Hello, fellow Rebel Capitals. Hope you're well. I am back with my good buddy Darius Dale. Now, Darius has never been on this channel, but you guys are in for a treat. I had the pleasure of hanging out with him in St. Barts with Mr. Hugh Henry.

"Oh yeah."

And Darius, for whatever reason, convinced me to drink about 20 vodka Red Bulls. Hughes' blowout party. And so I don't know if I should thank you for that, but I'll thank you for the hangover. How's that sound?

"I'll take full, full credit and responsibility for that. We had ourselves quite the uh, quite the boondoggle. Uh, that was a phenomenal, that was a phenomenal."

"That was a lot of fun. I remember about 11 o'clock at night, we were upstairs and we were hanging out, kind of shooting the breeze and just having fun and having those drinks and like I'm like, 'Oh man, what are you gonna...' Oh, I think I'm going to go home and, you know, get, get a little sleep." I'm like, "Oh, dude, come on, man. You gotta hang." And then I went off and started talking to some other people. Then I went back like two hours later and you're still there like doing tequila shots. Everyone wants to, everyone wants to do shots with the big guy. I don't even do shots. Like, the only time I ever do shots is when people buy me shots. And you never want to turn on a gift, you know."

"Yeah, Hughes, he's, he's that bad influence on all of us. Darius, Darius portfolios."

"So, for my audience who's not familiar with what you do, can you give us the quick Reader's Digest version? And then let's go over kind of your overall framework and how you see what's happening with macro right now? Timing. Just yesterday, the Fed cut by 25 basis points. I guess Powell was kind of dovish. We only had one person dissent. Uh, no surprise there. Moran with a 50 basis point cut. But we've got a, a lot of volatility in the bond market. So, tons of stuff to talk about. So, what do you do and what's your overall macro view right now?"

"Yeah, I appreciate it, George. And thanks again for having me on the program, man. This has been way too long. Way too long. So, uh, just quick, just real 30 seconds on, on me and who 42 Macro is. You know, I'm one of many talking heads uh in this um finance space. You know, my background is, I ran macro uh and was a partner at one of these large uh, you know, institutional research shops across Global Wall Street. So, I have a lot of clients and contacts um from many of the major um investment firms and asset asset managers around the world. I left that world to start 42 Macro, which is to sort of, you know, create better risk management solutions for ordinary investors. You know, I spent most of my career helping rich people get richer. Uh, and as someone who sort of grew up on the bottom of that K-shaped economy, the very bottom of that K-shaped economy, you know, it just didn't sit well with me. So, I, we created 42 Macro to help everybody get rich as opposed to just helping the rich folks get rich."

"Okay. So, now you've got something and I was just listening to one of your podcasts and you are calling it the U-shaped economy. So, can you explain that and then maybe also explain, I think your KISS strategy. I don't know if that's 'Keep It Simple, Stupid' or if it is a variation of that. Uh, can you explain that and should we get into your charts for you to do that?"

"Yeah, 100%. So, I'll explain the U-shaped economy with words and then we can uh, just quickly unpack KISS because I think that's a really important thing. If, if people hear one thing from me today, it's that I think they need to rethink how they're approaching asset allocation. Okay. If your goal is to retire on time and comfortably, you may not share that goal. Your goal may be to overtrade your account or pick factors. But if your goal is to retire on time and comfortably, uh, KISS is a phenomenal solution to help people do that. Uh, so, uh, on the U-shaped economy, so we've been of the view. So, let me just take it, let's set the stage. I think we got to go backwards and go forward. We came into the year with the expectation that we would see the kind of most negative aspects of the Trump 2.0 agenda hit the tape first from an economic standpoint. Most notably tariffs, the general level of trade policy uncertainty. Something we didn't accurately forecast, but obviously has contributed to that view was the general chaotic nature with which we're legislating policy. So, all those things are, you know, causing the economy to slow down. Uh, sort of essentially throwing sand in the gears of the economy. You know, we were also sort of essentially comping up some very, you know, anniversarying some very positive fiscal impulse as well from 2022 or 2023 and 2024. So, if you think about what tariffs mean is like, not only are we stopping the positive fiscal impulse, we're actually having a modest fiscal retrenchment going in the other direction. At the same time, we have all this policy uncertainty. So, it was our view that we would see, you know, a negative, you know, dynamics in the economy for, you know, maybe three to four quarters before we actually started to see the positive aspects of the Trump 2.0 agenda, specifically deregulation, uh, accelerating the AI infrastructure investment. Um, you're talking about, you know, all the different things and levers that they're pulling, specifically with monetary policy, which we'll obviously talk about today. Uh, they're pulling all these levers essentially to create a, a growth, a boom within the economy. Uh, and the report driver of their desire to create a boom in the economy is to outgrow the debt. Uh, we've gotten plenty of very explicit and implicit signaling from various members of the administration that they pivoted from what we were calling Paradigm B. Paradigm A being Biden's economy. Paradigm B being the first part of the Trump economy where they were trying to cut their way out of the problem, uh, and move in the um, direction of fiscal retrenchment. We got a lot of confidence and a lot of signal from the administration, various members of the administration back in April that they were ending Paradigm B and transition to what we've been calling Paradigm C, which is their choice to outgrow the growth of the federal budget with with."

"Yeah. So, basically, just for clarification, uh, the Trump administration now is all about getting debt to GDP down by, uh, growth as opposed to just cutting spending, which what we maybe would have seen with Dodge."

"Correct. Correct. Absolutely. Absolutely. And so now we've, now that we've transitioned to Paradigm C, which is the grow your way out of the problem as opposed to cutting your way out of the problem, now we have to have our antenna up as investors for all the levers they're pulling to, you know, to achieve this outcome. Obviously, one big ugly bill. Uh, if you think about the tax, uh, relief that we're going to see from that and the incremental spending on the national defense and border security side of things, if that represents a meaningful positive fiscal impulse starting in early next year, that should extend all the way into 2027 and 2028. So, that's positive at the margins in terms of the expansion of the deficit that we're likely to see. But to me, I think, um, something we've been pounding the table on for a variety of economic and and and geopolitical reasons is the Fed needs to step up and and actually do its part uh in this in this in this program. You know, this can't be a Federal Reserve institution. This is not my own view. This is just, you know, this is thousands of years of economic history. Um, you know, supporting these views, which is the Federal Reserve cannot be a, it can't fight fiscal dominance. It has to be a willing participant in fiscal dominance, or we're going to wind up with some really uncomfortable problems in in both in the economy and within society. And we're already seeing that um show up. Obviously, last week was a pretty big week."

"Okay. As far as social unrest?"

"Social unrest. Yeah."

"Yeah. So, with this view about what the Trump administration is doing, it assumes that there's a multiplier on the government spending. Uh, so we have deficit spending that creates a multiplier and that's how you get the debt to GDP down by trying to grow your way out of it. But are, are we confident that there's a positive multiplier? Because I mean, I listen to Lacy Hunt. I think he always references a study by, I'm sure you know, is it, is it Reinhardt and Rogoff where once you get debt to GDP levels up to or over 100%, how you have a negative multiplier on that government spending. So, I mean, could we go into an environment where the government spending itself is, I guess, hampering the economy from growing?"

"Yeah, I, I would argue it already has. We've then is part of the reason if you um, there's a, there's a very important chart I would throw on the screen here."

"Yeah, here, let me go ahead and and pull that up, Darius."

"Yeah. And and so this is, so what this chart here shows on the left. So, the answer is yes. I think we've already crossed that rubric and this is why they're panicking to address this issue. So, the, the chart on the left shows what we call the approximate next 12-month marketable Treasury debt supply. Uh, we're rolling over about $9.4 trillion over the next 12 months. We're annualizing in terms of our federal budget deficit at about 2.1, 2.2 trillion. And then the Fed is divesting about $60 billion on an annual basis from its Soma portfolio worth of Treasuries. And so you're talking about somewhere close to 12 trillion there. This number, this, this nominal amount is now gobbling up about 40% of global savings. And that's up versus a long-run mean at the time series with data back to the early '80s of about 20%. So, we're essentially gobbling up more than almost double the amount of incremental capital we used to eat up from the global economy. And the reason this is a problem is because there's not enough capital left over for small business capital formation. There's not enough capital left over for the housing market to heal. Um, you can see this very clearly in these two charts here where, uh, we show the refinancing risk, uh, specifically in the mortgage market here in this top panel. This, this plot is the spread between the yield and the coupon in the Bloomberg Mortgage Backed Securities Index. And so when there's a positive value there, that essentially means that the yield, the market rate, the marginal rate is much higher than the coupon rate. And so that ultimately means that there's what it means is that there's not enough demand for this asset in capital formation terms. And so that means is you, you're starving, you, you're essentially starving a whole couple of generations now between the millennials and Gen Z, uh, uh, uh, you know, homeowner or, or, you know, families. You're preventing them from buying houses because there's not enough capital um in the market to compress this spread because Uncle Sam has gotten too big relative to global capital."

