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Excess Returns
The Monumental Miscalculation | Jared Dillian on Tariffs, Fed Risks, and Where Markets Go from Here
00:54:22
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- [00:00]
Jared Dillian
Just because I agree with those things doesn't mean I agree with the tariffs. I think the tariffs are very dumb. I think there's a possibility that throughout all this, the Fed doesn't cut at all for a whole bunch of reasons, mostly political reasons. In the long run, the dollar is doomed. We have a much higher standard of living because we can get cheap stuff from China. We're exporting finance, we're exporting stocks, we're exporting bonds. We don't have hot wars, we don't have cold wars. We have financial. I agree with Dalio that we are going to have a debt crisis. It's probably going to be after Dalio is dead. Like, he's probably not going to be around. I might not be around. Like, if you are the world's biggest economy with the reserve currency, like, stuff just takes a long time to play out. I think we are kind of slouching towards a recession as we speak. They should cut. They should. They should cut fed funds to 3% foreign.
- [01:03]
Matt Zigler
You're watching Excess Returns. I'm Matt Zigler here with Jack Forehand today as my co host and today challenging me for best hair in the business. You know him as Daily Dirt Nap on Twitter, Jared Dillon on LinkedIn, Jared Dillion Money on Instagram, DJ Stochastic on SoundCloud, host of the Macro Dirt podcast and be smart on YouTube, not to mention the infamous Daily Dirt Nap newsletter, the we're gonna get those bastards substack. And author of many books, including his rarely discussed masterpiece, Bearships, Blurbed right here by Tony Greer, who said testimony of Dirt Pilot changed my risk appetite. Thank you, Tony Greer, for that. Sarah Dillian, welcome to Access Returns.
- [01:44]
Jared Dillian
Thank you. I don't think it's the best hair. I think it's the biggest hair. The hair just keeps getting bigger and bigger.
- [01:50]
Matt Zigler
I'm kind of envious. This, the. The straight pushed back thing. I. I can't. I can't do that. Mine won't do that.
- [01:56]
Podcast Host/Interviewer
Is that.
- [01:56]
Matt Zigler
Is that.
- [01:56]
Podcast Host/Interviewer
I'm losing the hair battle over here very badly. In this podcast. I could not grow anything close to what either one of you has gone.
- [02:04]
Matt Zigler
Well, luckily you're not here for hair care today. You're here for some macro talk and whatever else. Let's dive right in with the fun stuff. I mean, tariffs, Jared, you've been writing a lot about tariffs. You seem to think they're deflationary rather than inflationary. What the hell do you think is going on with all this tariff talk?
- [02:21]
Jared Dillian
Yeah, every time I go on Twitter and I say that tariffs are deflationary. Like, I just end up at the bottom of this giant dog pile and like, people say I'm an idiot and all this stuff and, you know, I actually kind of like it. It's kind of fun. But no, I mean, I really do believe the tariffs are deflationary. You know, just kind of a dumb example. If a car goes from 50,000 to 60,000, you go in to buy a car, you're like, I'm not paying 60,000, and you don't buy the car. And that's demand destruction. And multiply that times everything in the economy and the economy slows down and we're experiencing disinflation right now. I mean, we've had like, you know, two or three months of CPI going down and the true inflation numbers are in the one handle and there's an oil crashed.
- [03:10]
Guest/Co-host
Right?
- [03:11]
Jared Dillian
So, like, how does Jay Powell say that we have all these inflationary risks from the tariffs when oil was trading at like 57, you know, so I don't, I don't see it at all.
- [03:24]
Matt Zigler
I think it's important to say too, like, what you're saying is in the short term, in the immediate, it can be inflationary. You can push the price of that car up because of the tariffs and whatever else. But then if unemployment rises, if demand destruction happens, those prices are coming down.
- [03:40]
Jared Dillian
You know, the funny thing is, I actually was thinking about it and I think a small tariff would be inflationary, but a large tariff would be deflationary.
- [03:51]
Guest/Co-host
Right?
- [03:51]
Matt Zigler
Same. Say more about that.
- [03:52]
Jared Dillian
Like pretend you have like a 1 or 2% tariff that's so small that nobody's going to notice. Well, people will pay the extra 1 or 2%, right. And that'll show up in the inflation numbers. But if you have like 145% tariff on China and suddenly things from China cost, you know, one and a half times more. Like, that's where the demand destruction kicks in. Like there's, that's where the sticker shock is. So I think teeny tiny tariffs are inflationary, but big tariffs are deflationary. So.
- [04:31]
Matt Zigler
And the Fed should be, in your view, acknowledging this in some way, like this is a mistake, the way they're talking about this.
- [04:37]
Jared Dillian
Well, I think there's a couple things going on. So I there. It's possible that they're dumb. It's possible that they're just thinking very linearly on this. And they say tariff means prices go up, therefore inflation.
- [04:55]
Guest/Co-host
Right.
- [04:56]
Jared Dillian
Like, it could be that they're just, they're just done. That's a possibility. But the other possibility is that Powell is being very cynical about this and he knows that the tariffs are deflationary, but he's saying that they're infinite inflationary in order to justify tighter monetary policy while Trump is president. That's, and I think those possibilities are equally likely.
- [05:21]
Matt Zigler
So what do you think too about, and I think I saw you saying this about the IMF data that GDP could fall 0.4 to 0.6% by 2026 under tariff scenarios like this is just across the board demand destruction that comes out of this that the federal eventually react to.
- [05:40]
Jared Dillian
Yeah. And also not inflationary.
- [05:43]
Guest/Co-host
Right.
- [05:43]
Jared Dillian
Like GDP going down half percent is not inflationary. So I'm going to die on this hill for sure. But you know, the, the, the interesting thing is is that, you know, the bond market looks pretty good right now. You know, we went through a period of a couple of weeks where we suspect that foreign countries were selling U.S. bonds in retaliation for the tariffs. And also we suspect or know that the basis trade was blowing up because there's a couple of casualties of that. So I think that the bond market has sort of temporarily dislocated here. And it, it just like if you're getting close to 5% on 30 years and 4 and a half percent on 10 years or 4.3, like these are like these, that's a pretty compelling value, you know, especially in light of all these deflationary forces that we're about to experience.
