The Mechanics of Markets—Darius Dale & David Levenson on Pro to Pro

Darius Dale recently sat down with David Levenson to unpack what David believes are the hidden mechanics of markets, mortgage duration dynamics, and the liquidity fragilities shaping the next regime shift. If you missed the conversation, here are three key takeaways that likely have huge implications for your portfolio:

1) Mortgage Volatility Is the Acorn of the Entire Financial System

David argues that global asset markets are governed not just by central bank policy but by the reflexive interaction between mortgage and equity volatility. When mortgage rates fall, the average duration of mortgage-backed securities collapses—forcing institutions to unwind hedges and buy longer-duration Treasuries to rebalance their books. This “duration drain” fuels powerful bond rallies and asset repricing across markets.

Key Takeaway:
Mortgage convexity is the hidden driver of global liquidity cycles. As mortgage rates fall and durations shorten, expect a short squeeze in the Treasury bond equivalents used to hedge the banks’ mortgage books.

2) Policy Interference Is Artificially Propping Up Markets

Levenson emphasized that the Federal Reserve’s rate cuts, QT tapering, and yield curve engineering are emergency responses to rapidly deteriorating monetary transmission. Unlike Greenspan—who let the Nasdaq fall 57% before easing—Powell is emptying his toolkit preemptively, manipulating rates and the curve to hold up equity valuations. But the system is leaking, and compiled policy interference (CPI) is nearing exhaustion.

Key Takeaway:
Markets are no longer moving freely—they’re being duct-taped by a Fed losing control. When the final pump jack fails, expect an accelerated repricing of overvalued growth stocks and a shift toward hard asset defensives.

3) The Next Regime Will Be Driven by Mortgage Reflation

With $35 trillion in U.S. home equity and a structurally evolved mortgage origination model, Levenson believes housing is set to reflate aggressively—even into economic slowdown. Independent mortgage lenders, AI-enabled servicing, and low-friction securitization mean housing credit can expand without bank balance sheet constraints. As Powell cuts, mortgage demand will spike and M2 money supply could implode.

Key Takeaway:
Forget traditional recession playbooks. The mortgage market is structurally capable of driving reflation without Fed help. Investors should prepare for an economic regime shift led by housing and mortgage credit, not corporate earnings.

Final Thought: Signals Beneath The Noise

David Levinson sees markets at a critical inflection point, where traditional macro playbooks may fail to capture the reflexive, volatility-driven forces shaping the next regime. As he highlighted, understanding the structural mechanics of mortgage markets, policy distortions, and liquidity flows is essential—not optional—for investors aiming to stay ahead. The next big move won’t just be about inflation or growth—it’ll be about how the plumbing of the system reacts when the pressure builds. Stay vigilant, stay systematic.

If you are not confident your portfolio is positioned correctly for the evolving macro landscape, partner with 42 Macro for data-driven insights and proven risk management overlays—KISS and Dr. Mo—to help you stay on the right side of market risk.

THE MACRO CLASS

No catch—just real insights to help you stay ahead in the #Team42 community.

Best of luck out there,

— Team 42

The Paradigm Is Shifting — Are You Positioned for It?

Darius Dale recently joined Felix Jauvin on Forward Guidance to break down why the U.S. economy is undergoing a historic paradigm shift—from Wall Street-led globalization to Main Street-driven reindustrialization. If you missed the interview, here are three key takeaways that likely have huge implications for your portfolio:

1) Tariffs Mark the Beginning of a Multi-Year Economic Regime Shift

Darius explains that the Trump administration’s tariffs are not a short-term negotiating ploy, but the cornerstone of a deliberate shift from a K-shaped, globalized economy (“Paradigm A”) to an E-shaped, reindustrialized economy (“Paradigm B”). This transition, inspired by Fourth Turning dynamics, is designed to compress the gap between capital and labor-even if it means short-term economic pain.

Key Takeaway:
Markets are still mispricing the durability and intent behind these policies. Investors expecting a quick policy reversal or return to the status quo risk being caught on the wrong side of a structural transition that favors domestic labor and reindustrialization over corporate profit margins.

