Dennis Rodman is in the Hall of Fame, Basketball Hall of Fame, and he's the lowest scoring member of the Basketball Hall of Fame. And there was actually a controversy about whether he should even be included in the Hall of Fame. He scored like six points a game or something like that. If you had a team full of Dennis Rodman's, if you had five Dennis Rodman's on a team, it would be the worst team in basketball. Right? Because it can't score, but Dennis Rodman can rebound and he can pass.
So what happens is if you take Dennis Rodman and add him to a team of four people that can score, the team gets much, much better. Right. And that's really what gold is about. if you had a portfolio that was just gold, I mean, you said gold did really well in the seventies, but also gold, kind of like real estate has gone up 4 percent a year since, you know, the 1930s. So if you had a portfolio that would, that was just gold, it would not be very exciting.
When you, when you take gold and you add it to a bunch of other stuff, that's when things get better.
All right, welcome to another edition of Resolve Riffs. Today we've got a very special guest, freshly minted new author of the book No Worries, How to Live a Stress Free Financial Advice, Jared Dillian, also the editor of the Daily Dirt Nap, a fantastic newsletter for I think a lot of out of the box thinking and has been continuously in publication since 2008. Jared, welcome to Resolve Riffs.
I'm sure there'll be lots of, of our listeners who will be pleased and excited to hear what you have to say, both on, uh, taking the stress out of money and what your current macro views are on, you the current machinations around the world with respect to monetary policy, hard assets, and all of those types of things. So welcome to the channel.
Hey, thanks for having me.
should mention it's, it's, this is not Jared, your first novel, right? You've got a, you've got a few other novels under your belt. What are they?
Uh, well, the first book was a memoir. It was called Street Freak, Money and Madness at Lehman Brothers. And that was in 2011. And then in 2016, I published a novel called All the Evil of This World. 2023, I published an essay collection called Those Bastards. And then No Worries in 2024. And I have a short story collection coming out later this year. Well,
kind of cool. So I think, you know, Mike and I lived through many of the, same formative milestones of the journey that probably motivated the writing of your first three books, maybe not your exact experience with Lehman Brothers, but the decisions made post Lehman Brothers and, the constant creep of Supervision, regulation, intervention, markets, making markets less and less.
free to act on, you know, as a price setting mechanism and more, as a policy mechanism for various government objectives. but this latest book is, is quite a departure from those themes. at least that's my sense. If so, what motivated that, that shift in, in interest or curiosity, that thread that you wanted to pull?
I really wanted to write a book about personal finance. around 2018 I started reading all the classics, right? So rich dad, poor dad and the millionaire next door and the Dave Ramsey book. And I read all those and I kind of came to the conclusion that The advice that people were getting, you know, average people were getting from these personal finance gurus was pretty terrible.
and at the time I had a radio show, uh, actually had a radio show on personal finance that was, not a big show, but I was, I was on every night for two hours. And the themes I kept coming back to was this idea of financial stress and how to minimize it. And a lot of the advice that people are given. may help them get more money in the long run, but it does at a cost and that cost is your sanity. So really the two sources of financial stress are debt and risk.
So the idea is you want to minimize your debt and minimize your risk to the best extent that you can, and then you can be happy with your financial situation.
Is there any, is there anything in particular that really bothers you about the current state of advice going on? Any, any particular examples that are, uh, get under your skin?
Well, a lot of it focuses on Cutting expenses. This, this obsessive focus on cutting, cutting small expenses. And the classic example that everybody knows because Susie Orman talked about it is, buying coffee at Starbucks, right? She says if you buy coffee at Starbucks, it is like peeing a million dollars down the drain. Because if you, if you saved 4, every day for the next 40 years and you invested it, you could have 100, 000 or whatever. So, stop drinking coffee.
And what I found was, you know, if you do the math on it, it really doesn't make a lot of sense. through one decision, like buying a house, if you get a house that's 500 square feet smaller, And it's correspondingly cheaper than you're paying a lot less in interest over the life of the mortgage. And it ends up being way more money than what you might've saved by not being, not by not buying coffee. So it's really, the goal is to focus on the big things and not the little things.
The little things don't matter. The big things matter.
It reminds me a little bit of you know, the, the willpower sort of some of the books on willpower, where you have these, you know, these small things that you're going to deprive yourself on a regular basis, but they chip away at the ability for you to actually stick to that sort of stuff. So you end up failing on the small stuff. And if you're not making the big decisions right in the first place. then it's kind of total catastrophic failure across the board.
And I guess your point is get these pillars correct, get the house right, get the student debt right, you know, figure out how to get a car properly, use credit cards in a smart way. and then the little stuff, enjoy your life, I guess is kind of the,
The reason why that fails is because human beings can give up large luxuries, but they can't give up small luxuries, right? Like you can live in a slightly smaller house and you're not, Like this house sucks. I hate it. I can't wait to move out of here. It doesn't really matter. You're sitting in the living room watching TV anyway. Like you can give up a, you can give up a slightly larger house, but you can't give up coffee every day.
