TONY GREER: I'm here with the six-foot-four, 280-pound left tackle from Seattle, Washington playing for Yale football and he's here with me to bring the macro heat, Darius Dale, how're you doing today?
DARIUS DALE: Tony, it's an absolute pleasure to be with you today. How are you doing, man?
TONY GREER: I'm great. I'm great. I'm really excited for this conversation, we're going to carve up all kinds of corners of the globe, but I want to talk a little bit about, I love the quote on your website. A quote from Jackie Robinson, "A life is not important except in the impact that it has on other lives". Tell me a little bit about how that fits in with your founding of 42Macro if you would.
DARIUS DALE: Yeah, man. And it's something I live my life by. I certainly consider myself to be extremely lucky, very blessed. I came from extremely humble beginnings. And quite frankly, the only reason I'm sitting in front of you today and really had been blessed to have the career that I've had is that a lot of folks have been looking out after me and opened doors for me between coaches, teachers, mentors throughout my childhood and throughout the industry, have all really taken me under their wing and have given me an opportunity to excel and be great.
And so, what I want to do at 42Macro is do that same thing for other people, not just with respect to investing and democratizing what I would consider to be world class institutional grade macro risk management processes, but also to provide seats and homes for you as we continue to grow for analysts and disadvantaged groups in our industry.
TONY GREER: Beautiful, man. That's a great motivation for starting your business. And mine was similarly motivated. Why don't you go ahead and just give us a short arc of your career right up to founding 42Macro, and then we're going to go right into the macro world?
DARIUS DALE: Yeah, absolutely. So, I joke when people ask me, like, my career, it's like, I only really only had one job post college, and that was I spent about 12 years at Hedgeye, where I was most recently the sector head for macro for the last three or four years. Most people around global Wall Street know me from my days at Hedgeye and designing and developing what are called the quads, which are their regime segmentation process that they use to guide their asset allocation decision making.
And so, it's interesting when I was creating that stuff, this is like, over a decade ago now, when I was doing the work on that, initially, it was mostly to inform myself because I didn't have a clue. I couldn't tell my ass from my elbow with respect to what was actually driving financial markets. It's all narratives. There's all this, there's all that.
And I finally started to do the work obviously inspired by Ray Dalio of Bridgewater and his team over there. I started to really do the work on actually understanding the mechanics of global financial markets, the mechanics of how the macro economy relates to global financial markets. And ultimately, that learning, that drive and desire, and ultimately, that product really catapulted my career across Wall Street, and ultimately, into the seat that I'm sitting in today.
TONY GREER: Beautiful, man. It's really inspiring that you've had the mentors, yet you came across your own framework of looking at markets and you developed it, it's something that you can run a firm on, which is really exciting. So, let's get right into it., Darius. I'm anxious to hear some of the views that you have at 42Macro, and how your science of following the markets either interact, overlaps or contradicts mine.
And so, there's a lot to talk about today. I think that we're going to wind up on the same page on a lot of things, but it's going to be cool to go. Why don't we start with the head of the beast at the Federal Reserve? Obviously, yeah, you've got to know what's going on at the Federal Reserve. I've argued that the Fed doubling their balance sheet last year is the biggest story in financial history. Obviously, it's led to a lot of, I think, developments that are just now hitting the screens, actually, and just now playing out in front of us.
What do you think of the Federal Reserve in terms of the Powell-Brainard conversation, and then just talk about how you approach them and fitting them into your macro framework, if that's fair?
DARIUS DALE: Yeah. So, I would tend to be on the camp that the Powell-Brainard conversation is somewhat moot. And really, for two reasons. One, the Federal Reserve is not-- it's led by the governor, it's led by the chair, but the reality is, the chair's job is really to find the midpoint of consensus, rather than to guide consensus or rather than to instruct consensus.
And so, I think reality is that Powell has done a good job of playing the role of cat herder, a chief cat herder with respect to all the disparate views on monetary policy on the labor market, on inflation and things like that with respect to the FOMC board and all the committee members. Secondarily, Powell and Brainard in terms of their commentary and their views on inflation, their views on the labor market and the disparate dynamics within the labor market, it doesn't strike me that they're going to have too big of a difference with respect to their own personal views on policy.
Now, I will say this. Powell has gone from being one of the worse Fed chairs in terms of communication, obviously, we have the stumble in late 2018. And then the forced pivot after the market crashed in January of 2019. To what I would argue is, man, he's fantastic in these interviews and answering questions and he's both honest but he's really good at not answering the question in a very honest way, ironically. He's a master communicator.
And I think it goes back to his days that you're having to pitch deals and get deals done at Carlyle, obviously. He was a private equity guy prior to joining the Fed. And so, I just don't know that Lael Brainard, it's not to say anything negative about her, But I just don't know that she has the experience, including she doesn't have the experience of sitting up there and really being forced to answer some very tough questions.