"Okay. So, this is where we disagree. This is one point where we disagree."

"Because this assumes that that that banks' balance sheet capacity is limited."

"Yep. And so I, I would argue that it's not."

"Especially outside of, of the US and the, in the Eurodollar market. So, I, I don't really. Because let me just explain this to the audience. So, so what we're saying here is that the United States, even if they keep the, the debt, the deficits to GDP at the same levels they are right now, uh, we've got to roll over how much, 12 trillion this year."

"Yeah. And it's, and it's continuing to grow."

"Yeah. So, that's going to continue to grow. And so, where does this money come from? So, Darius's point is that there's a limited pool of money out there. And we're already drawing from 40% of, let's just say the savings, just using that as a hypothetical, outside and inside the United States. So, at a certain point, there's not going to be money to go ahead and allocate to businesses to grow and to create more goods and services, or to absorb higher and higher and higher and higher and higher issuance from the Treasury. And the, where I see it a little bit different is assuming that we do have infinite balance sheet capacity, uh, especially outside the United States with the banks, then if there is a productive loan, then they're going to do it."

"Correct."

"Because they don't need bank reserves, you know, they can settle on their own balance sheet. And if there is a good risk-reward, assuming that Scott Benton issues another, whatever, you know, 10 trillion on top of the 12 trillion he's already got to roll over, assuming that the risk-reward makes sense, then those banks are going to step in and increase the size of their balance sheet because they're pocketing the spread between the liabilities and the assets. They're the marginal buyer. So, I, I, I don't know that I would agree that there's a, a limited pool of capital for either investing into the real economy or buying those Treasuries."

"Yeah. So, um, what you just said is all correct in my view. And again, we can, you know, reasonable minds can disagree. Where we disagree is bank's balance sheet capacity is not unlimited, uh, neither here nor neither here nor domestically. And there's several reasons why. The most important reason why is that we have capital requirements across the Basel 3 and Basel 4 um, you know, frameworks. And so those capital requirements limit, based on the amount of equity that each of these banks have, the amount of capital. Now, they can make choices between what, you know, how they um, you know, what the composition of their balance sheets are, but that, that, that means that unless you, because of those capital requirements, means by definition, there's going to be, uh, some limit, some multiplier on the capital stock relative to their total asset size. So, that's kind of step one. And number two, even if that was not true, even if that was not true, what is true is that we have deeply negative swap spreads in the Treasury market, which is the world's largest uh market. Um, look at the 10-year swap spread, it's minus 52 basis points. It's minus 80 basis points on 30-year. And so what that swap set, for, for those who may be unfamiliar at home, it's the spread between the interest rate on an interest rate swap, which doesn't require any capital, and the spread on the Treasury, the corresponding Treasury bond, uh, security for that particular um, duration. And so, in theory, these things should be equal, but they're not equal. And the reason there's a, a lower price, there's a lower yield on the swaps relative to the Treasuries is because you don't need to hold capital against it. And so that's already telling you that there, because there is a capital requirement, the bank's balance sheet capacities aren't infinite because if they were, they would be arbitrating the spread away."

"That's an interesting angle because see, when I look at the negative interest rate swaps, I see that as more of the financial players wanting to pay that, uh, adjustable rate and wanting to receive that fixed rate because they think that interest rates are going to go down in the future. And then you have the primary dealers that aren't willing to accept that arbitrage because of the counterparty risk."

"Yeah. True. But, uh, the, the swap price should, whether you're paying or receiving on a swap, that shouldn't, that shouldn't change the term structure of interest rates. This, what this is arguing is that there is a hidden cost in the system associated with having to hold capital against Treasuries on a risk-weighted basis. And that that is, that's the issue. Like, that, that is the underlying fundamental issue is that, in my opinion, bank's balance sheet capacity is not infinite because if this was infinite, this spread would be arbitraged to zero regardless if you're receiving or paying on the swap."

"Oh, I just look at that as the counterparty risk as far as the rationale for that. You know, the, the hard time that I have with regulations hampering the banks or constraining them is the reserve requirements that we had. You know, we had the, the, the 10% reserve requirements going all the way back to, I don't know when they they started, but we had them, I know for sure in 1980. And, you know, back then, the, bank reserves and this included vault cash was around $40 billion. And at the time, M2 in the United States was around $1.5 trillion. And then you fast forward to 2007, and the amount of bank reserves in the system was still $40 billion, but the amount of M2 in the United States went to $7.5 trillion. And so the banks just totally ignored the reserve requirements. And the Fed actually knew that. I've read papers from the Fed in 2000, 2002 where they knew the banks were doing this. And they just, sweep accounts and a variety of other things to just go ahead and get around the regulation to the point where it, it didn't constrain them at all. And if the banks, I mean, at the end of the day, they're greedy and they've always been greedy and they always will be greedy. And they're always one step ahead or multiple steps ahead of the regulators. So, if they were able to get around like reserve requirements to that degree and in a way that was that explicit as well, I, I just, I always have a problem with them being like, 'Oh, you know what? We could make this loan and make a trillion dollars, but we're not going to because that darn Basel 3.'"

"That's a naive way to look at it."

"Yeah. No, that's a, that's a phenomenal. And I, and actually, I do agree with you. Like, banks are, these guys are nothing if not resourceful in terms of trying to make money, right?"

"Yeah. Yeah."

"So, look, I, you and I share that same sentiment. What I would say is, I would, I would posit that the continuum, the spread between how far ahead of the banks, how far ahead the banks are relative to the regulators is not static. And so, I would argue post GFC, in the 10 to 20 years post GFC, the regulators have largely caught up. And now the banks themselves are probably looking for new ways to extend, you know, credit and and and make money. Um, okay, obviously, you look at a chart of the NASDAQ 100, I'm guessing a lot of them have some exposure to that in some, you know, form or another in terms of total return swaps, if not, you know, some other, you know, meaningful um, allocation to to to, you know, alternative asset managers. I don't know what the answer is, but the banks aren't, they're not sitting on their hands going broke. They're just probably, you know, putting their money to work in other places. And the reason this matters, and I think it all, I think we're going to wind up agreeing on this, which is irrespective of the bank's ability to extend credit, whether that's uncapped or capped. What we do know is we are now gobbling up double the amount of the world's savings on a on a rolling basis than we used to. And so that means that the, that, you know, portion of savings, that 20-ish percent of savings between the where we used to be and where we are now is not going to capitalize the mortgage back securities market. It's not going to extend small business loans. It's not going to, you know, finance, you know, the the purchase of a new house from some Gen Z or millennial family. So, we know that that is the outcome. We can see it, by the way. Look how angry and frustrated this country is every time you look at a poll."

"Yeah. Yeah. See, there I think is where we start to align that we come almost to the same conclusion but from maybe a different path. And that although that, you know, your point here is that this is sucking up a lot of capital, so there's not investment going into the real economy, which is one of the reasons we're seeing this social unrest, I completely agree. But I would say that it's due to the risk in the overall monetary or the perceived risk from the banking system and them choosing to go ahead and opt for Treasuries, something that's safe and liquid, as opposed to lending into the real economy and maybe getting a little bit better interest rate where the risk-reward doesn't make sense because the monetary system itself broke during the GFC and it really hasn't been fixed. So, you're just, you know, in this stuck-in-the-mud type of economy where the only way that you can get ahead is if you own asset prices and then you've got the big, the, the growing wealth gap that leads to that social unrest."

"No, look, I, you, you and I very much share that that conclusion and and quite frankly, some of the sad things."

"Let's, I think we've given people two different angles, some food for thought. So, let's get back to your, your charts, Darius. And, um, can you explain the U-shaped economy? This, this, I, I think because that's your main starting point and that's kind of the framework for Macro 42, excuse me."

"Yeah, no worries. So, I would say the, the U-shaped economy, the reason we started highlighting the fact that the economy was U-shaped back in April was because we, I think we arrived at a conclusion faster than most that there was going to be the other side of the U, specifically the right side."

"What do you mean by a U-shaped economy?"

"Uh, so, what? Let me find a blank sheet here. So, the, the, the U-shaped economy just means that growth. So, if we're, this is why this GDP growth or some measure of output, we're going to be slowing in the growth rate of that measure of output. And we're probably, at least according to our models and according to our fundamental research process, which is, you know, separate, one's one's more fundamental in terms of connecting the dots, one's more econometric in terms of the models, they both sort of see, uh, kind of the bottom of the U-shaped economy in Q4. Uh, and what we mean by U, the reason we keep saying U is, don't focus on the slowdown right now, which is what a lot of investors are looking at. They're seeing data, they're seeing the labor markets starting to deteriorate, and they're getting nervous about a potential recession. The whole point of the U-shaped was to get people to focus on, hey, we're going to bottom and accelerate and accelerate markedly starting next year. We, we think growth is likely to be somewhere in the 3 to 4% range on a real basis in the US economy, uh, starting next year."