It's these small luxuries that we need and they don't cost a lot of money. And I said, people can give up large luxuries, but they can't give up small luxuries.
and I guess those, those small, sorry, go ahead Adam.
You know, it's cool. I was gonna say, you know, so much of the cost of a home is, not so much related to square footage as it is to time of travel, right? Like, you want to live within a certain time of travel to your, to work, for example, right? and there's, you know, there's sort of a minimum amount of space that, a new family, for example, can use to approximate some kind of middle class lifestyle, whatever that means these days.
So, you know, I'm just wondering how you trade off because that time factor is to my mind, quite different than the space factor, right? Because that time factor is something that you'll just never get back. You spend an extra 20 minutes in the car every day, versus spending a little more to live a little closer to work. But all those homes are owned by people who bought them 30 or 40 years ago. You know, how do you try to factor that into the home buying equation?
Well, time is super important. You know, the interesting thing is, is that, in about two weeks, I'm moving into a house that I built. And the house has a dedicated office space and I'm going to be working from home. So my commute goes to zero, right? my wife's commute gets longer. she has about a 45 minute commute right now, which is going to turn into an hour. But she only has to go into work like two or three days a week.
So it's not that big of a deal, but like you said, like time is, time is super important. So I know I never, I never really understood these people who lived in like Easton, Pennsylvania and commuted all the way to New York city every day, like two hours each way. Like, I mean, yes, you can be productive on the bus and you have a laptop and you can read books and stuff like that, but that's a, that's a colossal waste of time.
Yeah, I guess I agree. I guess my, my point was, or question was sort of how you, how you would advise thinking through this issue? Because I think, you know, the size of the house has, to my observation, kind of largely, Become secondary to the time you get to spend with, family or doing things that you like rather than commuting, right? And that as a function of that, the, cost of time ends up being the limiting factor, not the cost of more, of more housing space.
Yeah. And I think people tend to undervalue time, with respect to money. I think they put a higher value on money and less value on time when it should be the other way around. It should be the other way around. So
Yeah. No, I agree. And obviously working from home, is a growing trend or, I guess it's probably in the middle of finding some kind of equilibrium, but at the margin, it seems like this is a growing trend and that trade off will become less and less important over the next few years.
yeah.
see
is, is as you have debt to, you know, pay it down quickly, which is interesting. I don't know if, you guys ever, you know, heard about the, uh, when interest rates got to that sort of zero bound and stay there for such a long time. Something I heard from the younger generation was Why would I ever pay off, right? This idea that I'm always going to have it anyway. And, and the, the management of the, of that is so, um, it's at such a low rate and so manageable, I'll just leave her up continually.
And, as someone who. You know, witnessed a little bit of the 70s at the tail end and can remember that in some of the 80s and early 90s in Canada. That's kind of a head scratcher. People just didn't have the experience of having a period of time where interest rates ratchet up quickly, which they have. So maybe this is less of a lesson today than it was back then. But walk us through some of the thoughts on debt and how you think the perception of debt over time has changed.
Well pretend you had a mortgage with a 0 percent interest rate. Okay. So you were just making principal payments. You can still default on that mortgage. Like you can still default on it and lose the house. Okay, so the value in paying off a mortgage is to reduce your stress. Now, I paid off a couple of mortgages in my lifetime, and I can tell you that when you own a house free and clear, it reduces your stress massively. If you own your house free and clear. There is, you are untouchable.
You are in an unassailable financial position. It really, no matter what happens to you, you have a place to live. Nobody can take the house away from you. So, you know, I say in the book that everybody should strive. to pay down their mortgage in 10 years at a minimum. my last mortgage, I paid off in three and a half years, right? Now the other part of that is, that's, that was a 3. 75 percent mortgage. so you say, well why did you pay it off in three and a half years?
Well, basically, after I paid it off, I added up all the interest I paid in three and a half years, and it was 70, 000. And I said to myself, what could I have done with that 70, 000 aside from paying it to the bank? Like interest interest is the worst thing in the world because you get no enjoyment out of it. Is paying interest fun? Do you get some utility out of it? It's basically all you're doing is contributing to bank profits.
And one of the things I say in the book is you never want to be a good customer of the bank. And a good customer of the bank is somebody who makes a minimum payment every month, pays the maximum amount of interest. Never prepays, and that's a good customer of the bank. So I never do that.
Right, okay. So part of your, how to buy a home. Is to buy a home that you have a good shot at paying off aggressively or on aggressive timescale, right? you, you've got a few other points in the book about, you know, a lot of people don't make thoughtful decisions in how they buy a home. What are some other elements that people often miss?
Well, you know, buying a house for a lot of people is an emotional decision, right? Like they they see a house or, you know, they get a realtor and the realtor shows them a bunch of houses and they fall in love with one. They say, Oh my God, we have to, we have to live here. Right? We can, the kids can play in the yard and we can put the TV here and bedrooms over here and they see themselves in the house, then they have to have the house and then it becomes an emotional decision.
