What Happens to Markets In A Fourth Turning?

Darius recently sat down with our friend David Lin, where they discussed the drivers behind current market positioning, the Fourth Turning, its impact on asset markets, and more.

If you missed the interview, here are the three most important takeaways from the conversation that have significant implications for your portfolio:

1. What Has Caused The Current Market Positioning?

In our view, current market positioning has been driven by three main themes:

Resilient U.S. Economy: Since authoring the theme in September 2022, we have seen ongoing upside surprises in U.S. growth. We believe this resilience has contributed to the current crowded long positioning in risk assets.
Here Comes The Liquidity: We anticipate a significant acceleration in both U.S. and global liquidity over the medium term.
Jay Wants A Soft Landing: We have maintained this theme since last November, which revolves around the Federal Reserve’s asymmetrically dovish reaction function. When the Fed leans dovish and the economy is not in or heading into recession, it is often a bullish signal for investors.

2. How Will The Fourth Turning Affect Income Inequality?

At 42 Macro, we conducted an in-depth statistical study on Fourth Turnings, focusing on the economic implications and policy shifts, as well as their impact on asset markets.

In our empirical study, we found that income inequality, measured by the top 10% share of national income, declined sharply throughout previous Fourth Turnings.

We are currently at a very high level of income inequality, and we expect a significant decline throughout this Fourth Turning – but not without great cost. We anticipate policy trends to become increasingly populist, essentially redistributing wealth from the rich to the poor. This shift may not occur immediately, especially given the current divided government, but it may be a response to a larger crisis that both households and investors will need to navigate.

3. How Will Asset Markets Perform During The Fourth Turning?

Anticipating how asset markets will perform during the Fourth Turning involves understanding how policymakers typically respond to these geopolitical, economic, and social developments. Historically, they have used two main strategies:

Fiscal Support: There is usually significant fiscal policy support for the economy, which boosts nominal GDP and tends to be favorable for risk assets, such as stocks, credit, crypto, and commodities.
Monetary Debasement and Financial Repression: The Federal Reserve has historically engaged in monetary debasement and financial repression during Fourth Turnings, effectively lowering the value of money to support fiscal measures.

Combining these factors—excessive fiscal policy, monetary debasement, and currency devaluation—leads us at 42 Macro to maintain a structurally bullish stance on risk assets throughout the Fourth Turning, including stocks, credit, crypto, and commodities, while remaining structurally bearish on defensive assets like Treasury bonds and the U.S. dollar.

That does not mean that risk assets will appreciate in a straight line. There will be significant drawdowns to risk manage along the way – perhaps as painful as the Dot Com Bust, GFC, or COVID crash. Fortuitously, 42 Macro clients have access to our KISS Portfolio Construction Process and Discretionary Risk Management Overlay, aka “Dr. Mo”, to help them successfully navigate their portfolios throughout these increasingly trying geopolitical times.

By now, you’ve likely realized that piecing together an investment strategy from finance podcasts, YouTube videos, and macro “gurus” on 𝕏 is not delivering the results you know you deserve.

This kind of approach only leads to confusion from conflicting advice, frustration from mediocre returns, and exhaustion from the emotional rollercoaster of your portfolio swings.

If you don’t change your process, how can you expect to get better results?

Over 2,000 investors around the world confidently make smarter investment decisions using our clear, actionable, and accurate signals—and as a result, they make more money.

If you are ready to join them, we are here to support you.

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The Biggest Threat To The US Economy Today

Darius recently joined our friend Anthony Pompliano, where they discussed the impact of the recent port strike, the outlook for inflation, the national debt, and more.

If you missed the interview, here are the three most important takeaways from the conversation that have significant implications for your portfolio:

1. What Impact Will The Recent Port Strike Have On The Economy?

Many of the goods entering the country pass through the ports along the Gulf Coast, East Coast, and the Port of Long Beach. We believe the recent shutdowns at these ports are likely to cause a temporary stagflationary effect.

To track the potential impact on inflation, we monitor the ISM Manufacturing and Services PMIs, which include a subindex for slower supplier delivery times. Our research shows these delivery times surged during the pandemic and after the early 2021 Biden stimulus, but have since retreated, coinciding with a decline in core inflation.

