#1019 Darius Dale On How We Get To Deflation
6/24/2022 · 34 min · transcript via mlx
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Key topics
— Jerome Powell is now being honest about inflation causes, breaking from political narratives that blame Russia-Ukraine invasion, and confirming inflation was already 7.5% in January 2022 before the invasion.
— Core services inflation is accelerating at 7.8% on a three-month annualized basis—the fastest rate since mid-1990—indicating broadening price pressures beyond commodities.
— The Fed is pursuing an aggressive tightening cycle with quantitative tightening and rate hikes to destroy demand and restore inflation credibility, even at the cost of recession.
— A structural transition from globalization and disinflation to deglobalization and higher structural inflation is underway, requiring fundamental changes to portfolio construction.
— Bitcoin is functioning as the cleanest free-market macro asset, pricing in the Fed's inflation-fighting stance and eventual deflation scenario before traditional markets.
— The traditional 60-40 stock-bond portfolio is obsolete in this new regime and must be rebalanced to include real assets and alternative investments.
Market & price signals
— The 10-year Treasury yield has dropped 40 basis points week-over-week as recession fears cascade through global sovereign debt markets. Oil prices have fallen $15–$20 per barrel in one week, mirroring Bitcoin's decline as both reflect anticipation of demand destruction. The bond market term premium sits at minus-6 basis points (eighth percentile since late 1950s), indicating the Fed still has credibility to tighten. Market-based inflation expectations are topping—two-year through 30-year inflation swap rates show the bond market no longer pricing inflation moving higher, signaling a transition toward deflation. Real yields on the five-year and 10-year Treasury have turned positive, but the two-year remains ~110 basis points away from comfortable levels. Bitcoin at $20,000 shows resilience after a 70% decline from $69,000, demonstrating price discovery in the cleanest free market available.
Actionable insights
— Position for the deflation regime: cash is currently king; when inflation fears subside and bond yields decline, sovereign debt will become attractive again before a potential pivot back to recession hedges.
— Bitcoin should be in every institutional portfolio despite regulatory friction; it is the only truly free market asset pricing in macro regime shifts accurately, and institutional capital allocation will eventually follow price discovery.
— Abandon the 60-40 framework: rebalance toward real assets, real estate, and alternative investments in a world of structurally higher inflation, deglobalization, labor scarcity, and persistently higher bond yields.
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