I would say 95 percent of home buying, really unless you're an investor, is an emotional decision. Once you've decided you want the house, you have to have the house and then you're willing to overpay for it. And that's what happens to the vast majority of people. It has, you have to separate. The emotions from buying a house. It has to be just a rational decision.
One of the things that, cause I mean, that just seems to make a ton of sense to me and I've, I've always embraced the idea of trying to pay off a mortgage as quickly as possible, even, even during the low rate period. but you know, that, that seems to have just flown out the window. And, and part of the reason that that has, you know, people almost laugh at that idea now is that it has paid so handsomely to be imprudent. Over the last 10 years, right?
I mean, the smartest thing in retrospect, you could have done 10 or 15 years ago is buy a home vastly outside of your, affordability range, continue to ratchet down the interest rate that you pay on that loan as, as the fed and other factors lowered rates.
And of course, as a function of the fact that people began to think about home prices in terms of not the cost of the home, But the monthly payment on a home that the prices of homes went up commensurately over that time and made everybody who decided to be over leveraged to buy too much home, very rich, right? So how do you, how do you counter this experience? I mean, I struggle with this. From a very frustrating perspective all the time.
And I'm, I'm wondering how you positioned it in the book so that it connects to people who obviously have had a very different experience with, with prudence and imprudence over the last 10, 15 years.
Well, I didn't talk about this in the book, but interest rates are basically a signal. Okay. And when interest rates are low, they're telling you to borrow money and buy assets. And when interest rates are high, they're telling you to sell assets and raise cash. Right. And now interest rates are high. So the calculus is completely different. I will say that the housing market is still pretty strong. you know, at least in the U. S. for, demographic reasons.
You know, you have a huge population bulge, the millennials that are just starting to buy houses. And we also had 10 million people come across the border, which are going to need a place to live. So, you know, I think housing prices over the next 10 years in the US are going to do what they did in Canada from 2013 to the present. So, I think it's, I think they're going to go parabolic here. I think it's going to be crazy.
So then, you know, how, how do you advise, the young person now you say, look, get in now doesn't really, yeah, they're vastly overpriced already, but they're never going to get cheaper. So just be prepared to have far less disposable income than your parents You know, you're going to have to spend a lot more on your home.
yeah, I mean, that's, look, that's an economic forecast and there are no economic forecasts in the book. You know, I didn't, I didn't, you never want to put a forecast in a book, right? Because
Yeah.
going to turn out to be wrong. And then you're going to look stupid. Right. So I didn't make, I didn't make any forward looking statements on what the housing market is going to do over the next 10 years. But, you know, usually the housing market is, um, not, doesn't really provide a great return. Like if you look over the last 100 years, housing has returned about 4 percent a year, which barely beats inflation.
and it's, you know, having said that, even though it hasn't been a great investment for a lot of people, it is a great investment. Because a lot of people don't have the ability to save and invest. they can't put money in a bank account, they can't buy stocks, they can't buy mutual funds. But what they can do is pay off a mortgage, right? And build equity over time. There's a lot of people in this country Who have, you know, they bought a house for 70, 000 in 1979.
And in 2024, they sold it for 900, 000 and it would, the mortgage was paid off and they had a hundred percent equity. And they take that money and they move to a place like South Carolina and they buy a house for 250, 000 and they just live off the rest and retirement. Like that story happens over and over again. And these are people who never bought a stock, bought a mutual fund or anything, but they just, Yeah,
Yeah, I guess the question is, how do you, how would you advise millennials at the moment who are, as you say, at the point in their lives when they do want to start a family? For many, the biological clock is ticking, but they're faced with a housing market that is going from strength to strength. It started from very expensive, interest rates have risen. So the monthly payment now is even twice what it was, three years ago. I'm just wondering your, your thoughts on it.
Cause I, I personally struggle with what the advice should be.
it's a hard decision. I mean, look, it's also an asset allocation decision. You want to have some money in stocks. You want to have some money in bonds. You want to have some money in cash. You want to have some money in commodities. You also want to have some money in real estate. And if you're renting, I mean, there's nothing wrong with renting, but what that means is you don't have any exposure to real estate as an asset class.
So if real estate as an asset class does really, really well, and you own stocks and bonds, which don't do very well, then you're missing out. You're missing out on that diversification. So, since you can't predict the future, you basically want to own a little bit of every asset class.
Which means you're probably going to have to buy a house and the only advice in the book that I give is that your housing costs should be less than 25 percent of your income, which is difficult to achieve, but that's the goal that you should shoot for. So your mortgage, your HOA fees. Your property taxes, your insurance should be 25 percent of your income.
Which basically, I think for, you know, the top dozen major, major employment centers in the U. S. means that your average millennial family is living about 90 minutes one way to the office if they have to commute.
