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The War Markets Can't Price | Jared Dillian on the Regime Change Investors Miss
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Shop now@palmolive.com it's weird because the market is a fantastic discounting machine and it seems to discount some things better than others. And sometimes it doesn't discount the very obvious things. The problem with regime change isn't the regime change. It's that most people fail to adapt. Right. They're still playing by the old rules. I don't know if you've looked at Vol in options on WTI, but they're. They're like 150 ball. The Fed is not going to cut rates with oil at 100 because that would seem to be insane and that would subject them to a lot of criticism. Right. So they're not going to do something like that. Like, they're. They're going to do the conservative thing. They're going to wait and see. Is Powell right To be hawkish here, I actually kind of don't think so. Now, it doesn't really matter what I think he should do. What matters is what he will do.
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You're watching Excess Returns, the channel that makes complex investing ideas simple enough to actually use, where better questions lead to better decisions. The best Duel Cat psychic supporter and Jon Bon Jovi fan in finance. Let's give a middle school slow dance round of applause for Mr. Daily Dirt Nap himself, Jared Dillian. Welcome Back to excess returns.
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B
Somebody pointed out recently that Jon Bon Jovi now looks like Bea Arthur.
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A
I don't disagree with that.
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B
With the haircut, you know, it's a look. It's a look.
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A
But once you've been slippery when wet, I think that's an earned right. Gradually devolve into Bea Arthur status. It's worth it. New Jersey will do that to a person.
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B
Yep.
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A
All right, I'm taking, I'm taking you in. We've got lots of stuff to cover. Markets, macro and everything in between. You have this line, and this is part of the inception for getting you back on for this one, that markets are structurally bad at pricing low frequency, high impact events. So that's geopolitical risks, that's war, that's regime change. We've had a lot of those lately. Can you tell me, are markets getting any of this wrong? How do you even think through that statement?
- [03:29]
B
Well, I mean, there's a lot of things like the Ukraine war wasn't priced in. Like, it was the weirdest thing in the world. Like Russia put about, you know, a hundred billion dollars worth of military equipment on the border and everyone is like sleepwalking through this. They're like, nah, they're not going to invade. And prices didn't move until they actually invaded, even though there was plenty of warning. Same thing with Iran. We've been saying, you know, I mean, Trump has been agitating for this for a long time, but we knew it was coming for weeks.
- [04:04]
A
June 2025 was when the stuff started.
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B
Yeah.
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A
Like we're in March. That. Yeah.
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B
So it's weird because the market is a fantastic discounting machine and it seems to discount some things better than others. And sometimes it doesn't discount the very obvious things. Like it's, it's very strange. It's like a strange psychological phenomenon. It's almost like, like willful ignorance. Like, I'm just going to pretend this thing goes away, you know, I'm just going to pretend this doesn't exist until I can't ignore it anymore. And then, you know, it gets priced in. So structurally bad. Yeah.
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A
What about. Are there any situations where it gets overpriced, like after the fact? Do we see an overreaction in the opposite reaction? Underreaction first, overreact later, does. Is that normal?
- [04:59]
B
Yeah, that's normal. And there's, there's a whole class of people, including me, who kind of play the bounce. Right. Like play for the overreaction. I'm trying to think of an example. Nothing's really coming to mind right now. But, yeah, there's. There's. There's such a thing as maybe. No, not peloton. I was going to say peloton. I guess peloton is a pretty good example.
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A
Walk me through what's the peloton example like?
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B
During the pandemic, peloton was rallying because, you know, business was good. People were buying them for their homes. They couldn't go to the gym. And, you know, over time, peloton was. Was basically pricing in, you know, this level of revenue forever. You know, just out to eternity. And when, you know, it was pretty obvious that, like, it was the pandemic was going to end and people would end up going back to gyms. I had a. I had a friend of mine who was an early investor in Peloton, like, friends and family. Round. Like the first round and early. He turned $25,000 into $9 million. And I was. You know, I was. I was telling him, I was like, you know, when it was close to the highs, I think it was a little after the highs, I'm like. I'm like, dude, like, he had sold some. He had sold about a third of it, But I'm like. I'm like, dude, like, this is a. You know, this is a gift. You got to get rid of it here. You know, So I think he held on a little bit longer. But, yeah, which. I mean, the whole thing is an incredible story. You know, he knew the CEO was friends with them. Hey, I'm starting an exercise bike company. You want to invest? You know, and he had, like, $200,000 to his name and gave him $25,000, and it turns into almost 10 figures, you know, eight figures.
- [06:54]
A
So goes. Goes to show it's still who, you know, at the end of the day, it's who you know. Are you willing to bet on people, even if they're just putting an iPad on an exercise bike? Gotta admit, some amazing stuff. What about another. Another expression? Maybe you could break it down. You've said this before long. Gamma at heart. What's that mean? Is that a Bon Jovi tattoo you have somewhere on your body?
- [07:21]
B
Yeah. I mean, I was heavily influenced by Nassim, like, growing up in the markets. First of all, a lot of people don't realize this, but Fooled by Randomness is not his first book.
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A
He wrote the textbook, the options one.
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B
Yeah. Dynamic Hedging.
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A
Yeah, yeah.
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B
He wrote Dynamic Hedging, and I read Dynamic Hedging when it came out, although I didn't understand much of it. And I read Fooled by randomness in 2001, and that was. He thoroughly convinced me about the virtues of being net long options. Right? I'm an option buyer, you know, professionally, in my fund, in my personal account. Like, I generally don't sell options as a general rule, not even really covered calls. So, you know, I don't, especially in the stock market where you have so much gap risk, you know, in individual stocks. Like, I don't want to be in a situation where I'm short calls on something and it gets taken out or I'm sure puts on something and there's like an earnings report and it gaps down 20%. Like, I, I, I have a. And you know, the funny thing is, is that like, I'm not even saying that my way is the right way. Like, there's a lot of people who make a lot of money selling options. I work with this guy at Leon Brothers. He was a desk analyst. He wasn't even a trader. And he left Wall street to trade his own account. All he does is sell teeny options. Like, that's, he just sells teeny options all over the place and collects premium. And with the proceeds, he bought a condo in Miami, like a $2 million condo in Miami just by selling options. And I saw him, I had drinks with him a couple years ago, and I, I said to him, like, well, how did you do during the pandemic? And he's like, oh, during the pandemic, I almost got carried out. Like it was, I, I almost got tapped out during the pandemic. And I'm like, you see, I just don't want to live like that, you know, like, that's, that's not really how I want to live at all.
