2456: 42 Macro: Interest Rate Realities and the Federal Reserve Strategy

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I've actually been learning a lot about trusts and tax benefits to real estate and how to invest with IRAs and those sorts of things. I've been investing actually well over 10 years now, and I learned a lot of new things today, so I was pretty surprised that there's some techniques out there that I'd never heard of with how long I've been doing in real estate, so it's really great and, uh, I'm getting a lot of good information.

Welcome to the Creating Wealth Show with Jason Hartman. You're about to learn a new slant on investing, some exciting techniques, and fresh new approaches to the world's most historically proven asset class that will enable you to create more wealth and freedom than you ever thought possible. Jason is a genuine self-made multimillionaire who's actually been there and done it. He's a successful investor, a lender, developer, and entrepreneur who's owned properties in 11 states, had hundreds of tenants, and been involved in thousands of real estate transactions. This program will help you follow in Jason's footsteps on the road to your financial independence day. You really can do it.

And now, here's your host, Jason Hartman, with the complete solution for real estate investors. Good day, Empowered Investors. Today we have a great guest. Darius Dale is with us and he's going to share some fantastic insights. This from a Wall Street guy. And I got to ask you a question. I would love to see your comments below on this if you're watching on video, or if not, you can always go to askjasonhartman.com and ask us any questions, make any comments, give us feedback, whatever. But reflecting on this interview with Darius, I was kind of confused by some of his predictions as to the Fed response or the general market and interest rate responses. Now we all know we are in a tougher interest rate environment. Some think rates are going up, some think they're going to remain steady, and of course there are a smaller number of people who think they're going down. And I think we would have seen much lower rates by now if it wasn't for the war. But we have what we have, and that's one of the steps to mastery, by the way, is to accept the environment. And then after that, be grateful that you are an investor in a multi-dimensional asset class, because no matter which way rates go, you don't have to depend on it. Remember, higher rates mean people who are renting cannot afford to move out of that renter pool into the homeownership pool. So that puts upward pressure on rents. Lower rates mean affordability is increased. The renters get sucked out of the renter pool into the homeownership pool, and then you tend to see downward pressure on rents. But you do see capital appreciation during those times. So no matter what the market is doing, when you have a multidimensional asset class, you have the chance to respond and to benefit in kind from whatever is going on out in the economy. So always, always be grateful. Remember that you just have to change your strategy. That's all you have to do. Now, looking on the screen, if you are watching on video, I am showing a chart here of vacancy rates. And this is from the US Census Bureau Housing Vacancies and Homeownership Survey. Rentometer published this, but what it shows you is it goes way back to 2016 and it shows you a vacancy rate for single-family homes of 6.2%. Now it got just a tad higher than that, almost reaching 6.3% last year, and all the rest of the time since 2016, it's been lower than that. Now we're elevated a little bit more at 6.1%. And why am I showing you this? Because I want you to notice how conservative our assumptions are when we are doing performance on properties. We have always, always, ever since I got into the business of working with Nationwide Investors way back in 2004, 22 years ago, I have always said that we are going to assume an 8% vacancy rate. 8%. Higher than it's been since 2016. According to the US Census Bureau.

Wow.