2) A Technical Recession Is Likely—But an Actual Recession Isn’t Guaranteed (Yet)

Despite rising fears, Darius argues that the U.S. is more likely headed for a technical recession (two or more quarters of negative growth) rather than an NBER-defined, broad-based recession—at least for now. Strong private sector balance sheets, labor hoarding, and a healthy base rate for corporate profitability suggest the downturn could be shallow initially.

Key Takeaway:
While risk assets may still fall over the next ~two quarters, the likelihood of a full-blown financial crisis is much lower than in past cycles. But should the transition falter or policy missteps compound, downside risk could still reach -30% to -40% on the S&P 500.

3) Only QE and Fiscal Stimulus Can Smooth This Transition

Darius emphasizes that cutting interest rates alone won’t be enough. The Fed must resume some form of quantitative easing (QE) to offset the current global debt refinancing air pocket, rising yields, and negative fiscal shocks from both tariffs and DOGE spending cuts. The now-House-approved-Senate tax cut plan could help, but execution risk remains given the deficit hawks, high-Medicaid-state-Senators, and “SALTY” Republicans in Congress.

Key Takeaway:
Without QE or meaningful fiscal relief, the economy could suffer prolonged stagnation. Investors must be prepared for a bumpy ride, with significant downside if the Fed and Congress fail to act boldly. Persistent above-target inflation mean the Fed may be too slow to respond.

Final Thought: Positioning for the Paradigm Shift

Markets are still adjusting to the scale and seriousness of the paradigm shift underway. What many dismissed as mere political posturing is now revealing itself as a structural realignment—one that challenges decades of globalization, reshapes corporate profit dynamics, and forces both investors and policymakers to reconsider their playbooks. Whether or not you agree with the direction, the implications are undeniable: positioning for the durability of this transition will be the key differentiator in portfolio performance and resilience.

THE MACRO CLASS

No catch—just real insights to help you stay ahead in the #Team42 community.

Best of luck out there,

— Team 42

Tariffs: The Ultimate Stagflationary Shock?

Darius Dale recently joined Jack Farley on The Monetary Matters Network to break down why we remain bearish on U.S. equities, cautious on bonds, and are eyeing a short-term bid in Treasurys. If you missed the interview, here are three key takeaways that likely have huge implications for your portfolio:

1) The U.S. Economy Faces a Slower Growth and Higher Inflation Environment

Darius emphasized that tariffs, policy uncertainty, DOGE, and restricting immigration are creating a stagflationary shock. This is pushing growth expectations lower while raising inflation risks. The Trump administration’s economic restructuring plan aims to shift the economy away from deficit-financed consumer spending toward a more balanced, private sector-driven model—but that transition is likely to be turbulent.

Key Takeaway:
Markets may still be underpricing the magnitude of the economic slowdown. A period of slower growth, rising unemployment, and compressed corporate margins could drive a significant repricing of risk assets from here.

2) A Global Debt Refinancing Crunch Remains the Top Risk of 2025

Darius flagged what he calls a “global debt refinancing air pocket” as the number one risk for investors this year. While debt refinancing needs are surging due to the all-time-low-interest-rate borrowing from 2020 rolling over, global liquidity is not keeping pace. This creates a dangerous imbalance that historically leads to severe dislocations in asset markets. Global debt refinancing risk is being exacerbated by the risks we flagged in callout #1 above.

Key Takeaway:
Unless the Federal Reserve intervenes with QE before a crisis hits, financial instability—especially in credit markets—may force a much sharper correction than consensus expects. The Fed’s delayed reaction function adds to the downside risk.

3) Asset Allocation Must Reflect a Wide Distribution of Probable Economic and Policy Outcomes

Darius highlighted that 2025 presents one of the widest distributions of macroeconomic outcomes he’s seen in his career. With meaningful downside risks in the near term, followed by potential tailwinds (tax cuts, deregulation, QE), investors must be prepared for both a deepening crash and a rapid recovery over the next few quarters.

Key Takeaway:
Sticking with a static portfolio strategy may expose investors to unnecessary drawdowns. Systematic risk-managed approaches, like KISS, that dynamically adjust based on volatility and macro signals could be essential in navigating this highly uncertain environment.

