Ed D'Agostino: Welcome everyone. Thanks for joining me. My name's Ed D'Agostino and today we'll be chatting with Jared Dillian. It's great to have you with us. Before we start, I just want to tell you a quick story about a trade that Jared made, that I think really sums up his approach to investing. We're going back to March of 2008. It was the middle of the subprime mortgage crisis. Bear Stearns had gone from $98 a share to $2 in under a week. The economy was in the tank, investors were panicking, to the point where they couldn't see any new opportunities in the market. And that type of environment is such a perfect setup for Jared and his focus on investor sentiment. His thesis back then was, when the consensus is just so lopsided, it's probably wrong. He sensed there would be a bounce in the S&P 500, and he was right.
The market popped by about 17%. And in three months, that one trade made his employer $5 million. We're going to get into that trade in a little bit more detail, figure out how Jared structured it. But let me just introduce Jared. He's the former head of ETF trading at Lehman Brothers. He's been an investor for over 24 years. He's an author, a financial writer. You all know Jared. Let me give you one more example that most of you are probably familiar with. Back on November 3rd of last year, the S&P 500 was near 3,700. Most Wall Street analysts were calling for the market to go a lot lower. And Jared wrote to his subscribers, "The S&P could bounce to 4,150." And again, he was right. Within 90 days, the market rallied, it hit 4,150.
So let's take the next 20 minutes or so to hear how Jared uses investor sentiment to invest. How you can work that into your own process. We're also going to get into some of his latest investment ideas. And we're going to end with a lot of questions that many of you sent us earlier in the week. So Jared, it is great to see you. And before we get too deep into some of the things we want to talk about, let's go back to that story I told. In 2008, you made $5 million for Lehman in that trade. How much did you put at risk?
Jared Dillian: I put zero at risk. So what I did was, I did what was called a call Christmas tree, or just a call tree. Which is where you buy a call option of one strike and sell two call options of different strikes. And it's kind of like a call spread with selling another call. And basically, the goal is you want the index to finish between the two top strikes. But I did this for basically zero premium. Which means that the return on the trade is basically infinite. So my cost basis on the trade was zero.
Ed D'Agostino: Your ROI was massive.
Jared Dillian: Yeah.
Ed D'Agostino: That's pretty funny. All right, well let's get into the meat of the conversation here. What is going on right now? Are we in a bull market, technical and real bull market, or are we in a bear market rally?
Jared Dillian: This confuses a lot of people. A lot of people think either you're in a bull market or a bear market. The answer is, you can be in both. We are technically about 20% off the lows, which is the technical definition of a bull market. We are still in a downtrend. So we are still in a bear market. We are in a bull market and a bear market, simultaneously. I am of the view, like Felix Zulauf, that we are going to have a long period of time with subpar returns, like the 1970s. But in the 1970s, if you look at a chart of stocks in the 1970s, there were huge opportunities along the way. I mean you had a 46% bear market in 1974, plus a huge recovery. There were lots of things to do during that time period. I think, if you’re an index fund investor, and you’re investing over the next five to 10 years, you’ll probably be pretty underwhelmed. But if you're an active investor, I think there's going to be lots of stuff to do over the next 10 years.
Ed D'Agostino: Yes, Felix said that at the SIC, at our conference, the Strategic Investment Conference, how you're really going to need to be nimble and tactical to make this work for you over the next decade.
Jared Dillian: Yep, definitely.
Ed D'Agostino: So let me hit you with a counterpoint. I've got some notes here. JP Morgan, they reported that in the last 10 instances since 1950, that the S&P has been up 15% or more in the first half of the year. And we're there. It's gone on to make further gains in the second half six of those times, with a full-year average return of 25%. So do you think we fall into a situation where the second half of this year just continues to be incredible, in terms of market returns?
Jared Dillian: I don't have high conviction on this. But I think if you make me answer the question, I do think that there's a greater chance that we're going to have more gains in the second half of the year. We're talking about my sentiment framework. And I saw a tweet about a week ago that Jeff Gunlock said that stocks are currently in a mania, right? And I'm like, stocks are not in a mania. Stocks were in a mania in 2021. I live in Myrtle Beach, which is the most financially backwards place in the United States. And in 2021, I was getting stock tips from people here about crypto and SPACs, and all of that stuff. And stocks are 20% off the lows. And we have AI, and Nvidia’s ripping and stuff like that. I am not hearing anything from people in Myrtle Beach. It is not a mania. So I think sentiment has come up significantly off the lows. But in order to call something a mania, you're talking about 1999, 2021, those types of environments. I still think this bull market has some legs.