"And that could happen for, that could last for, you know, multiple years if, if the midterm elections go well for the party in power and they are allowed to continue pulling the kind of levers they're currently pulling. How do you look at the labor market right now as far as it it slowing down? And if you believe that it is slowing down, uh, due to the data, then what's going to be the catalyst to get that thing turned around?"

"Yeah, excellent question, George. Excellent question. So, uh, let's just go to the labor market. So, uh, one of the things we look at when we measure the economy is we're, I mean, we measure a variety of every meaningful economic statistic that gets reported across the 10 major economies in the world. We analyze and rate of change terms on a daily basis. So, I mean, some days there's hundreds of indicators that have come out that we have to analyze. And labor, love for sure. But what, one of the things we look at, um, in terms of labor market is, you know, the relationship between private sector employment. Right now, it's in what we call a strong negative impulse. So, the three-month annualized rate of change is below the six-month annualized rate of change, which is also below the year."

"This is no. So, we, we take the mean of the household and establishment surveys as to not bias it towards the birth-death model or the low response rate. They're both, they both have their own problems, but, you know, this is a, in my opinion, it's a more accurate measure in private sector employment than just looking at course or or this household survey in isolation. Uh, and then when you look at that relative to private sector wages, which are turn tracking at 4.1% through methanolized, um, you look at that relative to private sector average weekly hours at 0% through methanolized, the sum product of these features on a frequency-adjusted basis, you wind up with private sector labor income. And right now, we're in a strong negative impulse in terms of private sector labor income growing at a below-trend rate of 3.2% on a three-month annualized basis. This is the last three months, about the weakest three months we've seen in private sector labor income growth since June of 2020."

"Not good."

"Very not good. So, yeah, so this is a labor market that is cooling off and cooling off for a variety of cyclical reasons in terms of the tariffs and the general level of policy uncertainty. On that policy uncertainty point, uh, this spread, the shaded area curve here shows the seasonality of the long-term time series of the Baker, Bloom, and Davis Policy Uncertainty Index. So, this would be January, this would be December. And so it just tells you like what the range of the, the time series was with data going back to, I want to say the late '80s. This orange line shares shows what the index's average value is on a monthly basis since, uh, since the start of 2025."

"What index is that?"

"This is the Baker, Bloom, and Davis Economic Policy Uncertainty Index. They use, um, natural language processing across, you know, different, um, uh, different, uh, uh, you know, news publications to see how uncertain investors are about policy."

"I've never heard of that."

"Yeah. So, we've been, we've been, so time series has been around for, uh, almost since the late '80s. And so what I'm essentially saying is we've been operating at the highest level of policy uncertainty in recorded history, this entire year. And so obviously that's going to cause companies to slam their foot on the brake in terms of new hiring. But there's also some structural factors as it relates to hiring as well. Specifically on the, um, on the AI front. Um, if you look at, yeah. So, if you look at, um, the New York Fed maintains this data set, recent, the unemployment rate for recent college graduates in 2022, coincidentally the same year that ChatGPT became a thing. It broke out above the nationwide U3 headline unemployment rate and has remained, and that spread has gotten wider and wider ever since. You go back and you look at, you know, 30 years of data prior to that, the recent college grad unemployment rate was never meaningfully above or or persistently above the headline unemployment rate for the nation, for the nation as a whole. And so it's telling you that firms are now looking at saying, 'Hey, ChatGPT can do exactly what I would pay an analyst to do right now.' Well, that, that's going to continue to evolve over time. It's going to be, well, it's going to, it can do exactly what I can pay an associate to do, and then maybe five, 10 years from now, it'll be exactly what I can pay a managing director to do. You see where I'm going with? And so, to me, I think the, the labor market is is taking it on the chin, both cyclically in terms of policy uncertainty and tariff implementation, and structurally in terms of there's this new thing that's replacing the demand for labor and called AI."

"Yeah. You know what's funny is I'm going back and forth with the hotel for Rebel Capitalist Live in 2026."

"Nice."

"And I, I do it at the, uh, Hilton in Orlando. I've done it there the last, three years, I think. But anyway, uh, they just sent me, uh, their contract for me to sign. And usually I'd send that to a lawyer and I have to pay them to review it to make sure that, you know, there's nothing in there that's, uh, that's going to get me in trouble or they're not taking advantage of me. But this time, all I did is I just put it in the ChatGPT and I said, 'Pretend you're my lawyer and pretend that your number one objective is to protect my interests and give me your analysis or your conclusions based on this contract. What should we go back to them with? How should we revise it? And, you know, what should I, what terms should I negotiate?' And it just, 30 seconds later, bam, there you got it. There you go. And."

"30 seconds."

"Yeah. I mean, that's it's, it's just an anecdotal story to back up your point."

"No, you're, you're spot on. I mean, I, I, I, I did this the other day. I said, okay, because I was trying to figure out, okay, which part of the Fed's mandate is in more at risk. You know, the people tend to say that because unemployment rate is low that it's more at risk. But in my opinion, I haven't disagreed with that because, you know, we're only what, 90 basis points above the Fed's arbitrary 2% inflation target."

"But if you go back and you study the history of of of business cycle downturns, you know, the median increase in the unemployment rate when it starts going up, it's usually it's about 360 basis points. 360 basis points. So, it's like you're wagering 90 basis points to get to this arbitrary 2% inflation target that we got from the Reserve Bank of New Zealand in 1989."

"Yeah."

"To, you're risking a 360 basis point increase in unemployment rate to do that. And you know how I've determined that? I asked ChatGPT and I said, 'Well, put it in Excel thing so I can make a chart out of it.' It's like two minutes. Like this is something that I would have told an analyst to do and I hope by in an hour or two they would come back to me with the chart, mate. And it was a couple of minutes. And so to me, it's just this is this is where we're headed. We have to accept it as as as humanity and try to, you know, create positive outcomes for people in the context of this."

"Yeah. You know, that two things there. First and foremost, that arbitrary mandate they have is so ridiculous if you look at the, the history of that. And if you actually just think about it for five seconds, it's like, wait a minute, you're telling me, let's just use CPI as the proxy. You're telling me that if the CPI is 1.9, then we're in danger of this deflationary doom loop? And if the CPI is at 2.1, then all of a sudden we're in danger of a hyperinflationary doom loop? And we just have to have it right there at 2%. Like, what are we talking about here? What are we talking about? And then, uh, the second thing is, so how, okay, I get how you're getting to the bottom of the U. That makes a lot of sense to me. But how are we getting to the, the next upswing to that U? Is that just through fiscal?"

"Yeah, absolutely. So, there's a confluence of things. So, uh, just one final thing on the point you just made on this arbitrary 2% target and whether we're at risk of deflation below it or risk of hyperinflation above it. You're absolutely right. And this is why all my friends who do hard science, the physicists that I went to school with, the, you know, the astronomers, the, the, the people who work at NASA, the people who do data science and computer science, they all laugh at what I do for a living and appropriately so because it's ridiculous. Ridiculous. I mean, like, we need to have some frameworks in order for, you know, trillions of dollars of capital to exchange hands across the world. We need to agree on some things, but we need to also agree that this stuff is made up."

"That's why I'm wearing this hat, Darius."

"Oh, yeah."

"Just let the market determine interest rates for heaven's sake."

"Oh, man. You're going to get me 100%, man. Oh, it's insane that we don't have that by now. But that's either."

"Now, let's go into the upswing of the U. How are we going to get there? You said that we're likely going to bottom out in Q4 of 2025. So, going into 2026, what's going to produce this economic growth and get the labor market back on track?"

"Yeah. So, that's a, that's a great question. So, uh, the number one, so the, the two big things that are causing the reacceleration to, you know, the right side of the, right now we're in the bottom left side of the U, the worst part of the time, second half. We've been guiding investors to not focus on that, but to focus on the recovery, the right side of the U-shaped economy. And the reason we believe we have a lot of conviction in our Paradigm C theme, which is to focus on investors on the right side of that U, is for two reasons. One, fiscal policy is easing substantially starting in 2026. Number two, monetary policy is likely to ease substantially starting in 2026. So, starting in, so let's start with fiscal policy. You know, right now, if you look at the, um, I'll come back to this slide. We got to go to one slide here. Uh, so if you look at the, the advent of the new tariff regime, right now, tariffs are currently annualizing on a calendar year-to-date basis at about $217 billion. That's up, uh, where we, up almost triple relative to where we were last year. It's up 174%."

"Are you talking about how much we're collecting in tariff revenue?"

