Financial Repression Survival Tactics

Darius recently sat down with Exploring Prosperity’s Robert Dewey, where they discussed the new wave of populism, the impacts of the U.S. regional banking crisis, the U.S. 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. Is There A Material Difference Between Either Presidential Candidate From A Fiscal Policy Perspective?

Regardless of which candidate wins the upcoming election, we believe we are likely to see even more populism, or the promotion of policies that reflect the concerns of the people, regardless of the economic or institutional impact those policies have.

No matter what form this new wave of populism takes, it is likely to drive US public sector debt growth that forces the Fed to remain asymmetrically dovish.

Our view is that we are all frogs being slowly boiled alive in a pot of monetary debasement and financial repression, driven by Fourth Turning-style fiscal dominance. We have called for continued financial repression, which we have already experienced—and in our view, it is likely to accelerate throughout this Fourth Turning.

2. How Has The Focus of Policymakers Shifted Since The U.S. Regional Banking Crisis?

During the U.S. regional banking crisis in March 2023, the forward rate curve inverted and has remained persistently negative ever since.

This deepening inversion signaled to investors that financial stability concerns had taken precedence—reflecting Fourth Turning-style financial repression, in which stabilizing sovereign debt markets is the central focus for policymakers.

The persistent inversion has profoundly impacted the Fed’s balance sheet and overall U.S. liquidity. As the Fed responded with dovish measures during the crisis, trillions of dollars flowed out of the reverse repo (RRP) facility and into financial markets. In our view, this liquidity flow remains ongoing and is likely to extend into Q1 2025.

3. How Will Global Reliance on The US Dollar Change Over The Next Decade?

Our research indicates the U.S. dollar currently plays a dominant role in the global financial system:

50% of currencies with pegs are anchored to the dollar (by GDP).
60% of global FX reserves are held in dollars.
60% of cross-border bank lending is conducted in dollars.
70% of international debt securities are dollar-denominated.
79% of global trade is invoiced in dollars.
88% of foreign exchange transactions involve the dollar.
99% of stablecoin reserves are backed by the dollar.

In our view, these numbers will decline over the long term as countries reduce their reliance on the dollar. We believe the continuation of aggressive populist fiscal policies in the U.S. poses significant risks for investors, with the most important risk being how the Federal Reserve responds to the global shift away from the dollar, as this transition will have profound implications for financial markets. We think the Fed will print money to monetize US deficits, filling the increasing void left behind by international investors and central banks.

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 learn more about how our clients incorporate macro into their investment process and how you can do the same, we invite you to watch our complimentary 3-part macro masterclass.

No catch, just macro insights to help you grow your portfolio—our way of saying thanks for being part of the 42 Macro universe.

Navigating Inflation, Budget Deficits, and Global Monetary Shifts

Darius recently hosted our friend Nadine Terman on 42 Macro’s Pro to Pro, where they discussed inflation, the federal budget deficit, China, 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 Both Political Parties Likely to Increase The Federal Budget Deficit?

Even if Republicans win and Elon Musk advocates for severe spending cuts, we believe those cuts are unlikely to materialize. While there may be headlines about cutting spending, slashing large portions of the budget carries significant career risk.

Our research shows that the type of wasteful spending Musk might target accounts for less than 1% of federal expenditures. Meaningful cuts would require reductions in defense, Medicare, or Medicaid—areas deeply important to American voters.

Some minor budget trims may occur, but both parties appear committed to profligate spending, with no clear plan to meaningfully reduce the national debt.

2. How Has The Recent Shift In U.S. Monetary Policy Affected Chinese Policymakers?

At 42 Macro, we monitor the growth of the PBOC’s balance sheet relative to the share allocated to FX reserves. When the yuan appreciated sharply in early 2015, its real effective exchange rate (REER) rose significantly, disrupting China’s export model.

As the Yuan became expensive on a REER basis, export growth secularly slowed and foreign direct investment into China slowed, reducing the expansion of its manufacturing base. As a result, the share of FX reserves declined from approximately 83% to just 50% since March 2014.

However, the recent shift to a more neutral U.S. monetary policy, evidenced by the Fed’s decision to implement a 50-basis-point rate cut, suggests less risk of severe yuan devaluation. This change has signaled to Chinese policymakers that they can now begin accelerating monetary expansion.

