Join hosts Matt Ziegler and Jack Forehand as they interview Jared Dillian (@DailyDirtNap on Twitter) for a fascinating discussion on current market conditions, macroeconomic trends, and controversial investment perspectives. Jared shares his unique takes on everything from tariffs to portfolio construction, offering insights that often challenge conventional wisdom.
Topics Covered:
Jared's contrarian view that tariffs are deflationary rather than inflationaryThe potential long-term decline of the dollar despite possible short-term strengthHow financial wars have replaced hot and cold wars in global politicsThe future of US debt and potential parallels to past debt crisesJared's "Awesome Portfolio" strategy: 20% stocks, 20% bonds, 20% cash, 20% gold, 20% real estateWhy international stocks may continue to outperform US equitiesPossible recession indicators and economic headwindsFed policy predictions and why rates might not be cut as expectedThe value of sentiment indicators and Twitter as a market research toolWhy free trade benefits economies and the risks of protectionist policies
[00:00:00] 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.
[00:00:22] 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 wars. 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.
[00:00:50] I think we are kind of slouching towards a recession as we speak. They should cut. They should cut Fed funds to 3%. You're watching XS Returns. I'm Matt Ziegler here with Jack Forehand today as my co-host and today challenging me for best hair in the business.
[00:01:11] You know him as Daily Dirt Nap on Twitter, Jared Dillion 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 going to get those bastards, Substack, and author of many books, including his rarely discussed masterpiece, Bear Ships. Blurbed right here by Tony Greer, who said, testimony of dirt pilot changed my risk appetite.
[00:01:39] Thank you, Tony Greer, for that. Jared Dillion, welcome to XS Returns. 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. I'm kind of envious. The straight pushed back thing, I can't do that. Mine won't do that. 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 going. Well, luckily, you're not here for hair care today. You're here for some macro talk and whatever else.
[00:02:09] 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? Yeah. Every time I go on Twitter and I say that tariffs are deflationary, I just end up at the bottom of this giant dogpile. And people say I'm an idiot and all this stuff. And I actually kind of like it. It's kind of fun.
[00:02:36] 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.
[00:02:59] 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. Right. 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.
[00:03:23] I think it's important to say, too, like what you're saying is in the short term, in the immediate, it can be if inflationary can push the price of that car up because the tariffs or whatever else. But then if if unemployment rises, if demand destruction happens, those prices are coming down. You know, the funny thing is, is I actually was thinking about it and I think a small tariff would be inflationary, but a large tariff would be deflationary. Right. Same more about that.
[00:03:52] Like, pretend you have like a one or two percent tariff that's so small that nobody's going to notice. Well, people will pay the extra one or two percent. Right. And that'll show up in the inflation numbers. But if you have like a hundred forty five percent tariff on China and suddenly things from China costs, 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.
[00:04:20] So I think teeny tiny tariffs are inflationary, but big tariffs are deflationary. So 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. Well, I think there's a couple of things going on. Um, so I there it's possible that they're dumb.
[00:04:46] It's possible that they're just thinking very linearly on this and they say tariff means prices go up, therefore inflation. Right. Like it could be that they're just they're just dumb. That's a possibility.
[00:05:00] 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.
[00:05:20] 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 percent by 2026 under tariff scenarios like this is just across the board demand destruction that comes out of this that the Fed will eventually react to. Yeah. And also not inflationary. Right. Like like GDP going down half percent is not inflationary.
[00:05:48] 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.
[00:06:11] 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 just like if you're getting close to five percent on 30 years and four and a half percent on 10 years or four point three, like these are like these.
[00:06:37] That's a pretty compelling value, you know, especially in light of all these deflationary forces that we're about to experience. So. And we'll put a 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. Sixty percent chance of recession, depending on who you ask. Temporary dislocation from China selling and basis trade blow up. My opinion, only not investment advice. So it seems like you're pretty positive on bonds here. Yeah, I am.
[00:07:11] It's. I don't know how 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 of trading sessions. They were up a lot on Wednesday until Bess and Pete all over the market. But there, you know, the long bond was up over two handles at one point. So. Yeah, we're going to publish this. We're recording it on April 24th. We'll publish it on the 26th.
[00:07:40] 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've 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 to 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. I really think it's all those things.
[00:08:06] And keep in mind, 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.
[00:08:31] But he is fascinated with this period, the 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 like I don't I personally don't think that's like feasible.
[00:08:52] 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.
[00:09:18] And about a month ago, you heard Howard Lutnick 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 think is a disaster. Like it just it just takes progressivity to a new a new step.