Ed D'Agostino: You've been an investor for, like I said, over 24 years now. I don't know if everyone knows your background. It might be worth taking a couple of minutes just to explain, because you took a non-conventional path to get to Wall Street. You weren't a rich kid. Your background's similar to mine. You didn't go to an Ivy League school. And yet you ended up running the second-largest ETF desk on Wall Street for many, many years. How did you get there?
Jared Dillian: Well, I was in the Coast Guard. I graduated from the Coast Guard Academy, and I got stationed on a ship in Port Angeles, Washington. And around this time I started to get interested in investing. There was a used bookstore in town. I went and got a book called A Random Walk Down Wall Street, by Burton Malkiel, that famous book. And I read the book and I'm like, I don't know why, but this is the most wrong thing I have ever read in my entire life. This is absolutely wrong. But I did not have, I didn't have the education, I didn't have the tools to really refute the things he was saying. And reading that book really sort of ignited this passion about learning about markets, about having to try to beat the markets.
So I read some more books. And in 1997, I started investing in some mutual funds. 1998, I was stationed in the San Francisco area. I started working on the options floor. I got a job on the P-coast Options Exchange, and I was learning about options. And at this time, I'm 24, 25 years old. I opened a brokerage account. I started trading options. It was awesome. And then I got hired by Lehman in 2001, and did index arbitrage for three years. And as you said, I ran the ETF desk from 2004 to 2008.
When I took over the ETF desk, it was a pretty small business. It was making about 22 million a year. And my boss said that my job was to market the business. And I didn't really know how to market an ETF business. This isn't like running TV commercials or something like that. But I started writing. And I started writing market commentary. And it got a huge following, and I had this distribution list with thousands of people. And at the end of it, in 2008, the desk was making 90 million a year. So we went from 22 million in 2004 to 90 million in 2008. So it was a huge success.
Ed D'Agostino: Is that where you sort of honed in on sentiment? And then you started using that in your strategy?
Jared Dillian: Yeah, it is. But on a micro level. So as an ETF market maker, I was doing a lot of intraday trading. I wasn't really holding positions overnight. But even on an intraday basis, I was using sentiment. If there were a bunch of sell orders coming in, I knew that we were pretty close to a bottom, and I'd start accumulating a position. Or if there were a bunch of buy orders coming in, I would do the opposite. So I was using sentiment, but it was on an intraday basis.
Ed D'Agostino: How do you define sentiment? And when you say you invest around sentiment, what are you talking about?
Jared Dillian: People try to quantify markets all of the time. That's really what the CFA program is all about, it’s about putting numbers in spreadsheets and quantifying it. But the markets resist quantification because the markets are really a manifestation of human behavior. When people buy and sell stocks, they're doing so because people are emotional beings. They're buying because they're optimistic or enthusiastic. Or they're selling because they're despondent or demoralized. And I really think that the markets are a study in human emotion. So I'm not saying that my way is the right way, and everybody should do it my way, because there's a ton of different ways to make money in the markets. People do what they do successfully. But my way works for me, and it works for a lot of people. And even if you have a different strategy, having a sentiment overlay on top of that can be super helpful, in terms of dodging some bullets or picking up some extra basis points. So that's basically what I do.
Ed D'Agostino: Does it work across the board? Does it inform how you look at, say, the big picture? Macro. Or is it more of a bottom-up? Like a stock-by-stock approach. How do you employ it?
Jared Dillian: For me, it works really well with asset classes. Stocks, interest rates, commodities, currencies. It also works really well for sectors. It works well for large-cap stocks. If you think about a stock like Apple, Apple has a hundred pieces of news coming out on it every single day. You have a lot of sentiment data points. If you're talking about a small-cap stock with a billion-and-a-half market cap, then there's just not as many sentiment data points. And that's actually, that's a place where fundamentals play a much bigger role. If you look at people who are small-cap analysts, they tend to be really good fundamental analysts. Sentiment isn't as useful. We'll get to the portfolios later. But most of my portfolios, when they have individual equities, they tend to be large-cap stocks.
Ed D'Agostino: So I've been reading you through The Daily Dirtnap for about eight years now. So I feel like I'm very familiar with you and your process. And the one thing that I find interesting about how you use sentiment, there's a lot of nuance with how you employ it because sometimes you go against the grain, against consensus. And then other times you go with it. So how do you decide which direction to go, based on what you're seeing?