Okay, so that means in real life, your numbers should be better than the pro forma. And that's what we aim for. You know, promise less, deliver more. We can't control the market. Of course, nobody can. Nothing is guaranteed except death and taxes, as the old saying goes. But, you know, if you're an income property investor, you can get away without paying much in the way of tax if you do that right. And by the way, I've got to tell you something so exciting. This is so exciting. On the pro formas in the Empowered Investor Marketplace and on Property Tracker, on both of them, you will soon see cost segregation right there on the pro forma. Wow. Wow, wow, wow, wow, wow. That is going to be phenomenal. And you're going to have the chance to see return on investment as a basic, I'll say, old-fashioned or kind of primitive return on investment. And then, as you have it now, return on investment with IIIDD, Inflation-Induced Debt Destruction, my trademark strategy. Then you will soon see it now with IIIDD plus cost segregation. So if you can benefit from cost segregation, and many, many people can one way or the other, it's not always the same way you benefit, but you know, 95% of the time people can benefit one way or the other from it. That will be in the pro forma, and you will see amazing amounts of return on investment and dollars saved in your pocket from that. So look for that, it's coming up soon. It's first going to go live in the Empowered Investor Marketplace, empoweredinvestormarketplace.com, and you can see that Or of course, you can get a free Property Tracker account at propertytracker.com so that you can put in your own assumptions and your own numbers and run your own pro formas and really understand the math of the business. In 22 years of doing this, I tell you, I think the math is the biggest deal. People just need to understand the math. Very, very important. Now, another point on that home equity investment. My other company, equityliberation.com, which is an HEI company, has been getting a lot of interest lately, but people still aren't always understanding what this is. Remember, home equity investment, first of all, is not a loan. It is like taking on an equity partner in a deal, right? So if you have a property and you have, say, 40% equity in that property and you wanted to get some cash out of the property with no debt, no payments. It's not a loan, okay? It's taking on an equity partner in essence, right? Not exactly, but that's in essence the way it works. Some people think, oh my gosh, the HEI, the Home Equity Investment, or the HEA, Home Equity Agreement, is too expensive. And, you know, compared to borrowing, you're kind of right. It could be more expensive, but it might be less expensive. You just don't know because as Yogi Berra said, the future ain't what it used to be. It's unpredictable. You just don't know which way the future is going to go, if the property is going to stay the same value, if it's going to appreciate, if it's going to depreciate. And those numbers work out differently because someone is taking the ride with you as an investor, right? So you don't know, but I can tell you this. If you pay on the highest end of the rate for a home equity investment of 19.9%, you're thinking that's too expensive. As long as you use that money for an investment that creates more alpha, more return on investment, you can do so well. I mean, it's just amazing the kind of money you can make. Remember, you don't have any payments. There's no payments. It doesn't change your debt-to-income ratio. It's just money, money trading for future equity, for that future equity opportunity. Okay, so it can be a very, very good deal. So check that out, equityliberation.com. We only offer it in a few states. I also want to say there are many other HEI companies out there. And the thing that differentiates us is really that we like investment properties. They don't. Okay. All of them, they want to, you know, have you get an HEI to put solar on your house or consolidate your debts, or— and it's not really debt consolidation because it's not a loan, it's not another debt, but you know what I mean. And that kind of stuff. We recommend you do HEI to use the money to invest and buy more properties. That's the difference. They want to do it on your personal residence. Okay, they— many of them do offer it on investment properties, but the terms are terrible. Okay, they're really just not very good. So check that out if you want. But most importantly, get a free Property Tracker account and do your pro formas, do your numbers, and very soon you will see cost segregation opportunity added to that. Now, We talked about this last night at our Empowered Investor Pro meeting. We have monthly meetings on Zoom with our inner circle group. We had a small group last night, a great meeting. Thanks to those who joined us. And then on our masterclasses, every month we have a free masterclass the second Wednesday of every month. It's totally free. You can just go to empoweredinvestor.com/wednesday and join us for that. So take advantage of these Opportunities. They're either free or super, super inexpensive. And even if you do pay a small amount for any of our stuff, it's so worth it. But the other thing that's free, and you really got to take advantage of this one if you haven't already, is meeting with your investment counselor. A free consultation with your investment counselor. And all of you have these available to you. Just go through JasonHartman.com or call us 1-800-HARTMAN or 714-820-4242. 200 extension 2, and you'll be connected with an investment counselor, and they'll sit down with you on the phone or on Zoom for maybe a half hour. They'll do a portfolio makeover or a portfolio review, and they'll help you determine the highest and best use of your assets to put your money to work. Don't allow your money, don't allow your equity, don't allow your assets to become lazy. Don't let them be lazy. Put them to work. Very important. Okay, one more thing before we get to our guest, Darius Dale, and that is just a note on inventory. So I am looking at a chart here, and for those on video, you see the chart. This is the Altos Research inventory for week 30— well, this is actually week 31 of the year. I said 32 because we're on week 32 now. This is week 31. It's last week's numbers, but Take a look at this and just go with me on this. Inventory is still lower than pre-pandemic levels, 2019. Okay? And it's lower than many, many other years. So we've got the black line here is 2019, and then we've got the current line, which is the solid red line. And you see that we still have lower inventory than pre-pandemic levels. Certainly not the lowest, but lower than many, many other years when the market was more than solid. Okay, so inventory just not creeping up that much. Amazingly, even though we have very, very tough and tight affordability problems and a relatively slow market where, you know, we've got demand destruction really for the last 3.5 years of about 30%. So That's creating a lot of pent-up demand out there in the market, a deficit of about 2 million transactions per year. So you could very roughly, back of the napkin type of math, say 6.5 million people didn't buy a house and they would have normally purchased a house. So what's going to happen when rates come down, or as has been happening, housing affordability getting slightly, not much, but slightly better as wages have been creeping up over those 3.5 years to catch up to the higher elevated prices and the higher mortgage rates. When mortgage rates come down, or as those wages continue to creep up, we're going to see a lot of people moving into the market. Now, when are mortgage rates going to come down? Well, that's anybody's guess. I have admitted Full transparency. You've heard me say it many times over the last— well, out of the 21 years I've been podcasting, I've probably said this for maybe the last 17 years. And what is that? I'm terrible predicting interest rates. And so far, my track record seems to be holding up. I'm still terrible at predicting interest rates, but I'm damn good at predicting most everything else. So I'll take it. Okay, I'll take what I'm good at. I'm good at predicting prices and rents and affordability and inventory and just general things about what's going to happen with the market and the economy and so forth. You've heard me say those. And the great thing for you about being a podcaster— well, about me being a podcaster— is you can just go check my track record. You can go look at old YouTube videos. You can look at old podcast episodes, listen to them, and they're all date stamped. You can hear what I said. You can see what I put on the screen, and you can hold me accountable for my predictions, good, bad, and indifferent all the way. Okay, good, bad, and uneventful either way. All right, so let's get to our guest, Darius Dale. Here he is. It is my pleasure to welcome Darius Dale to the show. He is the founder of 42Macro, and he has some incredible insights on the economy, on the markets, And we're going to talk about interest rates too. You might not like what he's going to say, but we're going to say it because this is the no hype zone where we just tell it like it is. So we're going to go into that. Darius, it's great to have you. You're coming to us from New York State, right?

Yes, we are. And thanks again for having me, man. We really appreciate you, Jason Hartman. You and I met each other at George's Rebel Capitalists Live conference, and boy, I was blown away by your analysis, man. You are a sharp cookie. So I was really thankful to meet you and Looking forward to this discussion.

Thank you. Thank you. Yeah, we were both speakers there and was not very familiar with you before. I'd heard your name, but, you know, I really liked what you had to say at the conference as well. That's why I invited you on the show. So let's get into it. First, maybe Darius, just give people a general elevator speech on what you do and sort of what your unique maybe take on the markets would be.

Yeah, I appreciate you giving me that opportunity. So I would say the number one thing we do in a nutshell is we We sell Wall Street risk management services at Main Street prices to all investors. My background is in institutional risk management. I built models for buy-side insurance companies, pension funds, etc., to help them what we call stay on the right side of market risk, which ultimately is really just a factor discussion. How much high beta do I need to be at any given time? How much exposure do I need to have at low beta? Should I be long growth? Should I be long value? Should I be long stocks? Should I be long bonds? These are the types of questions that I spent my 2 decades on Wall Street helping institutional investors answer. And so our company, 42Macro, was started with the premise that this type of research, these types of signals that we built are not just useful for institutional investors, they're useful for all investors. And so we meet our audience halfway by pricing our product at a rate that people can afford and really can help delivered to the guys about Jason Hartman.