[00:09:46] But but basically the $600 billion they're trying to raise in revenue from the tariffs would replace the revenue lost from that tax cut. That's what they're trying to do. So 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.
[00:10:12] 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 U.S. soil. But it's there's it's just going to take a really long time. 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.
[00:10:42] So in the long in the long run, the dollar is doomed. And so, you know, 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 the tariff, the dollar would rip like one percent 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.
[00:11:13] I think from a trading standpoint, the dollar is due for a big bounce. This whole capital flight thesis of people selling U.S. 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.
[00:11:35] We're probably going to get like a five percent 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 percent. But relative to the euro relative to the yen, it is still really, really strong. It can depreciate a lot more.
[00:12:03] 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 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? I hate to hazard a guess, but I would say at least 20 percent from here.
[00:12:30] 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. So it's not 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?
[00:13:02] 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.
[00:13:31] He's been very successful and he's also a libertarian. But we got into that. 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 uses example of baseball pants. Right. So I used to be in Little League with him.
[00:13:59] 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 a piece. Right. Like that is globalization.
[00:14:27] 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 needed to go to Walmart to buy a doormat. Right. So there was a big pile of doormats at Walmart and I pick it up and I look at it. It was four dollars made in China.
[00:14:57] I mean, it wasn't anything special. It was this rubber thing and had like the AstroTurf on it. But the doormat was four dollars and it 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 four dollars in the U.S. Right.
[00:15:20] So fast forward to last year, I went on Walmart dot com and I looked up the same doormat and it is now forty four dollars. 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.
[00:15:46] 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.
[00:16:15] 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.
[00:16:44] 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. Wait. 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? The full pair of pants. The full pair of pants. And what are the kids wearing now? They all got the full pairs of pants. These are like ankle length. Yep. Yeah. So it's not even like we can adjust for the loss of fabric. I think I had them.
[00:17:12] 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 U.S. Treasuries and basically termed out vehicles and stuff like that. What are you thinking right now? About the U.S. debt as it exists in foreign holders hands. Um, well.
[00:17:40] You know, I think, um, I think Scott Besson miscalculated, you know, um, I think Trump miscalculated. Um, 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.
[00:18:01] 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 going to, 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 tens go up to a four and a quarter.
[00:18:28] And like, it's a problem, you know? So, um, 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. So. Do you look at that as a form of, I don't want to use the term financial warfare per se. Yeah. Like that's a weapon they hold in their hands. Right. Yeah. I even, I even use that exact term in my newsletter.
[00:18:58] 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. 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?
[00:19:21] 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. Right. 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.
[00:19:45] 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. Like I think that was the plan. Right. Right. And it hasn't really gone according to plan.
[00:20:12] 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? So I remember when I was like brand new in the business in like Y2K, I had a subscription to Barron's.
[00:20:41] And, you know, Alan 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 of total debt to GDP in the U.S. And it was going from the lower left to the upper right. And at the time, total debt to GDP was about 200 percent. So it's public and private. And he said, we're totally doomed. Short stocks. Right. This was in 2000.
[00:21:10] Now, total debt to GDP is like 400 percent. 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.
[00:21:36] You know, so our debt to GDP is 120, 130 right now, something like that. But 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.
[00:21:59] And partly because, like, there's there have just been no consequences to running up debt. People, the average voter does not see how the debt affects them personally. Right. The problem is an abstraction. Right. Say, well, we have this debt. Well, how does it affect me? Right. It really doesn't. It doesn't. You know, in Canada, it's kind of a different story.
[00:22:28] 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.
[00:22:58] Like, until it's a real problem, nobody's going to care. You know. How do you, like, play that out just a little bit more. If the U.S. starts acting like just another country, 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 stuff forward? If we go into that type of recession? If we end a lot of these trade agreements? I don't know the answer to that question.
[00:23:27] I don't think anybody does. 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. Right? Our ability to defend is tied to the reserve currency. It's actually the Navy, right? The strength of the currency is tied to the Navy.
[00:23:53] If you think about the world's great naval powers in history, Britain had the reserve currency. The pound sterling was the reserve currency. They had the world's biggest Navy. Before Britain, it was Spain. Right? 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.
[00:24:22] We used to, when I was in the Coast Guard, the Navy used to have 600 ships. Now we have like 300, right? China has a bigger Navy than the U.S. True. 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. Yep. You lose the ability to protect shipping routes. You lose the ability to protect trade. And then that challenges your reserve currency status. Exactly.