Yeah. Yeah. Pretty much. Yeah. I mean, you can stretch it a little bit. You can do 30 percent of your income, but what a lot of people do is, you know, if you live in San Francisco, then it's 50 percent of your income and that crowds out your ability to save or even spend money on fun stuff. Right. So look, it's a balance like, you know, these are, these are hard choices.
Yeah.
offs, trade offs, and trade offs.
Yeah, for sure.
Yeah. I guess, yeah, those are sources of the financial stress you talk about, and you have two sources of that you talk about in the book, you want to elaborate on that a little bit more, cause you're beating around the bush a little bit, but, you want to lay them out distinctly.
So the two sources of financial stress are debt and risk. And we've spent a lot of time talking about debt as it comes to housing. Um, risk is the investment side, financial markets risk, and you know, the conventional wisdom in investing is that you should put all your money in the S and P 500 index fund. And why should you do that? Because it returns the most. You should put your money in the thing that returns the most. Well, if something has a good return, it probably also has a lot of risk.
And if you invest in an index, you get the returns in the index, but you also get the volatility of the index. And the S& P 500 is pretty volatile. It moves around a lot, about 1 percent a day, 15 20 percent a year. And over the course of an investing lifetime, there's going to be one year when it's down 50%. It's just going to happen. So I don't think that's very good advice. because number one, it causes people a lot of stress, right?
Number two, they may not be able to withstand that stress and they may liquidate their investments at the worst possible time. So the goal is to be in some kind of vehicle, which gives you a good return, but cut your volatility in half.
And then how, how did you approach that in the, in the, uh, sleep at night portfolio that, um, you talked about in the book,
Yeah, I called the awesome portfolio, and that's 20 percent stocks, bonds, cash, gold, and real estate in this portfolio, which we backtested back to 1971. this has returned 8. 1 percent a year. for the last 53 years with half the volatility of an 80 20 portfolio and the worst drawdown in any year was 12. 2 percent. So you say look, like I'm getting one percent less than the stock market with half the volatility And the worst year that I can possibly have is down 12%.
And by the way, in the year of the financial crisis, it was down 9 percent when the, when the broad market was down 38%. So even during the financial crisis, you were protected. So this is. this is the solution.
So it's that old adage of diversification. Yeah. And then how do you, so we're large proponents, big proponents of diversification. One of the challenges is the tracking error that comes with, you know, having everybody else in your friend group who are in the S& P and having the best of times at times and the worst of times at times, and you're not in that emotional rollercoaster. Do you have any thoughts on that side of the equation?
Yeah, I mean, this is, this also takes some intestinal fortitude because 42% of the time you are going to underperform the s and p by 10%. 21% of the time you are going to outperform the s and p by 10%. As it turns out, the times when you're outperforming the s and p, you do it by a lot more than when you underperform, but 42% of the time. You're going to be talking to people at cocktail parties and they're going to be bragging about how the market is up 30 percent this year.
And you're going to be up 11 percent and you're going to be like, why am I in this stupid portfolio? You know, everybody else is getting rich but me, but in the bad times is when it has real value.
Yeah. And a lot of people have forgotten that 2000 to 2014 running the S and P where you get. Two 50 percent declines in the market and zero returns for, you know, better part of 12 to 14 years. So it is a, stocks are risky and they are a certain regime. Now that, that might move us into, um, the area of gold. I know Adam, you found a, a wonderful market carpet that showed the top asset classes.
I forget who published Bank of America, maybe, and gold seven out of the 10 years in the seventies was the top performing asset class, not by a little, I know you're a proponent of, gold, Jared, but, you know, can we walk through a little bit of the, the value of having these different pistons in the engine of the awesome portfolio versus, you know, just betting on, stocks and sort of one regime all the time?
Well, a lot of people, you know, people who have an index fund, They say, well, I am diversified because I have 500 stocks. I'm diversified. Well, I don't, I don't consider that to be diversification at all because stocks are highly correlated to one another, right? So you have this big basket of highly correlated stuff. And they say, well, I'm going to add some bonds. Okay. Well, there's long periods of time where bonds are actually positively correlated to stocks. We saw that in 2022.
So basically what you have is if you have stocks and bonds, a 60 40 portfolio, you have this basket of financial assets, but you don't have any real assets. And once you start adding real assets, like gold commodities, real estate, that's when the benefits of diversification really kick in. Right. And particularly gold, you know, the, the most special thing about gold is its diversification qualities, because it is lowly. It is very little correlated to anything else.
And those correlations are not stable. They change over time. So it is the perfect diversifier to any portfolio. Once you add gold to a portfolio, The volatility immediately comes down. That's what makes it so useful.
uh,
with the, uh, the Dennis Rodman analogy, which I think is, it bears repeating cause it's such a great, it's a great illustrative story on the power of diversification, via a different avenue than just scoring all the time, if you will, maybe you can walk us through that.
Yeah. Well, Dennis Rodman is in Hall of Fame Basketball Hall of Fame, and he's the lowest scoring member of the Basketball Hall of Fame. And there was actually a controversy about whether he should even be included in the Hall of Fame. He scored like six points a game or something like that. If you had a team full of Dennis Rodman's, if you had five Dennis Rodman's on a team, it would be the worst team in basketball. Right. Because it can't score, but Dennis Rodman can rebound and he can pass.