However, with the port shutdowns – now scheduled to begin on January 15th – we expect delivery times to rise again, further contributing to the stickiness in inflation we are currently observing.

2. Is 3% Inflation The New 2%?

We first published our secular inflation model at the beginning of 2022, which predicts a higher underlying trend in core PCE inflation over the next decade.

From 2010 to 2019, the 10-year run rate of core PCE inflation was 1.6%. However, our model projects a range of 2.7% to 3.1% for 2020 to 2029.

We have maintained the view that the Federal Reserve is prioritizing financial and economic stability over strict adherence to its 2% inflation target. Inflation has effectively become the Fed’s third mandate, and we believe the Fed will ultimately tolerate a higher trend inflation rate over the next decade, likely around 3%, even if they do not officially adjust their target.

3. Do Both Political Parties Contribute To The Deficit?

Our deep dive into historical economic and policy dynamics reveals that both Republicans and Democrats have contributed to the national debt.

Since the post-war era, the growth rate of the national debt under both administrations has been roughly similar:

After one year, median cumulative debt growth is 7% under Democrat Presidents and 6% under Republican Presidents.
After two years, it is 10% for Democrats and 12% for Republicans.
By the third year, both are around 22%.
By the fourth year, Republicans outpace Democrats with 39% debt growth compared to 26%.

Whether through increased fiscal spending or tax cuts that widen the deficit, our research indicates that both parties are responsible for the unchecked growth of public debt in the United States.

In short, the data run counter to emotional narratives bandied about by the media (e.g., Fox News) and increases the probability the US experiences a fiscal crisis in this Fourth Turning Regime because it lowers the probability of fiscal austerity being implemented.

That’s a wrap!

This kind of approach only leads to confusion from conflicting advice, frustration from mediocre returns, and stress from the emotional rollercoaster of your portfolio swings.

If you don’t change your process, how can you expect to get better results?

Over 2,000 investors around the world confidently make smarter investment decisions using our clear, actionable, and accurate signals—and as a result, they make more money.

If you are ready to join them, we are here to support you.

When you sign up, you’ll get immediate access to our premium research and signals—and if we’re not the right fit, you can cancel anytime without penalty.

Here Comes The Liquidity

Darius sat down with our friend Maria Bartiromo on Fox Business last week to discuss the probability of a soft landing, the outlook for global liquidity, China, and more.

If you missed the interview, here is the most important takeaway from the conversation that has significant implications for your portfolio:

We Believe A Soft Landing Is The Highest Probability Outcome Over The Next 12 Months

While the stock market fundamentals might disappoint over the medium term, we believe the key driver of asset markets will be rapid liquidity growth.
China is injecting an estimated $400 to $500 billion of liquidity over the next 6 to 12 months. Additionally, we expect around $700 billion in TGA spend-down during the first three to four months when the debt ceiling moratorium ends early next year. This anticipated surge in liquidity is not a force you want to bet against as an investor. If you are bearish, we suggest holding off on that view and revisiting it in Q2 of next year.
Credit debt is currently an issue, especially for small businesses and low-income consumers. However, the U.S. economy is a very K-shaped, top-heavy economy. If financial conditions remain easy, we believe wealthy consumers will continue spending.

This kind of approach only leads to confusion from conflicting advice, frustration from mediocre returns, and exhaustion from the emotional rollercoaster of your portfolio swings.

If you don’t change your process, how can you expect to get better results?

Over 2,000 investors around the world confidently make smarter investment decisions using our clear, actionable, and accurate signals—and as a result, they make more money.

If you are ready to join them, we are here to support you.

When you sign up, you’ll get immediate access to our premium research and signals—and if we’re not the right fit, you can cancel anytime without penalty.

The Fed Is Easing Into A Major Regime Shift

Darius recently sat down with our friend Felix Jauvin from Blockworks, where they discussed the Fed, the bond market, a positive inflection in the fiscal impulse, and more.

If you missed the interview, here are the three most important takeaways from the conversation that have significant implications for your portfolio:

1. Is The Fed Cutting Rates to Ease or Normalize?

When the Fed cuts rates, it is important to distinguish between policy normalization and easing. Outright easing refers to the Fed lowering the policy rate below neutral to stimulate the real economy.