[00:24:51] That's very interesting. I heard an interesting fact the other day on a podcast. I think China's building more ships in a month right now than we are in a year. Yeah. Yep. So it 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. How do you think about analyzing a situation like this? We know the economy is hard to predict, the market is hard to predict, but usually we have some sort of data.
[00:25:18] Like if we're trying to figure out what's happening with inflation, 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, how do you think about navigating an environment like that? It's awesome. I love it. So much fun. I mean, it's fun. It's fun, do you say? 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.
[00:25:48] It's awesome. Awesome. So 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. Does that come from your trading days? Is that something that's like a relic of just when there's action, you're excited?
[00:26:18] Yes. Yes. This is basically like a Lehman Brothers Jared Doberman. Yes. Thanks, man. You can see I get a big smile on my face. I love it. It's a beautiful thing in its own sick, twisted way. It is a beautiful thing. 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?
[00:26:45] Yeah, you have to, you know, in a 60 vol environment, you have to take position sizes down. You just do. And that's something I learned, you know, when I was at Lehman. I traded through terrorist attacks. I traded through 2008, 2007, traded through the bear market in 2002. Yeah.
[00:27:13] When, you know, it's your position sizing should be inversely correlated to volatility, basically. Do you have any hard and fast rules that you follow there? Or is it just some rules and some instinct? I don't even know that I have any rules. It's pretty much just instinct. Yeah. Yeah. Because that's not something that you're taking and like modeling through a spreadsheet in this case. No, no, no, no.
[00:27:41] You're just going volatility's high. These position sizes are coming down and staying in this range. Yeah. What about the number of positions that you have on? Does that change in a different vol environment? Are there more smaller bets or is it just less bets overall? 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.
[00:28:08] So it's just a game of probabilities and expected value. 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? Yeah. So 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.
[00:28:38] 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. Right. So gold is not necessarily the focus of the awesome portfolio. The idea is the average person is not diversified. Right.
[00:29:07] They have stocks. Right. Usually just tech stocks. But let's just say they have stocks. They have the S&P 500 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 100 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 60-40 portfolio. I'm going to have some bonds with my stocks.
[00:29:37] Well, then 2002 comes along and bonds and stocks are positively correlated. And they both go down 20% and you're down 20%, right? So the negative correlation between bond and stocks, which people kind of got used to, is unstable and doesn't persist always. Right. 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.
[00:30:05] 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. Right. You need to have cash around. And the good thing is, is now it yields like four and a quarter. Right. So, uh, and gold in real estate. The nice thing about having gold and real estate in the portfolio is that they give you some exposure to inflation. Right.
[00:30:34] 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.
[00:31:00] So talk a little more about rebalancing because so something like this, people are going to make fun of you when cash yields 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? Yeah. So I've looked at a number of time horizons, rebalancing monthly, quarterly, whatever annual rebalancing is the best.
[00:31:28] Um, it, it rebalancing annually allows trends to play out over the course of a year. Um, 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 in town to camp. We were kids.
[00:31:54] 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% of the portfolio. I'm like, well, you should probably sell some Apple and buy some other stuff. She's like, well, I like Apple.
[00:32:22] 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.
[00:32:50] 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. 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. Let's talk about international stocks. They've been on a tear. People have been, we're loving to hate on them just a couple of short years ago. And now all of a sudden they're working. You think that continues? Absolutely.
[00:33:18] 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 U.S. has outperformed for the last 20 years. So you have these charts. The U.S. is going like this and international stocks are going like this.
[00:33:47] 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, cause this guy is a ding dong, you know? So I'm like, it, this, so it turned out to be very timely.
[00:34:12] Um, and if you've, if you put, if you expect Europe in particular has done well. Um, so if you diversified internationally, you're happy, but it's not too late to do that. Do you think, and tie this back to earnings, tie it back to the recession risks. Like is part of what we're seeing is just low PEs, attractive companies in these economies.
[00:34:38] And now all of a sudden they have a reason to invest and there's upside in earnings and multiple expansion. Well, I don't think we should get carried away because, um, the U.S. remains the center of innovation, right? I saw a chart, um, a couple of 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, or Meta.
[00:35:07] Like we're talking, we're talking about like Home Depot is bigger than all the startups in Europe combined. Like the potting soil department might be the only thing rivaling their, their startups in. 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?
[00:35:32] 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 eight to 12, you made 50%, right? Like that's, that's value investing, you know? What about what that says about, I guess, the larger recession risks? So U.S. is still the hub of innovation, but we've got this, these tariffs, we've got this demand destruction that's going on.
