Forward Guidance: The Growth Strategy Trapping The Fed | Darius Dale

Sourced by podcast-ingest on 2026-08-15. Auto-transcribed via AssemblyAI (universal-2, en). Speakers identified by AssemblyAI Speaker Identification using the per-podcast host/regulars hints; the resulting label→name mapping is in the frontmatter. Duration: 46m. Episode page: (not provided). Audio: https://traffic.megaphone.fm/BWG5316337661.mp3.

Show notes (from RSS)

Running the economy hot may keep growth alive, but it creates a dangerous balancing act for markets.

Darius Dale, founder of 42 Macro, joins us to explain why today’s reflationary regime demands a different investing playbook.

We also discuss rising neutral rates, bond-market pressure, Fed credibility, capital scarcity, and systematic portfolio risk management. Enjoy!

TIMESTAMPS:

00:00 Intro

01:00 The Risk-On Reflation Regime

06:29 Why This Bull Market Feels Harder

14:54 The Fed Risks The Bond Market

20:57 Inside The Fed’s Policy Tightrope

29:49 Can Policymakers Stick The Landing?

37:10 Why Risk Management Beats Buy-And-Hold

43:29 Making Institutional Tools Accessible

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DISCLAIMER

Nothing said on Forward Guidance is a recommendation to buy or sell securities or tokens. This podcast is for informational purposes only. Any views expressed are opinions, not financial advice. Hosts and guests may hold positions in the companies, funds, or projects discussed.

Transcript

Jack Farley: Nothing said on Ford Guidance is a recommendation to buy or sell any investments or products. All right, what's going on, everybody? Welcome back to another episode of Forward Guidance. And excited to be joined today by repeat guest, Darius Dell, founder of 42 Macro. Darius, it's been far too long since the last time we got on the show. What's going on, dude?

Darius Dale: It's, it's a real, real pleasure to be back. Felix, man, it's great to see you. Glad you're doing well, you guys. See you guys are making moves over at Block Works and then the acquis position side of things, so best of luck with that. Things are good, man. We're, you know, business is booming. Life is booming. I got a two year old who's as crazy as ever. Things are good, man. God is good. I'm, I'm blessed.

Jack Farley: Imagine. Yeah. Glad to hear that, dude. That's awesome. No shortage of news this summer, I thought, you know, sometimes we get these summers where it's a bit dull and you just kind of get this low volume, you know, grind up or what have you in little news. Feels like the complete opposite this summer, especially in recent weeks. Want to just start off by understanding, like, what is, what is the broad regime that you're viewing macro through right now? Like, obviously there's been some pretty interesting headlines coming, especially from the fiscal authority side of things and what Secretary Scott Bessant has been up to. There's been this yen intervention, the first coordinated intervention in decades, I believe, and then some interesting priority shifts and, you know, term changes in terms of what is it looking like in terms of do we prioritize issuing on the long end versus the short end and what are the macro implications of that? So, yeah, I just want to catch up on how you're thinking about all these different frameworks.

Darius Dale: No, great, great, great way to set it up, man. I agree. So let me take a step back before we kind of get into the nitty gritty. You know, I would say, you know, things have been broadly fine from a risk standpoint. Recall that we've been in this Paradigm C bull market since April of last year, Paradigm C being the administration's choice to run the economy. Hot. That's something that our fundamental research process picked up on in April of 2025. And so we've been coaching our global investor community to anticipate these kinds of dynamics, the kinds of dynamics that we're seeing on the tape today. Bubble like conditions in equity markets, interest rates, bonds selling off on the long end of the curve because they can't compete with the nominal GDP expectations that are associated with, you know, running the economy hot. Obviously we've been in this, you know, this is, this environment, what we've been terming is a geopolitically driven supply demand imbalance in the treasury bond market. That's been our core research thesis since the summer of 2023. And part of that core research thesis is a limited menu of options that the sovereign here in the US can choose to kind of deal with that issue, you know, deal with that disequilibrium and their supply demand imbalance. And so, you know, we notice the administration's choice to go with what we call paradigm B, which is cut the deficit back in the spring of 2025 or you know, winter, late winter or early spring of 2025. And so we were appropriately positioned for that, for that crash. But we immediately noticed, you know, going back to April of last year that hey, they were actually pivoting from paradigm B to paradigm C which is running the economy hot. Then they layered on a sprinkling of paradigm D in December when the Fed launched its reserve management purchase program. So right now here in 2026 we have paradigm C which is running the economy hot with the sprinkling of paradigm D which is printing to kind of counteract the issues in the bond market and address this disequilibrium. And so ultimately what we've been expecting and coaching our global investor community to expect are bubble like conditions in the equity market and so and ultimately some issues in the bond market associated with all that extra nominal GDP growth. And so here we are today with our Treasury Secretary, Scott Bessen, a former client of mine, making choices to kind of incrementally address this unfavorable disequilibrium. And ultimately it's our view that that unfavorable disequilibrium will be set at bay for now, that's hard to determine ex ante. And so we have to kind of rely, we have to stand on the shoulders of giants as it relates to our market review now casting process, our macro weather model in terms of interpreting signals from the macro economy and ultimately converting those signals into actionable forward looking market risk signals. And so ultimately, when you put those two things together, things are fine and they should be fine. We'll start with the market regime now casting process. So we use our global macro risk matrix to nowcast the market regime. Investors must position for the market regime if you want to avoid FOMO or fomo, fomo, FOMO or Arguably the two worst emotions you can feel as an investor. Fear of missing out causes you to buy cycle tops. Fear of more losses causes you to envelope cycle lows. And so sales cycle lows rather. And so ultimately this market regime now casting process is essentially saying the coast is clear. We're essentially now casting the volatility, just a momentum signal condition across the 42 most important asset market exposures in the world. And right now that nowcasting process is essentially saying we're in a risk on reflation market regime. It's got the highest unmanned share of confirming markets. It's got a reasonably high strength of signal of, you know, at 71%. And so ultimately if we can stay in this risk on reflation market. So let me take a step back. The, the probability of us staying in this risk on reflation market regime over the medium term is reasonably high when you layer on the signals from our macro weather model and I'll pause after this, but the, the macro weather model is essentially saying, you know, it's, it's, it's a great short to medium term outlook for stocks, gold, bitcoin and commodities, not so much for the dollar and bonds. And so ultimately that's very consistent with being in a reflation market regime. This is exactly the kind of trading environment, risk environment you would expect to see in global capital markets associated with a reflation market regime. And so what that's essentially saying is that the markets from a top down perspective, if you look at the institutional flows, which is what our volatility, just the momentum signal is designed to track based know, based on all, you know, my, my experience on global Wall street building models and having model stress test by you know, many of the top buy side institutions, you know, we built that model, we calibrate that BAM signal in order to essentially front run big changes in flows, institutional flows. And so what it's ultimately saying is those institutional flows from a top down signaling perspective, you know, are saying we're in a reflation market regime. And then the economy itself, when you look at it through the lens of the six key macro cycles, growth, inflation, monetary policy, fiscal policy, liquidity and positioning on a net basis are signaling reflation as well.

