Macro Outlook (A Discussion with Darius Dale)

Hey everyone and thanks for jumping back Into the macroverse we are going to Continue our collaboration series we Have a very special guest with us today Darius Dale founder and CEO of 42 macro This guy knows his stuff when it comes To the macro verse Darius it's a Pleasure to have you here man it's a Real pleasure thanks again for inviting Me to uh participate this is awesome No problem um if you guys are unfamiliar With Darius make sure you can follow him On Twitter I will link his Twitter down In the description below and in the Pinned comment he also has his website 42macro.com I would encourage you guys To check this out I've been following Darius for uh quite a long time now and He's always a great voice to to listen To in the space and he always provides Really interesting insights Um that are are extremely unique and and For that I really do appreciate you Darius Darius if you could provide just Maybe a brief background on on your sort Of um your you know your your Introduction into the macroverse and and How you got here I think that people Would appreciate that Yeah of course man if they see him like I said uh for having me um so just quick Background on myself and what we do uh At 42 macro I cut my teeth in the sort Of hallowed Halls of institutional

Finance uh spent about a dozen years Helping build out a pretty big Investment research company Um um since uh since I left Yale back in 2009 Um you know primarily what I've done was Throughout my career was sort of build You know very sophisticated econometric Models and fly around the world Explaining that to the folks on the buy Side in terms of um you know hedge fund Managers Pension funds Etc Um since then uh since covet I left to Start my own firm um the 42 macro and Where I got sick of wearing the suits And flying around all the time and was Much more interested in actually just You know building models iterating the Models and explaining the output and Ultimately interacting with folks like You and getting to really grow this you Know awesome Global Network of investors You know not just you know it's Traditional institutional Finance which Are primarily our client based but we Also have a very large and growing um You know subscription base for the Crypto universes well I myself fancy Myself a bitcoiner I don't know if I'm Somewhere somewhere between a Bitcoin Maximalist and like maybe ethereum It's kind of where I am But uh you know I kind of approached That from a very um you know personal uh

Belief that you know crypto is real Democratization uh of finance and Resources uh but also from the Perspective of I don't think Bitcoin and Crypto in general uh is really any Different than trying to risk manage you Know traditional financial markets a lot Of the same tools and processes and Econometric systems that I've built uh Here at 42 macro that apply to the Equity and credit markets fixed income Markets currency markets very much apply And in many cases are actually more Accurate and more valuable uh in the Digital asset space because there's a Little bit less of an Institutional Performance chasing feature in those Markets uh there will be eventually you Know especially BlackRock is successful With the CTF But ultimately You know I do believe we had a lot of Value in this and then the crypto Arena So again uh definitely come check us out At 42 macro.com we have a lot of price Points and a lot of products for a lot Of folks but excited to get this Discussion started And I can Echo I can Echo at Darius uh They they provide a great perspective on The markets and um you will not be Disappointed so make sure you guys check Out their uh uh their relevant links in The description below so to get started Um we just had a new CPI report come out

Today headline inflation is down to About three percent and core has finally Broken below five percent I'd be really Curious to hear what your outlook is on Inflation or what what do you think this Means right now these these reports but Also what your outlook is going forward Yeah 100 so let's just wrap right into Some sharing some charts you know I like To uh I think we add a little bit more Value in that regard so let's uh we'll Get into uh into what this this slide Deck here is what we call our monthly Macro scattering Port every month we Publish about 100 pages of a you know The street this decks usually around 100 Pages uh and it really kind of helps Investors understand what we call the Full distribution of probable outcomes You know there's the modal outcome of What we think is the most highest Probability events both from the Perspective of the economy and also from The perspective of the liquidity Functions within the economy but then There's always right tail risk and There's always left tail risk they're Not always equally distributed sometimes The shape of the distribution changes You know we're at the bottom of the Cycle there's way more right tail risk To mismanage we're at the top of the Cycle there's a lot more left tail risk To manage and so we help investors not

Only understand what those risks are but Also understand kind of the shape of the Distribution with numbers facts and Figures and you know kind of um you know Things that you can trust across Market Cycles so let's start with uh with Inflation And so what I'm showing in this chart is Headline CBI core or the food CPI energy CPI shelter or sorry this is core Installation my apologies what I'm Showing in this chart is a headline CPI Food CPI energy CPI and then the person The PC deflators Still looking for that for that because We just got the CBI data this morning I Was obviously extremely dovish and what Happened in terms of when you Highlighted is that we had this Significant deceleration in the year of Your rate of change in the time series Up to three percent we've seen basically A hunt to almost 200 basis points come Out of the time series only over your um Upgrade to change basis on inflation Since you know over the last couple of Months and that's been obviously very Positive and supported for the markets Because it's allowed the market to run Away with this emeritive that we have an Opportunity to immaculately disinflate Our way out of this out of this cycle um That and the reason we'll talk about Later why that that phrase Immaculate

Disinflation be you know is here to Begin with because ultimately what would It alludes to is the fact that this is Not a normal business cycle and this is Not a typical inflation disinflation Process you typically see disinflation Well after the recession starts and so That's headline inflation on core Inflation we're starting to make some Progress you know we slowed to I want to Say about four percent three months or Sorry three on the over your basis but To me what the most exciting aspect of This morning's inflation report is Nothing to do with the year-over-year Time series we knew that the year over Year time series were going to Decelerate because of the base effects In June were actually quite quite strong But what is most important most exciting From from the perspective of the markets And the forward outlook for right tail Risks in the markets is that we have This you know kind of we're finally Starting to see a little bit of a Breakdown in the blue bars the blue bars Are the three-month annualized growth Rates or inflation rates of of these Particular indicators and on a hip on a Core basis we saw a court the the core Decelerate 90 basis points a month over Month to four percent on three month Annualized basis that's the lowest Sprint we've seen since September of

2021 and if you look at Super Coral Which is Pal's current preferred Favorite metric on on monitoring Inflation we slowed you know I want to Say a little bit over 100 basis points To 1.4 percent on a three-month Annualized basis which again is the Lowest part we've seen since the fall of 2021 so we are now back to what Powell And the other Central Bankers might Consider you know you know at Target or Slightly even below Target if you look At Super core inflation so all we have To do now in their Theory according to Their theory is wait for the lagging Indicators like shelter to catch down to Uh to where other indications of Inflation are so that was very positive Um it's not shocking to me that Bitcoin Is not rallying as much as the stock Market today Um in terms of the response to this Because ultimately what this really just Means is that we are going to put a cap On policy tightening from the Perspective of the interest rates this Doesn't really have any bearing or Impact on the balance sheet policy which Obviously uh crypto assets uh care a lot More about Do you think that with this recent Dovish print on inflation that the FED Will continue their rate hiking cycle And qt in general or do you think