Final Thought: Prepare to Risk Manage a Deep “V”

Markets are entering a treacherous phase—caught between slowing growth, rising inflation, and record levels of debt that need refinancing. With tariffs and fiscal retrenchment amplifying downside risks, the Fed may be forced to choose between maintaining inflation credibility or delivering preemptive liquidity support. Meanwhile, the global capital cycle is turning, and U.S. exceptionalism is starting to fray. Investors must recognize that the range of outcomes in 2025 is unusually wide—and incorporating signals from proven risk management overlays is more critical than ever.

No catch—just real insights to help you stay ahead in the #Team42 community.

Best of luck out there,

— Team 42

Is President Trump Engineering A Hard Reset?—Darius Dale on Negocios TV

Darius Dale recently sat down with Víctor Hugo Rodríguez to break down the impact of fiscal tightening, global debt refinancing risks, and the Federal Reserve’s next move. If you missed the interview, here are three key takeaways that may have huge implications for your portfolio:

1) The U.S. Economy Is Slowing Faster Than Expected

Darius warns that the U.S. economy is decelerating more quickly than consensus expects, as both fiscal tightening and policy uncertainty weigh on growth. The economy had been artificially boosted by government spending, but that effect is now wearing off. Meanwhile, the federal deficit has surged by 38% this fiscal year and by nearly 30% on a calendar-year basis, increasing the risk of a faster-than-expected slowdown from this artificial sugar high.

Key Takeaway:
Without policy intervention, the risk of a full blown crash in the stock market is rising. The Fed’s response will be crucial in determining whether the market can stabilize. We do not currently anticipate the Fed will be proactive enough.

2) The Global Debt Refinancing Crunch Could Trigger Forced Deleveraging

Roughly 20-25% of global non-financial sector debt must be refinanced in 2025, creating a massive liquidity gap. The key question: Who will absorb this debt? With investor balance sheets stretched and the Fed unlikely to launch QE soon, liquidity shortages could force asset sales and amplify volatility.

Key Takeaway:
Investors should watch credit markets closely—signs of stress here could signal broader market fragility and a sharp repricing of risk assets.

3) Defensive Positioning Is Critical in a Liquidity Vacuum

Darius argues that investor expectations remain too optimistic, despite sizable downside risks to growth. In this environment, capital preservation should take priority. Defensive positioning includes raising cash, rotating up in credit quality, and shifting toward defensive equities like consumer staples and utilities.

Key Takeaway:
The safest sectors in this environment are defensive dividend stocks like utilities and consumer staples, while high-beta cyclical assets tied to trade remain vulnerable.

Final Thought: The Fed’s Dilemma Will Define 2025

The Fed faces a tough choice: stick to its 2% inflation target or intervene with liquidity support to stabilize markets. If inflation reaccelerates while growth slows, the Fed may need to revise its inflation target higher to justify adequate monetary easing. The macro landscape is shifting fast—investors must stay ahead of these critical developments.

THE MACRO CLASS

No catch—just real insights to help you stay ahead in the #Team42 community.

Best of luck out there,

— Team 42

Is Trump Crashing The Market On Purpose?

Is Trump Crashing The Market On Purpose?

Darius Dale, 42 Macro Founder & CEO, joined Anthony Pompliano on The Pomp Podcast to break down the potential market impact of Trump’s economic policies, the Fed’s inflation dilemma, and why the government might be engineering short-term pain for long-term gain. If you missed the podcast, here are three key takeaways that may have huge implications for your portfolio:

1) Is Trump “Kitchen-Sinking” the Economy to Rebuild It?

Darius likens Trump’s approach to President Reagan’s 1980s strategy—short-term pain to reset the system. By implementing tariffs, restricting immigration, and perpetuating maximum uncertainty among investors, consumers, and businesses, the administration appears to be forcing a hard reset toward a supply-side economy. While the long-term goal may be economic expansion, markets are reacting to the immediate downside risks, as uncertainty weighs on growth and sentiment relative to elevated expectations.
Key Takeaway:
While short-term pain may lead to long-term gains, the adverse sequence of policy implementation should not be ignored.

2) Policy Uncertainty Is Freezing Consumer & Business Confidence

Consumer spending has slowed despite rising disposable income, as people increase savings due to economic uncertainty. Businesses are also holding back on investment, with Q4 real business investment contracting over 3%. This hesitation is already showing up in slowing growth data, and if uncertainty lingers, it could push the U.S. into a deeper slowdown than previously expected.