And by the way, when you say people can afford, I mean, this is institutional-level product at consumer-grade prices. I mean, your newsletters and your research is not expensive at all. So thank you for making that accessible to the broader investor world. Let's go into it now. For those not watching on video, we've got a chart up, and let's just kind of talk about this, uh, for a minute.

Yeah, so if I can hammer home one point today, and there's a lot of things that we can talk about, and I would love an opportunity to come back on the show if I do a good job today. Uh, there's a few things I want to talk about, but I'd say the most important thing I can talk about as it relates to your audience, and I know you have a very core, uh, real estate-focused audience, Jason, is this concept of interest rates eventually going to come down and, and it's going to ameliorate the quote-unquote lock-in effect that we see in terms of the nationwide effective mortgage rate being about 200 to 300 basis points below the marginal mortgage rate. And I got news for you guys, that rate ain't coming down. It's not going to come down. It's probably going to go higher over time.

And so no one would accuse you of telling us what we want to hear.

No, no. Look, I'm telling you what you need to hear. That's what the risk manager's job is, right? That's, that's what risk managers get paid to do, is to tell you what you need to hear at the appropriate time, not what you want to hear when you want to hear it. And so, as a risk manager, as a macro risk manager, and a highly sought-after macro risk manager, let me do my job here in terms of making sure people know that they need to hear this. So, if you think about the Federal Reserve right now, one of the big debates in financial markets is, is the Fed going to hike? Is the Fed not going to hike? Are they going to resume their cutting cycle, or are they going to continue easing monetary policy? What's the contour of all the regime change that Fed Chair Kevin Walsh is trying to institute in terms of the task forces. There's a lot of big questions that need to be asked and answered around monetary policy. But one of the questions that I think the market is already starting to answer for the Fed is the concept of where is R-star, where is neutral. R-star would be the— neutral being the interest rate, the policy rate level that most corresponds to an economy that's neither accelerating or decelerating, to like a steady state equilibrium economy. R-star is basically the real the inflation-adjusted version of that. And so, when we look at our analysis, we have this model called our market implied Fed neutral rate model, it's designed to estimate what the market thinks R-star is and neutral are. And because these are technically unobservable variables, you only observe them after the fact with statistical analysis. And so, we built a model that can estimate what the market thinks R-star and neutral are on a forward-looking basis. Which ultimately has kind of— it's a leading indicator for monetary policy. And so what we found is that if you assume the Federal Reserve is still in the cutting cycle that began a couple of falls ago, back in September of 2024, if you assume the Fed is still in the cutting cycle, we would take the minimum value on the overnight index swaps curve, which is a curve of interest rates based on the policy rate, overnight policy rate. We would take the minimum value on that curve out 5 years to determine, OK, this is the level that the market is pricing the Fed to get its rate-cutting cycle to. That's the terminal, that's the destination of this rate-cutting cycle. And then if we were in a hiking cycle, we would say, okay, what's the maximum value on the OIS curve? This is where the Fed is trying to hike the policy rate to, to get to a neutral setting, which is obviously the Fed would prefer to remain in a neutral setting at all times as much as possible. And so assuming there's no issues with inflation or unemployment. And so What we found in this model is that now, those estimates, whether you believe we're in a cutting cycle or hiking cycle still, they're now essentially saying the Fed is 1 to 2, perhaps even 3 rate hikes in accommodative territory, i.e., neutral and r-star, according to the market, have gone up by 50 to 75 basis points in recent months. And so what that ultimately means is a couple of things. One, the Federal Reserve has to hike by that much just to keep its policy setting the same. If it does not hike interest rates by that much, then ultimately, we're going to wind up with easier monetary policy. And the reason this is an issue from the perspective of the mortgage market is, in our— it's our belief that the Federal Reserve, once it outlines the net results of its task forces at the end of the year, it's really moving in a way to essentially ease monetary policy pretty materially starting in 2027 and 2028. And the dirty little secret on finance, I'm not sure if everyone understands this, but you certainly understand this if you're one of our large fixed income clients, we have a couple clients who manage trillions of dollars of fixed income money, they understand this and I want all the listeners to our show today to understand this. Higher interest rates on the short end of the curve, tight money, equals lower bond yields. Easy money, i.e., lower interest rates on the short end of the curve equals higher bond yields. And so ultimately, when we think about the task forces, the 5 task forces, and I'll shut up, the net result of the 5 task forces is likely to be pretty dovish, like very dovish, and particularly relative to current market expectations. And so ultimately, we're going to wind up 2 to 3 quarters from now with a very dovish monetary policy outlook that could be very bond negative. Over the long term. And so then our view, we think we kind of— if you haven't moved on the mortgage market, you're going to miss your window here.

Okay. So it sounds like that conflicts a little bit with what you started with. You said rates would not go down. In fact, and maybe you said this before we started recording, rates are going up. But it sounds like within about 3 quarters or maybe a year from now, it's going the opposite way and they're going down. Am I right? No, no.

Well, I'm essentially saying the market is telling the Fed that it needs to tighten monetary policy to maintain a neutral setting or a mildly restrictive setting. And if the Fed does not do that, the Fed is essentially sending a signal back to the market that it's choosing easier and easier monetary policy by not moving in lockstep with the positive revision to neutral and positive revision All-Star, the Fed is allowing itself— its policy setting— to get more and more easy. A policy setting that gets more and more easy is incrementally bearish for bonds and, and bullish for yields.

And it's inflationary.

Exactly.

And it's also what real estate investors like. Yeah, true, because inflation is their friend, obviously. So you think it's going to be tight and higher rates than No, uh, so that's a, that's a sort of a two-step process.