And the reason I bring that up is because if she gets appointed for Powell's job, she's going to be walking into a Fed chair where you're talking about a five-handle on headline CPI. And that's just a very different scenario than what Powell walked into in terms of having to deal with the media scrutiny.
TONY GREER: That's a good point, Darius. Now, we've gone from clearly, we've seen Powell pivot from transitory to clearly acknowledging the commodity rally on the screens, the supply chain disruption, the headline inflation now. How do you think the Fed reacts to this going forward? And do we need to be concerned about it derailing the equity market or causing a dislocation in the bond market?
DARIUS DALE: Yeah. So, there's two answers. One, I believe the probability of them accelerating tapering has gone up. In fact, I don't believe the December meeting is live. It's unlikely to be live based on Powell's commentary in the November meeting. And so, we're talking about in the January meeting, I believe it's on January 26 of 2022, their meeting, they're going to have in hand the November core PCE print. Right now, our models for core PCE are pointing to a cycle peak of 3.9%.
So, they're going to be walking into that meeting with potentially a four-handle on core PCE in which our models suggest that's the cycle peak, but obviously, there'll be no evidence of that being the peak until we actually see the data, the subsequent data roll off that peak. So, the reality is, the probability that they start to accelerate tapering in January of this year is reasonably high from my perspective, but going back to the policy, because I think tapering and policy rate hikes are obviously two very different things, and so the committee has been very clear about those things being different.
With respect to policy rate hikes, in our opinion, the first live meeting is the July 27 meeting of next year, that's when they'll be done with tapering or you could potentially say the June meeting if they accelerate, tapering, but let's assume they're staying on the 15-basis point or 15 billion path that they're currently on per month. In that July 27th meeting our projections for core PCE in terms of the May core PCE data that they'll have in hand, because they won't have the June print in hand, that's likely to be somewhere around 2.9%.
In our opinion, that is a reason for them to hike interest rates, potentially given like we're going to be talking about four-handle, five-handle CPI throughout the whole first half of next year, talking about 3% to 4% core PCE for the first half of next year. So, in our opinion, that's how you get that rate hike, but in terms of, will they continuously hike rates like we saw obviously, in the Greenspan era, we saw that--
TONY GREER: Is it going to be a cycle, or is it going to be--?
DARIUS DALE: I think, yes, we're going to see a cycle, but I think it might be one and done as it relates to 2022. Because again, in terms of where we're going to be in core PCE terms in the end of the year, their December meeting is December 14th of next year. Our models for core PCE have it already back down at 2.2%. I don't think they hike it 2.2% in December of 2022. I think they go one, check out the economy, which will be slowing by the way, and then have to just wait until 2023 or 2024 to really pick back up.
TONY GREER: I could absolutely accept that. That makes a lot of sense to me.
DARIUS DALE: What are your thoughts? Am I [?]?
TONY GREER: No, I listened to you, Darius. The Fed for me is just another window on my dashboard to keep an eye on. I listened to your economic predictions and I listened to what people think about the Fed. I'm a reactionary trader. So, I'm not even capable of coming up with theses of how many rate hikes we're going to have over what period of time. It's just not how my brain works. So, my method of watching the Fed is watching the Fed balance sheet.
And I find it was very interesting to see that we're talking about tapering, and we're talking about potentially tightening in order to combat this inflation. And you say, oh, really? And you look over the Fed balance sheet, and you say, we've added 1.7 trillion this year. It shows no sign of backing off if you look at the chart on Bloomberg, so that's my guide as to you've got a mechanism of your own of what is driving markets now.
And for me, that's a big part of the mechanism that's driving the equity market. So, that's how I'm looking at that. Do I believe that they're going to have to make adjustments and address this clear headline inflation? Yeah. And I'm just going with your idea of how they do that, that totally can make sense to me so. And like I said, only because I'm not in the business of making predictions like that. That sounds like a great niche for 42Macro because it sounds like a very well thought out and constructed theory.
So, probably we're going to wind up being on the same page, and we'll get to that. Do you think about the Fed's balance sheet as part of your thesis at all? Does that fit into where the markets are going at all if they continue to add to that?
DARIUS DALE: Yeah, absolutely. So, one of the dynamics that we track in the markets as it relates to policy, the policy function is net liquidity. And so, how we calculate that, I think there's a million ways to calculate it. But in terms of our simplistic calculation, it's the Fed's balance sheet minus the Treasury General Account, because obviously, the Treasury General Account, when it goes up, it's tightening liquidity. When it goes down, it's easing. And so, you get the two double negatives there.
And on that metric, we've seen $2.5 trillion of liquidity being pumped into the markets in the year to date. It's ridiculous. Obviously, you got the $1.7 trillion increase in the Fed balance sheet. You have the $800 billion reduction in the Treasury General Account. This is some wacky stuff, man.