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A
So, so break that down back to the first idea of like, what we're seeing right now with the Iran stuff and just the underpricing of political risk before it happens. Connect, connect the gamma through line here for me. Well,
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B
I was, I had exposure to oil, not even really because of the potential for war, but I believed it was just undervalued anyway. But I, but I knew about the potential for war, and that's asymmetric risk that goes one way. So I had exposure to that. The interesting thing is now is that I don't know if you've looked at Vol in options on WTI, but they're, they're like 150 volt. Like the, at the money straddle in oil. One month out is like 20 bucks. Like, there are, there are situations in which you Want to sell options. I haven't done this, but I would sell the 1 month $20 straddle in oil. I would, you know, so, and I
- [10:43]
A
think I'll, I'll check on this one, but I think, Chris Abdelmasia, if you're out there, I think you've been writing about this too and flagging some of the weirdness and skew in commodity markets in general. All right, let's, let's jump to another place. This is regime flip idea that I've seen you talk about for a while now, and I do mean a while, because you've been saying that everything worked from like 81 to 2020 or so. Everything worked. And everything that worked then is now working in reverse. Explain what that is. Explain where we are now in 2026 and how this is playing out.
- [11:21]
B
Well, I would say, I think that refers specifically to the 6040 portfolio. Right. So the 6040 portfolio works, or at least did work for a long time because stocks and bonds were negatively correlated. Right. I don't remember what the correlation was. It wasn't a strong negative correlation. But they were negatively correlated enough to rebalance. Yeah. And if you added bonds to a portfolio of stocks, it reduced your risk. Right. Well, after 2020, bonds became positively correlated to stocks, especially right now with the war going on. Like bonds are very correlated with stocks right now and that really limits the use of diversification. Like it eliminates the diversification benefits. So what was different? What happened? What changed? Well, what changed was from 2000 to 2020 we were in an environment of declining inflation. And after 2020 we were in an environment of increasing inflation. And if you go back in history over the last 100 years, you can see that that stock bond correlation worked in periods of declining inflation and in periods of rising inflation it did not. So one of the things I like to say about markets is that there is non stationarity. And I don't know if that's a made up word or somebody told me once or what, but non stationarity basically means that you're playing a game where the rules are constantly changing. Right. So imagine you're playing non stationary chess and I assume you know how to play chess. I'm terrible at chess. But.
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A
But the night terrible chess match at some,
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B
the knight goes up two spaces and over one and the bishops go diagonally and the rooks go horizontally and vertically. Well, what if you were playing chess and you were in the middle of a game and all of a sudden all the rules changed so now the knights Go diagonally and the bishops move like knights and the queens move like pawns in the middle of the game. And you had to adapt to these new rules. Right. That is what investing is like. Right. Because in a regime which might last 20 years, you get very comfortable with the rules and you, it's, it's hard to imagine an environment that could be different. Right. So when the rules change and correlations break down and everything goes upside down, then you're in an environment. You have to adapt very quickly. So I think adaptability is one of the greatest qualities for an investor.
- [14:13]
A
What do you think? Where's the tell? What's the tell? Did we know that Was true? Because 2020 and inflation coming back into the picture in the post pandemic stimulus period, whatever else, or was there some other tell that the old playbook was over with? And I'm asking that because. When do we ask those questions again? Now.
- [14:34]
B
Well, I don't think there's anything you can do to predict regime change. I don't think it's something you can predict. What I think it is is that you have a portfolio, the correlations are stable, and all of a sudden they become unstable. And you have to ask yourself what is going on? And you have to adapt very quickly. Right. But the problem is, the problem with regime change isn't the regime change is that most people fail to adapt. Right. They're still playing by the old rules. Right. So this is, this, this is a lot about being intellectually flexible, which I think is one of the top 10 or 20 qualities of an investor. Right. Like to, to say, okay, what I used to do worked, it's not working right now. I have to do something different. And I think that's very important.
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A
Do you think that's part of the underpricing of risks of playing by the old playbook? Does that exacerbate it?
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B
Yeah, 100%. Yeah.
- [15:42]
A
So in a case like this, and maybe I'm going to reference the oil trade, but it doesn't have to be in reference to the oil trade. When we're in an environment where you recognize some people are still playing by that old playbook and are therefore going to influence markets by playing by that old playbook, you're on the new playbook. How's that? How do you think about position sizing? How do you think about confidence?
- [16:05]
B
Well, position sizing doesn't really matter unless you're exceptionally large. And it's hard to turn the ship. You know, I don't manage a huge amount of money, so I can be very nimble and I can adapt very quickly. But you know, if I'm at Bridgewater, like that becomes very difficult and there's all kinds of logistical problems around, just around execution and liquidity and impact and all the stuff that you have to think about that somebody like me doesn't have to think about usually.
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A
So how do you think about it inside of your portfolio though? Like, is there a max that you'd let a certain position with confidence get to?
- [16:52]
B
I, I think being a chicken is a virtue. I think, I think any good investor is a chicken. Like, I, I, no matter how much conviction I have on something, I generally don't let position sizes get out of control, you know, because you always have to entertain the idea that you're wrong. And even if you're not wrong, there will be drawdowns along the way which will force you to question whether you're wrong. Right. And if you're too big, then you can get, you can get shaken out of a trend very easily. Whereas if you had a smaller position, you can stay in the trend because it's not causing you so much pain on a drawdown.