So in our— we've been caught— we've been— we've had this theme on for the last couple of months, which is we believe the Fed is going to quote-unquote play action pass to set up the run. For those of you guys who understand football, you know, most people think you got to run the ball to set up the pass. That's the kind of the old school way of thinking. The new school way of thinking, based on the analytics that we've, you know, we've had in, in the sport in the last 10 to 15 years, is that Passing to set up the run leads to better outcomes from an expected point perspective, and the best performing offices start by passing, and then they finish by running, as opposed to vice versa. And so, what we ultimately think the Fed is trying to do here in terms of its hawkish signals that we're sending in terms of the change in the Fed press conference, the change in the minutes, and how hawkish the minutes were, and you go back on record, this is the most recent FOMC, the June FOMC, It was one of the most hawkish FOMCs in the history of— with data, natural language processing data going back to 1993. Historically, that's always been a leading or coincident indicator of monetary tightening, of policy rate tightening by the Fed. And so ultimately, what we think is happening here is that the Federal Reserve is, quote unquote, play action passing to set up the run, i.e., it is moving to tighten monetary policy to keep up with R-star neutral over the short term. But over the long term, once we get the findings from the task forces, which we can unpack in terms of our expectations on that, the net findings of those 5 task forces is likely to be very dovish. And if it's very dovish, then ultimately, you're going to have a— you're going to transition from a period where the Fed is implementing tighter monetary policy, which is bond bullish, interest rates go down, to implementing easier monetary policy, which is bond bearish, interest rates go up. So when you look out into 2027 and 2028, you have to expect the Fed that is much more easy, and from a policy setting standpoint, which ultimately means you're going to have much higher bond yields relative to current market expectations, which ultimately translate to higher mortgage rates relative to current market expectations.

Okay, so Kevin Warsh's first address was quite interesting and vague. And, you know, he wants to evaluate inflation differently. He wants to change data. It sounds like he's not as married to the Phillips curve as, you know, the Fed has been over the years. And I kind of almost thought— I mean, maybe I'm wrong about this, but it felt like he was sort of giving himself advance cover for really whatever he wants to do. And of course, he doesn't control everything. He does control the data the other members C to a large extent. He controls the research. You know, that's what the Fed chair does control quite a bit. You know, what do you make of Kevin Warsh and especially his first address?

I love him. I think he's doing an excellent job as a leader. You know, this whole concept of the task— he could have— think about this. You and I run businesses. We could just come in and say, you do this, you do that, you do this, you do that, and you might get some percentage of that done. However, If you say, you go into this room, come up with your best idea, you go into that room, come up with your best idea, but you control the framing by which the debate is being held, then you ultimately wind up with people who are much more motivated to implement your desires as the organization's leader. And so what we think he's trying to— seeking to achieve with these task forces, you know, he's in control of what the task forces are debating. So he's using the power of framing to essentially create the outcomes that he wants. Which is less communication. If you think about it from the Communications Task Force over time, the people he staffed on the Communications Task Force are very anti-central bank communications. So, we know that's going to wind up with less communications over time. The Balance Sheet Task Force, he's been very clear in 5 hours of testimony that I had to sit through and review last week. He's very clear in 5 hours of testimony and in all of his commentary in recent years that he wants a much smaller Fed balance sheet. But ultimately, from our perspective and from our vantage point, The only way you can achieve a much smaller Fed balance sheet without blowing up the bond market in the context of the overwhelming share that the private non-bank sector already owns of the market, of the Treasury market, almost 60% up from 36% at the end of 2021. The only way you can get a much smaller Fed balance sheet, Fed owns about 14% of the marketable Treasury market, is you're going to have to play hot potato and pass the potato to some other large cohort, a large bank.

That's exactly— that's what was so interesting about Warsh's seeming plan— maybe it's not the plan, but it seemed like what he wanted to do is pass that off to the banks and basically let the banks— he wanted to kind of delegate that balance sheet to the banks and get them to buy the treasuries, right? So is that going to be successful? And, and what— I mean, it seems to me that the ultimate impact of that is easier money.

Yeah, 100%. Well, uh, it's, it's I wouldn't say it's necessarily easier money, but it is much easier money than the market is currently priced for. Bitcoin in the $60,000 range, gold in the low $4,000 range. Those prices are wrong in the context of what you and I are talking about, which is financial repression on the orders of $2+ trillion. And so we think the Federal Reserve, whose share of the market, of the Treasury market, is currently 14%, down from a high of 25% in 2010. 2022, we think they're going to play hot potato and try to transition some of their share to the commercial banking sector. Commercial banking sector share is only 15%, down from a high of 34% back in 2003. So they have a lot of scope to increase their participation in this market. And ultimately, what's going to happen is bank regulation is going to be relaxed considerably to allow them to do that. There's a few things, a few levers they can pull. They can change the preference for Treasuries relative to to bank reserves for internal liquidity stress tests, for the G-SIB surcharge. They can exempt treasuries from the SLR. You're talking about $2+ trillion of available balance sheet space you can create overnight. Obviously, it won't be an overnight process, as bank regulations tend to take time to implement. But at some point in the next 2 to 3 years, you have to expect the Fed's balance sheet to be— assuming we have no major economic or financial event that the Fed has to respond to,— you can assume the Fed's balance sheet is probably going to be on the magnitude of $2 trillion smaller, with bank balance sheets being about $2 to $3 trillion bigger. So to answer your question, Jason, or your point, it is likely to be easy money, not necessarily in a net basis, because it might net out to something near zero in terms of the transfer of the hot potato, but relative to market expectations, this is much more dovish than what's currently priced in.

And that ultimately leads to an an easing of interest rates if, as long as the banks absorb what the Fed wants to get off their balance sheet, right?

