Yesterday on Talking Markets we welcomed back
, founder of 42 Macro, for the first time in six months. As ever, Darius brought what’s technically known as a sh*t ton of data to back up his views - and those views are sunnier than might have been expected. TL;DR: He sees a ton of market upside ahead, even as bonds are “uninvestable.”“A Booming Economy”
“We’re headed for a booming economy, and that’s exactly what we’ve ben arguing for since April 23 when authored the ‘Paradigm C’ theme, that, in our view, has become the theme across global Wall Street,” Darius said.
Wait, what’s ‘Paradigm C’?
“[It is] a situation where the administration is choosing to use all the levers that it can, including negotiating trade deals and trying to rewire global trade in favor of American companies,” Darius explained. “They’re essentially trying to create an economic boom because they figured out that cutting your way out of the fiscal mess isn’t going to work. So now they’ve ported us over to trying to grow out way out… Newsflash, it’s not going to work, but there’s at least a couple of years to figure that out, and so I think you’re in a tough spot as a bear here if you’re trying to fight that.”
Looking Toppy?
With the return of meme-y stocks to the headlines, there’s an argument to be made that markets are starting to look pretty toppy.
But Darius thinks that some metrics do point to that, “We’re nowhere near where we were in February… Not only do we need to get back to where we were in February from a positioning cycle standpoint, we’ve been making the case that we need to go well past that because the distribution of probably outcomes has shifted to the right - there’s just more right-tail risk relative to where we were in February. That suggests we have a tremendous amount of scope for upside.”
It’s not going to be plain sailing - “There’s going to be volatility to risk manage along the way,” Darius said. “But if you’re an investor that’s focused on an on-time and comfortable retirement, or you’re a buy-sider that’s focused on a lucrative bonus, ignore the chop, ignore the scarecrows, ignore the volatility, because you know the dip has to be bought by legions of underperforming investors that ultimately need to capitulate into our Paradigm C theme.”
We’re in a “Risk On” Market Regime
There’s been a broadening out in markets, Darius said:
Tech is still leading…
“But we’re seeing a tremendous amount of participation in international equities as well. Emerging markets are up 9%, China is up 10%.”
High beta is “doing really well”
Commodity producers “are up 7%”
Small caps “are performing in line with the market at 7%”
Quality is “lagging,” dividend compounders are “lagging”
💡“These are all things that that are telling you we’re in a risk on market regime,” Darius said. “And [they’re also] telling you that the market internals think we’re headed for positive outcomes.”
Tariff Impact (or Not)
Darius and the team at 42 Macro are expecting to see growth, but he thinks it’s “unlikely” that that growth comes hand in hand with inflation. “We’re going to see a one-off price level change to the tariff sectors of the economy,” he said. “And so we’re going to have to deal with that… But I imagine a lot of that was priced [in] at the lows of April.”
So, he said, “The reality is, in our view, that tariffs are kind of a non-event. It’s not that they are not going to come and they’re not going to shift the price level higher… It’s just that they’re one of several levers the administration is pulling. And when you factor in broad-based deregulation, tax cuts, accelerating private sector credit growth… that’s a lot of positive stuff that is yet to occur that will likely drag both liquidity and asset markets higher over the long term.”
Trade Deals… Impossible to Predict
On whether we should expect further trade deals to be made before the August 1 deadline, Darius said: “I have no idea. I’m not working in the administration. I have a former client who’s the Treasury Secretary [and] I don’t even have a line into him. Frankly, if I did I wouldn’t be able to use it from a client standpoint, but I don’t even think he knows where we’re headed with all of this.”
But, he added, what he’s been saying to clients since May is to “assume that the trade deals will work out on a net positive basis.” Why? Because capital outflows from US markets in April “spooked” the administration because sustained outflows would lead to a debt spiral “where your cost of capital is accelerating and the dollar is going down… You would be forced to print your way out of it, which is obviously how a lot of empires have ended historically.”
Fourth Turnings “Always End in Fiscal Dominance”
Fourth Turnings “always end in fiscal dominance, and fiscal dominance requires substantial monetization of deficits and financial oppression,” Darius said. “Whenever you get to this level of inequality in society, you tend to have populism, populism begets fiscal dominance, fiscal dominance demands financial repression and deficit monetization… So that’s where we’re headed from a long-term perspective.”
And if that’s the case, Darius and team think “we are going to see an increasing loss of independence by the Federal Reserve to support this fiscal dominance regime,” and that’s basically why President Trump has been attacking Jay Powell and the Fed’s credibility: “Over the long term, we believe monetary policy is going to get very, very loose as a function of that fiscal dominance.”
The KISS Portfolio
KISS is a portfolio developed by Darius and the 42 Macro team that is:
60% stocks
30% gold
10% Bitcoin
“Essentially what it’s trying to do is take the 40% of your portfolio that you would otherwise be allocating to a very clearly and obviously melting ice cube [i.e. the bond market]… and expose investor portfolios to the assets that benefit from the destruction of the bond market that you very likely s in a Fourth Turning,” Darius said.
Essentially, Darius thinks bonds are “uninvestable” and will only get more uninvestable based on worsening debt and deficit dynamics, and so he would rather put that traditional 40% bond allocation into “more productive assets.”
🪢More details on the KISS Portfolio from 42 Macro here
And Finally…
“It’s never too late to get on the right side of market risk.”
Enjoy,
Maggie
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