Twin Deficit Crisis: 'This Is How You End Empires', Recession Imminent? | Darius Dale

**Darius Dale** (0:00)
And this is why we think we're early innings of a secular dollar bear market. And I think the Trump administration will welcome that. They're not gonna fight that. But at the end of the day, it's not gonna be great from the perspective of the cost of capital that we're gonna have to pay in our stock and bond markets if you lose that broad tailwind of currency support. Folks in the administration, if you're listening to me talk, you gotta start with the capital account and not focus on the current account. Capital account is what matters because ultimately, if the rest of the world doesn't like your policies, they will sell dollars, sell stocks, and sell US bonds, just like we saw on multiple occasions throughout April. And that is how you end empires, period.

**David Lin** (0:37)
Our next guest has correctly called for a market downturn in 2025 Last time he was on the show, Darius Dale called for a potential market correction. He said the conditions are right and are in place for a market crash in 2025 Since then, since he was on the show in January, the S&P is down about 10% year-to-date. The NASDAQ was down about 20% at its trough. So what's next? And should we be allocating more to defensive allocations? Or is this the bottom? Darius Dale from 42 Macro joins us once more. Welcome back, Darius. Good to see you.

**Darius Dale** (1:11)
It's great to see you, David. Thanks for having me back and appreciate the warm introduction there. We're doing a good job for our clients this year.

**David Lin** (1:16)
Yeah, good call. Back in January, we had you on middle of January. Back then, you had 50% in cash.
Good call. So, are you changing your allocation now that we've had this correction that you've been kind of warning us about?

**Darius Dale** (1:31)
Yeah, great question. So, as we talked last time I was on the show, we are purely systematic investors here at 42 Macro. All of our recommendations on the asset allocation and portfolio construction side of things come from the form of our institutional-grade risk management overlays, KISS being the process that we talked about last time for retail investors, and Dr. Mo being the more complicated, more sophisticated process for helping institutional investors pay factors long and short. And so, when it comes to change those allocations, the only thing that's going to guide those allocation changes is if we go into a different market regime, or if the individual exposures within those overlays change from the perspective of their independent volatility, just momentum signals. In terms of where we are today, we still have a pretty healthy degree of cash. We're pretty uninvested as it relates to the equity market. We're overly allocated to the gold market and have been, and that's created a lot of positive performance and an alpha for us and our clients this year. And then we have a small half exposure to Bitcoin relative to our maximum allocation. So most of the risk that we're taking currently for our clients, at least the risk that we want our clients to be taking is concentrated in the gold and Bitcoin markets right now, because those allocations, those signals are actually better than the equity signal right now. I can see a scenario where the equity signal continues to improve and eventually take our KISS allocations and our Dr. Mo allocations higher, but that's not our base case scenario. Our base case scenario is that we are in what we've been saying is a W-shaped market in a U-shaped economy. And what I mean by that is that if you think about the shape of a W, we're sort of on the inside left of the W, and we're expecting over the next one to two quarters, that the markets will eventually have to sell off again and price in the inside right of the W to account for the fact that the economy, we're still very early on in this U-shaped economy thesis. And if that is true, then I would expect our KISS allocation to equities and our broader equity signaling to remain generally uninvested or generally kind of defensive until we get past the second part of that, the inside right of that W. To the inside right of the W concludes, it's very likely that we remain fairly defensive if our fundamental research is correct.

**David Lin** (4:01)
Are we currently on the inside left of the W-shaped recovery? Our market action, meaning we're about to see some sort of bounce?

**Darius Dale** (4:08)
Yeah, well, we are in a bounce, right? I think we've retraced about half the drawdown from the February 19th high in stocks. And that makes a lot of sense, right? If you go back to April 9th, when President Trump, in our opinion, we think the bond market broke President Trump and robbed him of the fortitude that's required to facilitate a very expeditious transition, the transition that you and I talked about back in January, from paradigm A to paradigm B. If anything, it looks like now we are going to paradigm C, which is a combination of paradigm A with a little bit of supply side economic sprinkled on top. And in my opinion, we can talk about how that's not, that's a disappointing outcome from the perspective of Main Street, the folks who voted the Trump administration in. But from an investment standpoint, in our opinion, the most important signal that we've gotten as investors in 2025 is the fact that the bond market broke President Trump and robbed him of that resolve. And as a function of that, it's our expectation that the trade negotiations are going to generally go well with the exception of the trade negotiations against China. It's very clear that the Chinese are digging in and they should, they're going to win the capital war, which ultimately means they're going to win the trade war. And so ultimately as a function of the other trade negotiations likely going well, it makes a lot of sense that the markets have bounced and have latched on to the fact that the bond market broke President Trump back on April 9th. Eventually, however, that stuff will run out as it relates to its ability to propel markets higher, in our opinion, because we still do have a gross slowdown ahead of us that in our opinion is not appropriately discounted at current valuations or current credit spreads.