Uh, yeah, well, again, the more dovish this is, conversely, the less likely it is that interest rates go down on the long end of the curve. The more dovish this is, the more likely it is that interest rates go down on the short end of the curve. The further interest rates go down on the short end of the curve, the more likely it is that they go up on the long end of the curve because fiscal policy is still Loose.

Darius, one of the things I think it's really important to make sure we convey, when you say interest rates, what do you mean? Let's just make sure we get that out of the way because that means different things to different people. Are we talking about the Fed funds rate? Are we talking about Treasuries? You know, we're talking about the 10-year. What are interest rates? I mean, they're not more— you're not talking about mortgage rates.

I know that, but correct, correct. So a policy rate in my nomenclature is the Fed funds rate. Interest rates in my nomenclature, when I'm just broadly thinking of interest rates, think 10-year nominal Treasury yield as a proxy for that. And then I'll obviously explicitly call out mortgage rates if I'm focusing on mortgage rates. But the key takeaway, summarizing all this to make sure everyone's still following along, is that if the Federal Reserve tries to shift to a net dovish policy, both in absolute terms and relative to expectations, as a result of the task force findings, what is likely to happen to interest rates across the curve is the policy rate will go down more than what's currently priced in. And as a function of that, you're probably going to have an extension, and if not amplification of the business cycle, that sends the interest rate, the 10-year nominal Treasury yield up higher than what's currently priced in if you look at the strip, which ultimately send mortgage rates higher than what's currently priced in. Essentially, this is a Federal Reserve that in our opinion, based on our estimation of how the task force findings are likely to wind up with the data task force being explicitly dovish, the productivity task force being explicitly dovish, and the inflation task force being explicitly dovish in terms of our expectations for those findings. If you net all that stuff out, you're going to have easier policy on the short end, or easier monetary policy on the short end. The transfer on the balance sheet will be relatively dovish relative to current market expectations. Which ultimately lift nominal and real yields on the long end of the curve, which will inflate mortgage rates as well. So going back to where we start this conversation, Jason, if you're hoping for mortgage rates to go down a lot to move out of your house or to buy a house, you're going to be very disappointed if you wait until 2027 and into 2028.

Let's talk about the timing on that because it sounds like it's one direction and then that direction shifts. Correct. Share with us some timing and To whatever extent possible, Darius, translate them into mortgage rates because that's most of our audience. They're really attuned to those mortgage rates.

Yeah, 100%. So you think about this from the perspective of like, just look at the catalyst calendar. You have the Fed meeting on July 29th, you have Jackson Hole kind of mid-August, and then you have the Fed meeting on September 16th. By September 16th, the Fed will have in its hand, I believe, 5 more inflation prints 2 more jobs reports. And so ultimately, we think by the time they get that information, it'll be pretty clear that inflation is stickier than is expected to be currently. It's likely that growth will be relatively more stable than it's expected, than it's currently tracking, which ultimately means you still have this massive tailwind from fiscal policy, you still have a massive tailwind from the liquidity cycle, which are ultimately contributing to stickier inflation outcomes, especially if growth starts to stabilize, which we would expect it to stabilize. And so from the perspective of a monetary policymaker looking out the next few months, it's our view that the Fed may move and, and, and probably should move to tighten monetary policy, at least modestly, maybe call it 1 to 2 rate hikes in the second half of 2026. In our view, we think that would be a mistake. And reason we think that would be a mistake is because we think the balance sheet is a more appropriate tool to target the current inflation pressure in the US economy. The interest rate sensitive sectors of the economy are still in recession, by the way. They've been in recession inflation since 2023. If you look at consumer durable goods, residential fixed investment, non-residential fixed investment and structures, basically anything that isn't tethered to AI investment is basically in recession. And so if they use the policy rate to, quote unquote, take some steam off the boil from an inflation cycle perspective, that would be very ineffective because those sectors are clearly not causing the inflation, they're in recession. And so in our opinion, we think the Fed should use the balance sheet to target some of the speculative excesses at the top of the K-shaped US economy, but that's neither here nor there. I digress. They might not get enough buy-in to do that. So, let's assume they tighten their balance sheet a little bit this fall, the second half of the year, or they hike 1 or 2 times in the second half of the year to "play action pass." That's creating the scope for them to follow up with much more dovish monetary policy. Here's why we think they got to play action pass to set up the run. You got to back off the linebackers and the safeties. The linebackers and the safeties, Jason, are the bond market. You currently have inflation on a core PCE basis annualizing at 3.5%, 150 basis points above the Fed's 2% target. If you just wait from today, and 6 months later, you have 5 task forces that tell you on a net basis, the Fed needs to be much more dovish than what is currently priced in, you risk losing the long end of the Treasury curve. You risk a big sell-off in the 30-year Treasury, the 10-year nominal Treasury. And ultimately, that would be— it could potentially be destabilizing for the equity market and the broader economy. And so in our opinion, we think the Fed would be much better served to do what it's already signaling that it looks like it wants to do, which is take some steam off the boil from an inflation cycle perspective, regain some credibility from an inflation-fighting perspective, which will give them much more scope to be as dovish as we think they're going to be in a non-consensus way. You know, starting, you know, late next year, early next year, late this year.

So, so the dovish part comes in late 2027?

No, late, late 2026, early 2027.

Oh, pretty quick.

Uh, semiconductors are up 105% in 3 months. That's a long time in this market, man.

Okay. All right. All right. You look at it more from a Wall Street perspective and like how many Fed meetings have occurred perspective, I think.

Uh, more quarterly.

Yeah, yeah, right. To me, uh, a dovish Fed by late this year, early next year is not so bad.