There's a chance that we get an Unexpected pause at the next meeting Followed by just wait and see kind of Like what we had last time yeah that's a Great question so if I were them and and That's two ways to answer the question If I were them I would I would stop There's really no reason to continue Hiking um but you know if you look at The spread between what's currently Priced in the FED funds rate it's around 20-ish basis points and so you know it's Probably about 80 85 probability uh or 80ish probability percent probability That they're going to hike and the FED J Powell Federal Reserve is historically Not surprised asset markets whatever's Price stands for the meeting that's Typically what they do he surprised Asset markets with his words but the FED Is his fed fomc's of you know basically Have 100 batting average of of doing Whatever they have uh what's priced in From the perspective of lending markets So uh they're probably going to hike in July and don't forget we did see an Upside surprise in wage inflation last Friday in the in the job support and so From the perspective of the the FED it's Not just about what the actual inflation Prints are doing themselves it's more About what they you know their fear or Lack thereof with respect to how tight The labor market is and right now the

Labor market remains quite it's Loosening but it remains extremely tight By any historical standard This business cycle is very interesting And it does seem somewhat unique in a Lot of regards one of which of course is How resilient the labor market has been Do you think that the FED will just Continue on until the labor market Finally shows weakness uh do you think That they might Pivot beforehand if they think that Inflation is going back down to their Two percent Target this is something That I I think a lot of people are Scratching their heads about like how do You how do we reconcile a a hot labor Market and and getting inflation back Down their two percent hardhead well you Don't that's that that's that's the That's the issue and that's why Powell Gets beat red every time somebody asks Them about this stuff right you know in These press conferences so uh no so Let's um you know you asked a question Earlier you know about you know kind of Like the the tightness of the labor Market and can we achieve this Immaculate disinflation outcome from the Perspective of uh you know from the Perspective of the business cycle and The reality is let's start with why we Are seeing so much resiliency in the US Economy going you know to begin with you

Know if you go back um many of your your Followers and listeners probably have Seen me on different podcasts and shows Or whatnot or maybe they're even Subscribed to our research but we've Been of the view since the fall of last Year since the 10-year three-month yield Curve inverted in the fall of last year That a recep question is I like most of The hive had the highest probability of Occurring you know kind of Q4 of this Year or q1 of next year that is the Modal outcome based on the historical Patterns with respect to um deal current Version and the and the lag the Traditional lags you typically see with Respect to an inflection in GDP to Negative and then a spike in the Unemployment rate it typically takes About 13 18 months before you get to to See those outcomes so we are very much On track to receiving those outcomes the Problem with a lot of investors here to Date is that they just didn't understand That the the time lags with respect to Some of these business cycle processes Very mundane in my mind ad but going Back to um you know why is the labor Market been so resilient uh there's a Couple of features right well we've seen A decent amount of Labor hoarding and The reason we we've kind of determined That is we if you look at the labor Force we are still below trend from the

Three years after the pandemic we are Below the pre-covet trend the 25th or 29 2009 and 2019 Trend in the in the time Series but we have recovered the trade In a long since recovered the trend in Gross Domestic income and so if you just Put two and two together there's a lot Of money sloshing around an economy but There's not as many bodies to create the You know the goods and services in the Economy and so obviously as a function Of that we've seen tight labor markets Persisted you know persistently strong Demand for for labor relative to the Available supply of labor and you know What we see here you know you can kind Of see this uh this blue line and this This chart shows labor Supply which is The total amount of um you know folks Who are employed according to the Household survey and then we add the Total amount of jotes um the job Openings uh as well to that to that Statistic and you write around 100 171 Million bodies in that in that statistic And we're still tracking north of the Available amount of Labor so the total Labor force we've seen again going back To the labor force here it's been below Trend for a variety of reasons but the Primary reason is that we've seen this Significant drop off in labor force Participation from the 55 plus year old Cohort um obviously they've you know

Covet was a you know the health threat For folks of that age but they also Probably just pulled forward their Retirement you know don't forget this is The richest generation in U.S history You know there's retiring Baby Boomers They have a lot of money and income on Their balance sheet so they probably Just looked her out and said let's let's Start traveling instead of working and Uh you know kudos to them for that and So you asked the question about Could we see more of this Immaculate Disinflation or or are we going to get Trapped at a late at a level of Inflation that is very inconsistent with Two percent the answer is we don't know Yet because right now and the reason It's we don't know yet we've never Really seen such a bizarre dynamic Because we don't have data for this Going back many cycles the jolts data Starts in 2000 so you know we kind of You know basically everything we know About today's labor market we we can Only study the data between now and and 2000 to understand and what we find is That you know what's taking pressure so Down here in this bottom panel we show This uh shaded area chart is the spread Between the labor to supply and labor Demand and so obviously labor demand has Been outpacing labor Supply in recent um You know in this post covert era we're

Currently at 3.9 million um in excess Demand for labor relative to the Available amount of Labor Supply and That's been unusual right like the only Time in prior to covet that we had that Was a you know a couple years between 2018 and 2019 if you go back to the last Fed tightening cycle on an eventual Inflection in the liquidity side cycle But so you know part of the reason so What's caused this number to go down it Piqued this labor Supply labor demand Spread peaked at 6 million in March of Last year and now we're down to 3.9 Million and the reason it's gone down is Because it's come all the way out of It's all only come out of jotes total Job openings so we're not causing an Outright decline in employment but we Are causing a decline in the need for Additional employment in terms of the Defense technique cycle was enacted thus Far so kind of the short answer to your Question is if this pattern continues Then you will eventually get to Immaculate this inflation towards two Percent because if we get back to you Know let's say flat here we're going to Go back to Trend levels in the private Sector employment cost index which is The broadest measure of wages and Salaries in the economy if however we do Not continue to see this and the blue Line starts to hook down uh once the

Blue Line starts to down then you know They tend to be pretty non-linear to the Downside then obviously we're going to Have to see a recession to get that blue Line down and the reality is none of us Knows the answer we all have hypotheses On what's going to happen to the economy We are of the camp that we will see a Recession Um kind of in um you know latter part of This year early part of next year in Terms of when that process is likely to Commence It's an interesting business cycle but I Also think it's interesting because a Lot of new people joined financial Markets you know out of the pandemic era Right we're all at home we're interested In finance and people joined but a lot Of people including myself haven't Really lived through a full business Cycle right where you go through the Whole rate hiking Cuts or the rate hikes The calls the cuts and and as you said Right it seems like we're more or less On schedule when you go by the the time In which the three-month inverted the Tenure which I know is one of your Preferred measurements and to say that Hey it could come as late as Q4 q1 uh One one night one one question I had About this is that when you look at the Context of history at least in Non-inflict at least during periods

