve their own situation. But the problem isn't raising taxes on people who barely make any money and have no savings. You know, I don't want to get political here, but the reality is we know that we have a wealth pump on. Peter Turchin talks about this in his work. Ray Dalio alludes to this in his work. My former colleague and mentor Neil Howe alludes to this in his work. You know, we have a, you know, just we, for a variety of reasons, mostly because of campaign finance, we've allowed, you know, the elites, I guess, technically speaking, we're part of that class. We've allowed our class of people to change regulation in ways that is very harmful for the common man. We've allowed the folks in our class to change fiscal policy in ways, particularly tax policy, in ways that are very harmful for the common man. And then we ultimately allow them to change monetary policy in ways that are very harmful for the common man. The Federal Reserve's balance sheet and interest rate policy, I mean, if you look at, you go back to 2021 just using this as an example, the Federal Reserve kept the policy rate in 2021 prior to the big upsurge in inflation that we're still talking about today. They left their interest rate at a level that was about 1000 basis points below what the Taylor rule would have said at the time, which is the most common kind of model based estimate of the policy rate. So 1000 basis points compares to 700 basis points for Arthur Burns in the 70s at the height of his malfeasance. You think about the balance sheet took up to 36% of nominal GDP. We're at 21% of nominal GDP now. Why is it at zero? Why does the Fed need to constantly be expanding its balance sheet and devaluing, creating more supply of money in a way that devalues the purchasing power of money that is obviously very clearly being underreported. If you look at measures of economic angst, financial hardship, all those types of measures, they're going one way, while at the same time the equity market and wealth of the folks like us is going another way. The only way out of this mess is to turn off the wealth pump. We're going to have to eat some, eat our vegetables for once in the last 30 years, at least we're gonna eat our vegetables in order to save our country. And I'm not sure that everyone in the baby boomer generation agrees with that. Or we'll, we'll go, you know, along with that.
- [30:07]
Pomp (Pompomp)
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- [32:42]
Darius Dale
Emphasis on were. Emphasis on were.
- [32:44]
Pomp (Pompomp)
Yeah, now I saw someone say it's not the MAG7 now it's the LAG7. 493 other stocks, they're flying. And so on one hand, that's how indexes work. And thank God this is a team sport. And so some carry some at other times. But on the other hand, maybe people should be concerned. Maybe there's cracks in the armor, maybe the valuations aren't what people thought they were.
- [33:08]
Darius Dale
What's your take on the Max 7 specifically? There's two things I would say. One, we've been of the view since last fall that the investors will use the Max 7 as a source of funds to capitalize AI adopters. And there's two primary drivers of that. One, and this is where the card of positioning was. And so to the extent that investors get more excited about the economy and the diffusion of AI throughout the economy, they're going to start to look at the other 493 or the other 3,000 stocks and start to capitalize, use their profits and their proceeds from the max seven to start to capitalize other businesses which were very cheap on a relative basis. And then the number two point on the max seven specifically on their, you know, own operating dynamics and I'm not an analyst, you know, this is not my own, you know, analysis but you know, there's some real questions about the decline in their free cash flow. Right. You know, historically speaking, when you have big CapEx cycles, two things tends to happen. One, you always overbuild. We've seen this with the railroad, the canals, the consumer durable goods, Internet technology. Every time you have a capex bubble, there's always some element of overbuilding. And two, whenever you, you know, when you go from an asset light business to an asset heavy business, your maintenance capex starts to get much, goes much. It ascends to a much higher height and stays at an elevated level. And so there's a real question about the massive expected recovery in free cash flow for these companies and the ultimate of these stocks in the coming out years. I think if you look at sell side estimates, they basically have a hockey stake recovery in free cash flow for these companies starting in like 2029 or 2030 and like that seems very unlikely in the context of history, those capex bubbles. And two, the fact that you're going to have to constantly be maintaining these data centers. It's not like you can build a data center and leave it alone for 10 years. You're going to have to continue to
- [35:00]
Pomp (Pompomp)
reinvest, going to put them in space and then we can't get them down.
- [35:05]
Darius Dale
Well, I think that's another thing. I think Elon's pitching this data center and space thing to get away from the pitchforks. Because if we don't turn off the K shaped regulatory policy without the lack of trust busting, we've seen the Supreme Court's coddling of big business in recent decades. We don't turn off the K shaped fiscal policy in terms of the convoluted tax code. 10,000 pages, 10 million words of ways for people like us to get more income and siphon wealth from the bottom part of the K. We don't turn off the K shaped monetary policy, then the pitchforks will come out. They're going to come out.
- [35:41]
Pomp (Pompomp)
It may already be out.