Yeah, it's not bad if you're, uh, if you're already long a real estate asset and you're expecting price appreciation. That's fantastic. You're gonna have a phenomenal 2024. 2027, phenomenal 2028. It's bad from the perspective of where we started the conversation, which is if you're one of those people who's expecting inflation and/or the economy to slow enough for the Fed to cut the policy rate enough to get mortgage rates down, that is a fallacy that won't come true, is what I'm essentially saying. So this— that's why I started the conversation on the mortgage rate side of things. You have a very narrow window of time here whereby the Fed is being hawkish, which might be the last time we see the Fed hawkish for several years. In the second half of 2026, might be the last time we see the Fed hawkish for a long period of time in the context of what's likely to occur with those task forces. And so in this window of time, while the Fed is being hawkish, these are probably the lowest, you know, long-term interest rates, long-term mortgage rates you're going to see on a fixed basis for, for quite a while. If the Fed— once the Fed starts implementing much more dovish monetary policy, assuming there's no material change in the economy, which we're not forecasting, then you're also going to wind up with higher long-term interest rates. You'll have short, lower short-term interest rates because the Fed will be cutting the rate more than what's currently priced in. But as a function of that and the economic durability that that is likely to contribute to, you're going to wind up, you know, reflate interest rates on the long end of the curve and in the mortgage market as well.

How does this play in with Trump, or does it not matter? And is Worscht going to kind of abandon Trump? I mean, you know, he was a hawk, then he became a bit more dovish, I guess. And, you know, Trump wants to see lower rates, weaker dollar, increased exports, manufacturing, onshoring. Do you think Trump has much influence, or is Kevin Worscht going to try and be his own man? No.

Yes, Kevin Worscht is going to be his own man. Treasury Secretary Scott Bessen is a former client of mine, so I know him really well. And I will tell you that he and I share the same general take on this, which is strong dollar, tight monetary policy equals lower bond yields. It's counterintuitive. Most people think Fed hiking interest rates, bond yields are selling off. And that tends to be what happened when the Fed is hiking interest rates in a surprising manner. However, we were essentially saying this is not a surprising hike. If anything, the Fed has telegraphed this to a degree that is rarely seen in history. I mean, you go back, like I said, the Fed, most recent Fed meeting, the minutes were as hawkish as they've ever been with data, natural language processing data going back to 1993. And that has always been a coincident or leading indicator for tighter policy on the short end of the curve. And so, if you have President Trump, who has a very eclectic list of demands here—

No question.

You want a booming economy and lower long-term bond yields, well, those things Those things are never going to happen in this economy, particularly in the context of us being an international investment deficit economy. We are a current account deficit economy. We are not in control of what our cost of capital is, the foreign creditors are. And so one thing that might be influencing that in terms of interest rates going higher is the closure of the Strait of Hormuz is essentially preventing the net international investment surplus economies in the Gulf like Saudi Arabia, Qatar, Saudi Arabia, UAE, etc., from generating the corporate profits and household savings they need to recycle dollars back into our capital markets. It's obviously having a big impact on petroleum importers in Asia, petroleum importers in Europe from that same perspective. That's where the world's capital pools lie. Those are the world's net international investment surplus economies. We are a net international deficit economy, so we can't dictate these outcomes for ourselves. So we either, as a US economy, have to choose. Slow growth, lower bond yields, lower mortgage rates, or high growth, higher bond yields, higher mortgage rates. And so ultimately, and that's not— we're never going to be able to break that paradigm. This is very consistent across economies and across decades, if not centuries. And so from that perspective, trying to get— going back to what will President Trump be most happy with, I'm not sure he has a big influence on the discussions anymore anyway. I think Bessin's in control here, to be totally honest. And based on what I've seen Bessin say and based on what I've seen Kevin Walsh say, they seem to be much more in alignment than, than, than Walsh and Trump. But that's neither here nor there because I still think Walsh is his own man.

And by the way, well, I mean, I mean, Bessin seems like a huge Trump supporter. You know, he— every interview I see with him, he tends to back up the president unless I've missed some comments.

But who, Bessin or Walsh?

Bessin. Oh, no.

Bessin is a huge Trump supporter. I'm sorry if I misspoke. I mean, Walsh is—

No, I don't think you did. I'm just putting that out there because it doesn't seem like Bessin has any disagreements with Trump, really, in any major way, at least.

No, no, no. And from knowing Scott, our Secretary Bessin, when they're in the room together, I would imagine Trump defers to him on economic matters.

Yeah.

Scott's a big, strong dude who's very smart. Yeah.

I agree, I agree. I like them. Okay, so let's see if we can cover two more quick things before— of course, yeah, and I know, I know we're running out of time here, but number one, I did want to bring up the issue of the war, and I want to bring up the issue of housing affordability, which actually is improving quite a bit. Not because rates or prices— it's because wages are finally surpassing housing costs, albeit by a small margin, but it is getting better. Affordability is improving. But let's talk about the war first. So It seems to me, and just correct me if I'm wrong, that the war— and I'm talking about Iran, of course, not Ukraine— and the Strait are relatively short-term issues. I can't imagine with the latest pummeling that is going on that that regime is going to last much longer. The second wave, they got to be out, or at least weakened into almost nothing soon. And then the strait opens and the ship starts to right, the inflationary pressures die down. I mean, inflation went down last month. What do you think? Am I crazy or—

No, look, I don't have a basis for determining whether or not, you know, this war is going to be over or short, at least an academic basis. My opinion on it is that it's going to last a lot longer than that.

How long? I mean, we're not talking 20 years.

It's been going on for years. The CIA, back in the '70s and '80s, were game theory— were, you know, they were game theorying this scenario out. They thought this would would be something that would never end if they— if they— if we ever got into a kinetic warfare with Iran. That, you know, this is well documented.

The CIA in the '70s didn't know about the weapons we have today.

And that just tells you the size of the blunder that was made from a policymaking standpoint. Okay, the weapons we have today make it more likely that Iran controls, uh, the Strait. I mean, these drones cost, what, $10,000 to make? They're getting shipped in by the day from China and Russia, they can keep this up forever.