Where inflation is not as hot as it has Been this cycle We'll see that during yield curve Inversion we don't actually typically Have a recession right it's upon the Uninversion that you you actually see That recession come back like if you if You told me hey yield curve's inverted Are we in a recession or not I'd be like Well probably not it's probably when It's you know upon the uninversion but If you go back to say like the 70s there Are periods where we did have recessions Even once the even during when the when The yield curve is inverted do you think That if we do get a recession which does Seem to be what you're you're most Likely outcome is do you think it would Likely come on the back of an uninverted Yield curve or do you think it could Still occur even when we are this deeply Inverted yeah that's a phenomenal Question of and so let's let's go back And kind of study the Cycles the last Time we had a significant inflation Episode in the U.S economy was the 70s Obviously the late 60s to the early 1980s and to your point we saw you know In very you know these um you know deep Inversions persist well into the Recessions in each of these outcomes in Fact in the 73 to 75 recession like most Of the recession the yield curve was Inverted you know and so I do believe

That that is a legitimate Possibility in this particular business Cycle and the reason I say that is Because we've already priced in a Tremendous amount of rate Cuts if you Look at the um you know so in this chart I'm showing the blue line is the Terminal fed funds rate the red line Shows the floor fed funds rate and how We derive those values or we take the Ois curve to the overnight index drop Curve which are swaps on the policy rate Themselves those values all the way out To two years we take the max value out To two years that's the terminal fed Funds rate and the Min value after up to Tiers is the floor so where does the Market think the FED is going to cut you Know within two years time and right now The spread between the max value max Value the Min value is minus 205 basis Points and so for the curve to uninvert In a recession early in recession you Effectively have to be saying That the FED is gonna the the mark the FED is actually moving faster than this Implied you know this implied 205 basis Points of rate cuts that number compares To minus 105 for the ECB and minus 128 For the bank of England so that's a Long-winded way of saying the hurdle for The yield curve to uninvert very quickly Early in the recessionary process is Actually quite high it's very likely

That we see this you know the three Month ten year curve invert really kind Of late in the process and that lines up With the fed's guidance right the FED Has been very consistently in the higher For longer Camp Um that you know they they don't want The you know the ghost of Arthur Burns If you will the stop start nature of Inflation back in the 70s to kind of Repeat itself in this particular decade And so we are of the view that um you Know if you think about this from the Perspective of the feds forecasts right We get every every three months we get The summary of economic projections in The um in the uh in the summary Objections in the fomc meeting and they Contain the feds forecast or GDP core pc Deflator pc deflator unemployment and And then obviously the dot block you Know the infamous dot plug but let's Focus on their forecast for the Unemployment rate in the fomc sees the Unemployment rate reaching a value of 4.5 percent by the year end of 2024. Unemployment rate is currently 3.6 Percent now Which means the FED is implicitly Forecasting a 90 basis point Delta Positive Delta in the unemployment rate Well you go back and you look at the History of the time series I asked Myself has there ever been a Plus 90

Basis point Delta in the history of this Time series on an 18-month interval so June of 2023 to December 2024. and the Reality is yeah there have been plenty But they've all coincided with their Sessions You know so to me what this says with The signals to me is that the FED is Implicitly forecasting a very mild Recession and I say mild because 4.5 Would be on the very low end of where The unemployment rate tends to rise to In recession in fact the median value in Terms of the terminal unemployment rate During recession is 7.7 so I think it's Going to take something that looks like More than a mild recession in the data For the FED to actually start to panic And deliver the market the rate Cuts in QE that'll obviously take Bitcoin you Know north of 100 000 next year So you think do you think the Bitcoin Could go north of 100 000 next year are You saying that process can start next Year oh I I think by the end of next Year probably had north of 100 000. we Are in a liquidity cycle upturn I think You know the folks like myself Michael Howe rob Paul A buddy of mine you know We've all have different models in terms Of trying to identify where we are in The liquidity cycle and the reality is It did bottom um in the fall of last Year this is the process to seeing the

Liquidity cycle upturn has not been a Smooth linear ride but the reality is That as long as we continue to trudge Forward you know three months at a time Six months at a time you're talking About a situation where you know Bitcoin Will have the the bat the wind that it Sells again it does not have the willing That it sells currently Um and the reason for that is that Liquidity right now in the very you know Very immediate term is actually moving In the wrong direction and so what I'm Showing in this chart The Blue Line shows our Global liquidity Proxy that's the the sum of the global Central bank balance sheet the the Global uh broad money supply and Global FX reserves by this code Um so that's that's how we track a Global liquidity at 42 macro um the red Line shows the s p and these bottom Panels show the max drawdown studies for Those respective indicators as you can See we bottomed late 2022 in liquidity Terms and the market has had a you know Fairly linear recovery since then Liquidity had a very sharp recovery but It's since been kind of going in the Wrong direction and that's something That you know we've been Keen to call Out and this is part of the reason why We've seen stocks continue to Rally in Recent months but we've seen kind of

Crypto be flat to them if you look at Things like Bitcoin ethereum and you Talked with your uh your partner the Other day about the all coins you know You know continuing to make new lows you Know the liquidity dries up in the Fringes and it you know it gets the Fringes excited first like whenever There's more liquidity you can't buy Enough altcoins but whenever liquidity Is in Retreat it's the things like the All coin or the you go on the risk Spectrum that tend to get hit the most Um in this situation so um you know Again we do see this you know this this Pattern of liquidity has been the Non-linear recovery process it's going To continue Rising longer term but it's Not we could continue to chop around if Not even make new look not new lows if Not even Trend lower a bit throughout The second half of this year because There's some more factors that are Actually contributing to negative Liquidity cycle developments in places Like Europe obviously here in the US So how do we reconcile things like Risk Assets in general like the s p is has Been trending up for basically the last Half year uh Bitcoin while it hasn't Been doing a whole lot recently it is Still 2x off its lows and I guess the Question of course is if if the if the Scenario go into 100K by let's say the

End of 2024 is in the cards what happens Between now and then right like if we Get a recession uh let's say Q4 q1 which Is it seems to be like the most likely Outcome as you discussed do you think Risk assets sell off into something like That like do you think that is something That risk assets would react very Negatively to or do you think they would Just shrug it off yeah absolutely so the The so the answer to your question is is Twofold right so we're talking about two Durations longer very long term Certainly from today you're talking About 18 months between now and today I Think by the Bitcoin to be over a Hundred thousand but between now and Today between now and that hundred Thousand we can go from thirty thousand To fifteen thousand very easily as a Function of what we call a phase two Credit cycle downturn and what they want To face two credit cycle downturn is It's just the market pricing in the Recession which we firmly believe in our Data show that the market did not do Last year last year at Price stay in the Liquidity cycle downturn and since um You know since the the lows of last year It's priced in the liquidity cycle I'm Turning the inflection in the liquidity Cycle um so let's put some numbers on This in terms of you know the the Liquidity cycle so you know we've had