Key Takeaway:
Without clarity on fiscal policy—especially tax cuts and deregulation—the economy and asset markets may struggle to sustain upside momentum.

3) Will the Fed Quietly Raise Its Inflation Target Again?

Darius’ secular inflation model suggests the U.S. equilibrium Core PCE inflation rate has shifted to 2.7-3.3%, making the Fed’s 2.0% target increasingly unrealistic.If growth continues to slow and inflation trends higher in 2025, the Fed will be forced to either tighten policy, risking recession, or revise its target higher to provide more flexibility for market support.
Key Takeaway:
A shift in the Fed’s stance on inflation could be one of the biggest market catalysts of the year, dictating liquidity trends and risk appetite. We expect the FED to cave and provide liquidity, but it may not do so proactively—risking a potential crash.

Final Thought: Navigating an Era of Economic Reset

Markets are in a tug-of-war between short-term economic uncertainty and long-term economic prosperity. A successful shift to a supply-side economy could sustain the economic expansion, but near-term turbulence may be unavoidable. Liquidity trends and Fed policy will determine whether this reset builds strength or triggers deeper downturns. Investors must stay agile and ahead of macro shifts.

THE MACRO CLASS

No catch—just real insights to help you stay ahead in the #Team42 community.

Best of luck out there,

— Team 42

Dale: U.S. Growth Slowing Due To Policy Uncertainty

Darius Dale, Founder & CEO of 42 Macro, recently joined Nicole Petallides on Schwab Network to break down market volatility, the resilience of the U.S. economy, and how investors should be thinking about liquidity, policy uncertainty, and positioning. In case you missed the appearance, here are three key takeaways that could shape your portfolio strategy:

1) Liquidity is Likely To Rescue Markets

Despite concerns over short-term volatility, Darius sees a general uptrend in asset markets driven by accelerating liquidity—both globally and within the U.S. As the Treasury General Account (TGA) declines and net debt issuance is restrained, liquidity conditions should remain supportive for risk assets. With the Fed likely ending the Treasury portion of its balance sheet runoff in the next one to two quarters, markets could see even more relief from liquidity tailwinds.

2) Policy Uncertainty Is Slowing Growth, But Not Breaking the Economy

While corporate confidence remains high due to expectations of business-friendly policies, the data shows a real slowdown in U.S. economic growth. Elevated policy uncertainty—at levels seen only during the Global Financial Crisis and the COVID-19 pandemic—is causing businesses and consumers to hesitate on investment decisions. However, Darius does not see this leading to a recession but warns that prolonged uncertainty could trigger renewed hard-landing fears that weigh on markets.

3) Clarity On Bad Policies + Uncertainty Regarding Good Policies = Risk Assets Struggle

Darius revisits his Triple S Framework—Size, Sequence, and Scope—to assess Trump’s potential economic policies, again, emphasizing that sequence is the critical risk factor. If restrictive measures like tariffs and immigration control are implemented first, they could tighten the labor market, drive up wages, and fuel inflationary pressures. Conversely, if pro-growth policies such as tax cuts and deregulation come later, they may help offset these effects. Ultimately, the market’s reaction will depend on the order in which these policies unfold.

Final Thought: Risk On For Now, But Stay Nimble

Despite policy-driven risks, the current market regime remains risk-on, favoring a buy-the-dip strategy in higher beta and cyclical assets. Emerging markets and international equities have outperformed recently, and relative economic trends suggest that outperformance could continue. But with historic policy uncertainty clouding the road ahead, investors should remain adaptable.

If you are not confident your portfolio is positioned correctly for the evolving macro landscape , partner with 42 Macro’s data-driven insights and risk management processes to help you stay on the right side of market risk.

THE MACRO CLASS

No catch—just real insights to help you stay ahead in the #Team42 community.

Best of luck out there,

— Team 42

Is The Fed Fighting A Losing Battle Against Inflation?