Well, but, but, you know, Trump's trip to China, it seemed like he made some headway on that, like China's not going to support Iran anymore.

I, I don't want to get an argument about this because I don't— again, I have no basis to have a real strong argument about this. All I know about this is that members of the national intelligence community basically said don't do this 50 years ago for the same reason, is that they're going to shut down the Strait of Hormuz. And so if they could figure it out 50 years ago, my assumption is that probably a lot of those same constraints, those binding constraints, persist today, which is why we are, you know, still in this kinetic war 4 months later.

I mean, fortunately, though, with our newer directed energy weapons, we have, you know, largely— well, we have not solved, but we've mitigated the drone problem to some, you know, to a decent extent because we don't have to spend $1.4 million on a missile to take out a $10,000 drone anymore. We can take it out electronically, and that's exciting.

That is exciting, you know.

So between that and the fact that Trump is just so reluctant to put ground troops on the ground because of course, you know, Americans will freak out and every— everybody will hate him more than they already do on the left, you know, he's just trying to conduct an air war largely, right? And so your limits—

hard to gain strategic advantages with an air war. Superiority. I know. Again, I'm not a military analyst at all. Everything we do in terms of keeping our clients on the right side of market risk comes through the lens of where are we in the 6 key macro cycles? That's growth, that's inflation, that's monetary policy, fiscal policy, liquidity, positioning, and ultimately, what are our risk management signals telling investors to do at any given time? That's Dr. Mo, that's KISS for retail investors, Dr. Mo for sophisticated institutional investors and retail traders. And so, my thoughts on the war are not going to influence what we're signaling to our customers, and thank God, because I think I've had a pretty good call on this war that it would last a lot longer than people realize. But again, that call is based on 50-year-old information that turned out to be true.

Yeah. Okay, duly noted. So, you don't think that the war is a short-term problem, or the Strait of Hormuz is a short-term problem?

Not unless the US admits defeat. I think it can be a short-term problem if we have the humility to admit defeat.

Oh, that's not going to happen. Not with Trump, it's not going to happen. Exactly.

Okay, yeah, okay. If we have the ability to pull out, this will be a short-term problem. Yeah, you know, if we're willing to give Iran, you know, permanent control of the Strait of Hormuz in terms of a tolling regime, which I think is probably the biggest sticking point from the international community, then yeah, we can just say, hey, look, we didn't, we didn't get what we wanted, we got to get out of here, let's regroup. But I see that being a low, like, low likelihood, a low probability outcome in the context of the DJT.

So in other words, the inflationary pressure continues because of the Strait, right?

Yes, but I would argue that's only a small portion of the inflation. You know, when you look at, uh, statistics like trimmed mean PCE, trimmed mean CPI, you know, inflation is— we have a pretty broad-based problem with inflation. You know, we got a strong positive impulse in trimmed mean CPI, strong positive impulse in trimmed mean PCE deflator. That just means the 3-month annualized is greater the 6-month annualized, and the 6-month annualized is greater than the year-over-year. So you have a trending acceleration in the slope of the underlying time series. And so a broad measure of inflation like this, which admittedly is designed to chop off the extremes of the distribution to give you a real general sense of what the general price level is moving, we're tracking and the momentum is really negative from a set of inflation fighting. And it's at levels that are starting to get inconsistent with the Fed's 2% target. I think they can hold at 2.8% and 2.7%. Respectively. But I think if you breach into the 3s, which we could easily breach into the 3s in the context of labor market that could tighten in over the medium term, or in the context of the massive AI CapEx continuing to spill over into the real economy, these numbers hit 3, the Fed will be tightening monetary policy.

Okay, got it. And then just lastly, housing affordability improving finally, really for the past little over a year, I think. But albeit housing is still very unaffordable. Any thoughts on the housing market?

Housing is going to remain unaffordable for a very, very, very long time because there's not enough savings globally. And so ultimately, we're never going to get interest rates down enough to make that process bigger. We're never going to have enough labor market growth in the context of AI to, to make, to make the wages accelerate markedly faster than inflation. That's a very low likelihood. We can explain that, but I know we're running out tight on time. But I'll leave you with two charts that kind of land the plane here on, on why I think housing affordability is going to be a structural problem. It's going to continue to be a structural problem.

Yeah. And then, and then, by the way, when housing affordability is a structural problem, that means upward pressure on rents. We haven't seen much of that because of the apartment overbuilding, but that ship is righting itself because that supply is getting absorbed. And then I think there's a lot of upward pressure on rents underneath the surface that we really just haven't seen come to bear yet. But yeah, go ahead.