"How much we're collecting in tariffs on a year-over-year percentage change basis. Okay. 74%. And so that change, that big change is causing the budget deficit, the, the change in the budget balance on a year-over-year basis is now the, is $124 billion. So, the budget deficit is narrowed by $124 billion. This is after having it expand by $234 billion in 2024 and $365 billion in 2023, which is the, the fiscal expansion that I talked about earlier. Right now, so in our view, once we get to about, right now, we're annualizing at $217 billion. Once we get to about $350 billion dollars of of of of incremental tariff revenue, which will occur in the next quarter or two, then we'll stop, we'll stop going in the wrong direction from a fiscal easing standpoint. And more importantly, not only will we stop going, or sorry, from a fiscal retrenchment standpoint. Not only will we stop going in the wrong direction, we're actually going to start to really accelerate in the positive direction as a function of the tax cuts and spending from the one big ugly bill."

"To be clear there, just because we're collecting more revenue doesn't mean we're spending less. We're, or, or is the government spending less?"

"Yeah, though. So, the government is spending more and taxing less. So, the deficit will get wider substantially next year. Okay."

"We're doing both in the direction of supporting the economy. Uh, so, we're going to get, uh, by our estimates, and and and our estimates are derived from, you know, uh, combining, uh, estimates from several quality sources like the Pinward Budget model, the Yale Budget Lab, um, you know, the, the CBO, the Joint Committee on Taxation, as well as the White House Council of Economic Advisors. There's a broad array of thought leadership in terms of, uh, projecting this stuff. You know, our, our math has the budget expanding by about a $450 billion next year and then having expand again in 2027 by about $580 billion. These are massive numbers. You're talking about positive fiscal impulse of greater than 1% of GDP, almost 2% of GDP in 2027."

"And that doesn't, that doesn't include a recession either, does it?"

"You, you're not going to get into a recession with this outcome. It's, understandable for the economy to go into recession because."

"Well, I don't know if it's impossible, but, but, but just to be clear, the spending numbers that you just went over, does that assume that the United States does not go into a recession?"

"Yeah, 100% it does. And, and I, I will stake my career that the United States of America will not go into recession in 2026 and 2027. I will stake my career on that. You're not going to go in recession with a plus two to 300 basis point positive delta in the fiscal impulse. Like, like you would have to lose like 400% of the of the economy. Like, something crazy would have to happen, like a black swan. You would literally need a black swan. We're not going to go into a business cycle downturn with this, this type of money being pumped into the economy. It's too big."

"Yeah. I guess, I guess the question is, could we go into a recession, or are we in a recession now, or could we be in a recession for that Q4 of 2025?"

"Half the country is definitely in recession. Has been for years now. And, and in my opinion, it's where we started the conversation. There's not enough money left over for multiple generations of people to buy houses. There's not enough money left over for people to start small businesses. There's not enough money left over. Or you could take it from your framework. It doesn't matter what framework is correct. It's the outcome is the same. Your framework says the monetary system is broken. So, there's not enough money, you know, um, you know, uh, supporting capital formation."

"The counterparty risk is too high."

"Yeah. Yeah. Exactly. But however you get to the answer, the answer is the answer is that half the country is flat on its back. And this man, you know, whether you agree with his policy, his platform, or his personality or not, this is true. And this is one of the most true and important things I've ever seen in my entire career. This was the signal that we need to stop caring about aggregate statistics like GDP, like corporate earnings, like the return of the stock market. And we have to start caring about distributional statistics if we want to front-run the policy intervention. And that's my job as an investor is to help thousands of investors around the world in our global investor community front-run policy intervention. And the policy intervention that we've observed thus far, or, you know, since we started our Paradigm C bullish Paradigm C theme in April, is in the direction of supporting the economy and will ultimately be in the direction of supporting asset markets. And to the final point on that, uh, the last thing I'll say to answer your earlier question, what's going to cause the economy to reaccelerate in terms of the right side of that U? The other part of it, we're going to get, so over the next couple years, we're going to get two to 300 basis points worth of GDP of positive fiscal impulse. That's very significant, very, very significant. Um, on the monetary side of things, which is also very significant. We believe that the Federal Reserve is in the process of undergoing structural regime change. There's a loud and growing chorus of very important minds circling the central bank, both now from within, but also around the central bank, including, I wouldn't say myself, very important, but I certainly am providing thought leadership on the subject, that the Federal Reserve is going to, I wouldn't say bend the knee, but certainly get more acquiescent of fiscal dominance. And the number one thing I would guide you to, uh, focus on as investors over the next 12 to 18 months is the floor Fed Funds rate pricing. Right now, the floor Fed Funds rate is about 2.88%, 88%. It was, you know, let's call that 3% for, for, you know, for simplicity's sake. It was at roughly 4 and a half% in January. Now the market, the market's pricing for where the, the terminal rate will be at the, at the low, at the end of the Fed's rate cutting cycle over the next two years went from 4 and a half% in January to 3% now. On a real basis, it went from 1.5% when you deflate by two-year inflation swap rates to zero. We think this zero number is on its way to minus 50 to minus 100 basis points. So, that the Fed, the market will price a durably negative real floor Fed Funds rate for an extended period of time. And this is all part of this."

"That's because we're going into a recession, Darius. That's what it's telling you. It's that's an economic slowdown."

"No. No. In my opinion, we think it's, this is a very clear signal of of of of regime change at the institution right now. The market, the institution's guiding the market that there's a 3% neutral rate. I think if there's enough people like me, like, you know, Mark Summerland, like David Malpass, like Rick Reer, like, like, like Kevin Walsh, like, uh, Steve Moran, there's enough people like me that'll go there and talk to the folks on FOMC that that they'll start to rethink that 3% is an asinine level of neutral rate for an economy where half the people in the country are gasping for economic oxygen. I, if you look at the Fed's current policy setting, you know, one of the things we, uh, do, uh, to, to sort of help investors understand the Fed's policy setting is we look at it on a five, we look at the Fed's Fed Funds rate and we look at the Fed's balance sheet on a five-year Z-score basis, uh, and, you know, on an inverted basis, obviously. And when you look at the Fed's Funds rate, you know, we're modestly restrictive at a 0.6 positive Z-score. But the balance sheet is at about 1.6. So, the Fed is pretty tight relative to history. I mean, look at that horizontal line I just drew, you know, and this is all because of their arbitrary 2% inflation target. So, what's going to happen, in my opinion, over the next 12 to 18 to 24 months is that the thought leadership circling the Fed, both from within and around the Fed, will convince the Fed that this, they don't need to be so steadfast about this because this is an economy in transition for a variety of cyclical and structural reasons. And ultimately, they're probably going to have to get to a new level of neutral rate that is more acquiescent of that of this where we started the conversation, which is, you know, Uncle Sam's gobbling up too much of the world's um, um, capital. Um, this is, this is US analysis, but showing it from the US perspective. We used to gobble up about 115% on a trend basis of US capital in terms of marketable Treasury supply on a rolling 12-month forward basis. It's now 215%. So, this is a problem. This is like having a stroke economically. Like a stroke is like where you have something that blocks the blood flow to part of your brain or somewhere in your body. This is the same thing that's happening. The side, the speed of the growth rate of the government is an is effectively causing an economic stroke in the economy. And the people on the bottom part of the K-shaped economy are, you know, they're flat on their backs because there's no money left over for them to participate in the economy."

"Yeah. I just think that's recessionary. I just think that those economic distortions that you're talking about from that government spending lead to what, what I think is a negative multiplier effect. I think that's probably where we see things a little bit different where all that government spending, I see it as as opposed to being a growth engine. I see it being an anti-deflationary engine, you know what I mean? That just kind of keeps you muddling along. And then with the interest rate, the problem with I have with monetary policy is to, to me, interest rates don't really control the economy. They're just a reflection of what's happening in the economy. So, I, I, I, that's what I struggle with that we could be at, let's say, the, um, let's just say nominal GDP is at 4%. And I, I just, I struggle with nominal GDP being at 4% and the Fed Funds being at 1% and the 10-year Treasury being at 1.5. I, I think if, if the Fed Funds is at 1% and nominal GDP is at four, the 10-year Treasury."

is going to be at I don't know what it's going to be, but not not 1.5, you know, it's going to be whatever six, seven, eight. You're going to have a massively steep yield curve. And the Fed just really can't control that. They can just control kind of uh psychology and they can control just that Fed funds rate and you know, going out six months and and and that's about it. So that that's why I always struggle with monetary policy actually juicing or being having a stimulative effect on the economy as opposed to just a reflection of what's actually happening and therefore if rates are at 1%, that means the economy is really struggling.

Yeah. No, I I I think I generally agree with your point that certainly as you go further out on the curve that the Fed's influence, any policymaker's influence, you know, tends to decay materially after, you know, let's call it the 12-month forward time horizon. It's generally gone by two to three years forward. I mean, there's almost hardly any influence when you get to the 5-year part of the curve. And that that's pretty consistent across major sovereign debt markets. And so, we know the Fed doesn't have a meaningful amount of influence on the long end of the curve. The longer the curve is going to be more reflective of the market's expectations for growth for inflation. You got the little term premium on there on a real and nominal basis, um, you know, for supply and inflation volatility reasons. So yes, I we agree with you.