Jack Farley: It's interesting to hear this dynamic of like when you look through your model there, things are, things are fine and it looks like it'll continue to be fine. And the, you know, whether it's the fiscal authorities or the monetary authorities, they're well on top of these things. As you mentioned, like there's the RMO side of things that happen then the fall and the monetary side of things. But so, you know, there's, there's, they're, they're playing the whack a mole game and they're very good at it. But it doesn't really feel like that in the market day in, day out. Like there's just been huge amounts of dispersion in markets, especially this recent summer. These, these big volume events, you know, big rotations. And so I'm just curious on your perspective of. Yeah, how do you, how do you translate this top down idea of things are okay, but when you're actually going through it on a day to day basis, like it doesn't really feel okay. Even though when you look back a couple months later you're like, oh, we actually came out of that okay. Like I don't know if that makes sense, but it's just this, you know, top down it feels like yeah, they're on top of it. But when you're going through the motions and allocating as an investor, it's, it's not as easy as it seems.

Darius Dale: Yeah, no, I got two answers to that question. And that's a phenomenal question by the way, because it's stealth, right? You, it's acknowledging that the game is actually harder than it normally would feel like in a reflation regime, which I agree with. You know, it's, this is not your grandfather's reflation regime. Like we're so used to. We got folks our age, Felix, have gotten so used to these like super low volatility, you know, bull markets where we know the Fed has our back. The Fed put is relatively at a strike price that's relatively close to the, at the money price on the market, on the broad markets. And so ultimately you have just these, you know, kind of, you know, long lasting, sustained uptrends whereby you know, those, you know, was that little bird thing people put on their desk, they'd be like this, you know, one of those things can make money in one of those bull markets. You know, like people our age have gotten so conditioned to, you know, this type of investing would make money. But the reality is that's actually not the same thing. With the, the long term history of financial markets. It's actually a lot harder to make money than what we've experienced in the post crisis era. And I think we've returned back to what is a much normal, much more normal environment in terms of having, you know, reasonable, reasonable level of interest rates, you know, steeply stoked, a steeply sloped Yield curve riding, I wouldn't say wide, certainly not relative to history, but relatively wide term premium, certainly relative to the negative term premium that we saw for most of our career. And so ultimately, the game has just gotten much harder as the scarcity of capital has increased. We have a scarcity of capital and we also obviously have a massive demand for capital. If you think about the AI capex bubble, you think about the fiscal profligacy that we're seeing across most developed and major economies. And so ultimately, you know, the job of ascertaining where should the incremental unit of capital go is just much harder. It's going to be much harder for an extended period of time, in our opinion, in the context of some of the kind of geopolitical forces that are pulling apart the charging market at the seams. And so hopefully that's a kind of a public service announcement to remind investors that this game is not as easy as a lot of us got used to. And that's okay. It's totally okay. It's just, you got to just elevate your investment process, elevate your risk management process in order to kind of stay on the right side of market risk in the context of everything we're saying. Answering your question specifically. So that was the general take on. I kind of agree with your sentiment. Answering your question specifically, when you're kind of in this reflation market regime whereby not all factors are winning, you have a lot more negatively beta, negative beta play. You know, negative beta factors in, in asset markets. And so, you know, we know that. You know, not, you know, when you're in a, any market regime, there's always something to be long or short. You know, when you're in a Goldilocks market regime, that's risk on with the disinflationary bias. You're in a reflation market regime, that's risk on with an inflationary bias. Inflation be risk off with an inflationary bias. And then deflation will be risk off with the disinflationary bias. So just kind of isolating reflation and going down the list here, you know, your general bias is you want to be long risk assets and short defensive assets. Okay, check. That's happening. But the reality is, is the spread, the dispersion between risk assets and defensive assets, it's wider than it historically has been at least, you know, over the last couple of decades or last 15 years or so. And so ultimately it feels harder. Right. Like beta is harder. Right. Like if you, you know, if you're just kind of broadly allocated to assets, you know, it's going to feel a lot more choppy and volatile than if you were only in risk assets and out of defensive assets. So basically what I'm essentially saying is alpha strategies are actually having a better time than beta strategies in a year to date basis. And that's something that should continue over the long term. So high beta tends to outperform low beta. In a reflation