Four liquidity Cycles not including the Current uh upturn not including the Current one that started in October We've had four liquidity cycle upturns Uh since March of 2009 since the bottom In liquidity uh in March of 2009. uh on Balanced on a median basis they tend to Last right around two two and a half Years Um and the s p tends to be up on a Cumulative basis 37 in these liquidity Cycle upturns on a median basis the NASDAQ 100 tends to be up 67 on a median Basis in that two two and a half years During these liquidity cycle upturns uh Bitcoin on a median basis is up not four Thousand eight hundred and twenty six Percent but again obviously you have a Lot of you know kind of early Bitcoin Pricing in there so if you just want to Focus on ethereum the medium upturn the Median recover cumulative performance in Ethereum during these liquidity cycle of Turns which is a little bit later of an Entry uh it's a plus 905 percent so You're talking about some very positive Returns from now through let's call it The end of next year as a function of This liquidity cycle upturn that began In the fall of last year the problem is Is that along the way you subject Yourself to significant volatility if And when the recession comes and again We continue to be Q4 to q1 in that in

That in that view so if you look at the Max drawdowns that something like Bitcoin has historically suffered during Liquidity cycle of terms wow the trend In liquidity has been higher we see the Max drawdown in Bitcoin doing those for Liquidity cycle upturns it's minus 66 Percent And the median Max drawdown for ethereum Is minus 67 again so Bitcoin and Ethereum have both been you know cut More than in half during the liquidity Cycle upturns and that's pretty Consistent across across uh you know Across these Market Cycles so you know It's all about mismanaging durations and Understanding where you are in the Business cycle in terms of you know Allocating you know Max your maximum's Exposures to these asset classes that Would certainly be in line actually with What we've historically seen Bitcoin do Kind of like find a bottom Um 2014 2018 2022 kind of bounce up and Then find like a double bottom or a Higher low 12 months later 15 months Later that's actually really in line With what we've historically seen it'd Be interesting if history repeated Itself uh once once more yeah no I would I would expect to see you know a pretty Significant drawdown in Bitcoin you know Probably you know sometime between q1 of The next year and the spring of next

Year prior to the happen you know the History of Bitcoin prior to having the Years prior to happen is actually quite Volatile Um you know you tend to see multiple 20 To 40 Corrections in the year leading up To the having cycle and so that I don't Think this year is going to be Particularly um you know we already seen One right I don't think this year is Going to be particularly um different in That regard but we also have something That we have yet to price in um in our View is again that that recession Process that's likely to commence uh you Know maybe in one and no no no sooner Than one quarter but uh certainly uh in Our view probably by two three quarters I have a question for you because I've Had this Theory with crypto and I'm Curious if you think it relates to Equities as well where I don't have as Much experience in Um so with crypto we've seen all coins Put in new lows right and actually if You look at the altcoin market we're now In our fourth potential red month in a Row Um where the altcoin market is trending Down Bitcoin has been mostly trending Sideways Um but it's interesting because we've Seen the altcoin market bleed to bitcoin Right like Bitcoin is is absorbing more

Of that market share and so I I've had This theory that like you know as Liquidity dries up the riskiest assets Get hit first right and they bleed to The safer ones like the all coins bleed To bitcoin do you think that in the Equity verse like or sorry I say it like That do you think in equity markets Um we've seen like large caps rally Because people are going to the relative Safety of you know plays like apple and And and and you know Microsoft and Nvidia Um or do you think it it's more so Related to the you know to the AI boom Like what's your view there yeah so I Mean your theory is very consistent with Hundreds of years of Market history uh Of studying the equity markets so yeah So typically all right tell my followers That please yeah no so uh unfortunately If you guys are on the wrong side of This uh discussion uh it's never it's Never too late to improve your Positioning uh that's uh that's uh Something I learned from a good investor But uh anyway the the the the the going Back to what we're discussing here is That you know you study sector and style Factor leadership within the equity Market which is something we study uh on A daily basis or six times a week here 42 macro because we're trying to help Institutional portfolio managers you

Know risk manage these big pivots in the Markets even though they're Market Neutral um so that's something where you Have a pretty good uh keen understanding In and what we find in studying those Cycles with hundreds of years of data as Far back as we get the data farmer French Etc is that the the riskiest Segments in terms of sector and style Factors tend to break down or they tend To Peak well in in advance of the Ultimate peak of the market which Ultimately is another way of saying the Market cap from those riskier sectors And style factors goes gets funneled Into what they would seem to be less Risky and obviously those what's less Risky is size Mega caps you know the Larger companies tend to be less risky They tend to have more Diversified Business models they tend to have less Leverage on their balance sheet they Tend to have more access to Capital Markets and so all these things that Make you more defensive in an economic Downturn are all the same fundamental Reasons why investors you know tend to Flow funds into those stocks um you know Later in the business cycle to me it's No different I think crypto is I think All markets are you know fundamentally Driven by fear and greed right the Reason this process happens is because People are fearful about the outcomes

And what's going to happen to their Riskier businesses their more Speculative Investments and right a Speculative investment is further out on The risk Spectrum for a reason we know It's riskier and the reason that's why We're seeking those higher ex-anti Returns you want higher returns from Assets that are deemed to be more risky Ultimately when you think those returns Aren't going to materialize you start to Pull rain it in and so I think that's Exactly to your point what's happening In the crypto space you know the altcoin The likelihood that we're going to see Enough liquidity provision over the Medium term like the next two to three Quarters in terms to really get the all Coin space excited is very low in my in My opinion in fact um if we go back to This um you know our charts on liquidity Every month in this in the slide deck we Have about 20 25 charts on U.S and Global liquidity to help investors kind Of understand where we are in those Cycles and and you know one of the Things we could spot and one of the Things we spot uh or track religiously Is um you know kind of the chilling Through month impulse and liquidity and So again as I mentioned this is our Global liquidity proxy which is again The sum This Global central bank balance Sheet Global broad money supply and

Global FX reserves minus gold we can Talk about why those indicators are There but I'm going back to this impulse We are minus 3.2 trillion dollars in the Global liquidity cycle impulse right now On a trailing three-month basis you know We haven't seen anything like that since You know kind of the latter part of last Year heading into Q4 of last year really This is and what we're experiencing and So clearly Bitcoin has weathered this Store formed by trading flat over the Last three months and part of them Weathering storm I think in our view and I think you would agree with this is the Fact that some of that care market cap From the altcoin space is flowing back Up the risk Spectrum or back in under The Spectrum towards an asset like Bitcoin You know I found myself wanting to Interview you to talk mostly about macro But now I just keep wanting to talk About crypto I think it's really I mean I think it's fascinating to get you know Someone who's really well versed in the Macro to give their views on on things Like all coins because it's not Something that you can necessarily Commonly find yeah so that's it's really Interesting and I I really do appreciate You providing for providing insight into That so so the argument of course I Guess is that when the liquidity cycle

Begins a more sustained upturn which Eventually will occur that's when those Riskier assets up the risk curve like The all coins that's when those can Start to do well again right yeah 100 And we know what's going to drive that Right it's it's all the stuff that we're Looking for as investors right it's the Spike in the unemployment rate spike in Jobless claims you know you're finally Going to see inflation break down uh Sustainably below Trend and ultimately That's you know we know where we are in Those processes we track that Religiously as well uh get here 42 macro In terms of understanding where we are In the business cycle so a couple charts On on that you know we'll talk about you Know our hope plus eye framework shout Out to Michael cancerous I'm not sure if You're familiar with him as you know Awful macro guy you know so he has this What he calls this hope framework um That sort of tries to understand you Know the progression of you know Different Cycles within the economy Heading into and out of recession and we So it expounded upon that framework to Include inflation because I think Obviously inflation is the most Important thing to be talking about Right now and so when you look at you Know kind of the historical progression Of these indicators