Where I would slightly disagree with you is that policy can be very stimulative. And and reason I say that is if you look at what happened and to let the inflation genie out of the bottle, you know, so policy can be very stimulative. It can be very restrictive. And so what we saw back in 2021, this so in this chart here, the spread shows the this is the Fed funds rate minus the baseline Taylor rule estimate for the United States. And so the Taylor is a is a you know, is a a hard and fast rule for what the policy rate should be based on the deviation from the employment mandate and the deviation from the labor market.

Uh, okay. So in other words, the Taylor rule's kind of a model for where the Fed funds rate should be.

Exactly. And the Fed funds rate was a thousand plus basis points below where it should have been according to the Taylor rule back in 2021. While at the same time the Fed took the balance sheet to 36% of GDP. You don't think this had any impact on the the 40-year high we saw in inflation? So we you know, we can so we both agree that the Fed does not control the term structure of interest rates nor does it, you know, nor nor that and we all we also agree that the term structure interest rates is more to do with the what's happening in the market from a monetary standpoint than what the Fed is wanting to happen in the market. However, the Fed when it makes these big distortion, when it creates these big distortions with its policy setting both on the policy rate side of things but also on the balance sheet side of things, we can get really positive outcomes or really negative outcomes. And obviously, we got a really negative outcome here in terms of the 40-year high in inflation that we're still

That's a great example. I mean, that's a great example,

by the way. How is more more dovish than Arthur Burns was more dovish than Arthur Burns.

Yeah.

Yeah. So that that's a that that's actually a great example. I guess my next question I don't think the balance sheet has a lot to do with it. And the reason I don't is because

I would see that's where we would very much disagree. I think balance is the driver. That's the captain.

Oh, no, no, no. Let me tell you why I I believe that. If you go back prior to QE, like I said earlier, there was about 40 billion in bank reserves, but that included vault cash. So, banks are not settling with vault cash. They're only settling with the electronic reserves. And at that time, it was roughly, I mean, it fluctuated quite a bit, but let's just say around $10 billion. And you know, they actually changed the way they measure the bank reserves back in the 1950s and starting in the 1950s is when they added vault cash. Prior to that, it was just probably not the electronic reserves, but just kind of what it was written in a ledger or something like that. And in 1940, 1941, the Fed had about 20 or excuse me, 10 billion of bank reserves. So the banking system in aggregate total had about $10 billion worth of settlement assets, let's say, and you fast forward to 2007, it's the exact same

it's the exact same and during that time the global economy nominal GDP in dollar terms went from, you know, rough under a trillion to 64 trillion or so. And so that my point there is the at least prior to QE, the banks were not settling on the Fed's balance sheet. They were not settling. They did not. Now, whether that was because it's too costly, there's not enough pipes going to the Fed's balance sheet, it's too cumbersome. I'm sure there was a lot of different reasons. So, you fast forward to today and I get it. We've got 3.5 trillion in reserves. It's much different. But my view is if we didn't need to settle on the Fed's balance sheet prior to QE, today we we don't need to settle on the Fed's balance sheet either. Now, we might be settling on the Fed's balance sheet, but we don't have to. And therefore, if the reserves, let's say, go from 3.5 trillion up to 3.9 or down to 3 trillion for the banking system in aggregate total, it's not going to make a difference. If they want to do the loan, they're still going to do the loan and they're going to settle on their own balance sheet without the Fed.

No, I I look, I agree with 100% of what you said and actually have nothing no pushback. 100% agree.

Well, then how can the Fed's balance Well, then how can the Fed's balance sheet impact what the banks are doing?

The Fed's balance sheet is not impacting what the banks are doing. The Fed's balance sheet and all the other major central bank balance sheets around the world are trying to create a portfolio substitution effect because the banks don't want to take any risk. They're essentially trying

that if they're doing QE, then that's dropping rates at the long end of the curve or whatever they're buying. Not dropping the rates, taking the assets, physically removing the assets physically from their ability to huddle. So now they have to go huddle something else with that capital if they want.

Okay. So there's not enough So there's not so there isn't the supply of treasuries because now they're all siloed on the Fed's balance sheet. So those financial institutions are going to have to look for another asset to grow the size of their balance sheet, make more money, and that's most likely going to be risk assets.

Yeah, it doesn't have to necessarily be risk assets, but it just has to go further out on the risk spectrum. It could go from treasuries to agencies to, you know, investment grade credit to high yield credit to to to equities to to private equity to, you know, so on and so forth. That portfolio effect happens to be a chain of activity that goes all across financial market participants.

Okay, I totally get your view now. So instead of uh the Fed increasing the balance sheet or doing QE and that doing something where the banks now all of a sudden, yay, we have more bank reserves, we can grow our balance sheet because we're balance sheet constrained. Uh, it's more so, okay, they're siloing these types of assets so the banks or the financial institutions have to find some other assets to go ahead and grow their balance sheet because they're greedy and there therefore other asset prices go up as a result.

Yeah, 100%. I'll just put a button on this with some statistics real quick. So if you look at the ECB's balance sheet, it was 12% of the Eurozone government debt back in 1999. It is now 41%. Currently, the Bank of Japan's balance sheet bottomed at 11% of JG of JGB outstanding in 2007. It is now 50% outstanding. The Swiss National Bank's um balance sheet uh is bottomed at 31% of Swiss government debt. It is now 276% of Swiss government debt. The Bank of England's balance sheet bottomed at 3% of UK government debt. It is now 23% of UK government debt. And the Fed was bottomed at 9% of um Treasury debt in 2008 and is now 19%. So they're trying to force this portfolio substitution effect because of this chart here, uh, which I I was going to show earlier where I was going to say this is a very sad dynamic. This blue line in this top panel is the private non-financial sector credit to GDP ratio of the United States of America. Since the monetary system broke, which you and I agree on, uh, our friend Jeff Snder certainly uh has provided a tremendous amount of thought leadership on that.

We've been going in the wrong direction. This is this is we can speculate as to what's causing that, but the result is central banks are now saying these banks around the world don't want to take risk anymore and so now we got to remove the risk-free asset from them and force them to take risk, more risk than they otherwise want to by using our balance sheet policy. So to me, ever since this line changed slope, the balance sheet policy became more important than the interest rate policy. So I would assume that that based on that conclusion you come to mechanically, that you would be bullish along into the curve at least over the next 6 months, 9 months, something like that, because if I'm hearing you correctly, you're saying there's a shortage, uh, obviously not that the that the US has uh doesn't have enough debt, but there there's a shortage of treasuries if you look at it through the lens of the financial system and the monetary system globally. And if we go into a further slowdown, whether that's a recession or not, that means that growth and inflation expectations, at least in the United States, go down. And wouldn't that make the price go up substantially, yields lower, especially at the long end?

Yeah. No, I'm I'm actually So I'm I'm not arguing that there is a shortage. I'm actually arguing that the we're having a temporary reprieve in terms of the very accelerated aggressive growth rate of Treasury debt. Right now, Treasury debt, uh, let me just draw like a simple diagram. Treasury debt used to grow kind of at this slope. Since COVID, it's been growing at this slope and now the Fed, the Fed's balance sheet has been growing at this slope and now we need structural regime change to get the Fed to acknowledge that the slope of growth of Treasury supply has changed. Right now, the Fed is, you know, arguing about tariffs doing this and the spread between this and this will cause problems in the economy and asset markets. I would argue it already has caused plenty of problems in the economy and asset parts. I mean, what we here in March and April, right? Um, and it will could cause bigger and bigger problems in the economy and asset markets over a durable time horizon if the Fed does not play ball. This is why we feel so convicted in our view that the Fed will eventually be forced to play ball because we can see a large and growing community of really thought, you know, important thought leaders agreeing with our conclusion that the slopes have changed. The Fed needs to get on board with that.

M. In other words, the Fed has to do QE to to soak up the Treasury issuance, not necessarily for rates, but to get that on their balance sheet so the financial institutions continue to buy risk assets and increase the wealth gap and therefore prop up the economy.