regime, you're going to have more dispersion, you have more dispersion between high beta and low beta factors. Cyclicals tend to outperform defensives. In a reflation regime, you have more dispersion between cycles and defensives. Growth tends to outperform value. You have more dispersion between growth and value. Same with small and mid caps relative to large caps. Same with international relative to us. Same with urgent markets relative to developed markets. Spread products with their credit, you know, credit and mortgage rates or mortgage mbs in treasury market. Short rates tend to outperform the belly, which tend to outperform long rates, you know, high yield tends to outperform investment grade industrial commodities tend to outperform energy commodities which tend to outperform at commodities. And then you tend to have gold 10 outperforming foreign currencies in the dollar. So not all of this is happening. We obviously don't have that signal in gold. We don't necessarily have it in small and mid caps yet. Actually no, we, we, I would argue we kind of do if you, you kind of isolated over the last kind of three months. And so really what's happening is generally speaking, rising tide of asset prices lifts all boats, particularly when you're in a risk on market regime. But what's happening in this, these, you know, the most recent risk on market regimes over the last kind of six months or so is that rising tide is no longer lifting all boats. So let's talk about why the rising tide is no longer lifting all boats. I'll start by saying our star is rising. So those may not be familiar with the concept of R star. R star is the level, the real level of the policy rate that allows the economy to neither accelerate nor decelerate from the perspective of inflation and employment is essentially like what's the goldilocks level of the policy rate when adjusting for inflation? Neutral would be the same concept, but not adjusting for inflation. And so when you look at R star, our model, our model of R has it up by about, let's call it two to, you know, 50 to 75 basis points over the past, you know, kind of three to four months. And so now we are in a situation where R Star is narrowly above the Fed funds rate. We got it in a range of 1.47% to 1.78% here in the US that compares to an effective real fed funds rate of 1.21%. So obviously the market is pressing R Star now higher than the policy rate. So there are implications for that. What are the implications? The first implication is that R Star rising tells you that the supply, demand balance for the global capital is deteriorating in a way that is favorable for capital and less favorable for capital providers and less favorable for capital demanders. If you need money, the price of money is going up. Basically, if you are lending money, the price of money is going up, which is a desirable outcome. It's not a desirable outcome if you need the money. And so that's a signal from our perspective that the balance sheet capacity across the global investor community is narrowing in the context of all these very large demands for capital. And so in my opinion, this is the number one reason why we're seeing a lot more negative beta sectors and factors within the equity and credit and fixed income and currency markets, et cetera. In the context of being in a risk on regime, it's just a lot harder to throw a dart against the wall and make money because the supply of capital globally is dwindling. The second takeaway here is that now that the, now that R Star is being priced above the real effective funds rate, it's ultimately sending a signal back to the bond market that a Federal Reserve has not caught up to me yet. Therefore, investors shouldn't be allocating the incremental dollar of capital to treasury bonds. You should be allocating the incremental dollar of capital to things that yield more than treasury bonds. Because the Fed is now modestly applying upward pressure on nominal growth, upward pressure on inflation and an upward pressure on employment. And so ultimately that's signaled that the ex ante returns from the real economy will be higher than they otherwise would be until the Fed actually catches up by tightening monetary policy, which they may not. Going back to where we started the conversation.

Jack Farley: Yeah, I wanted to double click on your perspective on the rate expectations situation because it's been quite interesting. Of course, like we had the July FOMC meeting where, you know, for the first time we're going into these meetings now under the war regime where the expectation isn't fully priced into a single, you know, it's not like, okay, everybody thinks there's going to Be a pause and we're going to price it as a pause. Like I think it was 60, 40 odds in terms of hike versus pause and it's feels like that's going to happen again in September. And I'm curious. Yeah. What is the signal you're getting from that and what does that mean for the context of the regime that we're in and the asset allocation perspective? Because you know, if, if you were expecting rate hikes and perhaps it's because, you know, we didn't actually get them delivered, but assuming they got delivered, say that happens in September, many would view that as perhaps bearish for risky assets. But you know, we've been, we've been, we're in a bull market all things considered. Yes, there's been some aggressive whips on dispersion but the fact of the matter is like you know, the S and P just hit an all time high just this week. So yeah, curious. What, what, what's your signal that you're reading from all of that?