So what happens is if you take Dennis Rodman and add him to a team of four people that can score, the team gets much, much better. And that's really what gold is about. It if you had a portfolio that was just gold, I mean, you said gold did really well in the seventies, but also gold kind of like real estate has gone up 4 percent a year since. You know, the 1930s.
So if you had a portfolio that would, that was just gold, it would not be very exciting when you take gold and you add it to a bunch of other stuff, that's when things get better.
what does gold respond to that makes it so different from stocks and bonds?
I, nobody knows. Nobody knows. Seriously. I mean, gold responds to a bunch of different things. I mean, theoretically inflation, but not really, lately geopolitical risk, but not really. the thing that it has the highest correlation to is budget deficits. That is the one thing that it has the highest correlation to is budget deficits over time.
So the idea being that governments have a really hard time scaling back spending. Eventually, it becomes very hard to fund deficits through tax receipts because of the crowding out effect or what have you. And, they become more and more incentivized to monetize some of that and then because the amount of currency outstanding or Dollars outstanding, say relative to a fixed amount of gold, which really doesn't change much from year to year. They don't mind hardly any of it out of the ground.
then, you know, over time, it's not that gold so much as rising as it, as other stores of wealth are falling. Right? And, and gold stands out from that perspective. That might be one narrative that, helps explain why it's a nice diversifier against stocks and bonds.
Yeah, that's right. I actually had a tweet thread about that a couple of weeks ago that was pretty popular. I just, that's the exact concept that I was talking about. So,
Gotcha. And then real estate, typically people own real estate with quite a bit of leverage, right? Because they're, you know, they're buying it, with a mortgage, right? I mean, obviously, if they pay it down really quickly, then that, that leverage factor declines conventionally. But for many years, they end up with this. Like highly levered bet on, on real estate and obviously equities are much more risky than bonds are.
Any thought to the fact that you've got, you know, different types of assets which are diverse in their nature and what drives them from day to day and week to week and month to month. but they have very different, Risk profiles. And that a lot of the time, you know, leave a real estate or, the equity side of the, basket will dominate what happens in the portfolio and the diversification opportunity from stuff like bonds and cash are, they don't really have a chance to shine through.
well, I mean, the funny thing is, is that, you know, that 12. 2 percent drawdown that I talked about in the awesome portfolio, uh, that actually happened in 2022. that was, that was the worst year for the awesome portfolio. Stocks were down, bonds were down, real estate was on, you started to earn more money on cash and it was also a pretty bad year for gold too. so that the one vulnerability to any kind of diversification is rapidly rising interest rates.
In a period of rapidly rising interest rates, really, the only place to hide is cash. The only place to hide is cash. So that actually might happen again. You know, that, that could be 2025 or 2026. It's possible that interest rates could go up a lot more. We go through that again. so yeah, I mean, in times when interest rates go up a lot, then everything becomes correlated to the downside.
Right. So let's, let's discuss some themes here. I mean, you mentioned that we, we could see another, inflation push over the next couple of years or so. what might drive that? In your view, and then we'll also sort of move around a little bit into some of the other themes you're watching.
well, I mean, really inflation is, you know, as Milton Friedman said, a monetary phenomenon, but it's also a psychological phenomenon. And for years, even though the fed was printing a lot of money, we had a disinflationary psychology. People did not expect price rises. The, this is how people behave. If you think that prices are going to rise, then you act in such a way to make prices rise.
Yeah. Let's say you're going to Home Depot and you're going to buy a bag of fertilizer and it costs like 8. And you get to Home Depot and you're like, well, you know, we have inflation and, I don't know what this bag of fertilizer is going to cost a year from now and I might need some more. So instead of buying one, I'm going to buy 10 and I'm just going to keep them in my basement. And the act of me buying 10 and everybody else buying 10 pushes up the cost of fertilizer.
It accelerates economic activity, right? So even though inflation has come down from the highs, which were about 9 percent and now we're at 3. 5%, we still have an inflationary psychology, which I'm sure you would agree with. People are expecting prices to go higher, right? If you go back to the late 70s, early 80s when Paul Volcker was chairman, the thing that he did that was so special was he raised interest rates so much and so fast that it broke that inflationary psychology, right?
And we haven't done that yet. And if you go back to the 70s, and if you look, There were really three waves of inflation. In 1969, you had a bump of inflation to about four or five percent. Then in 1973, 74 went up to about eight or nine percent. And then in 1979, it went up to like 14 percent. So we are currently in, we just passed the second wave of inflation, and I think that we are going to get another one that is bigger than the previous one.
So, because we did not break that inflationary psychology. And this is going to continue until we do.
Right, and what would be some signs that we were beginning to break that inflationary society, um, psychology? Do we need a major uptick in unemployment or a major fall in prices, say in equity prices or, you know, in aggregate prices in order to. To believe that, that cycle may be over.