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 learn more about how our clients incorporate macro into their investment process and how you can do the same, we invite you to watch our complimentary 3-part macro masterclass.

No catch, just macro insights to help you grow your portfolio—our way of saying thanks for being part of the 42 Macro universe.

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.

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.

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.

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.

Markets Turning From ‘Goldilocks’ Towards Deflation

Darius joined our friend Adam Taggart this week to discuss the risk of recession, inflation, the risk of a US fiscal crisis, 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. How High Is The Risk of Recession In The Next 3 to 12 Months?

While we agree with the consensus that the economy is late cycle, with a low unemployment rate of 4.3% and an inverted yield curve since October 2022, we do not currently see a high risk of recession in the next 3 to 12 months.

Our assessment is based on our econometric study of all the postwar economic cycles in and around recession. That process consisted of normalizing the policy, profits, liquidity, growth, stocks, employment, credit, and inflation cycles, and comparing current trends to historical patterns leading into and through a recession. Despite observing significantly tight policy, we have not experienced the typical breakdown in the corporate profit cycle, liquidity cycle, growth cycle, or stock market cycle that usually occurs a few quarters ahead of a recession.

The current constellation of these leading indicators suggests limited recession risk in the medium term. However, we will continue monitoring and flagging critical inflections in these indicators for our clients, as the US economy remains in a late-cycle condition.

2. What Is Driving The Risk of A US Fiscal Crisis?

We believe the risk of a US fiscal crisis is much closer than most investors realize.

Our assessment stems from a significant shift in the labor versus capital dynamic around 2000 – Employee Compensation as a share of Domestic Corporate Businesses Value Added dropped below trend and has remained there, primarily influenced by factors like China’s entry into the WTO, globalization, and domestic deregulation. This shift has concentrated corporate profits among the elite, creating an inequitable situation and fueling the rise of populism on both sides of the political spectrum.

Many do not realize that both political parties are contributing to a high probability of a fiscal crisis by the end of this decade. Democrats are implementing policies that inflate the incomes of the lower half of the income distribution, while Republicans are doing the same for the upper half. These forms of socialism require piling on debt, which in turn is pushing us toward a potential fiscal crisis.

3. What Is The Outlook For Inflation?

Per the same deep-dive empirical study highlighted above, we have found that inflation is the most lagging indicator of the business cycle.

Heading into a downturn, policy generally tightens first, followed by a breakdown in corporate profits and liquidity. Growth and stocks break down about one to two quarters later, followed by employment and credit. Inflation usually breaks down below trend 12 to 15 months after a recession starts.

As a result, we believe it is very unlikely that inflation returns durably to trend without a recession in the US economy. We do not, however, believe price stability is the Fed’s priority in a Fourth Turning regime. Maintaining order in global sovereign debt markets amid structurally elevated public debts and deficits is far more important.

That’s a wrap! If you found this blog post helpful, explore our research for exclusive, hedge-fund-caliber investment insights you can act on today.

Risk Management Strategies: How To Avoid Losing It All

Darius joined our friend Andreas Steno Larsen on Real Vision last week to discuss inflation, what 42 Macro’s quantitative asset allocation process is signaling, where we are in the positioning and liquidity cycles, 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. We Believe Inflation Is Likely To Slow, But Bottom Above 2%

We have maintained for nearly two years that the Fed would need to revise its inflation target to be higher, as their policies since early 2022 suggest they will allow the economy to run hotter for longer.

Moreover, we believe inflation is likely to slow over the medium term. However, given the current era of fiscal dominance and other structural factors, we do not foresee a durable return to the Fed’s mandate of 2%.

We believe the Fed’s decision to perpetuate a higher nominal GDP growth economy is structurally bullish for risk assets like stocks, credit, commodities, and crypto, and bearish for defensive assets such as Treasury bonds and the US dollar. Investors will still have to manage cyclical risks along the way, however.

2. Our Discretionary Risk Management Overlay aka “Dr. Mo” Is Responsible For Keeping 42 Macro Clients On The Right Side Of Market Risk

We utilize our Discretionary Risk Management Overlay as the primary tool to advise our clients on the appropriate trades and position sizes across every major asset class, sector, and factor.

At the time of the recording, we were in a risk-on REFLATION Market Regime, and our Discretionary Risk Management Overlay aka “Dr. Mo” recommended maximum long positions in many risk assets across equity, credit, and macro markets — recommendations it has maintained since November.