Darius Dale: No, excellent question, excellent question. The first thing I would say is it probably would be bearish for risky assets for a couple of reasons. The primary reason why it would be bearish is because when we look at our, our Fed decision tree model, which we evaluate the Fed's decision tree on whether they should tighten or ease monetary tighten, hold or ease monetary policy both from respective of imminent tightening and or easing and or imminent or easing or tightening over the long term over the next year. You know, when we evaluate the 12 dimensions that we feature in this model on net, they're essentially saying the Fed should remain on hold. And so a Federal Reserve like just from an economic standpoint, when you're looking at the real economy and looking at inflation expectations, you know, things that, you know, the kind of traditional Fed official would be evaluating to determine whether or not they should be moving incrementally in one direction or another from the set of monetary policy on net. That's you know, our model essentially saying things should be on hold now. There are some things that suggest the Fed should tighten federal deficit spending, suggest the Fed should tighten now and continue tightening over the medium term. If you look at the rate of current rate of Fed public debt monetization, they should tighten, that is stop that and then hold over the medium term. If you look at where we are on the Taylor rule, the Fed is policy rate is deeply negative relative to the Taylor rule. So they should probably tighten and ameliorate that imbalance. Nairu if you look at where Nehru is priced Relative to the unemployment rate. The model is just saying the Fed should tighten now and over the medium term. And so there are some signals from the economy where certain Federal Reserve officials will be kind of anchored on and saying, yeah, we should move, we should tighten. Obviously the three dissenters we got in the most recent FOMC would be anchoring on these types of signals. But by and large the real economy is essentially saying the Fed is fine here, you should be on hold. So if the Fed does tighten monetary policy, that would be a shock to kind of the median kind of Fed watcher in a way that could cause some problems for asset markets. The reason why we think the probability of this outcome is going down. So let me take a step back. Going back to the beginning of June when we first outline our play action pass to set up the run thesis. We've had this theme that the Federal Reserve was going to type monetary policy. That's what the play action pass inversion of that was tightening cyclically to set up the run, which is a football reference, easing structurally. You know, we ultimately believe that the outcome, the net result of the five task forces will be dovish on a net basis. Not all of them will be dovish, but when you put them all together and the policy recommendations that they're going to have either at the end of this year, at the beginning of next year, it's going to be explicitly dovish, which is not fully priced into the forward rates curve. And so in our opinion, we think there's a surprisingly dovish outcome heading for financial markets at some point in the next call, three to six months, maybe six to eight months, however long it takes for those task forces to deliver their findings. And so if that is true, we backed our way into this kind of play action pass instead of the run theme, which ultimately acknowledged the fact that our star was rising, the neutral rate was rising, and a Federal Reserve that does not respond to that with tight monetary policy, tighter monetary policy is risking the bond market. You're going to sacrifice the bond market in a context where we already have a supply demand imbalance in the long end of curve. That supply demand imbalance is being exacerbated by, you know, trillions of dollars of AI CapEx and oh by the way, you're going to, six months from now you're going to come and tell the that same bond market that oh my God, I'm going to be even more D, right? That's how you wind up with 6%, 30 year treasury yields. You know, that's how you wind up with 5 1/2 percent, 10 year treasury yields. In fact, what does our model currently say the fair value for the 10 year is? Fair value for the 10 year according to our model is 5.8%. And we don't have to, we don't do any, you know, mental gymnastics to get there. All we're doing is adding a normal level of term premium back to the bond market. Right now term premium is currently at, you know, right around 78 basis points. The long run mean prior to the GFC was 1.88 basis or sorry, 1.88%. And so if you just, you know, subtract the deviation from the long run mean, you know, to the time series, on the time series, then you wind up with a 10 year treasury yield that's somewhere close to 6% on a fair value basis. 30 year treasury yield somewhere well north of 6% on a fair value basis. That's the risk if the Federal Reserve does not appease the bond vigilantes with tighter monetary policy with tighter money. Right. Tight money makes bonds go up, easy money makes bonds go down in price terms. And so ultimately that's how we got into that play action pass to set up the run thesis. But going back again to where we started this conversation, Treasury Secretary Scott Bessen, former, one of the best economic historians in the world. Obviously he had a tremendous investing career with Soros and at Key Square. I think he gets all this stuff, I think he gets it about as well as anybody operating in capital markets right now. And so ultimately he's doing everything he can from his seat to make sure that the Federal Reserve has enough scope to get from now to when they start outlining dovish monetary policy without blowing the bond market up and having to tighten. So we can kind of walk you through those different things, but I'll pause here in case you have any questions.

Jack Farley: Yeah, I mean, I think just the, the distillation here of showing the, the current, the current rate versus the normalization, I think that is, that to me feels like the ultimate question of, of the next couple years of how to, how to navigate that, that tightrope. And it's interesting because on one side of the, it's almost this dichotomy that war tries to deal with, which is that he talks a lot about balance sheet normalization and trying to get out of that market. And to me that's a reflection of this suppression of sorts of the long end. But then on the other side of things, it's this almost refusal to actually hike rates even Though the bond market is screaming for it. And so the other side of that is, do you see this refusal to actually commit to the normalization that might be required? And it feels like this, this constant balance. And I just feel like it's such a great exposition of that dichotomy, which is just the spread between that current yield and the normalization level. And yeah, we'd just love to hear more about how you think that starts to play out. And what are the level levers that might be pulled to try to navigate that really tricky tightrope?