Normalization, however, aims to bring the policy rate to a neutral level without additional stimulus. We believe the Fed is cutting rates to normalize policy rather than stimulate the economy.

Taking a step back, the Fed is lowering the policy rate during a business cycle expansion, with growth already likely to exceed expectations according to our GRID Model projections. Altogether, this creates a generally supportive environment for asset markets.

2. Is the Bond Market Pricing In A Recession?

When examining the neutral policy rate in U.S. dollar money markets, we find that they are only pricing in about half of a recession.

Historically, on a median basis, during postwar U.S. recessions, the Fed has lowered the policy rate by around 400 basis points. In recessions caused by overly restrictive monetary policy, the Fed has lowered the policy rate by a median of 475 basis points.

With roughly 250 basis points of rate cuts currently priced in, this reflects only 50-55% of a typical recession. We disagree that the bond market is fully pricing in a recession. Instead, we believe the market is pricing in a bimodal distribution: one scenario of a soft landing (which we currently are in the camp of) and the other of a potential recession.

3. How Has The Fiscal Impulse Changed In Recent Months?

At 42 Macro, we track US Treasury Federal Budget Net Receipts, Net Outlays, and the Budget Balance on a fiscal year-to-date, year-over-year percentage change basis.

When observing the data, we find the fiscal impulse has been modestly negative since early 2024. Through July, the budget deficit was down 6% on a fiscal year-to-date, year-over-year percentage change basis. However, with the data through August, the budget deficit has risen by 24%. This marks a significant inflection from a negative fiscal impulse to a positive one.

This dynamic will likely contribute to our GRID Model projections for Nominal GDP to surprise to the upside in the US economy over the medium term. That dynamic favors overweighting risk assets like stocks, credit, crypto, and commodities and underweighting defensive assets like bonds and the US dollar.

This kind of approach only leads to confusion from conflicting advice, frustration from mediocre returns, and exhaustion from the emotional rollercoaster of your portfolio swings.

If you don’t change your process, how can you expect to get better results?

Over 2,000 investors around the world confidently make smarter investment decisions using our clear, actionable, and accurate signals—and as a result, they make more money.

If you are ready to join them, we are here to support you.

When you sign up, you’ll get immediate access to our premium research and signals—and if we’re not the right fit, you can cancel anytime without penalty.

What Will The Future of AI Hold?

Darius recently hosted our friend Beth Kindig on 42 Macro’s Pro to Pro, where they discussed the outlook for the Tech and Communication sectors, how companies will benefit from AI, the scale of AI as an investment opportunity, and more.

If you missed the interview, here are the three most important takeaways from the conversation that have significant implications for your portfolio:

1. Are The Tech and Communication Services Sectors Overvalued?

Our research shows that the valuations of the Tech and Communication Services sectors, when combined, are comparable to levels seen during the dot-com bubble.

At 42 Macro, we monitor metrics such as the trailing 12-month price-to-earnings (P/E) ratio, price-to-sales ratio, and the combined market cap of these sectors as a share of total S&P 500 market cap.

While the current earnings and cash flow generation of these companies make a return to the extreme P/E levels of the dot-com bubble unlikely in the medium term, we have already exceeded the peak price-to-sales ratio and their share of the overall S&P 500 index from that period. This suggests that while earnings may provide some cushion, valuation pressures remain elevated compared to historical benchmarks.

2. How Will Firms Become More Profitable Through The Implementation of AI?

Estimates from McKinsey and Gartner indicate that AI will generate $4.4 trillion in global profits. But where will these profits come from?

One example, highlighted by Beth Kindig, is Klarna, the buy-now-pay-later unicorn valued at around $7 billion. Klarna recently announced plans to eliminate Salesforce and Workday from their tech stack by developing custom large language models tailored to their needs.

Beth estimates the custom models might cost them between $3 to $7 million, compared to the tens of millions they would spend on Salesforce and Workday subscriptions. By integrating custom AI solutions and cutting out those expensive software products, Klarna will likely become more profitable.

3. Is AI A Better Investment Opportunity Than The Internet?

The internet is open-source and highly democratized, allowing anyone to create a website easily.