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A
So how do you think about that too, in terms of, I know you'll own ETFs occasionally you might own an individual name or something more like narrow and specific. How do you think about a thematic packaging of an idea like owning an index fund or owning an ETF that's focused on an area sector or otherwise? Do you think about that as diversified and does that change the way you think about the size of it in your total portfolio?
- [18:06]
B
Yeah, I mean you can be bigger in most ETFs, you know, because there is built in diversification. Although, you know, even in a very narrow index, the diversification benefits aren't that great. But yeah, I mean, you can have much larger positions in broad ETFs or indices than you can in individual stocks.
- [18:31]
A
You know, and let's talk about this because you, you share this with your, with your newsletter subscribers and I know on, on Macro Dirt and on the podcast and everything else, sort of the non traditional, the non stock areas, gold, uranium, commodities, the oils in some of these places, instruments like how do you think about putting those positions on, how do you think about sizing them? Especially in the last six months where you've been on top of a lot of this stuff.
- [18:59]
B
Are you talking specifically about like hard assets and natural resources and stuff like that?
- [19:05]
A
Let's pick on those specifically.
- [19:07]
B
Yeah, well, gold is extremely liquid. I mean, it's, it's it's very, very liquid. Oil is liquid, but volatile energy stocks are liquid. I don't traffic too much in uranium, but, you know, the big uranium names like cameco are pretty liquid. Like, so there's, there's really not too many constraints, like liquidity constraints on that type of stuff. Like, if you were, if you were running $50 billion, then you would run into liquidity constraints, you know, but for my purposes, there aren't.
- [19:47]
A
So go through some of the hard assets, too. I'm just curious, with everything that's been going on. So recording this, this is March 18th, you still, where's your confidence in these? With the conflict now a few weeks underway, what do you, what are you worried about?
- [20:05]
B
There's, there's, there's a guy on Twitter who I don't know, I've never met, who puts out some really, really good charts. Tavi Costa, have you seen his stuff on Twitter?
- [20:14]
A
I have. Great.
- [20:15]
B
Yeah, he puts out really, really good charts. And he's been on the resources bull market for a long time now, like, really since it was in its inception. And he's talked about how first it started with precious metals, now it's moving to energy. After that, it's going to move into agricultural commodities. Like, really what you've seen is the commodity index bottomed in September of 2024. Okay. And so commodities have been in a bull market for a year and a half. Right. And most people don't really realize that outside of gold, what's, what you're seeing is individual commodities being dragged into the bull market one by one. Right. So now I would say with the commodity index about 30% off the lows, you're actually getting broad participation across all commodities. And the war, it has been a catalyst for that. Right. Because the whole fertilizer story, how, you know, the fertilizer also goes through the straight of Hormuz. Like that's, you know, if you look at what's happened in corn, wheat and beans over the last couple of weeks, like, that has started to participate in the rally. So, yeah, it's, it's, it's, it's been great.
- [21:35]
A
What about just shifting over? Because I think it's really changed the story on this one. Crypto, Bitcoin in general.
- [21:45]
B
So what do you want to know?
- [21:50]
A
Let's talk about. You've talked about Bitcoin as a liquidity sponge, which I think is a really interesting way to frame this. So basically, bitcoin being different from gold. Want a store of value? Want to bet on global liquidity Yeah, I don't.
- [22:06]
B
It, it, it really doesn't act like a store of value. It's supposed to be, but it isn't. You know, bitcoin went from 125 down to 60,000. And I wasn't trading bitcoin, but I caught most of that move being short microstrategy. And I, and I covered microstrategy in the last couple of weeks and you've seen bitcoin get up. I think it was up to about 75 yesterday and now it's down to like 72. It's actually, since the war started, it has outperformed gold significantly. And I don't really know why that is. I don't, I don't, I don't know if it's because people in Iran are using bitcoin. I have no idea. I don't think it's going to continue and that's just a hunch.
- [22:58]
A
So besides the, the microstrategy play, what caused you to cover. What was your, why'd you think that it wasn't going to keep going? Did it have anything to do with any other events or was it just the way that it looked on a chart one day?
- [23:12]
B
It was really, I was spending some time Twitter and the amount of people who were beating up on Michael Sailor just reached like a fever pitch. And it just became very consensus that Sailor was an idiot. And I said, okay, that's, you know, that's, that's time to get out of the trade. I mean, like, I, when I first put on the trade, I thought it was going to zero, but I, I, you know, just, just because it was a pure sentiment trade, you know, just because so many people were beating up on Sailor, I decided to get out of it.
- [23:42]
A
So I appreciate that you stick up for the kid getting picked on on the playground as a risk control metric. All right, another kid on the playground that's getting picked on quite a bit. There was some moves, movement today and talk in and around the Fed. You've talked about Fed policy as finding the path of least embarrassment, I think was the line that I've seen from you before. What's that mean from rates and inflation? The Fed's in a weird spot right now. What do you think's going on?
- [24:15]
B
Well, there's a lot to talk about there. The Fed is doing a very normie thing here. First of all, like we're recording this about an hour after the latest fomc and the rates were unchanged. Mirren dissented, which is expected. There was really nothing in the directive to write home about. And then in the presser, like Powell says, if we don't make process progress on inflation, there will be no rate cuts and stocks melted down and bonds melted down and the dollar rip. And I was kind of expecting a hawkish meeting. So I'll get back to what I said originally about this Normie view of the markets, like, because, you know, the ECB does this too. Everybody is talking about the ECB hiking. Like, conventional wisdom is is that oil prices going up cause inflation, which is totally understandable because oil prices feed into transportation costs and everything else and increases the cost of everything. But there's a side to this that I think people don't fully understand, which is that they also are deflationary in the sense that they cause demand destruction. Right. So the. Like, the price of gasoline is not perfectly inelastic. If the price of gasoline goes up, people will buy less. Not a lot less, but a little bit less. And if the price of food goes up, people will buy less. So there is some elasticity there. And when it comes to more discretionary purchases like apparel or electronics or stuff like that, which oil prices also feed into because of transportation costs, there's much more elasticity. So I'm not entirely convinced that oil going to 150 bucks is going to unleash this inflationary spiral, which is what I think most central bankers think, you know. So is. Is Powell right to be hawkish here? I actually kind of don't think so. Now. It doesn't really matter what I think he should do. What. What matters is what he will do. I don't know if he's going to be able to or will want to hike rates with Trump looking over his shoulder. But, you know, we're pricing in one rate cut this year and one in 2027, and that's it. And those are probably going to get priced out. The yield curve is flattening here. The Yield curve's gone. Two stands have gone from 70 bips to 50 bips. It's probably going to continue to flatten.