[00:35:57] Does, does that skew towards either an earnings recession or a genuine GDP economy recession? Um, I think we are, I think we are kind of slouching towards a recession as we speak. And I'll give you an anecdote. Um, every other Tuesday I go into the radio station. It's like a conservative talk show. And, um, I'm like the, I'm like the money guy and I'm on the show for an hour.
[00:36:25] 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. Um, and it was big advertisers and it was like a conservative show. Yeah. And no, this is not because of politics. It's not because I'm making sure. Yeah. It's not, it's not because she said something bad or anything, uh, not about politics.
[00:36:54] It's just because they even said like, you know, it's more uncertain. Um, 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 one, 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
[00:37:18] be surprised to see GDP at 1% in the next quarter, you know, um, if not a recession, but you know, lower GDP. I think we are undergoing a little bit of a contraction. 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? Yes. Yes. Yeah. That's the big question here is if we get policy clarity, maybe those advertising dollars come back.
[00:37:48] Yes. If we don't, how long does that have to persist before it's not easy to pull out of that nosedive? Uh, it could be a long time. It could be a long time. Yeah. Yeah. We have a, uh, we have a rule in the podcast that whenever anyone mentions value investing, uh, 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?
[00:38:17] 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? Whatever that's worth. But, um, no, I think, I think the analog here is, uh, 2001 to 2004.
[00:38:42] Um, 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. Right. 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 2000 mutual funds.
[00:39:09] 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, no, 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.
[00:39:36] 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 4,000 basis points a year. So you had this period of time from like 01 to 04 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.
[00:40:02] So if you think there's an analog between this tech bubble we just had in MAG7 and the tech bubble we had in 2000, we, I think it's possible we could see a resurgence in value coming out of it. So. Do you think there's some major differences between now and then? Or do you think this is a pretty similar situation to what we saw back in the nineties? I think it's a pretty similar situation, you know?
[00:40:26] And I think that, um, I mean, look like relative to the U S the rest of the world is value. Like all of Latin America ex Argentina is trading at six times. All of Latin America. Argentina is trading at 12 times. Europe is trading at like eight or nine times. China is trading at six times. We are trading at like 23 times. Right.
[00:40:53] So like if you look, if you're looking at U S versus the rest of the world, it's not so much a domestic international trade. It's a growth versus value trade. Right. And if, if going international, you know, that could mean that value is becoming fashionable again. So. Let's switch from value. Let's talk about sentiment a little bit.
[00:41:17] You put up, uh, the AII 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? Uh, I think it's, uh, super bearish. Um, I think people are pretty bearish in general and I'm bullish. Um, I am, I am bullish for the moment for sure.
[00:41:44] Um, yeah, I think, I think that we put, we've put in the low during this tariff crisis. I don't think we're going to see those lows again. Um, 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. Um, 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?
[00:42:13] I think it, I think it, you do need some clarity on the tariffs, but I, I, I do think we're going to get that. Um, partially because I think, um, 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, um, they're going to, they are backtracking. They're going to have to backtrack more.
[00:42:40] And I think, I think we'll get some more visibility on this. Do you think the VIX and sentiment surveys and stuff like this are great indicators to not saying Besson 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. Well, first of all, let me say that the AAII survey is kind of garbage. Um, it's a little flawed. Yeah.
[00:43:09] It's a very small sample size. It's like 300 people, uh, and it's volatile. It's, it, people pay way more attention to that than they probably should. Um, there's, there's lots of other places to get sentiment data, um, just in the market. So, um, yeah. 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? I look at the VIX as the price of options.
[00:43:40] You know what I mean? Say more. Yeah. Um, so basically, um, 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, um, I was, I was selling puts during the crisis. Like, like I was going to the electric chair. I was selling puts, uh, in puts that I sold at 200 or now at 25.
[00:44:10] So. A little bit of action there. You're saying. Yeah. Just a little bit of action there. Uh, and do you think as far as just like an, like the other thing, upper limit on the VIX, you think we've, we've seen that just like you think the lows on equity markets here and, you know, late April of 2025, the near-term lows are in and the near-term highs for the VIX are in too. Yes. Yeah, for sure. Yeah. How do you think about sentiment in general?
[00:44:37] I mean, you talk about the AI, you don't think that's great, but do you use sentiment at all? Do you, do you think it's valuable? I, I, I use it all the time, but I use it, uh, in a qualitative sense, not a quantitative sense. So I actually get most of my sentiment information off of Twitter. Right. And I, 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.