- [06:46]
Podcast Host/Interviewer
So, and we'll put, we'll actually put this tweet in the podcast. You had a great tweet about this. You said bonds are the most mispriced security on the board. To me, tariffs are deflationary, not inflationary. 60% chance of recession, depending on who you ask. Temporary dislocation from China, stelling and basis trade blow up. My opinion only, not investment advice. So it seems like you're pretty positive on bonds here.
- [07:06]
Jared Dillian
Yeah, I am. It's, I don't know how you, I don't know, I don't know the, the timeliness of when you publish this podcast, but bonds have been up the last couple trading sessions. They were up a lot on Wednesday until Bess and Pete all over the market. But they're, you know, the long bond was up over two handles at one point.
- [07:34]
Podcast Host/Interviewer
So yeah, we're, we'll publish this, we're recording it on April 24th or we'll publish it on the 26th. So we'll get it out here pretty quickly. What do you think about the reason for the tariffs. I mean, it seems like we've heard a million different things about this. We heard about maybe these are just a threat to get trade concessions. Maybe we're trying to boost revenue with these. Maybe we're trying to bring manufacturing back the United States. Because it seems like the outcome here is going to be very dependent on what the reasoning is, because some of these are reasons tariffs should stay on for a long time, and some of these are reasons where tariffs could come off pretty quickly. So how do you think about that?
- [08:04]
Jared Dillian
I really think it's all of those things. And keep in mind, like, just because I agree with those things doesn't mean I agree with the tariffs. I think the tariffs are very dumb. But yes, I do believe they're intended to generate revenue. I do believe they want to raise 600 billion a year is the number. Trump, to the extent that he's been actually reading history or hearing about it or whatever, but he is fascinated with this period, 1880s and 1890s, which he views as some kind of golden age when the government was funding itself through tariffs before the income tax came along in 1913. So, you know, I don't, I, like, I don't, I personally don't think that's, like, feasible. Like, we, you know, the government would have to be a lot smaller in order for the tariffs to make a meaningful contribution to revenue. And as we can see, like, Doge is having a difficult time cutting even 200 billion of spending. So, like, the tariffs, you know, basically the tariffs are intended to pay for a tax cut. And about a month ago, you heard Howard Ludnick say he wants to eliminate income taxes for people making under 150,000 a year. That is 93% of taxpayers. 93% of taxpayers would pay no income tax. So the entire tax burden would fall on 7% of the population, which I, I think is a disaster. Like, it just, it just takes progressivity to a new, a new step. But, but basically, the 600 billion they're trying to raise in tev in in revenue from the tariffs would replace the revenue lost from that tax cut. That's what they're trying to do. So, but yes, in terms of bringing back manufacturing, you know, that's, that's something that is going to be accomplished over five presidential terms over 20 years. You know, it's not going to happen by the midterms. It's not going to happen by 2028. It's a very long, slow process. I've heard some rumblings here and there of companies like reshoring onto US soil, but it's, there's, it's just going to take a really long time.
- [10:33]
Matt Zigler
What do you think this means for the dollar? You're looking at a different area of history than Trump's looking at for the tariff policy and what you think this means for the dollar right now.
- [10:43]
Jared Dillian
So in the long, in the long run, the dollar is doomed. And so when I was trading, I got myself into a little bit of trouble around the election because it was my view that the tariffs were actually negative for the dollar. And every time Trump announced a tariff, the dollar would rip like 1% higher. And I was getting completely steamrolled. But it's, but I've actually turned out to be right. Like the tariffs are negative for the dollar in the long term. I think from a trading standpoint, the dollar is due for a big bounce. This whole capital flight thesis of people selling US Assets is way overdone. It's very crowded, it's very consensus. For my own subscribers, you know, I'm getting, you know, I'm getting pushback. People saying the dollar is going down forever, whatever. We're probably going to get like a 5% bounce in the dollar and shake out all these late shorts. But, but on a three to five year basis, look, the dollar is still rich, it's still expensive. If you look at purchasing power parity, like it's down 10%, but relative to the euro, relative to the yen, it is still really, really strong. It can depreciate a lot more.
- [12:03]
Matt Zigler
So we'll show the tweet that you had on that, if we haven't already showed it. What do you think that means, especially in, in terms of what you just said, relative to purchasing power parity, relative to other countries, how much do we see it go down, even if it's a gradual steady decline over the next three, five, however many years?
- [12:24]
Jared Dillian
I, I hate to hazard a guess, but I would say at least 20% from here. I mean, you're talking about getting the DXY to like 80 or 85 or something like that over the course of a couple of years. So I think that could happen. But like, but like I said, from a trading standpoint, I think, I think it's due for a humongous bounce in the short term. It's just gotten way too consensus.
- [12:51]
Podcast Host/Interviewer
It sounds like you were opposed to these tariffs, but not necessarily opposed to tariffs in general. I mean, do you think there's a better way we could do this? Do you think tariffs could make sense in certain circumstances, in terms of what we're trying to accomplish.