- [26:56]
A
So do you think is part of that the idea that a rising oil price ultimately reduces consumption and weakens the consumer?
- [27:09]
B
Yes.
- [27:10]
A
Therefore, like, you don't want to run into a credit event by being extremely hawkish. But the right response is to kind of like, wait and see how damaging that price rise is, that inflationary price rise, because it's not like it's rising because there's increased demand. It's rising because, oh, crap, the price of this basic input is throttling us.
- [27:28]
B
Yes. And getting back to what you said about the Fed causing the path of least embarrassment, like the Fed is not going to cut rates with oil at 100 because that would seem to be insane and that would subject them to a lot of criticism. Right. So they're not going to do something like that. Like they're, they're going to do the conservative thing. They're going to wait and see or they're going to, you know, agitate about hiking rates, but they're not going to take a risk and say we're going to cut rates anyway.
- [28:03]
A
What do you think this means for CPI? And just the way we talk about inflation for the next six or 12 months with all these shocks.
- [28:13]
B
Well, I mean we got a pretty hot PPI number today. You know, I, I'm a fan of truflation. Right. And by the way, truflation isn't like, they're not like a new concept. Like you know, if you go back to, even to 2008, you had MIT's billion prices project and you had the Google Price index. Like you had these online real time measures of inflation. You know, I think they're very useful.
- [28:42]
A
And the Big Mac index, Timeless index. The Big Mac Index, timeless in many ways.
- [28:48]
B
Yeah. So if you, yeah, I mean if you go back to the, I mean these have been around for a while, the truflation data. The truflation number got down to about 70 or 80 basis points about a month or two ago and now it's up to about 150 basis points, about a percent and a half. So it's coming up. But you know, I really, the one of the problems with this is really about psychology and people's perception of inflation. Like if people go to the gas station, they see $4 gas or $5 gas or something, it feeds into their perception of inflation which changes expectations and expectations affect behavior. You know, it could, you know the psychology of it is, it could, it could cause you to accelerate your consumption because you believe inflation is going to be higher in the future. That's what it could do.
- [29:48]
A
Do you think in a case like this though, it's, it's not like you're outside of where you have to drive your car to or where you have to take the bus to or whatever else. I think it's an interesting case with when it's inflation on the energy side. It's not like it's a different form of inflation than I'm going to go out and I'm going to bid higher for Another house or I'm going to do other things that are going to push these prices higher. Yeah, Follow the line just one more step further because this is also where I've already seen some of the talk. I'm waiting to see more of this where people start making 1970s analogs because of oil and gas and they start talking about 70s inflation and saying here's all the things that are the read throughs on the analogs of this. Agree with any of that. Think that's silly both for what it means for inflation and what it means for things like stocks, bonds and everything in between.
- [30:41]
B
Well, one of the things about the 70s is that they were a complete outlier. Like if you look at a chart of bond yields going back a thousand years, they're basically a 4% except for one humongous spike in 1970, and then they come back down to 4%. They're, they're a huge outlier. And I, I've always kind of wondered if we would have another regime, another environment like the 1970s in our future. And I, I think people, you know, people look back in the 1970s and they're like, you know, wow, that was really an outlier. But, you know, we could be on the cusp of something similar to that. You know, if you look, I am bearish on stocks, I'm bullish on commodities. If that idea works and you fast forward over the next 10 years and stocks are down 50% and commodities are up 200%, then it's going to look like the 1970s. And it is, you know, there's a, there's a lot of reasons to believe something like that could happen. We, I think we could just be at the early stages of it. So.
- [32:01]
A
Well, let the record show my hair is already long. 70s, you gave up the bid and now you're, you got a mid-80s thing going here. I love this line from you, which was for the vast majority because I feel this, talking to clients and people like this in the real world, for the vast majority of investors, their trading style, and I will say, or investing style, is simply their political views expressed in mathematical form. What's going on with that statement?
- [32:30]
B
Yeah, there's a lot to say about this. That's, there's like 5,000 words in that one tweet minimum. So look, there's, if you go on Twitter, there's a million different opinions on how to invest. Right. Some people really like index funds. I will make a broad generalization here and I will say that the people who like index funds tend to be liberals. And you say, why is that? Well, it gets down to a deep philosophical belief that, a belief in indexing. And if you believe in indexing, then you believe that no person can consistently beat the market. And if somebody does, it's either luck or statistical outlier. Right. And you, and you, and you truly believe that anybody who beats the market for a period of 5, 10, 15 years is simply lucky. Right. So you invest in the average and the average is pretty good. The average wins 80 to 90% of the time. And you believe in low fees because you believe in the little guy. You believe in somebody being able to invest very cheaply. So therefore somebody who promotes index funds is probably liberal. Somebody who invests in gold miners and uranium and those types of things is probably conservative hard assets. Right now there are exceptions to every rule. But you know, I was, I was, I was on Twitter the other day and I saw this guy who I'm friends with and he is very far left and he is shorting AI somehow. Like, I don't know if he's shorting like private stakes of AI companies. I couldn't really figure out what he was doing, but it's, it's very much tied up into his beliefs about Silicon Valley bros and you know, like these tech bros and stuff like that. And he was going to short them. Like I would say 95% of people, like are really not objective at all in how they invest. Like, they're like, they have these core philosophical beliefs and from that follows their trading style. And people usually don't do the opposite of their philosophical beliefs because then it would force them to challenge their own beliefs, which they don't. Right. And I would say I'm also guilty of that. Like I think everybody is to a certain extent, you know, is part of
- [35:12]
A
this just investor, know thyself. Like in both of those constructs you can be successful. You can be an index fund investment to your point, like 80 to 90% of the time you get to say I told you so. And likewise, maybe the hit rate's been lower for the last decade or whatever on commodities and whatnot. But you could be the hard asset person and you still get your day in the sun if you, if you stick to it over time. It's just, it comes in different fits and bursts than the index fund guy.
