#1259 Darius Dale on How Markets Are Reacting To Global Conflict
10/12/2023 · 17 min · transcript via mlx
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Key topics
— 42 Macro's weather model shows 10 principal components (growth, inflation, employment, sales, earnings, fiscal policy, dollar strength, liquidity, credit, and interest rates) that independently signal asset class returns and regime changes.
— The model currently indicates a medium conviction Goldilocks regime with growth accelerating and inflation decelerating, but growth is expected to inflect lower within 12 months, potentially shifting to a deflationary regime in Q4.
— Israel–Hamas conflict presents different geopolitical risks than Russia–Ukraine because the U.S. is an official partner with Israel, increasing odds of direct involvement, and potential Iranian involvement could remove crude oil barrels from global supply.
— The U.S. is at record crude production with near-record-low rig counts and Strategic Petroleum Reserve levels near 1970 lows, making incremental supply very difficult to obtain if sanctions tighten.
— A fourth turning (historical cyclical period) is underway; sovereign budget deficits and debt will deteriorate sharply as geopolitical conflicts escalate, requiring financial repression and currency depreciation beyond current consensus expectations.
— Investors should monitor market-based signals (volatility, credit spreads, dollar strength, stock–bond correlations) as leading indicators before economic data confirms regime changes.
Market & price signals
— The weather model projects below-normal stock market returns and below-normal Bitcoin and commodity returns over the next three months, with normal returns expected for bonds and the U.S. dollar. U.S. dollar positioning is at an extreme bullish signal; U.S. Treasury positioning shows an extreme bearish signal. Growth is accelerating on a trend basis but is expected to trend lower over the next 12 months per consensus estimates. Inflation is trending lower and expected to continue declining. The sovereign fiscal balance sits at minus 8.5% of GDP—a record non-war, non-recession budget deficit. Employment is trending higher (unemployment rising). U.S. Treasury yields show a negative two-year anomaly relative to benchmark policy rates, implying market expectations for Federal Reserve rate cuts in the near term.
Actionable insights
— Monitor market-based regime-change signals—volatility spikes, widening credit spreads, currency volatility, and stock–bond inverse correlation—as early warnings before economic data confirms a shift from risk-on to risk-off environments.
— Position defensively for Q4 and expect higher volatility across multiple geopolitical flashpoints (Taiwan, potential U.S. military engagement); the fourth-turning framework suggests a decade of debt and deficit deterioration ahead, eventually requiring currency debasement and financial repression that will benefit Bitcoin and hard assets far more than consensus forecasts.
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