- [13:02]
Jared Dillian
You know, when I think, when I think back to when I was at LEHMAN in like 2005, I mean, those were pretty great times. You know, you could buy. Let me, let me tell you a story. This is an incredible story. I went back to my hometown, this was like 10 years ago. And I met with a friend of mine from my high school, had drinks with him who is an actuary. I don't know what firm he works at, but he's an actuary. He's been very successful and he's also a libertarian. But we got into the, we got, we got into this discussion on prices and this was like 2015. And he's like, dude, do you have any idea how cheap things are? Like just how goods, just like how incredibly cheap goods are? So he used this example of baseball pants, right? So I used to be in Little League with him. And in Little League there would be like one kid on the team that had like one pair of baseball pants and they were 70 bucks in like 1986, right? And that's all you could afford that one person could afford them. He said, now on my kids little league team, like every kid has like five pairs of baseball pants and they're like 20 bucks apiece, right? Like that is globalization. That is a good thing. It, free trade brings down prices. It is disinflationary. So, you know, I'll tell you another story. I was, when I first moved to South Carolina, we moved into a new house and we, we needed to go to Walmart to buy a doormat, right? So there was a big pile of doormats in Walmart. And I pick it up and I look at it. It was $4 made in China. I mean, it wasn't anything special. It was this rubber thing and had like the Astroturf on it. But the doormat was $4 and there was a whole pile of them. And I'm thinking to myself, what is the profit margin of like manufacturing one of these things with all the rubber and all the raw materials and shipping them across the world and selling them for $4 in the US right? So fast forward to last year. I went on Walmart.com and I looked up the same doormat and it is now $44, you know, so free trade is a very, very good thing. And you know, there's, the politics of this are very ugly, you know, you know, J.D. vance says this all the time. He's like, you know, we've sacrificed all these manufacturing Jobs so we can get cheap stuff from China, like toasters and stuff like that. And I'm like, yes, we have a much higher standard of living because we can get cheap stuff from China. You know, like the standard of living of somebody in the bottom quintile or the second quintile is exceptionally high relative to other countries because we can trade freely and get goods cheaply. And what are we exporting? We're exporting finance, we're exporting stocks, we're exporting bonds. And that relationship worked for a long time. We import goods and we export finance. And I personally don't see anything wrong with that. And I don't, I don't think that like it's necessarily desirable to bring back many these stultifying, repetitive manufacturing jobs. Like I don't think these are good jobs. I think it's fine that we've exported them to the rest of the world. They're not good jobs anyway. I just went on a, got on my soapbox there. So.
- [16:55]
Matt Zigler
Those mid-80s Little League pants, were those like the three quarters like just below the knee or were they the full pair of pants?
- [17:01]
Jared Dillian
The full pair of pants.
- [17:02]
Matt Zigler
The full pair of pants. What are the kids wearing now? They all got the full pairs of pants.
- [17:05]
Jared Dillian
Yeah.
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Matt Zigler
These are like ankle length.
- [17:07]
Jared Dillian
Yep. Yeah.
- [17:08]
Matt Zigler
So it's not even like we can adjust for the loss of fabric. I think I had the, the early 90s and the three quarter ones that you couldn't do anything with except for skin your knee somehow still. All right, so trade happens and then we have the debt. Foreign countries ended up with dollars. Those dollars ended up in US Treasuries and basically termed out vehicles and stuff like that. What are you thinking right now about the US debt as it exists in foreign holders hands?
- [17:40]
Jared Dillian
Well, you know, I think, I think Scott Bessant miscalculated. You know, I think Trump miscalculated. It's not, it's not that a huge portion of the debt is really held overseas. I wish I could remember the number off the top of my head, but I think it's like 15% or 20% or something like that. But I think as was demonstrated a couple of weeks ago, like if somebody wants to send a message, you know, the whole, the whole point of this exercise was to, was, remember, was to target interest rates lower. We're not targeting the stock market, we're targeting the bond market and we're gonna, we're targeting tens to like three or three and a half. And all of a sudden China sells like 50 billion worth of bonds and tends go up to four and a quarter. And, like, it's a problem, you know. So, I mean, the good news is, is that, you know, China at this point only has about 700 billion worth of treasuries. But this can cause a lot of pain in the short term.
- [18:44]
Matt Zigler
So do you look at that as a form of. I don't want to use the term financial warfare per se. That's a weapon they hold in their hands, right?
- [18:55]
Jared Dillian
Yeah, I even use that exact term in my newsletter. Like I said. I think I said we don't have hot wars, we don't have cold wars, we have financial wars, you know, which is super interesting.
- [19:08]
Podcast Host/Interviewer
What do you think about that strategy of targeting the bond market over the stock market? Because there's been a little bit of controversy about that. I mean, I think a lot of people got that wrong coming into the year because people thought Trump would bail out the stock market. And I think they found out he's maybe a little bit more serious about that. But what do you think about that policy in general?
- [19:21]
Jared Dillian
Well, if the goal is to get rates down so we can refinance and term out the debt, I think that's a good goal.
- [19:32]
Guest/Co-host
Right.
- [19:33]
Jared Dillian
And I think Besson is a smart guy. He's a super smart guy. So he goes to Trump and he's like, look, this is the plan. We're going to tomahawk the economy right out of the gate, right? We're going to. We're going to. We're going to. We're going to start these tariffs, and it's going to, It's. It's going to tank the economy. It's going to tank the stock market rates are going to go to three. We're going to term out the debt, and then by the time the midterms come around, the economy will have recovered, it will be booming again, and we'll win at the midterms. I think that was the plan.
- [20:08]
Guest/Co-host
Right.
- [20:09]
Jared Dillian
And it hasn't really gone according to plan.
- [20:12]
Podcast Host/Interviewer
So going back to the debt, what do you think about the debt in general? I mean, that's been a big issue a lot of people have been talking about. I think Ray Dalio has a book coming out talking about, like, a pending debt crisis maybe. And then some other economists will say that we've had in the podcast will say, you know, really the debt's not a big issue. The risk is just higher, some higher inflation over time. But, you know, they don't really see a crisis like, how do you think about the national Debt in context.