- [35:44]
B
Yeah, there's, there's this. But it's funny, this kind of ties in with what we were talking about earlier with, with regimes and being adaptable because in the 2000 and tens I was not adaptable at all. We had this big rally in tech stocks. I had a bias against tech stocks, and that cost me. You know, my returns have been pretty good over the last 10 years, but they could have been a lot better if I just said, hey, dummy, like, tech stocks are going up. Buy tech stocks. Like, stop being so stubborn about this. Stop buying gold. Stop doing all this other stuff. Like, you know, I. I fell victim to that. So, you know, I've. I've sort of. You know, when I tweeted that I was. It was almost kind of like I made a promise to myself that I wouldn't do that in the future. And if we ever did have another tech bull market or something that I philosophically disagreed with, I would put that aside and I would vest in it anyway. You know.
- [36:43]
A
Do you think, let's unpack this just for a second, because I think this is part of the. Why it's so hard to see regime change when it's happening, especially if you were right in the prior regime. So your view on the tech stocks was coming out of the financial crisis era, right?
- [37:00]
B
Yeah.
- [37:01]
A
So a lot of what you were looking at, like gold, hard asset, whatever else was driven by whatever you were still feeling from the layover of the global financial crisis.
- [37:12]
B
Yeah, And a lot of that was about valuation. I refused to buy something that traded at 30 or 40 or 50 times because of my experience in the financial crisis. And not only that, you know, I. I started in the markets in 1999. Right. So my first experience with the markets was a giant tech crash. You know, so. Yeah, exactly that.
- [37:36]
A
So do you think in this promise to yourself, you'd be willing to override some of those emotions if you saw it happening again, where you'd go, this is in the rear view mirror. This is what's going on under my nose. This is my. This is my hold my nose moment and participate in this. Like, I'll. I'll pay 30 or 40 or 50 times for this, because I can tell that this is just the trend in this moment.
- [38:00]
B
Yeah, that's the goal. That's the goal.
- [38:02]
A
That's the goal. A noble goal, though, because you just said it completely disagrees with who you are and it's gonna eat you up inside.
- [38:08]
B
Yep.
- [38:09]
A
All right, well, we're gonna see if you can hold it there. All right, let's. Let's move from, you know, one crisis to the next. Everybody's talking recently about the marks in private markets, private equity, private credit, you, everybody else with half of a brain has added Their skepticism to this. Where do you think the stress is hiding? What do you think we should or shouldn't be worried about with private markets right now?
- [38:34]
B
Well, Cliff Asness used to have the best tweets about private equity because the market would be down 3% a day. You know, the S and P would be down 3%. And he would tweet, well, private equity is still unch, you know,
- [38:51]
A
gotta launder that volatility, gotta do it.
- [38:55]
B
So I used to love that. Yeah, I mean I've been, it's funny, I've been, I've been on the bearish private equity and private credit train for so long. Like I don't even, I don't even really reflect on it too much anymore. But you're talking about the marks. Like the stuff in these portfolios is not worth what they say it is. It's just not. Not the private equity, not the private credit. And you know what you're starting to see with some of the redemptions out of these private credit funds is that the marks are much lower. And you're also starting to see individual credits within these funds that are marked at par one day and they're market zero the next. Right. Which should be cause for concern, you know. So I guess the only really philosophical thing I'd have to say about this is that liquidity always finds a way, you know, and one thing I'll point out, you know, the financial crisis actually didn't last that long. It was very short, you know, from the summer of 2007 to March of 2009, 21 months and it was over. Like, that's really not that bad. The dot com crash was longer. The Great Depression was much longer. You. And basically, like I said, liquidity finds a way. And in the public markets you can sell things until they find a floor, until they find the clearing price and then that's the low. Right. With private markets, it's just going to take a lot longer. So when I was initially writing about private equity two years ago, I mean, basically what I said was it was going to be a very long, drawn out process for liquidity to find a way to get to this market clearing price. And it was going to be very painful.
- [40:55]
A
So do you think we'll see that play out in two different timescales between the private equity and the private debt? This is a genuine question I've been thinking a lot about lately.
- [41:07]
B
I think, I think private credit will, will collapse first.
- [41:16]
A
Do you think it'll take as long to. I'm going to say Recover on the presumption that some of it recovers because there's always a need for private lending. Granted, if you have less private equity, you'll have less lending to private entities. But like, does that snap back? Like we saw high yield debt snap back after the financial crisis because hey, a bunch of these companies are able to work out or service their debt. Ultimately you have the zeros. But then they're not all terrible loans. Does that give it more life than say, a bunch of walking dead equity vehicles?
- [41:46]
B
Well, I think it really, what it comes down to is refinancing, especially with
- [41:52]
A
floating rate debt that, that's designed to be that way.