- [35:42]
Darius Dale
Well, no, we would hear it because America has 400 million guns and 300 million legal owners. So we would. You will hear the pitchforks in this country. And so, you know, I have the great privilege of living somewhere. I used to live in the city, obviously for a long time, and I have the great privilege of living somewhere that's, you know, it's not rule, you know, it's definitely nice, you know, in terms of the income stratification, but the surrounding areas are what you would consider to be what elites like us would consider to be Trump country. And so I go to church with a lot of folks like that. And I'll tell you one thing, I'll tell you a few things from this experience because the first time in my life I've ever been around poor white people, if you don't mind me saying that I grew up around very poor black people, very poor Hispanic people, very poor Samoan people, Tongan people, very poor African people, immigrants. I'd never seen poor white people. Then I went to Yale, Just a bunch of rich white people. Then I moved to New York. Even richer white people. Then I dabble in Miami. Rich white people, rich Latin people. Now I live somewhere where there's still rich white people, but the surrounding areas and surrounding towns are not affluent at all. In fact, you would consider these folks to be on the bottom of the K. And I'll say a couple things. One, these are some of the sweetest, nicest, kindest people you're ever going to meet. The media does them a terrible injustice in terms of how they characterize them as racists and sexist and just deplorables, if you will, to borrow a horribly used phrase. So that deplorables moniker is not true. What everybody wants is the same thing, to be able to take care of their family 100%. That's all anybody wants. Now that I've seen poor black people, poor Hispanic people, poor Samoan people, poor African people and now poor white people. I'll tell you right now, everybody wants the same thing, which is to be able to take care of their family, period.
- [37:32]
Pomp (Pompomp)
I tweeted this recently. I said politics has become a competition between two extreme groups that are competing to capture votes by promising unsustainable policies to unhappy citizens.
- [37:42]
Darius Dale
Yep.
- [37:43]
Pomp (Pompomp)
And so in a weird way, both political parties are offering a different form of socialism.
- [37:49]
Darius Dale
Yeah.
- [37:49]
Pomp (Pompomp)
One is saying we're going to give it to the top and it's going to trickle down. The other side is saying we're going to take from the top and we're going to give it to the bottom.
- [37:54]
Darius Dale
100%. You nailed it.
- [37:56]
Pomp (Pompomp)
I don't know if either one of those are going to work.
- [37:58]
Darius Dale
Well, unfortunately they're not going to work and here's why. Peter Turchin, the Clio dynamic specialist complexity theorist whose work I tremendously admire and is featured in our own research. Peter, he's the author of the Ages of Discord, End Times, probably the best mathematician, the person who's applied math to this problem, the best in the world. He would say this dynamic that you just described is what they call intra elite competition. Whenever you have what he calls elite overproduction, which is the concept of having too many elite aspirants and not enough elite positions for those elite aspirants. Whenever you have elite overproduction and popular immiseration, which is folks not being able to get ahead, falling behind from a real income perspective, which is what we've been doing for 50 years, ever since Nixon took us off the gold standard and we put our foot on the accelerator with the neoclassical era of the Reagan administration and obviously neoclassics plus the, you know, devalued Fiat money equals 50 years later you have a country full of very angry people who can't get ahead. And so you have popular miseration plus elite overproduction equals unstable society. And so unstable societies. Whenever you have these types of dynamics they've studied, I want to say I think their database has studied 168 civilizations dating back 5,000 years. They've collected data over the course of 10 years to arrive at this conclusion. 75% of those 168 civilizations end in violent collapse, not collapse, violent collapse. And we are certainly tracking one of the most extremes of that combination of dynamics.
- [39:36]
Pomp (Pompomp)
It's crazy to see just how much we're following the historical trend.
- [39:38]
Darius Dale
It's crazy. It's actually kind of scary. As a father of a two year old son, I'm hopeful, very hopefully that whatever reckoning that we're heading for or vast I think we're fast heading for happens, you know, be before you know. My, my son is of military age 100.
- [39:58]
Pomp (Pompomp)
I. I agree. All right. Anyone who has not yet checked out 42 macro. Darius is one of my not only smartest friends, but I think that they do an incredible job in terms of putting together very, very kind of intelligent, but thorough. And I think thorough is probably the most important word. Research to help investors, a lot of institutional investors, but increasingly a lot of independent, sophisticated investors who manage their own portfolios, help them figure out what's going on in the market, what's going on in the economy, what's going on with monetary and fiscal policy. And then how do you invest your capital, understand different regimes that markets are going through or the economy is going through. So go check them out@42macro.com I appreciate you coming in, my friend.
- [40:37]
Darius Dale
Oh, it's a real pleasure, man. Thank you for allowing me to speak my voice. You know, I think we have a. So obviously I'm an investor and that's what pays the bills. But as someone who's ascended from the very bottom of the K to somewhere in the, I would say certainly above the middle of the top part of the K, I feel like I have a duty. I have a duty to heal our broken society. I may die trying, but it's very important for me. So thank you for allowing me to be part of your platform and spread this message. And hopefully more people will take it to heart. I think you're doing a great job.
- [41:10]
Pomp (Pompomp)
Do it again soon.
- [41:11]
Darius Dale
Thanks, brother. Appreciate you.