AI, however, is the opposite. It is proprietary, with companies owning their large language models. The barrier to entry for AI is extremely high, unlike the internet, where it is nearly nonexistent.

Training an LLM is costly, and the scarcity of GPUs makes success in AI challenging. This creates a winner-takes-all environment where early movers gain a significant competitive edge. Investing in AI today presents a rare opportunity to benefit from a high-barrier-to-entry industry with massive growth potential and the power to shape entire sectors for years to come.

This kind of approach only leads to confusion from conflicting advice, frustration from mediocre returns, and exhaustion from the emotional rollercoaster of your portfolio swings.

If you don’t change your process, how can you expect to get better results?

Over 2,000 investors around the world confidently make smarter investment decisions using our clear, actionable, and accurate signals—and as a result, they make more money.

If you are ready to join them, we are here to support you.

When you sign up, you’ll get immediate access to our premium research and signals—and if we’re not the right fit, you can cancel anytime without penalty.

Threading The Macro Needle

Darius recently joined our friends Nadine Terman and Ben Brey, where they discussed the Market Regime outlook, our “Resilient US Economy” theme, #inflation, and more.

If you missed the interview, here are the three most important takeaways from the conversation that have significant implications for your portfolio:

1. Is A Transition to A Risk-Off Market Regime Likely Over The Medium Term?

A transition to a risk-off Market Regime is typically caused by one or more of three factors:

A sharp, unexpected, and prolonged deceleration in growth
A sharp, unexpected, and prolonged acceleration in inflation
A sharp and unexpected tightening of monetary and/or fiscal policy – usually both

In terms of our fundamental outlook, we do not believe any of these scenarios is highly probable in the medium term.

As a result, we believe the path of least resistance in risk assets is likely to remain higher until one or more of these factors comes to fruition.

2. What Is Upholding Our “Resilient US Economy” Theme?

We expect growth to remain resilient and surprise consensus expectations to the upside.

There are five pillars upholding that view:

A historically strong household sector balance sheet
The “West Village Montauk Effect”
A historically strong corporate sector balance sheet
Limited exposure to the policy rate
Limited exposure to the manufacturing sector

Additionally, there is little evidence of capital misallocation or adverse selection in the current business cycle. Specifically, the U.S. private non-financial sector’s debt-to-GDP ratio has been declining during this business cycle, indicating that economic growth is outpacing credit expansion.

3. What Is The Outlook For Inflation Over The Medium Term?

Our models indicate inflation is likely to bottom in 2H24.

However, as we head into Q1 of 2025 and beyond, our models diverge from consensus estimates and suggest inflation is likely to reaccelerate from the cyclical low observed in 2H24.

We believe there are three major factors that are likely to cause inflation to reaccelerate:

Easing base effects;
Inflation is the most lagging indicator of the business cycle and we do not anticipate a recession over a medium-term time horizon; and
Incrementally populist fiscal policy.

This kind of approach only leads to confusion from conflicting advice, frustration from mediocre returns, and exhaustion from the emotional rollercoaster of your portfolio swings.

If you don’t change your process, how can you expect to get better results?

Over 2,000 investors around the world confidently make smarter investment decisions using our clear, actionable, and accurate signals—and as a result, they make more money.

If you are ready to join them, we are here to support you.

When you sign up, you’ll get immediate access to our premium research and signals—and if we’re not the right fit, you can cancel anytime without penalty.

Why The Fed Needs To Front Load Rate Cuts

Darius recently joined our friend Charles Payne on Fox Business, where they discussed the outlook for the US economy, the impact of rate cuts, the significance of the Dollar, and more.

If you missed the interview, here are the three most important takeaways from the conversation that have significant implications for your portfolio:

1. What Is The Medium Term Outlook On The Economy?

While the slowing economy might seem concerning after a significant market rally, we believe growth is likely to surprise to the upside over the medium term.

Generally speaking, the preponderance of evidence points to an economy that is moderating and a labor market that is cooling but not collapsing.

When observing the leading indicators of the broader business cycle, we believe they do not suggest investors should expect a recession over the medium term, which is positive for asset markets.