Darius Dale: No, it's the trickiest tightrope.

Jack Farley: I mean, again,

Darius Dale: you've seen those pictures some folks in the 1920s and they got the long poles tightroping across the building buildings. I'm like, that's what it takes to be a Treasury Secretary in a Fed Chair during a fourth term. That's what it takes. So if you don't have the appropriate team around you, you don't have the appropriate understanding of economic history, you don't have the appropriate understanding of the models that kind of power monetary policy and net financing policy, then you're going to struggle. But I do think we have the right people in the job. I know Scott for almost a decade. I don't know Kevin Warsh personally, but I know people that know him well. And obviously he's studied under Stan Druckenmiller, who I believe is arguably the best fundamental investor of all time. So obviously he's surrounded himself with the right people and have learned from the right people to give himself a great chance to be successful. Here's why I think Kevin Warsh was ultimately chosen to be Fed Chair. In the context of everything we're talking about the price of gold, which our clients were long Since October of 2023, the price of gold. And obviously we pivoted our entire flagship KISS model portfolio out of the bond market and into gold market in terms of the 30% target allocation to bonds. We pivoted that into gold back in the fall of 2024. So we were on the right side of gold. And to me, I think we were so on the right side of gold that it was sending a signal to the Scott Bessance of the world and to everyone kind of in and around his circle that we had problems from a dollar debasement standpoint because ultimately if the dollar gets debased too much, then you, you're going to lose, you're going to lose the entire long end of the treasury curve. Right? You have to have sound, you have to have investors to have confidence in the soundness of the dollar as money in order to have a bond market if they don't believe in the dollar as money, which obviously I would argue, you know, if you look at slide 112 in our most recent Macro Scouting report, we do this presentation every month. You know, this move that we've seen in gold as a share of global FX reserves, this move that we've seen in the dollar, the as a share of global FX reserves, this is frightening stuff. Doesn't happen very often. Right. Like, I mean, it's been a long time since we've seen gold shoot up as a share of global FX reserves. That was back in the late 1970s. And so, and obviously we didn't have a much of a bond market back then, by the way. And so, you know, I think the Treasury Secretary Bessen realized this in January and said, hey, Mr. Trump, President Trump, I know you want lower interest rates. The path to getting lower interest rates starts and ends with a stable US Dollar. So we cannot put Kevin Hassett, some, I wouldn't call him a kook. He's obviously really smart, but like he's a political kook in that sense. You can't put a political kook at the helm of the Fed because you're going to send a signal to the world's capital allocators, of which 30% of the treasury market is owned by foreigners. Obviously we have a deeply negative net international investment deficit ratio, roughly about 3/4 worth of our GDP. The only time we've ever seen it wider than that for any country in recorded history is in the most recent few years when it was like 90% of our GDP, you know, you know, thank goodness for booming GDP growth. But, you know, you know, so I think, I think the ch. The choice of Kevin Warsh was really designed from the perspective because he's the most credible dove in hawks clothing. Right. He's got the longest track record of sounding tough on inflation and talking hawkish. He's got very explicitly hawkish views on the balance sheet. And so ultimately putting him in a seat was, in my opinion, was a clear admission that the Treasury Secretary himself, and I know Scott thinks I've met with him a million times, he understands this, he understands the risk that this chart represents to the treasury bond market. And so ultimately they needed to put somebody in the seat who was credible enough with the bond market and credible enough with the currency market to ultimately, you know, kind of reduce some of this, some of this pressure and so kind of answering Your question, you know, taking it, you know, to the longer term, why do we even have to do that in the first place? Let's go to slide 86. If you look at this chart, it shows the Fed funds rate minus the baseline Taylor rule estimate. That's what the shaded area curve shows. So for those who may be unfamiliar, the baseline Taylor rule estimate is a model based kind of signal for what the appropriate level of the policy rate is based on the deviation from the inflation target and the output gap, which is basically the deviation from potential GDP in the real economy. And so when this spread is positive, it's essentially saying the Federal Reserve has a policy rate level that is tighter than what it otherwise should be based on this kind of simple. It's not simple, but it's simple model by our friend John Taylor over at the Hoover Institution. So you kind of just look at it relative to the Fed chairs over the last several decades. You know, Arthur Burns, who's kind of derided as the kind of the easiest, most inflationary Fed chair in modern times, you know, he kept the policy rate on average about, you know, let's call it 175 basis points below what the Taylor rule suggested at the time throughout his tenure, which obviously was inflating, helping, helping fan the flames of inflation throughout the 1970s. Then you have Paul Volcker come in with regime change. He kept the policy rate on average about 362 basis points, a lot, you know, tighter than the, what the federal, the Taylor rule would have suggested at the time throughout his tenure. And we shift to Greenspan, who was about 65 basis points tighter than what the Taylor rule suggested at the time. Although you know, post the.combust it was, you know, consistently around 50 basis points easier. But on an, on an aggregate basis he's about 65 basis points tighter. Bernanke, basically the same thing. He was about 31 basis points too tight on an average basis. But part of that reason is that, you know, post the gfc, the Taylor rule suggests that the federal funds rate should be negative. But obviously they can't take it negative or they didn't want to take it negative. And so ultimately you wind up with this kind of, you know, modestly positive value for Bernanke even though he kept the policy rate at 0 from A levels perspective. Then you get into Yellen and Powell. Yellen throughout the duration of her tenure kept the policy rate about 256 basis points easier than what the Taylor would have suggested throughout or tenure. And then you get to Powell, the most dovish Fed chair of all time. In the context of this analysis, at least since Nixon abandoned the gold standard, he kept the policy rate about 314 basis points on average below what the Taylor world would have suggested throughout his tenure. So you've got Federal Reserve policy since Volcker, that's gotten easier and easier and easier and easier from a policy rate standpoint. Meanwhile, you've also had Federal Reserve policy get, get easier and easier and easier from a balance sheet standpoint in the post crisis era. So the bond market knows this. And now the bond market has an alternate use for the money. Right? Or sorry, the investors have now an alternate use of the money. You know, it was for a long period of time, where did you, where could you allocate capital? You allocated it to sovereign, sovereign governments because there was really no real demand for private capital at the margins in the real private economy, particularly in the US economy and really around the world. We know China's struggling with its structural liquidity trap and its deflation dynamics. We know Europe is just kind of wiped itself off the map with overregulation and no growth. And so now we finally have an alternate source in use for the capital as capital allocators. And so ultimately the bond market is now competing with AI, competing with this massive infrastructure build out in ways that it hasn't had to. And so this is probably why you put all these things together. This is why Kevin Warsh was chosen for the job. Because he can, he's the best, most credible hawk or the most credible dove in hawks clothing that can guide us to, you know, the kind of structural, you know, low, easy monetary policy that we kind of need in order to, you know, keep this thing, keep this game going.