- [41:56]
B
I think the pain stops when people are able to refinance, you know. And you know, it was funny because I remember in the financial crisis I was looking at a bunch of corporate bonds and I was throwing these at some of my subscribers and I was like, I remember there was one in particular I was looking at Gannett, the newspaper company, which obviously would have been a terrible investment. But you know, I said, look at these bonds. Like it was like, it was like January or February of 2009. The bonds matured in June. I, I was, I was like, they were trading at like 50 or 60 cents on the dollar. I'm like, why would you buy these? And they're like, well, they're not going to be able to refinance. Well, guess what? They were able to refinance, right? Like the market improved and they were able to refinance. So that's really, that's really the, that's really the issue. This episode is brought to you by State Farm. Listening to this podcast. Smart move. Being financially savvy. Smart move. Another smart move. Having State Farm help you create a competitive price when you choose to bundle home and auto bundling. Just another way to save with a personal price plan. Like a good neighbor, State Farm is there. Prices are based on rating plans that vary by state. Coverage options are selected by the customer. Availability, amount of discounts and savings and
- [43:18]
A
eligibility vary by state. Ever feel like your brain just won't click? Onnit Alpha Brain is a daily supplement engineered to support mem focus and mental speed. Made with science backed ingredients on it, Alpha Brain helps you lock in, tune out distractions and stay sharp. See what your brain can really do. Visit onnit.com and shop Alpha Brain to unlock your next level. That's o n n I-t dot com. Yeah, I think it's an interesting piece of the nuance. I think it's, it's really with the redemptions as high as they are. And like, a lot of these funds is. We're seeing people redeem, like, they're redeeming at Navy before the marks.
- [43:59]
B
Yes.
- [44:00]
A
Which creates a whole other interesting waterfall because if you're holding through. I don't know, I think a lot about the bondholders through that financial crisis period.
- [44:10]
B
The first rule of panicking is to panic before everyone else does.
- [44:13]
A
Yeah. And if you don't, you have to understand what you're in bed with, so to speak, for whatever comes next. If you were like, if you were an LP and like a private equity fund or something like that, is it just here's the keys and walk away. What would you do to actually try to navigate it if you were involved in one of these structures on the inside?
- [44:35]
B
Oh, I have. I have no idea. I really don't. I'm so far away from that. Like, I couldn't tell you. I don't know.
- [44:43]
A
That's a good and honest answer. I'm just curious if you would. If you would wade into the strategy talk on it. All right, let's talk about the awesome portfolio. There's a new project coming out. You can tease that if you want, but for people who haven't heard it before, I think certainly the last year. But right now, it's a really valuable time to kind of revisit some of these as just basic philosophies. Not because you're liberal and you just want to own index funds and think this way, but maybe because this is a great benchmarking exercise. If nothing else is a starting point. Talk about what it is. Talk about what's coming.
- [45:21]
B
Yeah. So the awesome portfolio is 20% each. Stocks, bonds, cash, gold, and real estate. Okay. I came up with this idea in about 2018. I was. I had this subscriber who lived in Idaho. He's a financial advisor in Idaho, and he's a very smart guy. I think he used to work at Lehman. And we were running some numbers on some different portfolios, and I was like, we'll try this, we'll try this, we'll try this. And he put together this portfolio that was 20% each. Stocks, bonds, cash, gold, and real estate. And the Sharpe ratio on this thing was through the roof. And then you start looking at some of the numbers, like the. What was I going to say? The. The average. The biggest drawdown for this portfolio in history is 12%. The second biggest is 9%. And that was during the financial crisis. The next three are 1%. Like, so basically you have this thing that returns a little bit less than stocks. You know, if stocks since 1971 have returned 11% a year, this returns about 9% a year and it cuts your volatility in half and it practically eliminates your drawdowns. Right? And the whole philosophical reason for doing this is, you know, basically we tell people, look, the key to investing success is to get an s and P500 index fund, a dollar cost average it, and you can just do like a future value of an annuity computation. And if you max out your 401k at 23,500 every year and you put it into this S&P 500 index fund that returns 11%, you're going to have 16 million when you retire. Right? And everybody believes these numbers. But the problem is, is that if you have a 40 year investing career, you're going to have one 50% drawdown, you're going to have a bunch of 20% drawdowns. And unless you just have this bulletproof constitution, you are not going to be able to hold on during these drawdowns. And even if you don't necessarily liquidate, your behavior will change, right? You will invest more when it's going up, you will invest less when it go, when it's going down, you won't dollar cost average perfectly and your returns will go down. So the reality is, is that this 11% return since 1971, nobody actually realizes this. So Vanguard, everybody does this in Vanguard. Vanguard knows that their own investors don't realize these returns because they're constantly trading their mutual funds. They're in and out, in and out, in and out, into different stuff. And what they found was that if they added a person to the equation, an advisor, they call it Advisor Alpha, who just told them to stop trading their mutual funds and just hold their returns went up by 3% a year. But you don't even have to do this. You can just invest in this awesome portfolio and it returns 9% a year with a virtual like virtually no drawdowns. And that's the solution as a benchmarking
- [48:54]
A
strategy, if nothing else. So even if you're not doing this, is this something you think like, do you look at this as a benchmark? Do you implement something like this yourself? How do you understand this in the context of the rest of life?
- [49:09]
B
I have implemented something like this myself
- [49:14]
A
for
- [49:16]
B
close to 20 years. Close to 20 years. I mean, basically, if you're an investor, what is your goal? You want your returns to go from the lower left to the upper Right. With no volatility. Right. Like imagine a Bank account in 1979, it returns 14% a year and it looks like this. Right.
- [49:38]
A
With platform shoes.
- [49:39]
B
Yeah.
- [49:40]
A
Goldfish in the heel.
- [49:41]
B
That's the goal. Right, that's the goal. Like people, people get very focused on the returns but they kind of lose sight of the risk. Right. So I can tell you that my personal portfolio has returned less than some people. But I have done it in pretty much straight line fashion without a lot of big drawdowns. And it's because I am diversified across asset classes. You know, we talked about the 6040 portfolio. The 6044 portfolio is better than just being in stocks. But the problem with it is it's still just financial assets and financial assets kind of behave the same way. So when you add other assets like real estate and gold and cash, then there's this push pull between paper assets and physical things and that's where the diversification benefits come in. And it's fantastic. So you asked me to tease the book. The awesome portfolio book is coming out in September. It's, it's going to be great.
- [50:46]
A
So I feel like it's really important because it's for the same reasons and especially financial crisis era and I'm sure prior eras too. Like the permanent portfolio concept is worth at least having on your radar and understanding why it works through different periods. And I think this is an appropriate add on that helps smooth out some of those things. And with at least a real estate crisis partially in the rearview mirror here, finally, and with gold at least pulling some weight here, it's a good reminder of the full historical context of these five asset classes when you pair them up.