[00:45:04] 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. Um, it's super useful. Your ability to non-poll poll people is one that I, I look for those tweets.
[00:45:32] I look for them like, oh, Jared's trolling the trolls. Let's see what you're saying in the comments. Much is to be gained from this. 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. And 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, um, you know, that's fine. There's anything out there, I would guess. Yeah. Also magazine covers, the, the economist just had a dollar bearish cover, uh, last weekend.
[00:46:02] Um, so I mean, their, their, uh, hit rate is very, very high, you know? So what do you think the feds 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?
[00:46:28] Well, they should cut, um, they should, they should cut fed funds to 3%. Um, so that's a big cut from here. Yeah. They get right there. That would get real rates to about one and a half or two right now. See, I, I, I look at Truflation instead of the CPI data, right? The Truflation lead CPI. So Truflation is at 1.3. Fed funds is at four and a quarter.
[00:46:54] We have 3% real rates, which is super restrictive, right? Like we need to be at three and a quarter or three. Um, 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. Uh, I think, I think Powell is, um, I, unless he's faced with the prospect of a terrible recession, he does not want to cave in to Trump.
[00:47:23] Um, so I think there's, I think there's a possibility that they don't cut at all. Uh, Beth Hammock was talking the other day about rate cuts, but she's new. Um, yeah, I, I, I mean, I think we're pricing in two or three this year. Um, at this point, get us to where you're talking. No, I don't. I mean, I guess what I w what I want to say is nothing would surprise me. It wouldn't surprise me if we don't cut at all.
[00:47:51] 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? Um, there's yeah. With really if, so there's not a trade there, but there's just the reality of the feds 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. Yeah.
[00:48:21] 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? So. Do you have any views on Bitcoin in this environment? Like people talk about Bitcoin as being just a leveraged version of the NASDAQ for a long time, but it does seem like it's acting a little bit differently than that recently. Do you have any views on that? Uh, it is held up surprisingly well.
[00:48:51] Um, I, I currently don't have a position in Bitcoin. I have no plans to have a position in Bitcoin. Uh, I am just surprised at how resilient it is. Um, you know, everybody said last year that Bitcoin was like two beta NASDAQ and this in 2025, that kind of hasn't been the case. Uh, it's acting a little bit more like gold.
[00:49:18] Um, not exactly like gold, but a little bit more like gold. Um, so it, yeah, it's interesting. Do you think some of that's the fleeing of U S assets narrative? Just finally catching up to Bitcoin is digital gold. Yeah, I think so. Yeah. Do you feel like it's coming from any bigger investors or it's just this? I don't know. Yeah. I don't know. All right. So Jared, let's talk about this.
[00:49:43] 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? Uh, I think the majority of people would disagree with me on tariffs.
[00:50:10] Um, 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. Um, like people, it's kind of hard to remember what this was like, but back in the nineties and the early two thousands, like we were very much a free trade country.
[00:50:40] You know, uh, people saw the benefits of free trade and over the last 20 years, like that's changed a lot. Um, 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.
[00:51:05] Um, so it's like, I, have you ever heard of the allegory of the sandwich? You ever heard of this story? Possibly. Who's, who's this from? 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.
[00:51:33] 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.
[00:51:58] Trade may is mutually beneficial transactions makes everybody richer all the time. Right? So, uh, I, I'm very much opposed to what's going on right now. Um, and, uh, by the way, I, one other thing I point I'd like to make about that. Um, you know, it's funny because the Democrats have become very much free traders over the last couple of months in opposition to Trump.
[00:52:27] My guess is if a Democrat wins in 2028, they're not going to get rid of the tariffs. The tariffs will stay right. 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. And that, that's consistent. You're not the only person I see saying that too. That's not to challenge you saying this is different than the status quo, but there's a lot of stuff that Trump round one got carried through Biden and now we're just picking
[00:52:55] 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. Um, you know, Warren Zivon had the other rule of the sandwich. Do you know that one from the Letterman 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, uh, you wrote a song, life will kill you.
[00:53:25] How are you feeling right now that you're faced with death? And his takeaway was enjoy every sandwich. That's Warren Zivon's role of sandwich for you. Jared Dillian, if people want to follow you, find out more, where should they check out on the internet? Uh, at Daily Dirt Nap on Twitter. And if you want to subscribe to the newsletter, um, highly recommend it. Go to dailydirtnap.com and you send me an email through the subscribe link. And if you mentioned the podcast, I will give you a big discount.
[00:53:54] Um, 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. 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. 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.