Um you know uh prior you know leading up To and through a recession what we tend To find is that housing the basket of Indicators that we have to represent the Housing cycle over the last you know 12 Business Cycles you know going to all The business Cycles in the post-war era Tends to break down on the eight uh Right around 18 months ahead of a Recession orders tend to break down Right around you know kind of eight to Ten months ahead of recession production Profits tend to break down somewhere Around four to six months out of Recession employment tends to break down Right on time which makes sense right The nber uses primarily the labor market As its best primary business cycle Dating tool and then so when you look at Inflation inflation is tin it is Historically been the last thing the Shooter dropped prior to recession or You know it tends to break down six to Seven months after a recession concludes In terms of breaking down below and so If you look at where we are in the Current business cycle it actually you Made a comment earlier that like this Has been a funky business cycle which I Agree with like forecasting in this Business cycle has been used to have to Throw out all your models because how Most models work right you're training Them on historical data and we're using

That historical training set to forecast Future outcomes the reality is this Model this is this business cycle has Looked very different from a Delta and Magnitude standpoint relative to all the Recent data that we have in the economy But it has not looked different from the Perspective of the progression of the Things that are occurring in the economy Um and so we've seen housing break down A long time ago Then we had orders break down now we got Production profits breaking down Employment's on its way to breaking down We suspect it'll break down sometime in Q4 q1 of next year and then ultimately Inflation will really you know kind of Sustainably break down towards two Percent or wherever it's going to get Stuck at um you know kind of you know Maybe spring of next year and so this Looks like every other business cycle Again what's what's filtering into these Charts here into these lines here are You know somewhere between 8 to 12 Indicators per cycle again going all the Way back to as far as we can get the Data to each of the post-war business Cycle expansions so the US economy is a Pretty consistent beast and it's even Consistent in what has been the most Weird business cycle of most people's Lives and so that's you know that's kind Of a long way to way of saying you know

We know what to expect when these when These pink line and the blue line go Down and they finally start to break Down that's when you as an investor can You know have a green light to Anticipate you know significant Liquidity from the fed you know the ECB Would be on a three to six month lag to That just based on their inflation Dynamics and where they are in this Particular cycle for the Eurozone Economy which is something we we track As well so One of the I think common questions We've talked about or people have talked About for a while now is you know no Landing soft landing hard Landing Um and certainly it seems like a Recession would more so fall into a hard Landing uh Camp than a soft Landing of Course if it's a mild recession then Maybe it would be categorized as a soft Landing I'm not really sure but if if Somehow you know three years from now we Look back on this business cycle and it Sort of remembered Um as a soft Landing how how do you Think that would play out from here Yeah so I mean the the number one thing That I think that separates this Business cycle relative to previous Business Cycles at least prior to um the 60s and 70s really the 60s is the amount Of liquidity that's in the system when

You talk about uh cash on household Balance sheets checkable deposits so None of this nonsense on Twitter Everyone keeps talking about XX savings This and excess savings that and I'm Like what It's a stupid statistic I've heard in my Career so uh part of me if I'm hijacking The program to poo poo it but uh getting Back on track the if you look at Checkable deposits from the flow of Funds report on the private sector Particularly household sector corporate Sector obviously Um it's a it's right around three Percent of total assets and you have to Go back to the mid-1960s uh to exceed The three percent of total assets in That in that ratio you know for the for The private sector I mean it's we have Not been we the private sector have not Been this flush with cash and feeling This rich and having this much liquidity On our balance sheets since going back To Prior to the great inflation and so That's um that's kind of one Dynamic That I think is um really supportive Another Dynamic that's really supportive And you know kind of makes this business Cycle process unique and part of the Reason why the FED has had to hike Interest rates so much more than than Was initially anticipated why our star Has gravitated higher is because we have

Not seen the capital misallocation that You traditionally see ahead of a ahead Of a business cycle downturn and so you Know one of the ways we track that is Looking through the lens of private Non-financial sector debt to GDP Um that that metric I'll be tracking on A five-year z-score basis and typically When you reach two on that metric like a Two Sigma move on that metric uh you're Talking about you know you're very close You're very late in the business cycle You know bad things can happen typically When you expand credit at a very fast Pace it's usually there's some form of Capital misallocation and adverse Selection that is yet to be revealed but Will be revealed when the downturn Happens and so um you know we've seen The obviously a significant degree of Financial tightening through the lens of The private sector service ratio but That Financial tightening has sort of Come without the commensurate you know Like growth and credit and so we're Basically who are we tightening on Basically you know so much debt has Turned out so much debt is obviously Long in duration in that regard if you Look at the share of of corporate debt That's um that's that's um that's um Floating rate relative to fix rate you Know we're down at 30 you know it used To be like 90 you know a few decades ago

You know so like there's so much you Know there's so many reasons why this Business cycle is unique this tightening Cycle is unique specifically the Tightening cycle so if we have an Immaculate disinflation and a soft Landing in our view it's going to come Primarily through the liquidity Functions of the private sector and also The function that we just we simply just Not don't have the credit cycle Vulnerabilities in this business cycle That we've historically had leading up To recession It does seem like liquidity has been Ample over the last year I mean you're Still seeing all sorts of I mean in the Riskiest assets of crypto there's still There's still tons of liquidity that We're seeing and uh it's even surprised Me uh you know for the last year I've Actually been very surprised at just how Resilient Um some of these riskier projects have Been I am curious though I mean so if The if the idea about a a you know a Recession coming let's say within you Know two quarters or so one of the Things that is interesting to me is the S p normally we see it it loves climbing The wall query right like the s p it's Almost like you know it doesn't really Need a reason to go up right it needs a Compelling reason to go down and right

And so what I can what I can't wrap my Head around is like well is is it only Going to be the labor market that brings It down right of course there's a Geopolitical risk we can't really Concern ourselves too much with that Because it's impossible to predict right But I'm curious you know does it all Just come down to the labor market like At the end of the day is that what will Finally break the back of of this Rally Or you know could you see it could you See the s p fading before before a Recession comes uh no I I cannot um so We would have to see another significant Withdrawal liquidity a Canada 2022 which Is like a by a country mile like a Historical withdrawal of liquidity um by Any measure that we have data for um you Know you got to go back to I want to say Like the 1800s to see the stocks and Bonds down the uh in one year at the Same time like so clearly 2022 was like An anomalous Year from the center of Liquidity uh if you're talking about What would cause the market to go down It's it is the the recession it's the Business cycle downturn uh you know I Don't want to use I want to use specific Phrases you know because recession is This kind of amorphous thing but a Business cycle downturn is a process you Know there's you know there's this Process of corporates having the right