Darius recently joined Charles Payne on Fox Business to discuss why the Fed’s inflation fight is failing, the limits of traditional economic indicators, and how Trump’s potential policies could impact markets. If you missed the appearance, Here are three key takeaways that could significantly impact your portfolio:

1) The Fed’s 2% Inflation Target is Unattainable

Darius has been warning since January 2022 that the U.S. economy’s equilibrium inflation rate is in the high 2% to low 3% range, making the Fed’s 2% target unrealistic. Despite recent disinflationary trends, inflation remains sticky, and the latest data reinforces the idea that the Fed won’t get back to 2% without causing serious economic damage. Rather than continuing its restrictive policy, the Fed should revise its target higher and adjust accordingly.

2) Traditional Economic Indicators Are Outdated

Darius argues that widely used indicators like the Leading Economic Index (LEI) are outdated and less relevant in today’s economy. Decades ago, manufacturing made up 30% of GDP and 50% of employment—today, it is only 10% of GDP and 14% of jobs. This structural shift means that many recession indicators don’t capture the strength of the modern economy, which remains resilient due to fiscal stimulus and liquidity dynamics.

3) Trump’s Policy Agenda Could Trigger Inflationary or Deflationary Shocks—Depending on Its Sequence

Darius outlines his Triple S framework—Size, Sequence, and Scope—to evaluate Trump’s potential economic policies. The biggest risk? Sequence. If tariffs and immigration restrictions are implemented first, they could disrupt supply chains, tighten the labor market, and push inflation higher before pro-growth policies like tax cuts and deregulation take effect. The market impact depends on how these policies are rolled out and whether the positives outweigh the negatives.

Final Thought:

Liquidity is likely to trend higher through mid-2025, which is supportive for asset markets. That said, policy-driven inflation risks and potential Fed missteps remain key threats. Investors would be remiss to rely exclusively on fundamental predictions amid a historically wide distribution of probable economic and policy outcomes.

If your risk management signals are not keeping you on the right side of market risk, parter with 42 Macro and join the thousands of investors benefiting from our KISS Portfolio Construction Process and our Discretionary Risk Management Overlay, also know as “Dr. Mo”.

THE MACRO CLASS

No catch—just real insights to help you stay ahead in the #Team42 community.

Best of luck out there,

— Team 42

Darius Dale on MacroVoices: Investing Amid The Changing World Order

Darius recently sat down with Erik Townsend on MacroVoices for a wide-ranging discussion covering inflation, fiscal dominance, and the impact of the Fourth Turning on financial markets. If you missed the interview, here are three key takeaways that could significantly impact your portfolio:

1) Inflation Is Not Going Back to 2%—And the Fed’s Response Will Be Crucial

Darius argues that inflation is structurally higher in this economic cycle and unlikely to return to the Fed’s 2% target without a full-blown recession. His research shows that inflation is the most lagging economic indicator, typically breaking down only 12-15 months after a recession starts—which is not currently in sight. Instead, inflation is likely to reaccelerate in 2025, driven by tight housing supply, faster credit growth, slowing labor supply, and increased pressure on corporate margins.

Key Takeaway:

The Fed faces a tough decision: stick to its 2% target and risk market turmoil or adjust expectations and let inflation and monetary policy run hotter. The market’s long-term trajectory depends on how policymakers navigate this tension.

2) The Fourth Turning Is Reshaping Fiscal and Monetary Policy

Darius highlights that we are deep into a Fourth Turning, a period of structural great institutional and geopolitical change. Historically, Fourth Turnings bring explosive sovereign debt growth, increased fiscal dominance, and rising inflation, requiring financial repression and monetary debasement to manage oppressive public debt burdens. With deficits spiraling and entitlement spending and net interest growing at a +15% CAGR, fiscal policy is unsustainable and risks a breakdown of the current world order in which the U.S. Treasury sits atop the the global capital structure.

Key Takeaway:

Investors must prepare for an era where monetary easing and inflation become structural tools to manage debt, fundamentally altering portfolio strategies. Holding assets that benefit from financial repression—like equities, gold, and Bitcoin—will be important.

3) Market Regime Shifts Will Drive Investment Success

Rather than making long-term macro predictions, Darius emphasizes trend-following and market regime nowcasting as the best way to stay on the right side of market risk. His 42 Macro Risk Matrix tracks growth, inflation, monetary, and fiscal policy shifts in real-time, helping investors adapt as macro conditions evolve. The biggest risk today? A potential mispricing in bonds and the possibility of term premiums normalizing, pushing yields higher.