TONY GREER: Yeah, it is. Do you have a theory for endgame on this thing? Or do you have in the back of your head, well, eventually, the Fed is going to have to stop tapering? Do you think there's an exit strategy for the taper? Because I always go back and forth and say, I feel like they're kicking the can on this way, way down the road. What are your thoughts on that?
DARIUS DALE: Yeah, they're going to finish tapering in our opinion. I think that's a highly probable event. I think, actually, it's increasingly probable that they accelerate the tapering. And I don't necessarily believe that that is the end game, however, because going back to my discussion with core PCE and more specifically, where will it be, where will this metric be, this very important metric? Where will it be when they're actually trying to make these decisions?
And so, you have to put yourself in the shoes of the Fed policymakers at these particular junctions at these intervals. And the reality is, we're going to be talking about an economy that's much slower in GDP terms. It's talking about economy that's much less hot in inflation terms. And so, the reality is there's going to be a contingency on the FOMC committee that says, hey, see, I told you so. It took us a little bit longer. But hey, I told you so. So, what the hell are we doing about this Eurodollar curve that's pricing in three rate hikes in 2022?
I think, to me, that's one of the big shorts out there in the market in my perspective. I think you can easily put on a two-year receiver and take that down and 50 basis points, because again, I just don't think we're going to have the same inflation and growth dynamics when it's time to make those decisions as we do now.
TONY GREER: Great point. I like that you're pricing in some measure of inflation, but that it's backing off the highs. What do you think this means for rates, Darius? We just saw 2 Year paper go bidless again. We saw some massive magnitude moves higher in 2 Year yields, we saw a bounce off of support in 10 Year yields from about 150 up to 160. Do you have a bias on rates here? It doesn't sound like you're expecting rates to go that much higher if you think inflation cools off, but I don't want to put words in your mouth.
DARIUS DALE: No, that's a very appropriate characterization. We're long bonds. Yeah, absolutely. So, I try not to make-- nothing we do is easy as you know. You're bolted to the chair like I am every day, but there are a few things in our market lives that they come around every three or four years that are pretty easy. Whenever you're at the peak of the sine curve for growth and or inflation, there's some very obvious asset allocation pivots you need to make.
You need to high grade your quality in terms of your credit exposure, you need to high-grade your cap size, your capitalization with respect to your equity exposure. And you obviously need to start pivoting back into bonds in lieu of riskier assets, in lieu of commodities, in lieu of riskier equities, in lieu of things of that nature. And oh, by the way, buy the dollar, buy gold.
Every single time you're the peaks of those sine curves, it's a very obvious trade, but it's so hard to put it on in the moment. Because in the moment, all the backward-looking data is telling you inflation's really hot and jumping through the roof, growth momentum is picking back up and it's still extremely elevated. Consumer balance sheets are very fine and have all this excess savings. And so, the narrative machine out there, and I think is as big as it's ever been, if anything, the biggest bubble I see out there is the bubble in narratives.
There's a lot of narrative based investing right now. And quite frankly, I think the narrative machine will be different a year from now. It'll be different six months from now. We can put probabilities around that. We forecast the economy from the perspective of regime segmentation. Goldilocks is when growth's accelerating, inflation is decelerating. Reflation is when growth and inflation are accelerating simultaneously. What we call inflation, most people call stagflation, that's when growth's decelerating, and inflation is accelerating.
And then lastly, you have deflation, what we call deflation, where both growth and inflation are slowing simultaneously. The conditional probability over the next six months for to achieve all those outcomes is somewhere around 10% for Goldilocks, 15% for inflation, 25% for inflation, and about 50% for deflation. So, you've got a 50/50 chance of realizing deflation over the next six months relative to all the other regime outcomes. And so, to me, that requires a very different asset allocation than the one we're exiting currently.
TONY GREER: Brilliant. I love that, that whole explanation that you went to made me understand the four quadrants as you guys refer to them. And that's very helpful to understand your framework. My question to you, Darius, and I want to push back a little bit on your view, because I see the commodity markets getting quite buoyant. I see the curves tightening up. And I see the cause of that, likely as being part of it coming from our aggressive push towards ESG, and carbon neutral.
And what I worry about on the inflation side is that our cure for high prices has always been high prices in commodities. And what does that mean? That means when prices get high, you turn to the producers, and they start putting out product for the better price. And next thing you know, demand is satiated. And the price can go back down.
Well, my concern is that we're still attacking supply as policy. In the energy world, you can make a case that we're attacking supply in a couple of different places in the energy world, but that can hurt base metal markets if energy prices go higher. And then I'm considering that 30% of grain prices is energy prices. And if I'm bullish energy, it's hard for me to not be bullish grains. And if energy and grains are going to go up, then we've got an inflationary flywheel going. And I would imagine that base metals and precious metals can rally with that, too. I think that's the risk to your trade. How do you look at that?
DARIUS DALE: I think it's very much a risk. And again, right now, if you look at over the next three months, those probabilities are overwhelmingly in favor of inflation, the stagflation