- [51:23]
B
Yeah, I mean you mentioned the permanent portfolio. I mean that was Harry Brown's idea. And the permanent portfolio is just stocks, bonds, cash and gold. It doesn't have real estate. The interesting thing is that when you add real estate, the returns go up and the Sharpe ratio also goes up, the risk comes down. Right. So it's actually an improvement on the permanent portfolio. It's actually better.
- [51:49]
A
Adds an interesting layer to the whole. Are you long gdp, are you long consumption? Are you like what's this actual basket that you're indexed to and that's part of where real estate is. Interesting. One more question on that. Real estate, if you own a home, if you have other things, do you factor that into the weight in the portfolio or do you exclude it? What's your thoughts?
- [52:08]
B
Yeah, so let's say you had, let's say you had a net worth of A million dollars. You could have 200,000 in stocks, 200,000 in bonds, 200,000 in cash, 200,000 in gold. And let's say you had a million dollar house and you had 20% equity in your house. Well, that $200,000 is your real estate allocation in the portfolio. It's not a great real. It's not a great allocation because it's the most idiosyncratic allocation possible. It's one piece of property in one geographic area, but it still counts as a real estate allocation.
- [52:45]
A
And I think this is the financial planner in me screams, you know, consider this. Don't be too overly long real estate unintentionally, but at least consider it. And it's a big difference from, you know, if you live in nowheresville, northeast Pennsylvania versus if you're holding, you know, coastal bajillionaire properties or something like that, or you can think about it at a different scale. All right, I got another one for you. Nobody works. Nobody works anymore anywhere. Labor disengagement. Not just a social observation, but something that shows up in the data. Do you still feel like nobody works?
- [53:25]
B
So right now I'm in my house. I have an office. Yes, this is a new house, moved in almost two years ago. I have an employee that actually comes to the house every day. My office is out there. This is the podcast room. So when I was, before that I was working in an office building, I rented space in an office building. And the reason I got the. I got the idea for this sub stack because there was one day, it was around 10:30 in the morning and a transformer blew out in the parking lot and the power went out. Everybody went home. Like, they didn't wait for the power to come back on. The power was on about noon. They just went home.
- [54:12]
A
It's like high school rules. When the teacher is like three minutes late and you're like, that means class is canceled.
- [54:17]
B
I. I couldn't believe it. Now, this is also the south, right? It's not, it's not New York. But, you know, as I looked around, I was like, I mean, if, if the one. The one thing that really stood out to me about the Y2K era was that everybody was working so hard. There was a book from about 99, 2000 called Monkey Business. Did you ever read that?
- [54:42]
A
This is very familiar.
- [54:43]
B
John Rolfe and Peter Trub. It was about these DLJ bankers in 2000. They were these tech bankers. I mean, they were working like 120 hours a week. They, they wouldn't even Wash their clothes, they would just buy new clothes. Like it was incredible. And nobody does that anymore, you know. So anyway, what do you think?
- [55:10]
A
Maybe this is AI productivity boom. Maybe there's other things that are going to come in here and change the math on this. What's that do to just not just labor and consumption, but just our relationship with work as a society? Is that shifting? I'm going philosophical with you here.
- [55:26]
B
Yeah, it's kind of interesting because I wrote that before AI, it was a long time ago that I wrote that, but let's pretend AI doesn't exist. And, and, and you mentioned productivity. Like, you know, the Internet, obviously when the Internet came out in the late 90s, like the productivity numbers skyrocketed, which is something Greenspan commented on, and the productivity numbers are skyrocketing now. But in, I would say around 2006 or 8, when Facebook came out and social media came out, the Internet was no longer a productivity boom, it was a productivity suck. Right? Like you were, you were sitting at your office and you were on Facebook, you were on Twitter, maybe you were doing some shopping online. You weren't using the Internet to be productive, you were using it to goof off. Right? So the productivity numbers fell off a lot. And now, now with AI they're coming up again for obvious reasons.
- [56:31]
A
So I think it's really fascinating through that lens because it's this, it's this idea of social media doesn't really help in any way, shape or form. It's the social medium, the singular, the like the one on one interactions and the actual productive engagements that actually drive stuff. Not to fool anyone. That a podcast is a productive engagement might feel like it, but it's not. But it is this idea of like if we start to move back away from at some point the social media side of things or just the bs, time wasting, doom scrolling that there, there are some core tools that are here and like the Internet kind of like woken up some animal spirits I think for people wanting to build stuff with this stuff. Are you encouraged by any of that at all? Do you think it goes anywhere or is it all bs?
- [57:18]
B
I mean I, I am not an AI futurist. I don't really know where this goes. I have a newsletter and I have 4,000 subscribers and they tell me stories about AI all the time. It just blows my mind. Absolutely blows my mind. Heard one recently, guy that works at a software company, they had this piece of software, they had to AB test it. They hired eight developers to a B test it. They paid them $600,000 over two months to a B test it. And then after they were done, they took some 22 year old kid and they said, here, why don't you do this? And he did it in an hour. And with like he, he was totally unsophisticated, didn't even know how to prompt the thing and he replicated the whole thing in an hour. You know, it's, it's unbelievable. So I don't know where, I really don't know where it's going. I mean, I think it's, I think it's fantastic and I think we shouldn't be afraid of the future. And you know, it's funny, there's, there's this Twitter account called the Pessimist Archive. Have you ever seen that?
- [58:26]
A
I have seen the Pessimist Archive, yeah.
- [58:28]
B
Where they have like, there's all these
- [58:29]
A
one too that I love. Yeah.
- [58:31]
B
News articles from like, you know, from when planes were coming out. They're like, this is never going to work, you know.
- [58:37]
A
I love it, I love it. It's the real version of like the Cat on the string, like the belief thing. It's like whatever the inverted versions of those were that I loved, only it's the Wright brothers. This is going to be a disaster.
- [58:53]
B
Do you.