Jack Farley: That is an awesome, just exposition of it all. Like that, that was very. I've been thinking about this a lot lately and that was, that was one of the better clarifications of it. I feel like I can, I can start to see the picture come together. I am curious, what does success look like and what does failure look like from this, like over the next couple years. Yeah. How do we discount those two potential outcomes?

Darius Dale: Boy, that is, that is the best question I've gotten in a long time.

Jack Farley: Thank you.

Darius Dale: Well, I both know that like success, like let's just take a step back, like ignore everything I just said. Like what does success look like for an economy? Right? Like you're growing, you probably have narrowing inequality so you have less political risk and ultimately you have debt and deficits that are narrowing and you have improving Fiscal dynamics. That to me is what success would broadly be for an economy. Now when you are an economy that is starting from the perspective of oh my God, we have 100% debt to GDP, which last time we had such high levels of debt to GDP from a sovereign perspective was right after World War II. Newsflash. We haven't been in war, we haven't been in recession either. So this is a problem. And so if you think about what success looks like from the perspective of this starting point, in my opinion, it's staying in paradigm C, which is the grow phase of the cut, grow, print menu of options that we have to deal with this problem. The paradigm B, which is cut, that probably causes more political issues. Right. If you think about, you know, having a slash benefits and whatnot, we already have an inequality problem. So slashing benefits is probably going to create, you know, it's going to send people to the streets. You know, we're probably already close to sending people to the streets in the context of AI and everything that can do to the labor market from a structural standpoint. And so, you know, paradigm B is not really a palatable option. Elon told us this as much, you know, last spring.

Jack Farley: Right.

Darius Dale: So like, you know, the more you can kind of stay in this kind of growth phase without having to get to the, the print phase, that to me is success from the perspective of the current, you have options. Facing our debt disease. I mean, again, you can't cut too much, you can't print too much either because you're going to have an inflation problem. Cutting too much winds up with war. Printing too much winds up with civil war. Both of these create bigger problems longer term. So ultimately their goal, in my opinion should be to keep the economy humming along as possible. But if you keep the economy humming as long as possible, you ultimately know that people aren't going to want to be long bonds in that situation. They're going to want to be long stocks, they're going to be long corporate credit, they're going to be long spread products, they're going to be long everything but a Treasury bond. And so it's, it is a legitimate type rope because paradigm C grow, you know, the grow your way out of the solution is the best option. But ultimately the best option is the same exact option that causes problems in the bond market. So this is truly, you know, a high wire type rope.

Jack Farley: Yeah, yeah, 100%. Yeah. And then just to look a little bit deeper at potential failures or risks, like I just think about this recent FOMC Meeting with, with Warsh and the reaction to the press conference where he has this, you know, pretty passionate interest to keep his cards as close to the, to his, to his chest as possible, it seems like. And doesn't want to give any sort of commentary or forward guidance. Yeah, he seems to hate the name of my podcast a lot like these days, but the market did not like that and people were, you know, people were calling it a disaster and I don't know, it felt a bit hyperbolic. But I'm curious your take on like when you look at something like that, what's your, what's your takeaway in terms of how, how potent, how possible it is to get to the other side here?