Uh, not quite. Uh, so there's a myriad of things the Fed can do. One thing you can do is accept that the arbitrary 2% inflation target is not suitable for the current economy and by, you know, implicitly or explicitly revising against inflation target, it will probably never do it explicitly, but it'll implicitly revising its inflation target higher, it'll allow it to drop the term structure of interest rates because the neutral rate pricing will go from 3% to something below 3%, let's call it 2%. And so the entire term structure of the curve will go down. So that's one thing they can do, um, in terms of, you know, signaling to the bond market. Another thing they can do, obviously, if the bond, if the bond yields like the 30-year get out of hand, the Treasury can, sorry, the Federal Reserve can implement some form of yield curve control. Uh, we don't think we're anywhere close to that. I mean, that to me that's like three to five, if not five to 10 years away in terms of the durable yield curve control we're likely to see and remind me to unpack why we think that. Um, but between now and the durable yield curve control, you're going to have more activist issuance policy out of the Treasury. Right now, if you look at the bill market, it's only about 22% of total marketable treasury securities outstanding. If you look at the total amount of marketable treasury securities outstanding, that I'm sure within a calendar year, it's about 31%. We can go from 22%. There's time series history of bills being about 35% of marketable treasury securities. So, we have plenty of space to go up in bills issuance. And there's time series history of uh going from of being up at 50-ish percent of total treasuries that mature in the next calendar year. So, we're 31% now. So Scott Besson, who I've known for many years, he's a former client. Scott Besson is no dummy. He used to spend, you know, he spent all day on Twitter lambasting our fellow Yelli Janet Yellen's activist Treasury is policy back in 2023 and 2024. And the second he got into the seat, he realized, oh no, wait, this is a necessary thing we must do, and they're going to do it in greater quantities in terms of jamming uh the market with T bills and starving it from duration issuance if we ever got a problem in the in the bond market.

Okay. So I see that. Yeah, I I see that differently. I I I think he did that because he knew that if he takes out the T bill component of it, now all of a sudden we got a collateral issue. Now we got a serious serious collateral issue and then as as far as

He should have known that. He would have known that at K Square. Why did he why did he blame Bass Yan for doing it? He would have known that at Key Square too.

I I don't know.

To me, I don't think it's a collateral. To me, I real I think he realizes that now that you're on you're on the job, you cannot be the one responsible for allowing the bond market meltdown. I think that's what changed.

Yeah. So

his understanding didn't change. The guy's a really smarty. I've known this guy for a long time.

But if his understanding was uh that at that level for the collateral, his understanding would have been that level for the issuance of the long end of the curve as well.

True. Yeah. Fair. Yeah. We can I mean, reasonable minds can disagree, but my my theory is that he got on the job and realized that everybody would be looking at him if it went wrong and so he changed the tune.

Yeah. Yeah. I just think he he the the risk to it going wrong that he realized wasn't at the long end of the curve. It was at the front end of the curve with the the collateral that was needed for the monetary system itself and you can't starve that or else the whole thing, you know, comes completely crashing down. But the reason I have a hard time with the issuance really impacting the long end of the curve is because that assumes that there's something out there that's really impacting yields other than growth and inflation expectations. And I go back to QE1, two, and three. And when they were doing QE 1, two, and three, interest rates went up and and they they should have gone down. If issuance or something outside of growth and inflation, you know, the Fed doing yield curve control, QE, whatever, if that really had a substantial impact on rates, you would have seen the long end go down and it did the act the absolute opposite of that. In fact, when they stopped doing QE every single time, then the rates went down. And then when they did QT instead of the rates go they go down. It did the exact opposite. So that's why I I always just struggle with this idea.

I actually have the answer to that conundrum.

The answer to the conundrum is what you said earlier actually because they were doing QE. They were forcing banks to take more risk and when you force banks to take more risk, the economy gets better. So growth and inflation expectations improve. That's why Treasury bonds sold off when the Fed was doing QE. It's because banks were taking more risk and then economic prospects were improving. You're seeing rising inflation expectations, rising growth expectations, rising earnings expectations. That's why the Trojan bond sold off. Not because it wasn't because of the QE. It's because the response to the QE in the global financial system is things are getting better.

Yeah, that's right. That that's that's the psychological component of it there.

I don't think it's psychological. I think it's literally banks are now they literally have cash that they need to live and so they're going to go instead of buying uh treasuries, they're going to go buy mortgages. And if the mortgage price gets the spread gets too narrow, then they'll go buy uh they'll buy investment grade credit. And if the investment grade credit people realize the spreads are too narrow, they'll go down the cap structure and down the credit rating system and they'll go buy high yield. And if the high yield people realize the spreads are too narrow, then they'll start buying private uh BDCs and equities and so on and so forth. But that all makes the economy get better by the way selling off doing QE, not because there was some, you know, adverse consequence.

Right? But but my my point there is that I don't know that issuance uh or lack of issuance, let's just say, really keeps interest rates low. And so like I've heard this argument ever since the yield curve inverted where the the the excuse there was, well, this doesn't mean that we're going to have nominal GDP slowdown. Uh, it's different this time because you can't really you can't really depend or you can't really get a signal from the yield curve because the issuance at the long end of the curve isn't there. And that's what's keeping interest rates low. It has nothing to do with growth and inflation expectations. It's all about issuance and and that's I I just I really I I struggle with that. That's why I struggle with that issuance.

It's not it's not all about issuance. It's not all about issuance. It's about the supply and demand for the securities. Supply is one part of the issuance is one part of the equation. The other part of the equation is the demand for the equation. And that in my opinion is what's changing the most of the margins that we haven't talked about. There's three mega forces that are happening in the world that are making the slope of this line. Remember I said hey, we change the slope of our issuance.

The reason it matters is not because the supply itself, it's because of the demand component. That's why I keep relating it back to global savings. And the reason I like to relate it back to global savings is because the US is a net international investment deficit economy. We we we're about 25 trillion or 90% of our GDP in terms of our net international investment deficit. That means foreigners own a net, you know, 90% worth of our GDPs of US assets, which means essentially we have to beg thy neighbor for capitalization. In fact, foreigners own about 30% of the marketable treasury market, 32% specifically. The largest creditor, Europe, they are now remilitarizing. So NATO is taking their defense spending targets from 2% of GDP to 5% of GDP over the next decade. They're not going to get to 5% of GDP. They're not even at two right now, but we know those numbers are going to go up by perhaps, you know, hundreds of basis points relative to their own GDP. So that's a capital call directly from our largest foreign creditor. That's number one. Number two, the least talked about story in all of global macro is the fact that Japan, the Bank, Japan has durably escaped deflation, has had persistent above target inflation for years. So the Bank of Japan is ridiculously behind the curve with its 50 basis point policy rate. So that represents a durable negative demand shock when you you uh reprice um treasuries yields on a currency adjusted basis. They're no longer, you know, the the Bank of the the Japanese investors get about a 100 basis point yield pickup just by staying home. So that's strike two. That's the second largest foreign creditor. And strike three is China. US and China are actively strategically decoupling from each other right now. And so that reduces China's demand to recycle um their their FX reserves into uh Treasury securities. And so that's we're moving in the wrong direction. So we're going down in terms of demand from our three largest foreign creditors while the slope of our growth of supply is accelerating. So it's the space, it's the spread between the supply and demand is what prices said. That's what matters. It's not supply or demand. It's supply and demand. And they're both moving in the wrong direction, which requires the Fed's balance sheet to fix.

Okay. So let me here's here's my view on that. If you've got nominal GDP at 4%. And let's just say the 10-year Treasury and nominal GDP just for the viewers, I'm using as a super broad proxy for risk for for risk for the banks to lend into the real economy or that's the global economy, the US economy.

And so you've got nominal GDP of 4% and then you've got the 10-year Treasury because of supply, uh, to your point, because the deficits, the debts exploding, etc. Uh, let's say it goes up to 10%. We'll just take it to an extreme. So now the banks have a choice. Okay, I can lend into the real economy, but my risk is is high. Or what I can do is I can buy a 10-year Treasury that's yielding 10%. 10% when my, you know, I'm paying out let's just say 1.5% on the liability side of my balance sheet through deposits. And I can either pick up what are an 8.5% spread by buying the safest most liquid asset out there, or I can go ahead and try to roll the dice on lending into the real economy assuming that I can lend, just let's say at 11% when the risk is extremely high. In my view, that's a no-brainer decision for the banks. They're going to buy every single treasury they possibly can, regardless of the inflation rate, regardless of issuance, because, as you know, there's pocketing the spread between the liabilities and the assets. And that all that lack of demand from China or Japan or whatever it is, is going to be soaked up and picked up almost immediately by the commercial banks in the EUR dollar system. It's going to bring that interest rate from 10% back down to something uh that would be consistent with nominal GDP or growth in inflation expectations. So that that's how I have a separate view there. Is I understand what you're saying on the demand side. I totally totally get it. It's just I think that demand will be picked up by the commercial banks because that the risk reward is just a total no-brainer for them if there's that big disconnect between nominal GDP and the interest rate on the 10-year Treasury. I can tell you right now, we're going to have President AOC in a heartbeat if that's the outcome. If if the commercial banks fill this void and not the Fed, meaning that there's no there's still no lending to the housing market, there's still no lending to small businesses, you will be talking about President AOC. This is this stuff has political ramifications.