Size their operating structure to be set Themselves up to grow for the next you Know for the next expansion and so you Know if you go back and you look at you Know historical you know kind of uh you Know business cycle downturns the s p Tends to decline on a median basis 24 in That process with an interquartile range Of minus 19 to minus 39 obviously if the Recession is deeper or more really not Even deeper it's more protracted is the Issue then you have worse outcomes and Conversely if it tends to be shorter in Duration you tend to have better Outcomes but you know it's that minus 19 To minus 39 that you need to be thinking About as an investor to having a risk Manage over the next let's call it Sometime between four and five months From now and and you know six to 12 Months from now I think that's probably One of those we'll see the big Land Express Um so in that in that regard it could be Sooner you know that's just based on our Interpretation of where we are on the Business cycle and the reason I say it's Based on that is historically the s p Tends to Peak it tends to squeeze every Year leading up to the recession like The median return and the s p in the Year prior to recession prior to its Peak ahead of a recession is plus 16 With an interquartile range of plus 11

To plus 20 sorry plus 14 to plus 20 so You're talking about 14 to 20 you know If the interquartile range is that in The year leading up to the s p and it Tends to squeeze right up into the very End and the s p tends to Peak right Around a month ahead of the breakout and Jobless claims so if you start to see Driver's claims really accelerate in the Material fashion that's kind of a Telltale sign that you're in a recession Because you're not going to know until Well after the fact when the MBR comes Out and dates it with the business cycle Data committee but it could take years They didn't think we were in the Great Recession until 2009. thanks for coming Out guys You know you kind of miss the wait but Thanks so they're not going to tell you They're not going to put the red bars in The charts or whatever and tell you in Real time so you're gonna have to look At a companion of indicators in real Time to give you a sense okay is this Five percent correction in the stock Market on its way to 20 or 25 or is this A viable five percent correction in the Stock market on its way to another you Know five ten percent upside before the Ultimate Peak that's that's that that we Have a dozens of indicators that we you Know summarize for our clients in terms Of determining that

The um the initial claims is something That I know people have been tracking a Lot and you just you mentioned it Recently and it's still trending it only Like you know 240 250 uh 240 250 000. Is it gonna take I mean 300 400 000 Before we see any any material change in The unemployment rate I mean it it seems Like it hasn't really made that move yet And Um it could take months before it Actually it gets to those levels yeah no It's a great question so it's it's a Lesson in my opinion it's less about Initial claims we've back tested this uh In terms of the different cycles and What indicators are best to give you the Most lead time in terms of getting in And out of the market you know around These business cycle Peaks and business Cycle drops and it's actually continuing Claims is the better indicator okay There's particular thresholds to analyze With respect to the speed of the change Because you know so much of the economy You know there's fits and starts if You're studying data too closely which Is what you know we do as institutional Investors you know you're kind of you're You're an engineer you know this better Than I do it's if you if you if you see The full distribution of data you Realize that the Tails and there's those Anomalies and there's all this other

Stuff right and so so much of what we Have to do as investors is you know Formulate you know use our experience to Know when to kind of weight certain Things and not wait certain things and These mental models and in these actual Models that we built and so going back To this initial claims you know there's Fits and starts in the jobless claims Data and fits and starts in late Market Data as well go back to last year we've We thought you know not we consensus you Know saw some some slowing in the labor Market and ultimately thought uh the Recession was on the Press of this but You know we very much pushed against That because we did not see the kind of You know speed of change that would Typically historically have been Associated with recession so um you know We're well aware what those thresholds Are we are not breaching those Thresholds yet we have some indicators Of that you know those dozens but you Know probably 24 25 indicators that we Look at to kind of give you a sense of Where you are specifically in the Business cycle you know there's some That are kind of broken down and they're Consistent with that hope framework that Hopeless I framework that we just Discussed which is all of the Leading Edge stuff is breaking down but all like The middle Edge stuff is maybe starting

To break down which means we're you know At least a quarter or two away from the The lagging Edge stuff that'll actually Confirm a recession from breaking down Do you think there's any seasonality in In some of this stuff like I I'm if Memory serves me correctly continued Claims back in 2019 we also had an Inverted yield curve in 2019 as well I Believe continued claims hit a local top Around that March April time frame just Like it did this year it dropped until Around September and then it started Going back up again and then of course We had the pandemic which it's hard it's Hard to draw too many conclusions Because I mean every everything just Went up so quickly but do you think There's any like seasonality associated With some of these macro metrics like With initial claims and continue claims Or do you think it's more so geared Towards just the each unique business Cycle and you can't take much away from The seasonality component uh so if You're analyzing data in proper in the Proper rate of change format seasonality Becomes less of an issue Um there is seasonality a lot of these Data points and so with the BLS and Other indicator and other you know Agencies try to do is you know remove The seasonality by seasonally adjusting Things the problem with doing that is

That we've had this very funky you know 2020 2021 experience in the data that Makes it very much impossible to use the Same season you know seasonal adjustment Models to do I mean what I what what I've what I've been doing in terms of Our econometric tools is just taking That out of the data set from a c if You're trying to seasonally adjust Something because clearly that's not a Seasonal pattern that was a very um you Know one-time event from perspective of Covet so to answer your question yes There are seasonality and data you need To know what you're looking at when You're analyzing data is this a Non-season adjusted time series is this A seasonally just a Time series was this Season of the dusted time series Significantly impacted by covet if it Was significantly impacted by covet We're probably going to have to find a Way to build our own seasonal Adjustments using the nonsense Adjustment data this is stuff that we You know we do a 42 macro you know for Our institutional clients and so the Answer is yes but I think taking a step Back from this you know very you know Esoteric discussion It's not just about you know worrying About is one data point giving you the Accuracy giving you an accurate read on The economy you know I I look at I see

On Twitter um what's it called Trueflation trueflation they're out There saying we know what inflation is This is the proper number of inflation Well the reality is no one gives a damn Certainly not an Institutional Finance Space because the FED doesn't care about That number right it's about Understanding what the balance of risk Is as it relates to the market and Market positioning as opposed to what The right answer is I actually don't Care what the right answer is I don't You think I care what GDP is going to do Or what CPI is going to do or PC is Going to do no I care about the rate of Change and the the the direction of Travel and the magnitude and how quickly It's traveling and because that's where Most of the information is from the Perspective of asset markets and Investor positioning so um you know just One final thing I make on this point is It's always very important to have a Compendium of indicators you never want To rely on one tool or one signal to Guide the your overall net worth as an As a retail investor certainly not your Entire investment process as an Institutional Investor because the tools And models break they all break you know This better you know just as well as I Do and so it's always important to have A compendium of tools a robust set of

