Darius Dale, the founder and CEO of 42 Macro, an online financial media company specializing in macro risk management through the dual lenses of asset allocation and portfolio construction, stopped by the ETF Think Tank recently to offer his views on the state of the economy and what he sees as some of the key macroeconomic impulses that could affect the financial markets right now.
In terms of his procedure, Dale says his process includes a very systematic approach. He focuses on understanding market internals and the catalysts that are changing them. While every market environment is unique and may not be directly comparable to similar ones over the course of history, Dale looks at rates of change because those are still relative. The stagflation regime of the 1970s may not be the same as the one we could be headed towards now but comparing economic rates of change could provide the signal that such a regime is coming.
When asked about why we have seen such a concentrated bull market in just a few mega-cap names, Dale isn’t all that surprised. He notes that cash flows into equities, likely assisted by stimulus cash, is certainly helping, but it’s actually typical to see this type of trend in a decelerating growth environment. Investors often shy away from high beta products and stick to more established names. He notes that growth peaked earlier this year and has been slowing since. The delta variant also catalyzed a sharper slowdown than what was expected and that probably helped mega-caps lead.
Since late spring, equities and Treasuries have been positively correlated with each other and Dale feels that cheap capital could be the driver of some of this behavior. He says the lower that interest rates go, the easier it is for established businesses to build and grow by using cheaper and cheaper capital. Many have the capability to sell products as loss leaders in order to build their businesses, something that smaller companies may not be able to effectively match. We have to be careful about this, though, because that turns out to be deflationary over time.
Speaking of deflation, Dale sees an opportunity for gold heading into 2022. One of the big questions is how gold succeeds in a world dominated by Bitcoin and other cryptocurrencies. He explains that it’s not about market timing, it’s about asset class timing. He thinks gold is going to have its day when reflation stops and that could start to happen next year. He feels many economies could begin to move towards deflation starting in Q1 2022 and that could be gold’s opportunity. You want to be holding traditional defensive assets heading into deflation. Gold can be a hedge against negative real interest rates, but it can do particularly well when there are negative real rates in a deflationary environment.
How does Dale’s team manage risk within portfolios? He says it’s all about style, not sector positioning. In down markets, sector leadership doesn’t necessarily matter because all sectors are likely falling. Style investing, however, can produce alpha, in particular with low volatility and quality dividend stocks. He notes that there are a lot of misnomers about short selling, but that’s usually just a decay on returns because markets rise more often than not. Cash is the easiest downside protection, but he thinks the best tool is proper asset allocation. His team had a negative view of the cycle in 2019 but didn’t make any changes to their allocations. Treasuries were able to do well and you’re able to generate gains as long as you have the proper allocations.
Is Dale worried about how the markets might be affected by the massive wealth transfer that will take place over the next decade? Not as much as others might be. While we need to be mindful of what the behavioral aspect is going to be with receiving this new wealth, it’s important to remember that it will be mostly handed off to 45–50-year-olds, not just 20-somethings. There will still be a preference to move this money primarily into some combination of stocks and bonds. Advisors shouldn’t necessarily worry that all of this money is going to go from fixed income into cryptocurrency.
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