- [20:34]
Jared Dillian
So I remember when I was like brand new in the business in like Y2K, I had a subscription to Barron's. And you know, Allen Abelson used to write up and down Wall street. At the beginning of Barron's, he had that first column and every single week that guy put in a chart, put. He put in a chart of total debt to GDP in the US and it was going from the lower left to the upper right. And at the time, total debt to GDP was about 200%. So it's public and private. And he said, we're totally doomed. Short stocks, right? This was in 2000. Now total debt to GDP is like 400%, right. And we still really don't have any ill effects. Like, I agree with Dalio that we are going to have a debt crisis. It's probably going to be after Dalio is dead. Like, he's probably not going to be around. I might not be around. Like, if you are the world's biggest economy with the reserve currency, like, stuff just takes a long time to play out, you know. So our debt to GDP is 12130 right now, something like that, it could, it could go to 200. Japan went to 200. They didn't have any issues. You know, it could go to 200. And I think that it's possible or even likely that that could happen. Partly because Doge has been ineffective or less effective than we thought and partly because, like, there's there have just been no consequences to running up debt. People the average voter had does not see how the debt affects them personally.
- [22:17]
Guest/Co-host
Right?
- [22:18]
Jared Dillian
The problem is an abstraction, right? Say what? We had this debt. Well, how does it affect me?
- [22:23]
Guest/Co-host
Right?
- [22:24]
Jared Dillian
It really doesn't. It doesn't. You know, in Canada, it's kind of a different story. Canada is a different story because they don't have the reserve currency. And Trudeau ran up the debt and Pierre is going around telling everybody, he is explaining to people very specifically how the debt is affecting people personally. And in Canada, half the country cares about the debt. Here, nobody really cares. And they're not going to care until they're experiencing a lot of pain. Until rates are 6, 7, 8% higher, inflation, like, until it's a real problem, nobody's going to care. You know.
- [23:04]
Matt Zigler
How do you like, play that out just a little bit more if the US Starts acting like just another country? If they're, if we're not, do we lose reserve currency status? Do we lose biggest economy in the world if we keep playing some of this store Stuff forward. If we go into that type of recession, if we end a lot of these trade agreements.
- [23:26]
Jared Dillian
I don't know the answer to that question.
- [23:28]
Matt Zigler
I don't think anybody does.
- [23:29]
Jared Dillian
But yeah. In terms of the reserve currency, the smartest thing I ever heard about that was the dollar will stop being a reserve currency when we lose an aircraft carrier.
- [23:44]
Guest/Co-host
Right.
- [23:45]
Matt Zigler
Our ability to defend is tied to the reserve.
- [23:49]
Jared Dillian
It's actually the navy.
- [23:50]
Guest/Co-host
Right.
- [23:51]
Jared Dillian
The strength of the currency is tied to the navy. If you think about the world's great naval powers in history, Britain had the reserve currency. The pound sterling was a reserve currency. They had the world's biggest navy. Before Britain, it was Spain.
- [24:07]
Guest/Co-host
Right.
- [24:07]
Jared Dillian
Same thing. So our navy is much, much smaller than it was even 20 years ago. And the cost to build an aircraft carrier is like 10 or 20 billion at this point. And nobody has the app we used to. When I was, when I was in the Coast Guard, the navy used to have 600 ships. Now we have like 300.
- [24:28]
Guest/Co-host
Right.
- [24:29]
Jared Dillian
China has a bigger navy than the U.S. true.
- [24:33]
Matt Zigler
I think I asked this partly of you because of that you have the insight in this. And I think about Peter Zion's work and the other people who write about just. You protect shipping routes. That's how trade actually works.
- [24:42]
Jared Dillian
Yep.
- [24:43]
Matt Zigler
You lose the ability to protect shipping routes, you lose the ability to protect trade, and then that challenges your reserve currency status.
- [24:50]
Jared Dillian
Exactly.
- [24:52]
Matt Zigler
It's very interesting.
- [24:53]
Podcast Host/Interviewer
I heard an interesting thought the other day on a podcast. I think China is building more ships in a month right now than we are in a year.
- [24:59]
Jared Dillian
Yeah. Yeah.
- [25:03]
Matt Zigler
Wouldn't surprise me if this becomes one of the things that continues to be a story we care more and more about, especially if that defense spending doesn't trickle through.
- [25:11]
Podcast Host/Interviewer
How do you think about analyzing a situation like this? We know the economy's hard to predict, the market's hard to predict, but usually we have some sort of data. Like if we're trying to figure out what's happening with inflation, you know, post 2020, we have some data to rely on. When you've got a single decision maker making decisions on a day to day basis that can completely whipsaw the market back and forth. Like, how do you think about navigating an environment like that?
- [25:32]
Jared Dillian
It's awesome. I love it. So much fun. I mean, it's fun. They say it. It really beats just sitting around watching the Mag 7 stocks like crawl higher every day, which was like torture for the last four years. I like, you know, personally, I like this environment. It's. It's awesome. So there's, there's times, you know, I'll be sitting at my desk and my screen starts freaking out and like, I'm like, all right, what's happening? And I go to the hot news on Bloomberg or I look at a Zero Hedge page on Twitter and I, you know, try to figure out, or Walter Bloomberg. I try to figure out what tape bomb just hit the market. It's. I love it, I love it.
- [26:13]
Matt Zigler
Does that come from your trading days? Is that something that's like a relic of just when there's action, you're excited?
- [26:19]
Jared Dillian
Yes, yes.
- [26:21]
Matt Zigler
This is basically like a Lehman Brothers Jared Dopamine.
- [26:23]
Jared Dillian
Yes. You can see I get a big smile on my face. I love it.
- [26:28]
Matt Zigler
That's a beautiful thing. In its own sick, twisted way. It is a beautiful thing.
- [26:33]
Podcast Host/Interviewer
But how do you think about like positioning in a market like that? Because obviously, do you back off some? I mean, I know you have the Austin portfolio, which is pretty well equipped to handle any type of environment, but how do you think about positioning in an environment where things can change so quickly like that?
- [26:46]
Jared Dillian
Yeah, you get, you have to, you know, in a 60 Vol environment, you have to take position sizes down. You, you just do. And that's some, I mean, that's something I learned. You know, when I was a Lehman, I traded through terrorist attacks. I traded through 2008, 2007, traded through the bear market in 2002. Yeah. When you know, it's your, your position sizing should be inversely correlated to volatility, basically.