Key Takeaway:

Investors need a dynamic framework to manage risk in a fast-changing macro landscape. Relying on old models like 60/40 portfolios won’t cut it—market regime awareness is key to navigating volatility and seizing opportunities.

Final Thought:

The themes discussed—sticky inflation, fiscal dominance, and market regime shifts—all point to a period of profound macroeconomic change. Investors who fail to adapt risk being caught off guard by rising volatility and policy shifts. To stay ahead, it’s essential to incorporate real-time macro tracking and flexible positioning strategies in portfolio management.

Since our bullish pivot in January 2023, the QQQs have surged 82% and Bitcoin is up +293%.

If you have missed part—or all—of this market, it is time to explore how our KISS Portfolio Construction Process or Discretionary Risk Management Overlay aka “Dr. Mo” will keep your portfolio on the right side of market risk going forward.

Thousands of investors around the world confidently make smarter investment decisions using our clear, accurate, and affordable signals—and as a result, they make more money.

Thousands of investors around the world use 42 Macro to confidently navigate market shifts and optimize their portfolios. If you’re ready to incorporate macro into your investment process and stay ahead of these monumental changes, we invite you to watch our complimentary 3-part Macro Masterclass.

The Macro Class

No catch—just real insights to help you stay ahead in the #Team42 community.

Best of luck out there,

— Team 42

Bitcoin And Stocks Are In For A Wild 2025

Darius recently joined Anthony Pompliano to discuss the outlook for global liquidity, the influence of the U.S. dollar on global liquidity, the potential economic impact of Trump administration immigration policies, 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 Outlook For Global Liquidity?

At 42 Macro, we track global liquidity using our Global Liquidity Proxy, which aggregates global central bank balance sheets, global broad money supply, and global FX reserves (excluding gold). We then add a global bond market volatility overlay to simulate the impact of the expansion and contraction of the global repo market.

Our models currently indicate that liquidity is currently moderating—not just globally, but also within most major economies.

We also track the leading indicators of global liquidity, such as stock and crypto market capitalizations, the U.S. dollar and currency volatility, global interest rates and bond market volatility, as well as global growth, inflation, and unemployment.

Our analysis of these leading indicators currently suggests a modest decline in global liquidity over the medium term. Combined with the current downtrend in liquidity across most major economies, this signals an environment that is unfavorable for asset markets from a global liquidity perspective. Rising US liquidity may offset that early in 2025.

2. What Role Will The US Dollar Play In Driving Global Liquidity?

Our research at 42 Macro includes comparing the year-over-year rate of change in our Global Liquidity Proxy to that of the USD Real Effective Exchange Rate and the CVIX. Our analysis indicates there is an inverse correlation between the dollar and global liquidity, as well as between currency volatility and global liquidity.

Currently, the strong U.S. dollar and rising currency volatility are exerting downward pressure on global liquidity. Looking ahead, potential policies under the new administration, such as tariffs and pro-growth, reflationary initiatives, could prompt the Federal Reserve to adopt a less-dovish monetary policy outlook relative to current market pricing, which may further strengthen the dollar.

If these scenarios unfold and we see sustained dollar strength and higher currency volatility, it would create an additional headwind for global liquidity, compounding the pressures already signaled by our leading indicators.

3. How Would Trump Administration Policies On Immigration Likely Impact the Economy?

We have recently highlighted in our research that one positive outcome of open borders and the influx of illegal immigrants has been a significant deceleration in wage growth.

Specifically, the Private Sector Employment Cost Index peaked at around 6% in 2022 and has since slowed to approximately 3%. This decline also drove a sharp deceleration in Unit Labor Cost Inflation, from roughly 6% in late 2021/early 2022 to approximately 1% today.

Reducing the influx of illegal immigrants, even modestly, would likely lead to a tighter labor market, faster wage growth, and higher unit labor cost inflation. Without a corresponding increase in productivity growth, corporate profit growth would likely slow as a result.

Since our bullish pivot in November 2023, the QQQs have surged 42% and Bitcoin is up +176%.

If you have fallen victim to bear porn and missed part—or all—of this rally, it’s time to explore how our KISS Portfolio Construction Process or Discretionary Risk Management Overlay aka “Dr. Mo” will keep your portfolio on the right side of market risk going forward.