Indicators that will allow you to say Okay this is this is it gives me a lot Of confidence that this is a turning Point where this gives me a lot of Confidence that that will be a turning Point I think the the quote is all models are Wrong and some are useful right exactly Um one thing you said uh it actually Stood out to me and I I think you Actually sort of referenced this earlier It's not about what we think it's about What you know the reaction function will Be Say by coming out of the Federal Reserve right and earlier I asked you a Question I said you know based on where CPI is you know what do you think and You're like well there's what I think And there's what the FED thinks Um and those can be two completely Different things so right we have to Prepare for what we think the the Reaction by the fed and other things Could be not not what we necessarily see Going on in trueflation because you're Right I mean the FED is not uh I doubt Powell is looking at the most recent Trueflation numbers to figure out if He's going to hike next month not at all Not even a little bit man so I don't Even knows that inflation is to be Totally honest Maybe we can wrap it up on on one of These final points I I mean I and I'd

Like to give you the floor at some point Just to provide some final thoughts but One one thing I'm curious about is let's Suppose that this we get this liquidity Cycle downturn right it doesn't Necessarily have to put in new lows but Even if it's just training in the wrong Direction and if if a market cycle Downturn or if the a downturn in the Business cycle Um occurs let's say Q4 q1 And we know that risk assets like the Stock market like Bitcoin and and Cryptocurrencies they don't tend to do That well so For for people that want to like hedge Right like where do you look do you look At things like gold uh and silver do you Look at bonds right you take a closer Look at TLT I know people are getting People have getting been getting Destroyed by by you know longing TLT too Soon and it just keeps not really going Anywhere so what's your view on on Hedging for those sorts of outcomes Um because it could become quite Relevant here uh in just a few months Yeah absolutely so in terms of hedging So hedging is about what what are you Trying to hedge right like and so like Answer your question it sounds like You're saying you know what you're Asking what what are what should Investors be doing to hedge left tail

Risk in in Risk assets right like to me Even before we begin to answering that Question There's always a distribution of Outcomes are you hedging left toe risk Or are you hedging right tail risk the Biggest hedge that investors needed to Do this year was head right toe risk Because the institutional investment Community by and large came into the Year under invested and invested for a Recession That was supposed to Materialize already they were dead wrong On that we were not dead wrong on that We've been very consistent about our Recession timing view it being Q4 of This year q1 of next year and so that That right tail risk really came home to Roost and part of the reason we're Seeing stocks rally so sharply is with All the short covering and performance Chasing associated with that right Tailor's hedging process you know having To having to really kind of materialize And so going back to the discussion as It relates to the left pedging left tail Risk a lot of investors have really Crowded in the bonds and fixed income as A you know kind of with the Understanding that hey the recession is A near-term probability and we need to Find ways to a make money at the bare Minimum protect our protect the you know The 60-ish style of their you know

Traditional 60 40 portfolios from the Issue in my opinion why bonds have not Worked and you know we've not been on The wrong side of bonds this year we Were on the wrong side of the bonds in The first half of last year but really Learned our lesson from that mistake and Have not been on the wrong side of bond Since then and part of the reason we've Understood this is because The bond market is priced to Perfection Already You really need to see some very Significantly negative outcomes in the Business cycle and they need to be on The tape they can't just be on Twitter They need to be in the reported data for The bond market to get spooked enough to Kind of really reward that positioning And so what I'm showing this chart this Is a pretty wonky esoteric stuff so let Me kind of explain this the the Shaded Area chart shows the 10-year term Premium and so that's the the excess Return you get as an investor for Locking your money in for 10 years as Opposed to constantly rolling over Short-term paper like a three month T-bill you know for you know for as many Times you need to to get to a tenure so That number is minus 67 basis points Which means there's an excess of demand For the tenure relative to you know what Uh you know the theoretical model would

Suggest to imply um you know you go back To the last time we had a inflation Episode we went from basically zero in The term premium to north of 500 basis Points so this number this number does Fluctuate and has obviously been one of The driving factors of the great Moderation uh over in recent decades Prior to coven this the red line in this Chart shows market-based inflation Expectations on the tenure at right Around two and a two and a quarter and Then the Blue Line shows implied Inflation expectations of the 10-year From you know from like theoretical Models of What bond should actually be Priced at and the reality is those Numbers coalesce around two percent and So we got a bond market that's pricing In two percent inflation on the tenure We got a bond market that is deeply Negative term premium on the 10-year Which means in order for you to make Money in bonds you need some like Significantly large left tail risk Outcome that's that's even more left Tail risky than what's currently priced Into the fed you know in terms of the Money marks what we talked about earlier Right you know they're already pricing In 205 basis points now the median rate Cutting cycle in a recession is right Around 400 basis points and typically Recessions that are caused by tightening

The medium the median rate cutting Cycles around 475 basis points there's Reason to believe that we're not going To get the C in my view it's very much Reason to believe that we um aren't Going to see that kind of those kind of Outcomes you know we have a what we call Our second inflation model which is Designed to sort of interpolate the Change in a significant or in about Around there's 20 factors to 20 features In that model that are interpolating the Change of all these features that have Historically been very correlated or Core integrated with inflation and right Now that interpolation suggests that Core pce the underlying Trend in core PC So what is it the time series cycled Around it's gravitated to three percent Now that doesn't sound like a lot of Inflation but the trend from the Previous decade was 1.6 so we're talking About a near doubling of that underlying Trend of inflation and If the Fed does Not change its inflation Target to three Percent what is ultimately going to mean Is that they're going to be constantly Leaning against markets as opposed to Supporting markets which is what they Were doing during the QE era of the Previous decade so ultimately you know Longer term I do believe the FED is Going to be forced politically into a Three percent inflation Target if only

Because you know they're going to be Called upon to sort of take down a lot Of Supply from the treasury you don't Forget the the private sector Thanks to QE thanks to you know Banks Not having the best balance sheet Capacity anymore I.E Silicon Valley Bank Uh you know First Republic Bank and then Obviously thanks to a global central Banks kind of walking away from the Dollar at the margins in recent decades Sorry really since 2014 you're seeing The private sector have to take down a Significantly larger share of Treasury Oceans in recent in recent quarters you Know we at the end of 2021 the private Sector owned about 36 percent of all Marketable treasuries right now that Number is 46 so we've grown our share of Marketable Treasury Market a thousand Basis points in like 18 months and That's part of the reason we saw what we Saw out of the bond market last year It's there are no buyers or we are more Price sensitive buyers and all the rest Of the other buyers are the fed's not Price sensitive foreign Center Banks Aren't price sensitive you can make the Case that commercial Banks aren't price Sensitive because of the Basel risk Ratings on those Securities and so that You know that when you think about this From a longer term perspective the FED If they're constantly anchoring on