- [27:23]
Matt Zigler
So do you have any hard and fast rules that you follow there or is it just some rules and some instinct?
- [27:32]
Jared Dillian
I don't, I don't even know that I have any rules. It's pretty much just instinct. So.
- [27:37]
Matt Zigler
Yeah, yeah, because that's not something that you're taking in, like modeling through a spreadsheet. No, no, no, no. You're just going, volatility is high. These position sizes are coming down and staying in this range. What about the number of positions that you have on? Does that change in a different volume environment? Are there more, smaller bets or is it just less bets overall?
- [27:56]
Jared Dillian
I tend to have a lot of small bets. I don't usually have very concentrated positions. My conviction level is never really that high. So it's, it's just a game of probabilities and expected value.
- [28:14]
Podcast Host/Interviewer
So since I mentioned it, can you talk about the awesome portfolio? Because it's actually a very good portfolio construction for an environment like this with lots of uncertainty. So can you just talk about how that Works.
- [28:23]
Jared Dillian
Yeah. So the portfolio, the awesome portfolio, is 20% stocks, 20% bonds, 20% cash, 20% gold, and 20% real estate. I actually have not run the numbers on this in a while, but as you know, gold has gone up a lot, so that's really helped performance. And in 2011 through 13, people were dumping all over gold. And now gold has actually outperformed stocks over any time horizon over the last 25 years.
- [28:54]
Guest/Co-host
Right?
- [28:55]
Jared Dillian
So, but gold is not necessarily the focus of the awesome portfolio. The idea is the average person is not diversified, right? They have. They have stocks, right? Usually just tech stocks, but let's just say they have stocks. They have the s and P500 index fund. And a lot of people are like, look, if I have The S&P 500, I have 500 stocks. I'm diversified. Well, no, not really. Like, not when a hundred million other people are doing the exact same thing. So the diversification benefits disappear. So then you say, all right, I'm going to have a 6040 portfolio. I'm going to have some bonds with my stocks. Well, then 2002 comes along, and bonds and stocks are positively correlated, and they both go down 20% and you're down 20%.
- [29:46]
Guest/Co-host
Right?
- [29:46]
Jared Dillian
So, so the negative correlation between bond and stocks, which people kind of got used to, is unstable and doesn't persist always.
- [29:55]
Guest/Co-host
Right.
- [29:56]
Jared Dillian
But then you add some cash, and cash is. You know, when I first started talking about the awesome portfolio six years ago, interest rates were zero. And people were like, you're a fool to be in cash. Nope, you still need cash. Cash dampens the volatility. And you also want cash as an option to buy something cheaper in the future.
- [30:18]
Guest/Co-host
Right?
- [30:18]
Jared Dillian
You need to have cash around. And the good thing is, is now it yields like four and a quarter.
- [30:23]
Guest/Co-host
Right?
- [30:23]
Jared Dillian
So, and gold and real estate. The nice thing about having gold and real estate in the portfolio is that they give you some exposure to inflation.
- [30:34]
Guest/Co-host
Right?
- [30:34]
Jared Dillian
So the awesome portfolio is kind of a variation of Harry Brown's permanent portfolio, which was stocks, bonds, gold and cash. I added real estate and real estate actually gives it a slightly better performance and improves the risk characteristics a little bit. And it's also easy for people to understand because you can say, look like the equity in your house is actually an allocation to real estate.
- [31:00]
Matt Zigler
So talk a little more about rebalancing because, so something like this, people are going to make fun of you. When cash yield zero, and now that gold's ripping, they're going to say, hey, this looks pretty smart. But along the way, you have to look at any type of portfolio allocation model like this and have a rebalancing strategy for it. How do you think about that?
- [31:20]
Jared Dillian
Yeah, so I've looked at a number of time horizons. Rebalancing, monthly, quarterly, whatever. Annual rebalancing is the best. Rebalancing annually allows trends to play out over the course of a year. I haven't looked at whether, like, any specific date is optimal or anything like that. So just do it on December 31st. But it's just, you know, it's not just the awesome portfolio. Like, everybody needs to rebalance, right? I have this childhood friend from like gifted and talent camp. We were kids, she lives in Paris. And she's like, hey, will you look at my portfolio? And I'm like, sure, I'll. Yeah, I'm like, the portfolio doctor. I'll look at your portfolio. So she sends me her portfolio and it's like 60% apple, right? And I'm like, you got a lot of Apple. And she says, yeah, I bought it years ago and I've just held it and now it's 60% in the portfolio. I'm like, well, you should probably sell some Apple and buy some other stuff. She's like, well, I like Apple. And I'm like, well, look, you asked for my opinion, but you got a lot of risk in Apple here. So generally, if people have a portfolio, they have one stock that goes to zero, they have eight stocks that go sideways, and they have one stock that goes to the moon, right? And you have to rebalance. Otherwise your portfolio starts to look like that. You have like 60% of your portfolio in one name, right? So that's why you rebalance the awesome portfolio. I mean, you know, you're going to have to rebalance at the end of this year with gold. If gold is up 40 or 50%, you're going to have to sell gold and buy everything else.
- [32:59]
Matt Zigler
So specific to the stocks. And I think this is another one that at least a lot of people are probably running into right now, whether they have it or not. Talk about international stocks. They've been on a tear. People have been. Were loving to hate on them just a couple of short years ago, and all of a sudden they're working. You think that continues?
- [33:18]
Jared Dillian
Absolutely. And also, I mean, it gets back to what we were talking about earlier. You know, I think the dollar is. Got a lot more downside. We. This was back sometime around the election or the inauguration. But on Twitter, it became very fashionable to crap all over international stocks, right? Like the US has outperformed for the last 20 years. You have these charts. The US is going like this and international stocks are going like this. Then I started to see articles about how financial advisors were telling their clients to like get out of international stocks. Then my mom's financial advisor told her to get out of international stocks. And I was like, that's it. Like, because this guy is a ding dong, you know. So I'm like it this. So it turned out to be very timely. And if you've, if you put, if you, Europe in particular has done well. So if you diversified internationally, you're happy. But it's not too late to do.