2. How Would A 50 Basis Points Cut Affect The Global Economy?

The U.S. Net International Investment Deficit doubled in the five years through 2023, increasing from $10 trillion in Foreign-Owned U.S. Assets to $20 trillion. This means a large amount of unrealized capital gains may flow out of the U.S. if the Fed is not careful managing the pace of the dollar’s decline.

A 50 basis point cut next week would likely send a signal to international capital allocators that something might be wrong with the U.S. economy, causing them to book gains and return home with their capital.

In our view, we would not suggest starting with a 50 basis point cut. However, if data from the labor market and inflation support it, the Fed should accelerate the pace of easing between now and the end of March. Beyond that, their window to continue easing may close for a while due to accelerating inflation.

3. How Will The DXY Impact Asset Markets Over The Next 12 Months?

The dollar is typically the most dominant factor in driving the global economy and global liquidity.

We believe the dollar is poised to decline significantly over the next 12 months, which should provide a positive boost to global growth.

However, investors should remain cautious and continue favoring defensive sectors and factors within the equity and fixed income markets because this could also trigger the unwinding of popular trades, including the Yen carry trade.

This kind of approach only leads to confusion from conflicting advice, frustration from mediocre returns, and exhaustion from the emotional rollercoaster of your portfolio swings.

If you don’t change your process, how can you expect to get better results?

Over 2,000 investors around the world confidently make smarter investment decisions using our clear, actionable, and accurate signals—and as a result, they make more money.

If you are ready to join them, we are here to support you.

When you sign up, you’ll get immediate access to our premium research and signals—and if we’re not the right fit, you can cancel anytime without penalty.

Stock Market Predictions To End 2024!

Darius recently joined our friend Anthony Pompliano, where they discussed the 42 Macro Global Macro Risk Matrix, the outlook for the global economy, AI-related productivity growth, and more.

If you missed the interview, here are the three most important takeaways from the conversation that have significant implications for your portfolio:

1. What Does Our Global Macro Risk Matrix Indicate About The Direction of Asset Markets?

We are currently in an era of peak noise. At 42 Macro, we help our clients cut through the noise, and our Global Macro Risk Matrix is one of the most powerful tools we have built to do that.

Looking at our Global Macro Risk Matrix, we have seen a battle between GOLDILOCKS and DEFLATION since the end of June. Currently, DEFLATION has the highest share of confirming markets, but the strength of that signal is low—only in the 27th percentile of data going back to January 1998.

This suggests that market participants are still uncertain which Market Regime will prevail. We expect this debate is likely to resolve in favor of GOLDILOCKS, but we could see asset markets price in DEFLATION over the short term.

2. How Will The Global Economy Influence Asset Markets Over The Medium Term?

At 42 Macro, we provide historical data and forward projections for the Bottom-Up GRID Regime across major global economies.

According to our models, many economies are in or moving toward a GOLDILOCKS regime through the end of this year.

In our view, this shift could create positive momentum for asset markets in the medium term. Although the U.S. economy’s GRID sequence generally carries more weight than the rest of the global economies, it is promising to see global economies providing tailwinds rather than the headwinds experienced from mid-2021 to the end of 2023.

3. How Will AI Impact Asset Markets Moving Forward?

Productivity growth is positive for asset markets because it allows the economy to grow with disinflationary pressure. When productivity rises, you typically see margin expansion, which supports labor market growth without triggering the inflationary impulses that would cause corporations to cut jobs – a dynamic that persists today.

However, we believe we have not yet seen substantial productivity gains from AI.

As a result, we do not believe AI will be the dominant driver of asset markets in the near term. That said, if AI turns out to be as significant as many expect, it will have an enormous impact on the future of the economy.

That’s a wrap!

This kind of approach only leads to confusion from conflicting advice, frustration from mediocre returns, and exhaustion from the emotional rollercoaster of your portfolio swings.

If you don’t change your process, how can you expect to get better results?

Over 2,000 investors around the world confidently make smarter investment decisions using our clear, actionable, and accurate signals—and as a result, they make more money.

If you are ready to join them, we are here to support you.

When you sign up, you’ll get immediate access to our premium research and signals—and if we’re not the right fit, you can cancel anytime without penalty.

Inflation & Recession: Darius Dale’s Macro Deep Dive

Darius recently joined our friend Andreas Steno-Larsen on Real Vision, where they discussed the economy, inflation, the labor market, and more.