You need all those things, but interestingly, interestingly, one big component of inflation is regulation. And regulation is known as inflation by fiat. So if you regulate an industry, you impose costs on it, and the industry has to raise prices in order to cover those costs. So if you have a period of time where you have increasing regulation, Increased costs. And what you, another thing that you saw correspondingly in the late seventies and early eighties was a big wave of deregulation.
We saw that in the airlines, we saw that in a lot of industries and prices dropped a lot. And it was actually because of deregulation. So that's a big part of it.
Gotcha. And we don't seem to be in a cycle where the government is hurrying to get out of the way. They, they seem to be moving, steadfastly in, in the opposite direction.
no. And if, and if we did, if the government did get out of the way and started a wave of deregulation, you would want to buy bonds until your head caves in. So
what are some of the other themes that you're watching though?
Uh, well, gold for sure. private equity is probably the biggest one I'm focused on at the moment. I am of the belief that we have a private equity bubble, like, so I saw, An article today that private equity is going to be buying NFL teams. they've already bought minor league baseball teams, but they've been buying dental practices and pizza parlors and car washes.
And, you know, the funny thing about finance, Is that somebody comes up with a good idea and implements it and they make money and then it turns into monkey see monkey do and everybody is doing it. We have 17, 000 private equity firms in the United States and this all made sense when You know, interest rates were zero and you could buy a business for four or five times multiples, but now interest rates are 5 percent and you're buying businesses at 10 or 12 times multiples.
Like, this is not going to end well. And it's going to have systemic effects. It's going to crash. It's going to be a problem. So
when private equity gets involved is that, and it's this, it's this weird cycle where, you know, so much of private equity is, investors are, are pension funds and sovereign wealth funds and endowments. And so you've got these, pension funds who are acting on behalf of.
Their stakeholders, you know, ex employees of a company or, you know, but just your average everyday citizens, and this is their retirement savings and you give them money to private equity and they go out and they buy homes and they go out and they buy gas stations and they buy dental practices and they buy, um, health insurance providers, et cetera, et cetera. And then they proceed to make the margins in all of those different businesses.
wider, the, you know, cut the customer service out in order to, to get those wider margins. And, you know, these are all relatively essential services to the very people that Are funding these private equity investments via their pension contributions. And it just goes round and around and makes everybody's life worse.
Well, I can tell you that Pension funds and endowments, you know, places like CalPERS, like, the, the goal in those places is to avoid accountability. the, those decisions are being made by committees of lots of different people and, uh, everybody, you know, the, the goal is to, Prevent embarrassment. So people do what is popular or fashionable. So, you know, CalPERS actually just put another 34 billion into private equity, on the highs. So, yeah.
Might be a good segue into, um, we touched on it a little bit earlier, but you know, Mike and I, and well, we have just in general on this podcast and at Resolve and of the view that, that benchmarking in general is one of the most insidiously evil, pursuits. That, seem to be absolutely pervasive in the investment management industry. any, any thoughts on, on benchmarking in general?
I mean, obviously, benchmarking is driving the phenomenon that you were describing in private equity, but it kind of drives a lot of those. You know, in the end, very bad investments, right?
what do you mean by benchmarking? I don't understand.
Just like having a policy portfolio, making sure that your policy portfolio is close to the other policy portfolios or asset allocation mixes of your peer group, and then being held accountable not to whether that asset allocation actually makes sense or is aligned with the objectives of your stakeholders, but using that benchmark allocation or the The underlying equity benchmarks within the equity sleeve of the policy portfolio, or the bond benchmark within that bond sleeve as an end in itself.
Well, I, you know, I, I, look, I think about things in terms of absolute return and not relative return. You know, like the mutual fund world is very weird to me. You know, if you have a small cap manager, and they lose 15% in a year, and the index is down 20%, then they're thrilled, right? Like, they're happy. And I'm like, guys, you've lost money. Like, I, you know, like, I don't get it. so I've always been, you know, of the absolute return mindset.
I don't, I don't really understand that at all. So,
Yeah. I mean, the strange thing about that example is that if the small cap manager who, you know, 95 percent of people who allocated to that small cap manager wanted that manager to be down just slightly less than the small cap index, and if the manager had. Too much tracking error to that index and, did wildly differently, but even in a good way in that year, many allocators would be pulling money from
yeah, absolutely. Yeah.
Yeah. That's the insidiously strange and evil dimension, or one of them anyways, of this obsession with, with benchmarking. Really makes no sense.
So what do you, also let's, uh, expand. We gold, obviously you're a big proponent of gold, both as a long term diversifier, as well as potentially a short term opportunity. I think you're on sort of record for that. Anything you want to add there? And I'd like to broaden the gold discussion out to commodities more generally.