- [34:25]
Matt Zigler
That, do you think? And tie this back to earnings, tie it back to earnings, tie it back to the recession risks is part of what we're seeing is just low PEs, attractive companies in these economies and now all of a sudden they have a reason to invest and there's upside in earnings and multiple expansion.
- [34:44]
Jared Dillian
Well, I don't think we should get carried away because the US Remains the center of innovation.
- [34:53]
Guest/Co-host
Right.
- [34:53]
Jared Dillian
I saw a chart a couple months ago about how Home Depot is bigger than all the startups in Europe combined. Home Depot, we're not even talking about like Google or Meta. Like we're talking, we're talking about like Home Depot is bigger than all the startups in Europe combined.
- [35:12]
Matt Zigler
Like the potting soil department might be the only thing rivaling their, their startups.
- [35:17]
Jared Dillian
In the post hunts. So there's like, it's kind of hard to get excited about. It's kind of hard to get excited about a region that just does not have innovation, you know, so it's really, it's like being a value investor, right? Like you're buying something at eight times and maybe it goes to 12 times and you're happy. And by the way, if something goes from 8 to 12, you made 50%, right? Like that's, that's value investing.
- [35:45]
Matt Zigler
You know what about what that says about I guess the larger recession risks. So US is still the hub of innovation, but we've got this, these tariffs, we've got this demand destruction that's going on. Does, does that skew towards either an earnings recession or a genuine GDP economy recession?
- [36:08]
Jared Dillian
I think we are, I think we are kind of slouching towards a recession as we speak. And I'll give you an anecdote. Every other Tuesday I go into the radio station. It's like a conservative talk show and I'm like the, I'm like the money guy and I'm on the show for an hour we just talk about, like, financial stuff. And the host is this woman named Liz. And she told me that in the last month, six advertisers had canceled from the show. And it was big advertisers and it.
- [36:43]
Matt Zigler
Was a conservative show.
- [36:45]
Jared Dillian
Yeah. And no, this is not because of politics.
- [36:47]
Matt Zigler
It's not because I'm making sure.
- [36:49]
Jared Dillian
Yeah. It's not. It's not because she said something bad or anything. Not about politics. It's just because they even said like, you know, it's more uncertain, we have less certainty about our business, we're going to pull back on advertising. And so I think the contraction is. I mean, obviously that's n equals 1, but that's a pretty good anecdote. I think the contraction is underway and I don't think it's a violent contraction, but I wouldn't be surprised to see GDP at 1% in the next quarter. You know, if not a recession, but, you know, lower gdp. I think we are undergoing a little bit of a contraction.
- [37:32]
Matt Zigler
So do you think the tariff decision, if that gets resolved sooner than later. Right. Sizes that if there's some clear policy outcomes or do you think it's.
- [37:41]
Jared Dillian
Yes.
- [37:42]
Matt Zigler
So that's the big question here, is if we get policy clarity, maybe those advertising dollars come back.
- [37:48]
Jared Dillian
Yes.
- [37:49]
Matt Zigler
If we don't, how long does that have to persist before it's not easy to pull out of that nosedive?
- [37:58]
Jared Dillian
Could be a long time. It could be a long time. Yeah.
- [38:03]
Podcast Host/Interviewer
We have a, we have a rule in the podcast that whenever anyone mentions value investing, we have to ask about it because we have a lot of, we have a lot of followers who have been value investors and it hasn't worked out that well over the past decade. So I'm just wondering, do you have a take on where we are with value? I mean, you talked about some of the, some of the growth companies have been doing a little bit worse. Now, do you think value investing is something that maybe might see a revival or are you not optimistic about it?
- [38:26]
Jared Dillian
I mean, the answer is yes, I do think so, but I've also thought that for the last five years. So. So for whatever that's worth. But no, I think, I think the analog here is 2001 to 2004 after the dot com bubble blew up. You know, the interesting thing about it is that the Nasdaq went down 80% in the dot com bust and the S and P went down about 50% in value. Stocks actually went up.
- [38:57]
Guest/Co-host
Right.
- [38:58]
Jared Dillian
So quick story. When I first started investing in 1997, I got a copy of Money magazine and it had like a list of like 2,000 mutual funds. And I'm going through all the returns and it's like Science and Technology fund, Science and Technology Fund, Science and Technology Fund. And all the returns are like 30 or 40% a year. And I said, nope, that's going to revert to the mean. And what did I buy? I bought the Dodge and Cox Stock fund, right? Which by the way, was up in 2001, 2002 and 2003. It like massively outperformed. Later I also bought the Vanguard Selected Value Fund, which is their actively managed small cap value fund that was outperforming the S and p by like 4000 basis points a year. So you had this period of time from like 0104 where value and especially small cap value were massively outperforming. And people, there are people who retired on that trade, they made their careers on that trade. So if you think there's an analog between this tech bubble we just had in Mag 7, in the tech bubble we had in 2000, we. I think it's possible we could see a resurgence in value coming out of it.
- [40:16]
Guest/Co-host
So.
- [40:19]
Podcast Host/Interviewer
Do you think there's some major differences between now and then, or do you think this is a pretty similar situation, what we saw back in the 90s?
- [40:24]
Jared Dillian
I think it's a pretty similar situation, you know, and I think that, I mean, look like relative to the US the rest of the world is value. Like all of Latin America, ex. Argentina is trading at 6 times. All of Latin America, Argentina is trading at 12 times. Europe is trading at like 8 or 9 times. China is trading at 6 times. We are trading it like 23 times.
- [40:53]
Guest/Co-host
Right.
- [40:54]
Jared Dillian
So like, if you look, if you're looking at US versus the rest of the world, it's not so much a domestic international trade, it's a growth versus value trade.