The recommendation logic is based on the interplay between an asset’s Volatility-Adjusted Momentum Signal (VAMS) and its historical performance within the current Market Regime. These trade recommendations are updated six times a week for our clients at 42 Macro and only change if the Market Regime or VAMS for a particular asset changes.

3. Our Analysis On Liquidity Cycle Upturns Suggests Risk Assets May Have A Larger Drawdown Ahead

Investors should focus on both the liquidity and positioning cycles to better understand how exogenous shocks, like geopolitical events or crises, can influence asset market behavior.

We have analyzed the various liquidity cycles since Mar-09 to aid our clients in predicting expected asset market performance and potential drawdowns during these cycles. Currently, we are in a liquidity cycle upturn that began in October 2022, lasting for 19 months—shorter than the median duration of nearly two years typically seen in past cycles. Despite this shorter duration, the performance has been greater than the median 37% return of other cycles, with the S&P 500 up 40% since the current liquidity cycle upturn began.

However, a concern for us is that we have not reached the median maximum drawdowns observed in past liquidity cycle upturns. In this cycle, the maximum drawdowns have been -10% for the S&P, -11% for the NASDAQ, -27% for Bitcoin, and -34% for Ethereum. These figures are significantly milder compared to the median drawdowns of -14%, -16%, -61%, and -51% for these assets, respectively. This analysis leads us to caution that, despite the strong performance and the persistence of the liquidity cycle upturn, there remains a potential for significant corrections in asset markets.

That’s a wrap! If you found this blog post helpful, go to www.42macro.com/research to gain access to 42 Macro’s proprietary trading signals, asset allocation recommendations, and portfolio construction pivots.

Cooling Inflation Could Create A ‘GOLDILOCKS Vibe’ In Asset Markets

Darius joined our friends at Mornings With Maria on Fox Business last week to discuss inflation, rate cuts, the resilient US economy, and more.

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

Many positive fundamental catalysts are driving the market’s strong performance. Growth has been resilient, the labor market remains robust, and inflation is increasingly behaving in a manner that allows the Federal Reserve to consider policy rate cuts.

While the economy has been resilient, we believe it is likely to slow over the medium term. However, our research indicates growth is likely to surprise to the upside, and inflation is likely to surprise to the downside. This combination could cause the current GOLDILOCKS Market Regime to persist.
That said, current market conditions are not an all-clear signal for investors. We are in an adverse spot in the positioning cycle, with various metrics indicating we are in the late innings of the market cycle. Many indicators we track in our 42 Macro Positioning Model are flashing red for medium to longer-term risks despite optimistic calls for the S&P to reach 6000.
The U.S. economy has experienced a K-shaped recovery, where different segments of the population recover at different rates. The top third of income earners account for 51% of total consumer spending, while the bottom third accounts for only 15%. This disparity has significant political ramifications for this year’s election, and when considering the direction of the stock and bond markets, it is crucial to view the economy in aggregate terms.

Renewed Fears Of A No-Landing Scenario

Darius joined our friend Nicole Petallides on Schwab Network last week to discuss 42 Macro’s risk management signals, the resiliency of the US economy, the outlook for asset markets, and more.

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

The Divergence Between Fed And Treasury Policy Creates A Complex Environment For Investors And Requires An Increased Reliance On Risk Management Signals Over Fundamental Predictions

When policymakers are not in sync, investing becomes more challenging. In an environment where all central banks row the boat in the same direction, investors experience a more favorable landscape. However, when signals across global growth, inflation, and policy are inconsistent, managing risk becomes significantly more complex.
The US consumer remains resilient, continuing to spend robustly. Our “Resilient US Economy” theme, which we authored in September 2022, is supported by the strong consumer balance sheets and income dynamics we have seen recently. This resilience has been a key driver of the risk-on Market Regime investors have experienced since November.
While the market impact of the policy divergence between the Treasury and the Fed remains uncertain, successful investing does not require you to predict the future; what it does require is an effective risk management system, which can help you navigate these uncertain times and stay on the right side of market risks. If you would like to add our proven risk management overlay to your investment process, we are here to help.

That’s a wrap!

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1. Go to www.42macro.com to unlock actionable, hedge-fund-caliber investment insights.

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3. Have a great day!