Darius Dale: I think the removal for guidance in a weird way is actually helping this, this pro. This process and here's why. Right? You think about what Ford guidance has done going back to that term premium chart we showed earlier. You think about what for guidance has done for guidance in the post crisis era has all been basically designed to push interest rates down both on the short end and the long end of the curve, right? They don't do for guidance to push interest rates up. Rarely have they done that. Bernanke did it for 2 months in 05 or sorry in 05 prior to the 06h tiking signal. But by and large they're using forward guidance to push rates down. We know Volcker didn't use much forward guidance. Greenspan would have laughed you out of the room if you mentioned it. And so this whole concept of forward guidance has really been a post crisis tool, post crisis, post GFC tool that the central banks have used around the world to essentially push down the term structure of interest rates and ultimately compress term premium in the bond market. And it was very successful. Term premia troughed during COVID at minus 167 basis points. And again that compares to a long run pre GFC mean of plus 188 basis points. Right? Like so it was very successful this forward guidance. But what was also one of the side effects of all this forward guidance is that you have capital misallocation, right? We've basically taken capital out of the real economy and put it into, I would say the financial economy, which obviously benefits folks like us on the top of the K, but it obviously had negative distributional consequences for folks on the growing bottom of the K. And another reason why, you know, this remove this. So essentially adding back forward guidance or sorry, removing forward guidance and injecting volatility into the interest rate curve will Ultimately keep the economy in our opinion, in a more narrower band of outcomes. Right? When you, when you have a Federal Reserve that's, you know, saying enough to get the 10 year term premium to minus 100 to 200 basis points, you're ultimately saying enough dovish things to sell investors to take a ton of risk in capital markets, to tell companies to lever up and buy back stock instead of investing in productive activities in the real economy. And so ultimately you wind up with these boom bust cycles, these speculative boom bust cycles, as opposed to an economy that, where, so this is kind of what the economy looks like with, for guidance you have all this fat tailed risk. This is what the economy would look like without, for guidance you have a lot more normally shaped distribution. So you're going back from, we're going from a leptocurrent distribution to a normally shaped distribution because ultimately you're not going to have as much capital misallocation because the short end and long end of the interest rate curves are going to appropriately reprice economic risk when they're focused myopically on the Fed and what the Fed is going to say next. From a day to day, week to week and month to month perspective, it's very easy for the short end and the long end of the bond market to lose sight of the economy because they're so focused on what the Federal Reserve is going to do. And so you can kind of make the case that like the whole job of setting monetary policy had shifted to the Fed. Whereas if you think about the Greenspan Fed, it was probably 50, 50 Fed versus markets. You know, Greenspan relied on markets to set monetary policy. Relied, you know, Volcker, you know, relied on markets to a certain degree. You know, we basically in the Bernanke, Yellen, Powell Fed, it's been all fed 100% of what's happening in the financial economy, the financial markets, not 100%, but a very large percentage of what's happening in financial markets is just markets repositioning to the latest Fed for guidance. And so getting, removing that at the margins should in theory reduce capital misallocation in a way that narrows the distribution of probable economic outcomes, which in my opinion is good in the context of their trying to stick the landing on staying in paradigm sea for as long as possible.

Jack Farley: Amazing. All right, on the note of changing kurtosis in terms of outcomes here that you just mentioned, they could be great to round out the conversation in terms of how do you take that shift into how you think about asset allocation, risk management, portfolio construction and what your Models are telling you.