Thousands of investors around the world confidently make smarter investment decisions using our clear, accurate, and affordable 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 high-quality insights to help you grow your portfolio—our way of saying thanks for being part of our global #Team42 community of thoughtful investors.

What Must Be Done To Prevent DOGE From Failing?

Darius recently sat down with FFTT Founder and President Luke Gromen to discuss how marketable U.S. treasury market dynamics have shifted over recent years, the likelihood of a meaningful reduction in the federal budget deficit in this Fourth Turning, and more.

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

1. How Have Changes In Ownership Structure Contributed To Price And Yield Dynamics In The Treasury Market?

At 42 Macro, one of the ways we analyze the marketable U.S. Treasury market is by segmenting it into various investor cohorts:

The Federal Reserve: The Fed’s share has been declining due to balance sheet runoff, peaking at 25% in late 2021 and now at only 15% of total marketable Treasury securities.
Commercial Banks: Banks’ market share decreased from early 2022 until late 2023, when it began to stabilize. This stabilization was driven by programs like the Bank Term Funding Program (BTFP) and expectations that the Federal Reserve would dramatically lower interest rates. Currently, their share is around 15%, well south of the peak of 33% in 2003.
Foreign Central Banks: The decline in global trade and the steady shift away from global dollar recycling led by the BRICS member nations caused foreign central banks’ share to steadily decline to 14% from a peak of 40% during the 2008 global financial crisis.
Global Private Non-Bank Sector (Investors): This cohort has become the largest holder of marketable U.S. Treasury securities, with its share increasing from 36% in late 2021 to 55% today.

This shift in ownership has structurally altered the Treasury market. Unlike banks—such as the Fed, foreign central banks, and commercial banks which purchase Treasurys to satisfy policy or regulatory mandates (e.g., Dodd Frank, Basel III and IV)—global investors demand ex ante returns to compensate for taking risk in their portfolios.

As a result of this seismic shift, upward pressure on yields has intensified, signaling a more acute phase in the evolution of Treasury market dynamics and expectations.

2. How Likely Is Significant Reduction In The Federal Budget Deficit During This Fourth Turning?

Our analysis of U.S. federal budget dynamics highlights significant challenges to achieving meaningful deficit reduction.

First, U.S. federal expenditures currently represent roughly a quarter of U.S. GDP—the highest share since at least 1970 excluding COVID and the GFC. Thus, significant cuts would likely catalyze a downturn in the economy—however beneficial a smaller government would be in the long run, which is something both Darius and Luke agree with. Per Luke, the last three recessions saw the U.S. federal budget deficit widen by 600bps, 800bps, and 1,200bps.

Secondly, our research indicates that approximately 90% of the budget is effectively untouchable. This “Aggregated Untouchables” category includes “True Interest Expense”—comprising Medicare, National Defense, Net Interest, and Social Security—along with Medicaid, Welfare, and Veterans’ Benefits. Collectively, these expenditures represent programs unlikely to face cuts under the current pro-populist political climate and are compounding at a rate of +3% per year (+13% per year in the “True Interest Expense” category). The remaining 10% of the budget, which largely includes discretionary spending, amounts to just over $700 billion and has already been shrinking at a compound rate of -15% per year over the past three years.

Lastly, demographic trends are exacerbating the fiscal burden. By 2025, 160,000 people will join the retirement-age population each month, compared to just 32,000 entering the working-age population.

Given these dynamics, meaningful deficit reduction appears improbable without tackling politically protected categories. This leads us to believe that meaningful austerity is an unlikely path forward in the context of this current Fourth Turning environment—especially without a significant devaluation of the US dollar preceding it.

Since our bullish pivot in November 2023, the QQQs have surged 42% and Bitcoin is up +190%.

If you have fallen victim to bear porn and missed part—or all—of this rally, it is time to explore how our KISS Portfolio Construction Process or Discretionary Risk Management Overlay aka “Dr. Mo” will keep your portfolio on the right side of market risk going forward.

Thousands of investors around the world confidently make smarter investment decisions using our clear, accurate, and affordable 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 high-quality insights to help you grow your portfolio—our way of saying thanks for being part of our global #Team42 community of thoughtful investors.