- [41:04]
Guest/Co-host
Right.
- [41:05]
Jared Dillian
And if, if going international, it, you know, that could mean that value is becoming fashionable again. So.
- [41:15]
Matt Zigler
Let'S switch from value. Let's talk about sentiment a little bit. You put up the AI sentiment survey the other day and man, it's telling us some confusing things, or maybe not confusing. Be clear about this. What do you think about the sentiment survey and where we stand right now?
- [41:31]
Jared Dillian
I think it's super bearish. I think people are pretty bearish in general. And I'm bullish. I am. I am bullish for the moment, for sure. Yeah. I think, I think that we've put in the low during this tariff crisis. I don't think we're going to see those lows again. And I think the volatility smush is underway. The VIX has gone from 60 to 27. The Vix is going to get back below 20 over the next couple of weeks.
- [42:08]
Matt Zigler
Does it need the tariff stuff to calm down, to do that, or can it do that even in, like, a vacuum of new policy now?
- [42:14]
Jared Dillian
I think it, I think it. You do need some clarity on the tariffs, but I, I do think we're going to get that partially because I think. I think that Trump and Besson have learned that this whole tariff idea is a lot harder to implement than they thought it would be. You know what I mean? So they're gonna, they are backtracking. They're gonna have to backtrack more. And I think. I think we'll get some more visibility on this.
- [42:44]
Matt Zigler
Do you think the VIX and sentiment surveys and stuff like this are great indicators to not saying Besset and Trump are studying the sentiment surveys or watching the VIX every day? But I don't know, maybe. Maybe they're kind of noticing this, too. Is that just a manifestation of just. This was really hard and people freaked out really, really bad. We couldn't make this clear.
- [43:03]
Jared Dillian
Well, first of all, let me say that the AAII survey is kind of garbage.
- [43:08]
Matt Zigler
It's a little flawed.
- [43:09]
Jared Dillian
Yeah. It's a very small sample size. It's like 300 people, and it's volatile. People pay way more attention to that than they probably should. There's. There's lots of other places to get sentiment data just in the market. So. Yeah.
- [43:29]
Matt Zigler
So what about things like. Like the vix, is that indicative of. Do you look at the VIX as purely a sentiment indicator or just how do you look at the vix?
- [43:37]
Jared Dillian
I look at the VIX as the price of options. You know what I mean?
- [43:41]
Matt Zigler
Say more.
- [43:42]
Jared Dillian
Yeah. So basically, if the Vix is at 60, you want to be selling options, and if the Vix is at 12, you want to be buying options. That's how I look at it. You know, I was selling puts during the crisis, like. Like I was going to the electric chair. I was selling puts, and puts that I sold at 200 are now at 25.
- [44:10]
Matt Zigler
So a little bit of action there, you're saying? Yeah, just a little bit of action there. And do you think as far as just, like, the upper limit on the vix, you think we've, We've seen that? Just like you think the, the lows on equity markets here in, you know, late April of 2025, the near term lows are in and the near term highs for the VIX are into.
- [44:32]
Jared Dillian
Yes. Yeah, for sure. Yep.
- [44:36]
Podcast Host/Interviewer
How do you think about sentiment in general? I mean, you talk about the AI, you don't think that's great, but do you use sentiment at all? Do, do you think it's valuable?
- [44:42]
Jared Dillian
I, I, I use it all the time, but I use it in a qualitative sense, not a quantitative sense. So I actually get most of my sentiment information off of Twitter.
- [44:54]
Guest/Co-host
Right.
- [44:55]
Jared Dillian
And I don't know if, you know, if I do this or not, but a lot of times I'll just throw out a trial balloon and I'll be like, gosh, the stock market is really low and I'll get like a hundred replies and I'll look at the replies and if 80 of them are bearish, then I'm like, okay, I kind of know how people are set up. You know what? So I mean, I, I don't have a huge amount of followers, but I have enough so that if I, if I do that I can actually get some data out of it. It's super useful.
- [45:25]
Matt Zigler
Your ability to non poll poll people is one that I have. I look for those tweets. I look for him like, oh, Jared's trolling the trolls. Let's just say it in the comments. Much is to be gained from this.
- [45:40]
Podcast Host/Interviewer
The Twitter thing I've seen done before and it's, Yeah, I mean, it probably is a better sentiment indicator than a lot of the other stuff we see out there. I mean, there's so much stuff out there, but just, I mean, Twitter is so active on the investing side. Like, if you can get a poll of what people's opinions are, you know, that's probably better than anything out there, I would guess.
- [45:55]
Jared Dillian
Yeah. Also magazine covers, the, the Economist just had a dollar bearish cover last weekend. So I mean their, their hit rate is very, very high, you know. So what do you think the Fed's.
- [46:14]
Matt Zigler
Ultimately going to do here? Like, we've seen some change in the conversation around Powell. They're in a interesting spot to say the least. Magic wand, your, your Fed chair, what would you do? And then other magic wand, what do you think they're going to do?
- [46:28]
Jared Dillian
Well, they should cut, they should, they should cut fed funds to 3%.
- [46:35]
Matt Zigler
So that's a big cut from here.
- [46:37]
Jared Dillian
Yeah, they, that's right there. That would get real rates to about one and a half or two. Right. Now, see, I look at truflation instead of the CPI data.
- [46:47]
Guest/Co-host
Right.
- [46:47]
Jared Dillian
The Truflation lead CPI. So Truflation is at 1.3. Fed funds is a four and a quarter. We have 3% real rates, which is super restrictive.
- [46:59]
Guest/Co-host
Right.
- [46:59]
Jared Dillian
Like we need to be at three and a quarter or three. I think there's a possibility that throughout all this, the Fed doesn't cut at all for a whole bunch of reasons, mostly political reasons, I think. I think Powell is. Unless he's faced with the prospect of a terrible recession, he does not want to cave in the Trump. So I think there's. I think there's a possibility they don't cut at all. Beth Hammock was talking the other day about rate cuts, but she's new. Yeah, I, I mean, I think we're pricing in two or three this year at this point.