Getting the economy back to two percent Inflation they're not going to be Expanding their balance sheet at a rate That is really commensurate with what The treasury needs it to do from the Perspective of the you know the Projection and the budget deficit so I Think they are going to three percent They're going to need a recession to do It and they just might get one in the First half of next year You look back on History it certainly Seems like you know watching what the FED does as opposed to what they say is A lot better because I mean they'll say All sorts of things right but when the Political pressure comes and it probably Will come I mean next year's an election Year Um we certainly could see something like That again and we I think it'll be Interesting to see if it if it plays out Like I will say the last two election Years though were uh 2020 and uh in 2008 So or sorry not to uh last two big uh Presidential election years or sorry let Me take it back the uh we've seen very Deep Market Corrections in a in a Presidential election year is what I Meant to say um obviously 2000 we've Seen 2008 we've seen 2020 so I wouldn't I wouldn't anchor on that as as a I Wouldn't anchor on that as a as a reason For the FED to Pivot I.E the political

Pressure from DC the pressure is not Political from DC or from the White House or from Congress the pressure is From the the indicators that they told Us to focus on right like you know the Labor Market's breaking down and they're Going to get pressure from the academic Community the buy side et cetera the Treasury is going to uh pressure from The treasury borrowing advisory Committee you know the fed's going to Get pressure from these fed listings Events and all the stuff in the press Conferences and at the fomc so there is Political pressure from the broader Populace it doesn't necessarily have to Be emanating from DC because ultimately I don't think the FED is a particularly Political body in that regard but I Think they're a political body in the With respect to how they interact with The general public They want to be liked just like everyone Does Right yeah that's true and of course They do have a dual mandate right it's Not just inflation it's also the labor Market if the labor market starts to go Then Um Right they're gonna have to they're Gonna have to do something to show that It's a dual mandate and not just to get Inflation back down I guess

Um Darius I I we've been going for about An hour here I I do want to I want to Give you just you know sort of like a Closing statement if you could if you Can make but if you guys are watching This and you you're not following Darius On Twitter make sure you do so again Link to that will be in the description Below also make sure to check out his Website at 42macro.com again links all For that in the description below and The pin comment Darius I'll just give You the closing statement here what do You think uh what do you think the most Uh the most important takeaways here for For investors are as we as we navigate Say like the the rest of this business Cycle yeah absolutely so thanks again Ben I appreciate being able to connect With your audience hopefully they can Learn some things about cycles and risk Management and all that stuff Um just in terms of like from a from a What to do with all this information in Your portfolio so that's we're Management is where we really specialize In 42 macro we don't just have these you Know macro thoughts and macro opinions It's about what do I actually do from The perspective of managing my own money Or managing institutional client money And so in terms of the key takeaways you Know we think we're about one to two Quarters away from the start of a

Recession markets tend to Peak looking At s p right around a month ahead of That process and so if you're saying a Recession is going to start in let's say On December in December you're talking About a market that could peak in October maybe even at the latest November if you're saying a recession That's going to start and let's call it February of next year you're talking About a market that's going to Peak in December maybe even January and so That's in terms of the s p as it relates To crypto you know crypto is a bunch of Different asset class liquidity is what Drives the crypto asset class there's Other factors that drive you know the Other other asset classes obviously Liquidities being one of them with Stocks and credit but you know growth Technical growth expectations Drive Equity structural growth expectations Drive equities inflation and you know Cyclical and structural inflation Expectations Drive equities and credit As well there's all these other factors That you need to be abreast of as a risk Manager in these more traditional Transfer markets but in crypto it's Really the liquidity cycle and so in Terms of understanding where we are in The liquidity cycle we are currently in A liquidity cycle upturn those upturns Tend to last two to two and a half years

So that kind of puts you in you know Late 2024 early 2025 of when we'll see The peak of this current liquidity cycle Upturn but one thing that's been very Different about this liquidity cycle of Term relative to the previous ones is That it has not come with kind of a Linear recovery in public sector Liquidity provision and what I mean by Public sector liquidity provision is Central bank balance sheet expansion you Know fiscal deficits as far as the eye Can see and those being monetized by Central banks much like what we saw in 2020 2021 and in previous liquidity Cycles that is not happening in this Particular cycle what's really driving The bus on the liquidity cycle here That's kind of offsetting some of the QT Dynamics that we're seeing is this Decline in the dollar this decline it Out so in this chart I'm showing going Back to those charts we were showing Earlier our Global Mac our Global Liquidity proxy which again is the Global central bank balance sheet Global Broad money supply and Global FX Reserves minus gold we show that number On a year of your rate of change basis In the black on the black plot what you See is almost perfectly inversely Correlated is the global real effective Exchange rate which is as the Dollar's Real effective exchange rate on a year

Over year basis and so one of the things That's been offsetting qt in the U.S QT And Eurozone the obviously the policy Tightening cycle although I don't think Rates matter as much to crypto as they Do in other asset classes because There's really no value rates would Matter if there's evaluation in the Crypto classic class but there isn't and So that's why it doesn't matter as much And so liquidity is really the only um Only only feature and so if we can Continue to see dollar weakness and Today's a huge down day down big day for The dollar we're breaking below the 50 Fibonacci retracement level from the January 2021 through September 2022 uh Bull market if we break through that Level it's an indication that we may you Know be on the precipice to have another Major lag down in the ballot if we have Another major lag down in the dollar You're going to see uh you know rise in This black line and a rise in global Liquidity if the dollar stabilizes at or Near these levels then what's going to Continue to happen is that we're going To continue to see liquidity siphon out Of the system you know albeit at a much Slower Pace than it has in recent months In our view China is going to come back Online from the perspective of liquidity Provision as well in the summer and into The fall so there's some offsetting

Factors in liquidity but I just want Investors to realize that a less the Dollar is going down and going down in a Pretty material Pace this black line Will have a very you know non-linear Process and in fact we could see it go Down pretty significantly in the winter When the public the private sector Liquidity portion really starts to wane Right it's not just about the public Sector it's about the private sector as Well it's about you know how banks are Growing their balance sheets how Non-bank financiers are growing their Balance sheets as well and ultimately How does that money filter through the Economy so Um you know there's a lot of stuff to Watch but that's kind of a long-winded Way of saying You're probably going to see s p Outperform Bitcoin over the next six to Nine months in our view Um and ultimately I do believe from Whatever Peak the s p reaches you're Talking about a market that's going to Be down 20 to or sorry let's use the Interquartile range to be specific a Market that's going to be down stock Market 19 to 39 bitcoin's probably going To be down several multiples of that in That business cycle process but Ultimately those are big buying Opportunities you know if you're a prude

And thoughtful investor certainly if You're someone who's taken advantage of You know the fact that consensus was Dead wrong in this recession view year To date yeah you have some cash to Invest and so you know the Prudence Would be prudent thing to do would be Just give it a few more months you know Maybe two one to two more quarters Before you start to see a lot of that Weakness that we expect you to be able To buy into ahead of what I think is Going to be a Raging Bull Market in Crypto in 2024. There is pleasure to have you here again Again make sure you guys go check us out Uh go check out his Twitter 42 Macro.com as well is um his website Thank you Darius for for coming on here And I will hopefully have you back on Here maybe maybe in about a half a year Since we can see if we've made any Progress in the business cycle yeah I Have to say Let's uh let's do this again In like December or January sounds good We'll see you next time appreciate it Ben thank you so much