Darius Dale: Yeah, absolutely. So as you know we're completely systematic investors here at 42 Macro. Everything we do is through the lens of what we call our KISS model portfolio which we design. That's a simple 3 ETF solution for retail investors. Or through the lens of our discussion risk management overlay which is basically KISS. But the individual factors in KISS we have 80 different factors that we run the same top down and bottom up risk management overlays for to infuse volatility, targeting and dynamic position sizing into all of our actionable signals. That's the same kind of, those are the same kind of risk management overlays that you see featured across global Wall street, particularly at these large multi managers, quote unquote pod shop hedge funds. That's exactly what they're doing. And so we're essentially standing on the shoulders of giants there in terms of copying this for our customers. And so ultimately when we think about how should investors be positioned, everything that I've just said for the last, I don't know, 40 minutes or so, throw it out the door. We do not invest on the basis of what Dariusdale thinks is going to happen in the economy. What Dariusdale thinks is going to happen with policy or asset markets. That's not, you know, we have thousands of families around the world relying on our signals. We have hundreds of institutions around the world relying on our signals. I am not smart enough to take on all that risk but I am smart enough to use you know, suit tools like our global macro risk matrix which again the market regime now casting process that we highlighted earlier, the marker now casting process that we highlighted earlier which infuses the volatility targeting into the strategy that that is the top down risk management overlay. We use our volatility adjustable momentum signal, you know to use the infuse the bottom up that imposition sizing into the, into the Kiss and Dr. Mo strategies. And so ultimately when you put those two things together you wind up creating what we call an institutional finance a positively skewed return distribution. And so what, why does that matter? You know, why does it matter to have a positive skewed return distribution? Because ultimately you wind up compounding your your wealth faster if you have a positive skew return distribution. And I'll get back to answering your question specifically but let me just kind of quickly show you this chart because it's a very important chart and really justifies what we do and why the five and a half trillion dollar hedge fund industry exists to begin with. Right? The Sequence of returns is by far the most important variable in determining how much money you have in a future date. It's not the return itself or the average return. It's the sequence of returns. Because wealth compounds, it's compounding. And so this, this analysis shows two investment strategies. The blue being, you know, it's called institutional strategy, that has risk management, the red being kind of your passive buy and hold strategy. And they both feature identical 50% average annual returns. Again, both these strategies feature identical 50% average annual returns. Yet after year three, the blue strategy, which does have risk management, you know, has about 60% more money than the red strategy, which is buy and hold. But why is that, despite him having the same average annual return? Well, it's because the sequence of returns was unfavorable for the buy and hold strategy, whereas the blue strategy manages risk to maintain a positive sequence of returns. That's the whole point of what we do and the whole point of why the entire five and five and a half trillion dollar hedge fund industry exists is because ultimately the compounding really starts to accelerate from an exponential standpoint. The further you go out in time, you always want to be compounding your portfolio at or near and a peaking your net asset value. You never want to get too far below your high watermark because ultimately all the incremental returns you're getting is just to get back to the high water mark. Right? You know, you think about the bull market we've seen in, in stocks since March of 2009. Like let's say this is March 2009. You know, you didn't get back to break even until, you know, January 20th or so February 2013. You know, if this, if this is, if this is October of 2002 in the NASDAQ, you didn't get back to break even until late 2015. 2015, 13 years from the low to the breaking even. And so that's the whole point. You can waste a lot of return not actually making money. And so going back to where we started the conversation on Kiss and Dr. Mo, you know, what we try to do is with investors. Kiss is a 60, 30, 10 stocks gold Bitcoin allocation. When it's maxed out, you know, it's not currently maxed out. You know, we keep the, the actual, the actual allocations to behind our paywall for our paying members. But you know, the, the kind of, the key takeaway on Kiss, you know, just, you know, one sentence on that is, you know, over the, since the lifetime of this out of sample back Test and the KISS strategy actually started in January of 2023. You know, it's got a 16% CAGR, which compares to plus 8% for 60:40 or plus 15% for, for the S&P100. But the Max drawdown is significantly smaller than those strategies. Minus 12% for KISS, minus 23% for 60, 40, minus 34% for. For the S&P 500. And then when you look at something like our Dr. Mo strategy, you want to compare Dr. Mo to, you know, kind of a naked long position. You know, Dr. Mo. If you use apply Dr. Mo, which is again, that same top, down and bottom upper management overlay that we're featuring in kiss, you want to apply that to, let's say, the total global stock market. You know, you're basically compounding at 111% of the total cumulative return. So basically, if the stock market went up $100, you would have made $111 responding to the risk management signals from Dr. Mo. Same thing with Bitcoin. If Bitcoin went up $100. Or you would have made $118 just responding to the risk management signals. And more importantly, you're not participating when all the volatility is happening, so you're not suffering that massive drawdown. You don't have all that stress and anxiety associated with. When. When is the bleeding? When is the bleeding going to end? When is the bull market going to begin again? When am I going to get back to my high watermark? Because ultimately, what KISS and doctor Won't do is keep your portfolio, you know, near its high watermark based on those volatility targeting and an imposition sizing signals. That's kind of what a crash would look like in Kiss relative to the S&P 500.

Jack Farley: Solid, solid stuff. Darius. Well, look, always great to have you on the show. That was a great. Just exposition of a lot of different macro themes that I've been thinking about. I know it's always important to anchor it into, like, actual systematic views. Macro investing is not just waking up one day and, you know, decided, putting your finger in the wind and deciding on what to do just based on feel. So I think it's, yeah, always super important to hammer that home. I appreciate you doing that. Yeah. Darius, great to have you on the show. Where could folks go if they want to see all of this work that you do feel?

Darius Dale: So again, I really appreciate the opportunity to connect with you and your audience. Man, if folks want to kind of check out more of what we do, particularly if they want to see the, you know, what Chris and Dr. Mo can do for their portfolios. Obviously that's behind our paywall. @42macro.com I'm on Twitterry stale42active on LinkedIn as well. So we have a lot of premium content on our website as well. So I think it's on our insights page and on a media page. So what we're trying to do with 42 macro is, you know, I spent most of my, I made a lot of money on Wall street helping design systems and risk management overlays and feeding research to portfolio management teams and investment teams across the global buy side. And you know, someone who's from the very bottom of this kind of K shaped economy, you know, it's really important for me personally to make sure that this type of access and information is available for regular people. Right? Like, I don't just think, you know, the top funds in the world, you know, deserve this information and content. You know, obviously they do. They have their own teams, they rely on folks like myself. But the reality is I think every family in the world can benefit from a system that keeps their portfolios, net asset value near its high water market all times and, or compounding when it's, you know, we're in a bull market. Like that's to me is something that everybody could use, especially in the context of this deepening retirement crisis that we have, the deepening inequality that we have and ultimately, you know, all the negative consequences associated that are hurting families around the world. And, and so we want to be part of the solution, not the problem.

Jack Farley: 100%. Well, Darius, can't thank you enough for joining. Great to catch up Again. Nothing said on for guidance is a recommendation to buy or sell any investments or products. This podcast is for informational purposes is only and the views expressed by anyone on the show are solely their opinions, not financial advice or necessarily the views of Blockworks. Our hosts, guests and the Blockworks team may hold positions in the company's funds or projects discussed. As always, investments in blockchain technology involve risk. Terms and conditions apply. Do your own research.