I completely agree. And so when you look at global savings, the flow of global savings, not the stock, the flow of global savings, right now in the most recent year, we were about $31 trillion. So basically, the world created $31 trillion of savings to allocate to assets. The savings have to find a home, whether they be in money market funds, or real estate, stocks, bonds, etc. They had gold, Bitcoin, they got to find a home. And so when you go and you study the growth rate of savings, particularly the long-term growth rate of savings, we look at it on a trailing 10-year percentage change basis, the flow of global savings is up 55% over the last 10 years. That's one of the lowest readings on record. In fact, it's pretty close to an all-time low with data going back to 1990 in terms of the trailing 10-year percentage change. We have savings data back to 1980. We are 3,000+ basis points, 3,500 basis points below the long-run mean of the trailing 10-year percentage change in global savings. So what does that mean? That's very mouthy. What does that mean? Well, it means the world is generating household savings, corporate profits, and FX reserves at one of the slowest rates it's ever generated those on. What's causing that? Well, we argue that the shift to a multipolar world, requires fiscal expenditures on defense and infrastructure. So you have sovereign budget balances are much wider than they've historically been. Most sovereign budgets, when you look at something like the Eurozone or Japan or China or UK, US, they tend to be in the 0% to -3% range. For the years, they've been in the -3% to -6% range in terms of those economies. And so we've run persistently wider budget deficits across all the major economies in the world. So that's pushing down the flow of global savings in a way that is ultimately reducing the total supply of capital. And so going back to landing the plane on this, the reason why we think we're going to be structurally high in interest rates, if not persistently rising over time, is because the Treasury, which is at the very top of the global capital structure, it's the asset that sits underneath all the other assets, or sits atop all the other assets, it's the thing that all the other assets are priced off of, on top of. We're now gobbling up in terms of the flow, the supply of Treasuries, whether you think about the Treasuries that are rolling over, the new Treasuries that need to be capitalized, or Treasuries that may be rolling off the Fed's balance sheet, that aggregate supply, which is somewhere close to $12 trillion right now, that aggregate supply is about 38% of the flow of global savings. The long-run mean of that is about 23%. So we're almost gobbling up double the ratio of global savings that we've historically gobbled up as a US sovereign. Which ultimately means there's that much less money to flow into the US mortgage market. There's that much less money to flow in, let's say, high-yield credit, et cetera. There's that much less money to flow into alternate asset classes. And so this ultimately means that where we started the conversation, which is R-star and neutral, are going to gradually rise over time as the growth rate of global savings continues to dissipate.

So it's global, but not US? Like, do you have an insight as to how the US is doing on that? I'm, I'm sure it's not great, but I just wanted to ask you that question because if we're talking about the US real estate market and hoping money will flow into it—

well, we have, we're on a current account deficit of the tune of 3 to 4%, so we obviously have negative savings. S minus I equals your current account. And so the key takeaway is we need foreign capital. We are a current account deficit, net international investment deficit economy. And so in order for us to grow, in order for us to run a sovereign budget deficit, we need to attract global savings. And what I'm essentially saying is the growth rate of the amount of money that the Treasury needs is going one way, while the growth rate of the amount of savings to capitalize the Treasury market is going another way down.

Right. Right. And that's, that's a definitely macro perspective. I was just kind of referring to the consumer, the potential home buyer, the potential home seller that's also a buyer. And what we don't count in here is that the homeowners have massive amounts of equity, about $34 trillion right now. So that equity can be traded into new positions, right? So, you know, yeah, I just wanted to kind of speak to that if you want before you go.

Oh, no, I don't know if I have anything thoughtful to add on equity. I got to do some more research on that. But the key takeaway here is is as long as interest rates are unlikely to go down a lot on the long end of the Treasury curve, it's highly unlikely that we get interest rates down a lot on the long end of the mortgage market. And so as a function of that, you're probably going to have this lock-in, low-supply dynamic persist indefinitely. And if the lock-in, low-supply dynamic persists indefinitely, then we're eventually going to burn through all that incremental supply in the rental market. And eventually start pushing rents up again, and perhaps at a rate much faster than wage growth. And so that's ahead of us. If we're right on this global savings dynamic, there won't be enough money to push mortgage rates down because the US mortgage market needs international capital to capitalize itself.

Yeah. It's so interesting, and so many economists miss— I mean, we live in a world of soundbites on TV and so forth, or even in articles that you read, it's a couple of quotes. It's not analysis like your newsletter is, they don't look at both sides of the equation of the dynamic, right? When, for example, the for sale market is slow, the rental market is improving, right? Or vice versa. When the for sale market is booming, everybody's leaving the rentals and they're buying as much as they can, right? And so they kind of always fail to look at the— there's always sort of an equalizing factor. And that's my point, I guess. But Darius, This has been super interesting talking with you. Please give out your website and, you know, maybe tell people about how they can engage with you. You've got some very low-cost products that people can take advantage of.

Oh, I appreciate you, man. So, uh, and again, this is a phenomenal conversation. Like I said, I, I learned a ton every time you and I connect. So I, I— let's keep this going. I would like to do this again. Uh, so just a quick bit on 42 Macro. That's it. I'm not here to sell anything. You know, you guys can check us out if you if you want to, but my background is in institutional risk management. My job is to keep investors now at 42Macro in this new realm, to keep all types of investors on the right side of market risk, which means maximizing upside capture in bull markets and minimizing downside capture in bear markets. And so, how we do that, how we communicate to our audience, which again, there are many of the top hedge funds and asset managers on global Wall Street who are clients of ours, we have Mag 7 companies whose treasury boards we sit on. We have all types of clients that we serve, but we also serve this very large, dynamic, and growing cohort of retail investors around the world, 80+ countries around the world. And so what we're trying to do, and the reason we named our company 42Macro, as an ode to Jackie Robinson, one of my heroes, is designed to basically channel my life experience, which is someone who grew up on the wrong side of the train tracks, as far as on the wrong side of train tracks you possibly can. I like to think that I was at the very bottom of the 0.01%. Very— the 0.0001% of the K-shaped USA.

I was right there with you. And that's the great thing about America.

That's why we love this darn country, don't we?

It's incredible that you can just— you can come from anywhere and do anything here. It's amazing.

Well, so the reason this company exists is because I don't want to just be the only one who's come from anywhere and does anything and has had a phenomenal life. I want to make sure that the people I left on the other side of the train tracks have a vehicle to get to this side of the train tracks. And that's why we price our research the way we do. If you want a unit of my time, it's going to cost you $10,000 a quarter. If you want to see my research, it's going to cost you as cheaply as $65 a month.

Yeah, $65 a month, that's great.

Yeah, it's much better than $10,000.

Exactly.

So again, come check us out, 42macro.com. If you're, you know, active DIY investor, that's kind of the audience we serve, or if you're an institutional investor.

There is Dale. Thanks for joining us, Jason.

And I really appreciate you, man. Thanks. This is awesome.

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