If you missed the interview, here are the three most important takeaways from the conversation that have significant implications for your portfolio:

1. What Is The Overall Outlook On The Economy?

From a fundamental standpoint, we are at a crossroads in the economy, coming off a period of strong, uninterrupted, accelerating growth that began in the second half of 2022.

Although growth is slowing, we expect it to surprise consensus to the upside over the medium term.

On the inflation side, we have accurately called for the current deceleration, and we anticipate inflation will continue to meander lower over the next few months before bottoming out.

However, by the first half of next year, we project inflation is likely to accelerate again. There is no historical precedent for inflation sustainably breaking durably below trend without a recession, so our view diverges from consensus, which currently expects a durable return to 2%.

2. How Will Inflation Behave In The Fourth Turning Regime?

We believe the Fed is yielding to fiscal dominance in this Fourth Turning regime, which is consistent with what the Fed has historically done in such periods. One key dynamic investors should anticipate during a Fourth Turning is the explosive growth of public debts and deficits and how those contribute to above-trend inflation.

As a result, the Fed will likely use its balance sheet and monetary policy toolkit to create excess demand for Treasuries relative to actual market demand for those securities.

Because of this Fourth Turning-style monetary policy, we believe inflation is likely to bottom at a level higher than 2%. As investors, we will likely realize this as we move throughout 2025. However, we do not see any immediate market risks associated with this today.

3. Should Investors Be Worried About The Rising Unemployment Rate?

Our research shows the unemployment rate is rising primarily due to the growth of the labor force, not because more people are losing their jobs.

While we acknowledge that the labor market is softening, we do not see an elevated risk of a recession in the medium term, based on current leading indicators of the business cycle and how they are trending.

That’s a wrap!

This kind of approach only leads to confusion from conflicting advice, frustration from mediocre returns, and exhaustion from the emotional rollercoaster of your portfolio swings.

If you don’t change your process, how can you expect to get better results?

Over 2,000 investors around the world confidently make smarter investment decisions using our clear, actionable, and accurate signals—and as a result, they make more money.

If you are ready to join them, we are here to support you.

When you sign up, you’ll get immediate access to our premium research and signals—and if we’re not the right fit, you can cancel anytime without penalty.

Private Investing 101

Darius recently hosted our friend Kris Naidu, Founder and CEO of Zeacon, on our monthly Pro to Pro, where they discussed the dos and don’ts of private investing.

If you missed the interview, here are the three most important takeaways from the conversation that have significant implications for your portfolio:

1. What Determines Success in Private Investing?

Having been involved in private tech investing for over twenty years, Chris believes in investing in what you know.

When investing in private companies, there is less information than in the public sector. The companies are not as well known, and their products are not as defined.

In private investing, success largely depends on anticipating where the market is headed and assessing whether the team can successfully develop the product or service to align with that direction.

2. How Do Investors Identify Where The Market Is Headed?

Spotting trends in the real world is crucial to understanding where the market is heading.

For example, AI is emerging as a transformative force, and examining how it will be used to solve real-world problems is important. In industries like healthcare and finance, AI has the potential to modernize outdated systems and outperform the current technologies.

Successfully predicting these trends comes from identifying where AI will have the most significant impact and investing in companies that can quickly capitalize on these opportunities.

3. How Do Investors Get Involved With Private Investing?

After six or seven years as a startup CEO, Chris began investing through an angel investment event in Seattle, where private investments were being pitched.

That experience provided valuable lessons: Chris learned that by being surrounded by both seasoned investors and newcomers, he was offered insights into what works and what does not.

For those interested in private investing, you should attend events and network with private investors with more experience so you can learn from their past successes and mistakes.

That’s a wrap!

This kind of approach only leads to confusion from conflicting advice, frustration from mediocre returns, and exhaustion from the emotional rollercoaster of your portfolio swings.

If you don’t change your process, how can you expect to get better results?

Over 2,000 investors around the world confidently make smarter investment decisions using our clear, actionable, and accurate signals—and as a result, they make more money.

If you are ready to join them, we are here to support you.

When you sign up, you’ll get immediate access to our premium research and signals—and if we’re not the right fit, you can cancel anytime without penalty.