If you're seeing things, um, in the energy space that are particularly interesting and how you're interpreting the impact of oil and the oil shocks might have on, your current global macro thesis.
gosh, I don't have a, I don't have a global macro thesis. I'm just, uh, I'm, I'm just a trader. I just, I, I mean, I would just say that commodities broadly have, you probably seen that chart. of commodities relative to financial assets over like the last 15 years or something like that. And financial assets were very expensive and commodities were very cheap and that chart was on the lows and now it's starting to tick up again.
So if we really do have an inflationary environment, which I think we will over the next couple years, commodities are going to outperform and they're starting to. gold and copper for sure. Oil has come up a lot. the one thing that really has, we've seen cocoa and, uh, orange juice obviously have exploded. Some of the soft commodities, coffee has gone up a lot.
Uh, the one thing that really hasn't gone up, Is agriculture, which is kind of a function of, climate change, which has been beneficial for agricultural production and also crop yields and stuff like that. So, but yeah, commodities have come up a lot and I expect them to come up even more.
And then, yeah, so that this idea of diversity as well, I think, you know, there's been a few folks out there talking about, for example, the S& P 500, 500 stocks, but you know, 4 percent is designated, 4. 5 percent designated to sort of the energy sector and another 2 percent to the material sector. And so if you're thinking that. Your stock portfolio has any hedge to energy prices. It's really not true.
I mean, you have to go back to 2008 when, the exposure to the energy sector was up in the 16 percent range. At least then you had some exposure. Today's exposure exposure is de minimis and the cashflow is coming from the energy sector, you know, sort of three times. The size of the free cashflow coming from Microsoft and Microsoft, you know, three times the valuation in the index.
So it's, we are set in a particularly strange way for, you know, a dis inflationary environment, sort of peaking in the S and P 500. And if we get an inflationary environment. You know, underneath the surface, the index can churn a long time, not go very far as the sectors underlying sort of readjust to where cash flows are coming from.
yeah, I mean, uh, a lot of things there. First of all, the good news is, is that unlike the seventies, you can, it's now super easy with the click of a button. You can get exposure to the energy sector. We have ETFs, right? So, you know, you can, you can build whatever portfolio of sector ETFs you want. you don't have to just accept what's in the S& P 500. So that's really easy to do. Yeah.
Yeah, so you should, you should empower yourself. And then the awesome portfolio, it seems a little bit, it's somewhat similar to the Talmud as well. I don't know if you've, if you've ever seen the Talmud portfolio from several thousand years ago, I think it was a A third businesses, a third gold and a third, is it cash? Something along those lines.
I don't know about this.
You know, it's, it's a, it's like a 3000 year old portfolio, like of a, of a similar elk you've, you've, dissected a little more at a little bit more, uh,
certainly in the same family as the permanent portfolio and, you know, the idea of global risk parity, you know, you know, this sort of the idea being that we want to be diversified Against regimes that are unfriendly to equities, right? I think that's, that's the basic theme.
Yup. Yup.
that we can, that we can see through history and that are favorable for different asset classes. And, and you should be positioned to benefit from that and not be completely at the whims of whether you happen to be in a positive tailwind environment for equities, right? What about international equities?
Well, that's a great question because US stocks are super expensive and foreign stocks are really cheap. So gee whiz, like you should definitely be overweighted to international stocks. And so I actually got this question recently about the awesome portfolio. Like somebody who's like, why don't you have any international stocks in the awesome portfolio? I mean, Think of the Awesome Portfolio as an index, and you can depart from that index.
I actually, I have almost nothing in the way of U. S. stocks. In fact, I am probably net short U. S. stocks. In fact, I know I am. I'm net short U. S. stocks. I have Investments in India and Argentina and EM broadly and Europe broadly. but I I'm net short the U S which is kind of by design, but kind of not. but certainly. You know on valuations like U. S. stocks are just so overvalued relative to overseas.
And one of the reasons that is, is because the U. S. is the only country with big tech stocks. You know, and big tech stocks have done the best. Europe doesn't have big tech stocks, so.
So let's explore some of those. I mean, I'm a big bet in India. And, emerging markets. What is behind those? Any, any particular narrative you're following there?
Well, India, India, India is really, it's become sort of consensus in the last couple of months. it's a great chart. It's been doing well. Modi is still popular in India. He's still an economic reformer. the demographics are good, unlike China. You know, the thing about the emerging market CTFs is that they're all heavily weighted towards China. Like the EEM has like 35 percent in China or something like that. And China has the worst demographics of any EEM country.
No, not to mention all kinds of other bad stuff, you know? So I think with EEM, you can't really generalize. Like you could generalize in 2002. You could say, I'm just going to buy all emerging markets. Because they all have the same characteristics, but you can't do that today. You have to pick and choose in emerging markets. So
And Argentina, you're bullish on.
yeah, I actually, uh, I've been in Argentina for a while. as soon as I heard of Javier Millet, I bought Argentina. I had him picked to be the next president and, that bet worked out and that's been a great trade. So,
Yeah, it seems to me that that model that he is doing a pretty darn good job of executing on, is kind of a sandbox for what the global economy is eventually going to need to reconcile with. and I, you know, when I was.