- [47:42]
Matt Zigler
Get us to where you're talking.
- [47:44]
Jared Dillian
No, I don't. I mean, I guess what I, What I want to say is nothing would surprise me. It wouldn't surprise me if we don't cut at all. It wouldn't surprise me if we cut five times. It wouldn't surprise me if we cut two times. Like, there's. I don't, I don't really think there's a trade here. You know, there's. Yeah, with. Really.
- [48:06]
Matt Zigler
If. So there's not a trade there. But there's just the reality of the Fed's reaction function or how they're thinking about this doesn't seem like they're eager to make as bold a move as would be required to recognize the state of the state we're in right now.
- [48:21]
Jared Dillian
Yeah. And having said all that, I mean, ultimately, the payroll numbers mean more than anything else for political reasons. So if we get a horror show of a payroll number, that would obviously change the calculus, you know.
- [48:36]
Podcast Host/Interviewer
So do you have any views on bitcoin in this environment? Like, people talked about bitcoin as being just a leveraged version of the NASDAQ for a long time, but it, it does seem like it's acting a little bit differently than that recently. Do you have any views on that?
- [48:49]
Jared Dillian
It has held up surprisingly well. Um, I, I currently don't have a position in bitcoin. I have no plans to have a position in bitcoin. I am just surprised at how resilient it is. You know, everybody said last year that bitcoin was like 2 beta Nasdaq and this in 2025. That kind of hasn't been the case. Uh, it's acting a little bit more like gold. Not exactly like gold, but a little bit more like gold. So it. Yeah, it's interesting.
- [49:27]
Matt Zigler
Do you think some of that's the fleeing of US Assets narrative just finally catching up to Bitcoin as digital gold?
- [49:34]
Jared Dillian
Yeah, I think so.
- [49:35]
Matt Zigler
Yeah. Do you feel like it's coming from any bigger investors or is just this?
- [49:38]
Jared Dillian
I don't know. Yeah, I don't know.
- [49:40]
Matt Zigler
All right, so Jared, let's talk about this. What's one thing that you believe the majority of your peers would disagree with you with? I know this is hard for you to think about something anyone would disagree with you with. You're just the vanilla ice cream of fintwit. What do you think? What's something you think the majority of your peers would disagree. Disagree with you on?
- [50:04]
Jared Dillian
I think the majority of people would disagree with me on tariffs. I remember in like 2001, 2002, Lou Dobbs was going on Fox News and talking about tariffs and protectionism and stuff like that, and he was so, like, he was not reading the room. Like people, it's kind of hard to remember what this was like, but back in the 90s and the early 2000s, like, we were very much a free trade country. You know, people saw the benefits of free trade. And over the last 20 years, like, that's changed a lot. And I find myself consistently on the other side of people. It's almost to the point where I can't even really talk about it in my newsletter because people get upset. Like, if I say pro free trade things, like, people get kind of cross with me. So it's like I. Have you ever heard of the allegory of the sandwich? You ever heard of this story?
- [51:15]
Matt Zigler
Possibly. Who's this from?
- [51:17]
Jared Dillian
So the allegory of the sandwich is, let's say you're going to make a sandwich, but you're going to do it all yourself. You're not going to trade with anybody. So you need to grow wheat in your backyard and mill it into flour and make the bread. And you need to raise hogs and slaughter the hogs and cure the meat and make ham, and you need to grow lettuce and you need to grow tomato, and I don't know where the hell you get mustard. So making one Sandwich is like 10,000 hours worth of work, right? Where obviously you could just take money and go to the store and trade and get the ingredients for a sandwich. Trade is mutually beneficial transactions. Makes everybody richer all the time, right? So I. I'm very much opposed to what's going on right now. And by the way, I. One other thing I point I'd like to make about that, you know, it's funny because the Democrats have become very much free traders over the last couple of months in opposition to Trump. My guess is if a Democrat wins in 2028, they're not going to get rid of the tariffs. The tariffs will stay.
- [52:35]
Guest/Co-host
Right.
- [52:36]
Jared Dillian
It's, it's part of the zeitgeist. Like we are against free trade now. So I think we're in for a little bit of a dark time. So.
- [52:45]
Matt Zigler
And that, that's consistent. You're not the only person I see saying that to that's not to challenge you saying this is different, the status quo. But there's a lot of stuff that Trump Round one got carried through Biden and now we're just picking up and we're doubling down on yet again. Yeah, I don't think that's abnormal in politics. I don't think we talk about that stuff enough. It's smart to bring that up. You know, Warren Zevon had the other role of the sandwich. Do you know that one from an interview? So Warren Zivon, of all the dreadfully depressing and other like wonderfully evil songs about what happens to you at the end of life. And then he's faced with cancer and he's on, he's on David Letterman and he's like, so you know, you wrote a song Life Will Kill youl. How you feeling right now that you're faced with death? And his takeaway was enjoy every sandwich. That's Warren Zon's role of sandwich for you. Jared Dillian if people want to follow you, find out more. Where should they check you out on the Internet?
- [53:39]
Jared Dillian
Aydirtnamp on Twitter. And if you want to subscribe to the newsletter, highly recommend it. Go to dailydirtnamp.com and you send me an email through the subscribe link. And if you mention the podcast, I will give you a big discount.
- [53:55]
Matt Zigler
So you gotta love that. You want to check out what Jared's doing. He's got a unique way of looking at the world. We love your stuff, Jared. Thanks for coming on Excess Returns.
- [54:02]
Jared Dillian
Thank you. Thanks so much for tuning into this episode. If you found this discussion interesting and valuable, Please subscribe on YouTube or your favorite podcast platform or leave a review or a comment. We appreciate it.
- [54:13]
Podcast Host/Interviewer
No information on this podcast should be construed as investment advice. Securities discussed in the podcast may be holdings of the participants or their clients.