Yeah, I'm talking more about, let's say, banks in the Cayman Islands, uh, banks,

commercial banks globally, which are the same commercial banks that extend credit to our houses and to extend credit to our small businesses. This is all it's a one global banking system. If those commercial banks choose instead of instead of giving money to the people on the bottom of the K-shaped US economy, they choose to give money to the Treasury because China, Japan, and Europe are stepping out away from the market, then we're still going to be winding up with this ridiculous K-shaped problem that might even get worse over time. So, you have to assume that we're going to have these really negative political outcomes. Where do we go to slide 37? This could be all blue in 2028, folks.

Yeah. What George just said happens. We cannot allow banks to continue not taking risk. That's their number one goal. For anyone to to implement structural regime change at the Fed, you need the Fed needs to calibrate its policy setting to force banks to take risk. Period.

Yeah. But yeah, but how do you, let's say, you run a bank, Darius. How do I force you to take risk when it doesn't make sense to?

Free assets out of the equation. By lowering the term structure of interest rates below what would most people would consider to be an equilibrium level of term structure interest rates. You force people out on the risk spectrum. Everyone has an X ante unit of return in their head for every security that they capitalize. And if you give them a lower X ante unit of return, they're going to go further out on the risk spectrum to get the X ante unit of return that they're seeking.

Yeah. This vaccine was affected.

Yeah, I I get the idea. I just I just don't know if in practice that's the the way it works. I I would much much much rather see a an environment of deregulation. I mean, you you talked about that. I actually wrote that down at the beginning of the conversation. And I I think that I I know I hate to use deregulation as a catch-all and like a panacea, but I think it solves so many of the problems that if you want businesses to invest, if you want businesses to hire, if you want businesses to actually get aggressive, um, you know, you've got to reduce the regulatory burden, and you've got to have some sort of consistency so there isn't that massive uncertainty on I don't know what the policies are going to be tomorrow. If you just set the rules of the game and say, "Okay, these are going to be the rules for the next five years and then you decrease the amount of regulations, now all of a sudden you've got an environment where those animal spirits are going to kick in. And once they do, then the banks then the the incentive completely changes because now from a risk reward standpoint, it makes a lot more sense to uh to uh lend into the real economy because they're going to get a higher interest rate than go ahead and buy those treasuries and then you get the circle uh the the feedback loop instead of going down and getting worse and worse and worse. It just gets better and better and better. But I I don't know how you get there unless you reduce the regulations because at the end of the day, you know, the banks are all about that risk reward and if the risk profile doesn't change, I don't think their behavior is going to change.

No, I I completely agree with you. That's why deregulation is one of the core tenants of our paradigm and resilient US economy theme because we see it coming. Uh, if you go back to the previous Trump administration, uh, they retired seven uh regulatory, you know, rules or whatever you want to call them, rules for every one that they added and their goal in this administration is to retire 10 for every one that they add.

How are they doing? Do do you have a way of measuring that?

No, I've been struggling for that. Uh, one thing we are tracking however, um, in terms of trying to measure that, we know that uh deregulation is going to be like one of the biggest uh parts of the administration's challenge. Deregulating is one of the biggest things that they can do to pull the levers to outgrow that that growth of that debt.

Exactly.

It creates, you know, sort of capital formation at the bottom part of the shaped economy.

It's hard to track regulation, but what you can track are the things that benefit from deregulation. So the number two things, the one and two things, the number one and number two things are financial bank credit. We know financial sector deregulations are one very high on the list that Scott has talked about that. Uh, so if you look at commercial bank loans and leases, we're already starting to see a breakout above the the pre-COVID trend growth rate of commercial bank loans and leases. We're now tracking at 5.9% three-month annualized and 4.5% year-over-year. Uh, you know, kind of been like that for the past couple of months or, you know, maybe almost two quarters now. For the last couple of years of the Biden presidency, we were tracking below trend in terms of commercial bank loans and lease growth. Uh, so we're now starting to see it, you know, bubble up a bit. It hasn't hit the small banks yet. And we know, um, uh, Secretary Scott Besson has has highlighted that they want small banks to participate in this economy and small business to participate in this economy. So instead of trying to track regulation, which is almost impossible to track and certainly you can't do time series format, which is the gold standard of economic analysis, you should track the output of deregulation, which is uh credit growth, bank specifically bank loans and leases. So we track in that of our um global investor community and the number, the other thing we're tracking is construction spending, right? We got to get the red tape out of the way of the housing market. We got to get the red tape out of the way of building factories and plants if you're trying to reshore. And so right now we're in a depression in terms of construction spending on an aggregate basis. We're at down 2.7% on a three-month annualized basis. Down 3% on a six-month and year-over-year basis. You know, we're basically contracting at levels that were more consistent with the recession. Uh, and this is consistent with res non-res is down 2%. Residential is down three and a half%. So, if the, you know, if we're if dere if they're successful at deregulating, we don't have to track it. We just need to see these numbers start to go up. We have a high view that these numbers are going to go up over the next 12 to 18 months. And if investors aren't prepared for that, they're going to underperform. I I think that's a great way to look at it is through loans and leases because that tells you pretty much all the information you need to know.

Yeah. Because if if they are deregulating, if the uh if there are those animal spirits, then you're going to see that reflected in the extension of credit by the banking system.

That that that's really great. So Darius, um, thank you very much uh for your time. That was

You're really smart, man. I I rarely have to go to this many charts in one of these discussions. I gotta get I gotta tip my cap to you, man. This is awesome.

Well, you said there was 99 charts or 100 charts.

175, actually.

Okay. Well, dude, we got to have you come back on soon so you can give us uh some more insights and your ideas on what's happening in the US economy. So, how should um, do you have time just to give us your KISS strategy really quick?

Talk about KISS. Yeah. So, uh, you know, um, I'm very mission-oriented as a human being and I've seen the best of Wall Street. I've seen the worst of Wall Street. I've seen all kinds of things across Wall Street. And something that, you know, really doesn't sit well with me right now that I'm trying to fix uh, with KISS is the fact that we have so many assets in this 40-some trillion dollar, you know, US retirement savings. And it's not just us, obviously, it's a global phenomenon too. So, I would, you know, roughly half of our client base are international. So, I want to include them as well. There's so many people whose portfolios are overdosing on bonds, sovereign debt, you know, and and and cash and cash like instruments in an era where deflation is no longer the biggest risk in our opinion because of the political cycles, not just in the US, but internationally.

If we don't fix these distributional problems in society, what's going to happen is that that electoral college map that I just showed you on slide 37, it's going to flip from red, bright red across from sea to shining sea to bright blue. And they're going to fail and they go back to red. And you see where I'm going with this? And so the ultimate what it means is the policymakers are going to come increasingly equipped with solutions that essentially equal bigger government and more monetary and fiscal debasement of financial repression. So deflation is no longer the big risk. And so if you think about a 60/40 portfolio, you can keep the stocks which offensively expose your portfolio to productivity growth, but you got to get rid of that 40% and replace it with alternative assets. Our choice for alternative assets based on extensive back testing. I you know, I'm an institutional investor, done you know, performed, created all kinds of models and back tests for many, you know, funds across global Wall Street, so I have a lot of experience with this stuff. Based on our analysis, we figured out that the combination of gold 30% gold and 10% Bitcoin produces the most optimal results from the perspective of trying to outrun financial repression and monetary debasement, which

40% so do you keep the 20% in bonds?

No, no, it's 60, 30, 10. So 60% stocks, 30% gold.

Yeah, you can see it easily here. So that when when it's fully invested as it is now and has been since this early spring, we are 60% stocks, 10% gold, 30% Bitcoin. And a couple of numbers, let me throw a few numbers here. Uh, so

What's your time horizon, Darius?

This this this designed to help people retire on time and comfortably. This is not a trading solution.

So this is like 10 years?

Yeah, absolutely. This is not a trading solution. KISS on KISS has averaged about 28 trades per year, so less than two trades per month.

I I love the like instead of Keep It Simple Stupid. I don't know if you guys caught that, but it was Keep Keep It Simple and Systematic.

Yeah, 100%. So we had

We had a conversation about you know, roughly 175 slides worth of institutional knowledge about the six cycles that matter for economies and asset markets. It's growth. It's inflation. It's monetary policy. It's fiscal policy. It's liquidity and positioning. That's it. That's the only thing that ever matters to markets. We can talk about that stuff all day, but none of my thoughts on that impact KISS. What impacts KISS in terms of the allocations that myself, I use KISS to manage my entire liquid net worth and our clients. We have thousands of clients in our global investment community around the world. The only things that impact KISS are the top down and bottom up risk management overlays. And so we use our market regime now casting process uh to to incorporate volatility targeting into the strategy, which is one of the hallmarks of institutional risk management. And we use our dynamic our B our volatility adjustable momentum signal to incorporate dynamic position sizing into the strategy. The combination of ball targeting and an imposition sizing is what makes KISS so valuable for investors around the world, particularly those that are focused on retirement that are later in life because ultimately you need to have the horses in your barn to outrun the financial repression, monetary debasement and expose yourself to productivity growth over time, but you also need the risk management solutions to make sure you're not blowing up your portfolio in quote unquote riskier assets.