Reading about his policies, it seemed to me that it was more likely that they're going to go through a period of extreme contraction and pain before they come out the other side with a clean balance sheet, a strong currency, a healthy private sector, a healthy, contained public sector. It seems like the market is sort of That valley and into the healthy state that it, you know, might emerge into and sort of two to three years. Did you have that intuition at all?
Or did you think this was going to be, roses right from the start?
well, I mean, there, if you talk to anyone in Argentina, things are very painful right now. you know, they've cut a massive amount of government employees, which has affected retail in particular, like people just don't have money. so I mean, you know, look, Malay managed to balance the budget within a couple of months of taking office. I mean, it's just an incredible achievement.
I am, it's funny because, I have a subscriber in Miami who emailed me last week and he says, look, I have a friend who's, who knows Malay. Do you want me to ask him any questions? And I said, no, not really. You know, just does he think he can do it? And he said, yes, he thinks he can do it, but he is up against the unions. He's up against, the Congress like it's, but I, you know, he's been very successful so far. So
Yeah, it seems to me that, you know, as this progresses, right, that, you know, the government's spending is the private sector's income and the government's. Debt is the private sector savings. And so in order to sort of clean this up and balance the budget, there's a lot less income to go around in the short term. again, huge long term benefits that the West. Has managed to, avoid at all costs for the last 20, 25 years.
and I see this as coming out the other side, if it can be fulfilled and if people can endure the short term, you know, two or three years of, of pain, as being very positive, but it'll, it remains to be seen whether or not
let me give you one, let me give you one quick statistic, So in the United States, in the United States, the stock market. Market cap is 170 percent of GDP. In Argentina, it's 9 percent of GDP. Right. which is the lowest in the world. So if you think that if Malay is successful, and by the way, the mean is about 100 percent of GDP. If, if Malay is even moderately successful and gets the stock market to 50 percent of GDP, that's a five bagger,
Yeah, no, that's a really, really interesting statistic. That's very interesting. any other themes besides, India and Argentina that stand out in your portfolio, even if they're just tactical?
No, not really. I would say that's about it.
And anything, anything on the negative side that you're, I mean, obviously private equity, you mentioned, you don't have a lot of us exposure, so. You would be sort of eschewing the, the semiconductors of shooing the market cap side of things. Is that sort of the, the feel and more. Getting that commodities and, and economies that are, demographically have positive, waves behind them along
Yeah, pretty simple. Pretty simple.
I mean, it's not that simple and it's, and it's not that, sort of well adopted yet. I mean, something that, gets me excited about a trade setup, if you will, is you have, you know, gold as an example, it's kind of like tobacco 1999. You've got, the ETF products across the board in pretty substantial reductions in AUM. And at the same time, you have breakouts to new highs. Of this, uh, shiny metal. And so you really don't have, you know, the, average investor.
And I mean, the average investor, both retail and institutional, because institutional investors do not buy physical gold, they're going to buy gold largely through. A proxy, like an exchange traded fund or product of some kind. So somebody's buying it, obviously, you know, we're seeing that through some central banks in the world.
And then we had some news over the weekend and the, um, the appropriated funds of the Russians being, potentially sent over to the Ukrainians, which is an interesting set of circumstances, which is going to make everyone question the sovereignty of their assets and where they're held and what they're held
Oh, yeah that and and that's you know, look like as Gold is actually having a bad day today as you know I'm not terribly worried about it I think that you know central banks are gonna continue to buy it, but that's not even my core thesis You know, my core thesis is really about the monetization. So
So, so that, that's more of a pegging of the yield curve, 30s, 40s type situation. You want to just walk us through that for the last, for, we'll wrap on that point. Does that
Yeah, so this happened in the 30s United States pegged the yield curve for the Fed. long bond yields were held at 2 percent for the period, for a period of want to say like 13 years or something like that. and at the end of it, at the end of world war II, inflation ripped to like 18 percent or something like that. We had a big wave of inflation. so this is going to be potentially much bigger.
This, this is, uh, You know, what we're talking about is the stuff that gold bugs talk about, like, Weimar Germany or, Zimbabwe or something like that. but you know, we really could see a big developed economy like the US, engage in full on debt monetization in order to keep interest rates at a manageable level, like that actually could happen. Like you can see the future, you know, it's coming. So,
Right. And with, you know, 1. 1 trillion in, in the cost of the debt alone, it's going to be some interesting math to go through as we progress into the future. All right. Awesome. Well, Jared, thank you for taking the time and, and, covering the book for us. And, as I said, you're the editor of the Daily Dirt Nap and you mentioned you're on Twitter. Where else can people find you that's beyond the, just the websites for the various, properties we've mentioned previously.
Twitter I'm on at daily dirt nap. And the best place to find me is Jared Dillian money. com.
Perfect.
Brilliant, Darren, thanks so much for coming on, man.
Great, great talk. Enjoy talking to you guys.
Yeah, us too. Have a great one.