- [58:55]
A
How long, how long do we give it or how, like, what do we look at in a story like this as it develops? You know, you got Jensen Zwang and the Nvidia stuff on stage yesterday, making these presentations. You yourself said you're not up on it, you're aware of it. When do you let that seep into your conscious awareness or actually affect you in any way, shape or form?
- [59:17]
B
You know, I had, you know, about 10 years ago I had this subscriber, he called me the caboose because I'm not an early adopter, I'm a late adopter. Like, so this was like 2014 and I signed up for Amazon prime and I'm like, this is the greatest thing ever. He's like, you're an idiot. Like, it took you till 2014 to sign up for this thing. So
- [59:42]
A
there's like the, the crossing the chasm thing. You're the absolute last stop.
- [59:47]
B
Yeah.
- [59:48]
A
You're the. So when you tell us that the AI hype cycle is real, that's when we know, like the bull market in that is well underway. For reals, not just maybes.
- [59:59]
B
Yep.
- [60:00]
A
All right, we'll keep that in. Now, I know I've asked you this before. This will be our last question today. You've if anybody has a laundry list of these, I know it's you. So what's something today that you think the majority of your peers would disagree with you on?
- [60:15]
B
So you know, I have my substack called we're gonna get those bastards and
- [60:21]
A
which everybody should subscribe to. This is my. My favorite thing that you do is. Yeah, is that substack?
- [60:28]
B
One of the first pieces I wrote was called you don't have to vote. This episode is brought to you by indeed. Stop waiting around for the perfect candidate. Instead, use Indeed sponsored jobs to find
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- [61:01]
A
On December 12th, Disney invites you to
- [61:05]
B
go behind the scenes with Taylor Swift
- [61:07]
A
in an exclusive six episode docuseries. I wanted to give something to the fans that they didn't expect. The only thing left is to close the book.
- [61:15]
B
The end of an era. And don't miss Taylor Swift.
- [61:20]
A
The Eras Tour. The final show featuring for the first time the Tortured poets department. Streaming December 12th only on Disney Plus.
- [61:34]
B
I am very much.
- [61:35]
A
I am very Mr. Upcoming midterm election.
- [61:38]
B
This is one piece that everybody disagreed with, okay? Everybody said I was out of my tree. So voting. First of all, I view voting as an act of aggression, right? Like, if you're a libertarian and you believe in the non aggression principle, which I think is kind of stupid, but regardless, if you believe in the non aggression principle, voting is an act of aggression. Because what you're doing is you're. You're trying to enforce your preferences on other people by force, right? So let's say you like to shoot up heroin, and I say you can't shoot up heroin. We pass a law, you can't shoot up heroin. And if you do, the police can get you. So I'm enforcing my preferences on you by force, right? It's backed up by the government. But beyond that, people get really excited to vote and they have those little I voted voting stickers, you know, can't argue. And the way I look at this is you are not accomplishing anything, right? Like, here's what you do. If you want to participate in the political process and you want to have more impact, there is a whole continuum of things that you can do, right? You can write an editor, a letter to the editor of the newspaper 5000 people will read it. You might change their opinion. You can donate to a political candidate and the, the average rule of thumb is that $30 will buy one vote. So if you donate $240, you now have eight votes instead of one votes. You can become a political columnist, you can write op eds, you can go on tv, you can be on Fox News or msnbc. You can actually run for office yourself. Now, the interesting thing about this whole continuum of things is that each level requires you to take more personal risk. And the more personal risk you take, reputational risk, the more impact you will have. But with voting, it's done completely in secret. Your vote is anonymous, you're taking no political risk, and therefore you have no impact. Right.
- [63:58]
A
So you start to win me over by the end of this on seeing it on the continuum, because it's the lowest, the lowest impact thing you can do is just cast the vote.
- [64:07]
B
Actually, there are, there are a couple things you can do that are lower than voting. So posting political stuff on Facebook is worse than voting. Right, because you're actually, you're actually pissing people off. You're alienating them. And participating in a protest is also worse than voting for the same reason.
- [64:31]
A
Yeah, I think there are better thought out protests than others, but unfortunately, probably rarely.
- [64:39]
B
Yep.
- [64:40]
A
Yeah. All right. There's some there there. I like where you're going with this one. That's the first. That was the kickoff. That was the inaugural. We're going to get those bastards.
- [64:49]
B
No, that was like the maybe the seventh or eighth post.
- [64:53]
A
Seventh or eighth? Yeah, in the case that they were going to get you. Bastard. See, had a lot of people disagree with this one. Or get up and.
- [64:59]
B
Oh, yeah, yeah. Well, you should look it up afterwards.
- [65:03]
A
I'm going to look it up afterwards. You at home. You should do that too. Jared, if people want to follow you online, they want to bug you on the Internet. They want to find more information about the book when it comes out. Where should we send them?
- [65:15]
B
Twitter. At Daily Dirt Nap you can subscribe to. We're going to get those bastards. I have about 13,000 subscribers now. Awesome. Which is pretty good. If you want to subscribe to the Market newsletter, it's the Daily Dirt NAP. Go to dailydirtnap.com if you mention the podcast, they'll give you a big discount. And in the book is. It's actually on Amazon. You can pre order it. But I'm not, I'm not going to plug it for a couple of months. So the book is the awesome Portfolio and there's six other books there.
- [65:47]
A
So get those six other books. I hear one or two even have a halfway decent forward that might make you return it. But with Amazon prime returns are free. So you know, get in on that. You're watching Excess Returns like subscribe comment all things below. Jared, thanks so much for joining me. And we're out. Thank you for tuning in to this episode. If you found this discussion interesting and valuable, please subscribe on your favorite audio platform or on YouTube. You can also follow all the podcasts in the Excess Returns network@excessreturnspod.com if you have any feedback or questions, you can contact us@excessreturnspotmail.com no information on this podcast should be construed as investment advice. Securities discussed in the podcast may be holdings of the firms of the hosts. At blinds.com, it's not just about window treatments. It's about you. Your style, your space, your way. Whether you DIY or want the pros to handle it all, you'll have the
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