Okay. So the the way you risk manage is is you switch up the percentage allocation or how how do you do the risk management component of that?

Yeah. So it's all just so the the target allocations are, you know, 60, 30, 60, 30, 10. We're not always maxed out at 60, 30, 10 based on whatever's happening in the market regime or with any of these individual markets themselves. And so right now, let's say if there's something bad happens in in uh specifically with the equity market, ignoring the market regime, then it would take down its it's, you know, it's, you know, det position sizing component, the stocks lower. Right now, it's at 100% of its maximum exposure of 60%. It could go to 50% of its maximum exposure of 60%, which means go to cash.

It will go to floating rate treasuries. So that that's a cash document, but we coach investors to just use whatever you prefer. Prefer money market fund exposure works, work floating rate treasuries works, whatever works because we have clients around the world. So it's, you know, it's not like it's one size.

Do do you help the clients with the green component or do you just say S&P 500 index fund?

If you're a retail investor, you should not be taking factor risk. If I if you learn one thing from Darius Dell before I die is do not take factor risk as a retail investor.

What do you mean by factor risk?

Betting on sectors, styles, countries, geographies, you know, betting on things trying to outperform the market. Your job and your competitive advantage as a retail investor, which is we have thousand, we've we we our institutional clients manage a collective 25 plus trillion dollars of of AUM. So, you can imagine who I'm spending my time talking to, you know, in these meetings every week. My their job, their very very hard job, which I think is the hardest job to do in finance, is to pick factor risk so they can consistently outperform the market. You don't have to do that. And it's home yourself to all that additional stress. You can just generate the market return. You can generate the return of the equity market. You can generate the return of gold. You can generate the return of Bitcoin. You don't need to go buy some poopcoin to outperform Bitcoin. That's a nonsensical activity. Go back to the beach.

You're not getting paid a dollar to do this stuff, but to take on all that additional stress. And so, we try to make it as simple as possible for retail investors to participate in the strategy. But if they insist on taking factor risk or more importantly, which I ignoring their their choices about factor risk, more importantly, they might have a different uh uh risk tolerance or investment preference, right? Some people might find that gold and Bitcoin are unsuitable for them and and their level of risk. Some people might find that they want more Bitcoin and less gold or more stocks and less gold, you know, whatever they want. We give them all the tools they need with this with our discretionary risk management overlay, which is the institutional uh tool that we this is our risk management overlay for institutional clients. This helps them generate factor long short bets. But all the information you need to basically run a customized version of that pie chart I just showed you on this slide is right here in this table. So if you you don't like 60, 30, 10 stocks, go Bitcoin every day. We publish this, the KISS allocations. You can just say, well, you know, I'm gonna be long more long gold or more less long bit, you know, whatever. It's we have thousands of clients around the world, so it's not my job to figure out what

The discretionary component of it isn't necessarily uh what to buy as far as within the S&P 500 or what stocks to buy. It's more so how you the discretionary component of is more so how you manage the percentage exposure that you have to each one of those three asset classes and then the overall portfolio uh relative or how should I say that or the overall investable portion of the portfolio relative to the cash position that you have in T bills based on your macro overlay and your uh assessment of risk.

Uh, yes, uh, can I modify that slightly?

Yeah. Yeah. Yeah.

These are two separate tools. KISS is the tool that we built for retail investors. Dr. tool that we built for institutional investors. They rely on model.

So those are specific, those areas.

So these are equity sectors, equity factors, global equity markets, geographic fixed incomes, macro exposures, which include currencies, commodities and crypto.

Okay.

I didn't see it.

Yes. So for example, right now KISS is 100% of its maximum exposure of 60% in stocks.

Okay.

That signal using the same models that KISS is using. That signal equals long max position in stocks in Dr. Mo. And so that's a signal to an institutional capital allocator that hey, I can be fully long, whatever my risk budget is for, you know, allocating to US stocks or fully long my risk budget is to allocating to, you know, tech stocks or NASDAQ stocks or for low beta, which broke down today to a half position. I need to reduce my exposure, cut my exposure to low beta as a factor in half in order to stay on the right side of market risk. You know, this is this is the tool that we use to help pod shop PMs and and other institutional investors, you know, essentially front run their own risk management system so they can stay in the seat.

So, two completely separate tools for two completely separate groups of people.

But the information we provide in our Dr. Mo model will allow people who choose not to use this standard version of KISS to implement a customized version of KISS using the same underlying risk management techniques.

Got it. And so, yeah, but so I I generally caution people not to deviate, but if you want to deviate based on your own risk tolerance and your own investment, you know, strategic investment objectives, then feel free to do so. We're providing that information.

Fantastic. Okay. So, how can people find out about this, Darius? I mean, is I'm assuming you've got a product for re or a a price point, let's say, for retail and one for institutional.

Yeah. No. Uh, so, uh, so the answer is no. Uh, one of the things that is very important to me in my mission is to democratize the stuff that goes around global Wall Street. Like this is what I spent my career doing is helping in investors build models and stay on the right side of factor risk and factor rotations. And I don't know that it's appropriate to charge someone $200,000 a year for this kind of information. So we charge, we are always going to be low man on the totem pole or close to low men on the totem pole because I grew up living in in vans and homeless shelters and been homeless multiple times, lived in motels. I want to make sure that I'm bringing up the people who grew up like me to give them access to this information because they need to retire on time and comfortably too. So, uh, one final thing that, uh,

Where can people find out, what's your website or where can people find out about this and more information and kind of, uh, what you guys offer?

Yeah. Yeah. So, 42mmackro.com. Definitely check us out. Uh, we have a ton of free information that we publish. My Twitter, Darius Dell42. Uh, we we publish a lot of content. Basically, anything that does not involve KISS or Dr. B, we're happy to publish outside of our way paywall. Obviously, you're not gonna get the full 90, but we publish a lot of information outside of our paywall because to me,

that stuff should not matter to your portfolio. What matters to your portfolio are the signals in KISS and Dr. Mo. And one final thing I'll say before we wrap up, I got to leave you with two numbers or actually I'll leave you with four numbers here.

Okay?

If you wanted to compare KISS the return, so this is a rolling out of sample back test, institutional grade back test, um, that essentially look prevents look ahead bias and all those other things that we would be concerned about and overfitting and all that stuff. What the KISS rate with the KISS model portfolio strategy, you almost have a so you have a 285% upside capture ratio relative to 6040 with a 57% downside capture ratio. So essentially, what KISS does for you is so if you said, okay, I'm done with 6040, I want to rotate it to KISS, you would get roughly three times the return, only half the downside. If you wanted to compare KISS to a fully constantly fully invested portfolio of 60, 30, 10 stocks, gold, Bitcoin that does not have dynamic position sizing and ball targeting KISS features, then you would get about 90% of that return would only have in the downside. So you're essentially creating a positively skewed return distribution, something that most if not any retail investor has the ability to do on a durable basis.

So that's what people in institutional finance get paid for. We get paid to chop off the left tail of distribution and outperform that way. That's what volatility invest. That's what dynamic position sizing does. And we were happy to bring this to, you know, the average ordinary person across the world because I think it's the right thing to do. I don't think we need to be charging people hundreds of thousand dollars for this kind of information. It's just wrong in my opinion.

I mean, it's really an interesting framework and and and one of the things that I learned by going and hanging out with those guys in St. Barts that we were hanging out with is that yeah, you can't outperform the market, but the a lot of those strategies, they are incredibly complex and there's just no way the retail investor can replicate something like that. Not only even if they have the intellect, it's just a matter of time that you you got to manage these positions like 24/7 and it's just not realistic. And so to have a KISS type of framework, I think is is hugely beneficial or can be for the retail investor as long as they have that uh let's just call it mentorship. And so thank you for doing that. And uh thank you again for your time, buddy. And uh we got to do it again soon. We got to meet up soon and the next time we do meet up, that you're going to be on the receiving end of those vodka Red Bulls.

George, you're the man, brother. And thanks so much for what you're doing for the world, man. We need more people like George Gam. Period.

No, I really I do mean it, man. Because look, I can tell that you care about people and you want people to have better outcomes with their families, their lives. We may disagree on this or that with regards to the banking system or this or that this policy, but I think we are going to the same place, which is

let's use our intellect as a society and as people to create better outcomes for people's families.

And get people to think about this stuff. Whether you agree or disagree, you gotta think. You got to think. Don't delegate your thinking to someone else. Amen. All right, everybody. Have a good one. Cheers.

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The $12 Trillion US Debt Time Bomb Is Set To Explode | Darius Dale

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