Jared Dillian: I mean, I was at a conference in French Lick, Indiana. This was in 2017, I think. Don't ask me what I was doing in French Lick, Indiana. But I was at a conference there. And they had a soybean analyst make a presentation. So this guy, this was the most bearish presentation on anything I've ever seen. More bearish than any presentation on stocks I've ever seen. He said soybeans are a multi-decade problem. And it's this fire-and-brimstone speech about how soybeans are basically going to zero. And at the time, I'm like, "I really need to buy some soybeans."
They were trading at six or seven bucks. And now I think they're 13 or 14, or something like that. It really was one of the greatest opportunities of all time. But I use Twitter a lot to get inputs. But I don't just use Twitter, I keep my eyes open and I listen to what people say. And sometimes if you're in the right place at the right time, and you're listening and you're paying attention, you can really get a good sentiment indicator. Now you asked me, sometimes I go with sentiment, sometimes I go against it.
Okay, well there's some examples... There's actually a really good one right now. We're talking about AI. And AI is, a lot of people, you can look at these charts of mentions of AI in corporate earnings reports and articles. And there's all these charts going parabolic. And people say, "Well you should fade that and short AI." I mean, I don't think so. There are fads in the market. There was Crocs, there was Krispy Kreme donuts, there was Peloton, there was Zoom, there was Beyond Meat. These were fads. And you have to be able to distinguish between something that's a fad and something that's a durable trend. I mean AI, I think, in terms of the technology, is really like Netscape in 1996. And I think this is going to continue for the next four years. So I don't just reflexively short everything that looks like a sentiment bubble.
Ed D'Agostino: Earlier this week, you wrote about one of the classic inside baseball macro jokes. Which is: What's the cover of The Economist and what's the cover of Barron’s this week? And usually those covers become the brunt of a joke for macro traders who go the opposite direction. So this week's cover, on it, The Economist I believe, was the problem with sticky inflation. Why inflation's just not going to go down. What's your take on that?
Jared Dillian: The Economist, or any magazine, when they publish a magazine with a cover, they're doing it because it's going to resonate with a lot of readers. And they're doing it for eyeballs and clicks and stuff like that. And the reason they publish a magazine that says inflation is going to be sticky is because that is going to resonate with a lot of readers who believe that inflation is sticky and it's having a tough time coming down.
So the question I asked in the newsletter is, well what if that's not true? What if inflation isn't sticky? What if it's, not only is it going to come down, it's going to come down all the way to the target. What if it goes below the target? What if we're talking about deflation or disinflation in a couple of months? I mean, you can look at a real-time measure of inflation, a private measure of inflation, that's currently at 2.4%. And every day I check that chart and it goes down more and more and more. So I disagree with The Economist. I don't think inflation is sticky. And I think if you were trading on the basis of that magazine cover, you would buy bonds with the expectation that interest rates would go down.
Ed D'Agostino: And you don't think bonds are a good place to be?
Jared Dillian: No, I think they're a great place to be.
Ed D'Agostino: Okay. So is sentiment investing the same as investing around investor psychology?
Jared Dillian: Yeah, absolutely. I think you can use those terms interchangeably. Yeah, for sure.
Ed D'Agostino: Okay. So last year was a hard year for a lot of investors. The market really took it on the chin. You did great. Street Freak is one of your services. You have three services, the Strategic Portfolio, The Daily Dirtnap, and Street Freak. And Street Freak is your more aggressive stock picking letter. I like how you described it yesterday, where you said let's go buy some stocks and make some money. So a little bit more speculative. But still, I would say medium-term aggressive. You've got high conviction behind those ideas. Anyway, last year the market ended up down about 20%. Street Freak was the reverse of that. It was up around 20%. What do you think provided that outperformance in Street Freak?
Jared Dillian: We actually had a conversation at the beginning of 2022 and we were talking about what kind of returns we would expect going forward. And I said, "Look, the market's going to be down 15 or 20%. I think if Street Freak is flat, that's a pretty good outcome." We did a little bit better than that. But Street Freak is, like you said, it's an aggressive stock picking portfolio. But the risk management within that portfolio is actually pretty sophisticated. And it's also, even though it's aggressive, it's responsible. I would say it's responsible risk-taking. And one of the things we did at the beginning of 2022 was, we turned the portfolio to value. Within the span of a couple of months, we just completely shifted the portfolio from growth to value. And that is why we outperformed in 2022. Because we had a massive outperformance of value in 2022.
Ed D'Agostino: Okay. Let's dig into that deeper. We'll get into some specific examples. Because I want to talk about some of your winners. And there were some trades that didn't work out. And I think it's important to talk about those as well. Because that all factors into risk management. So I've got some notes here on my screen. Energy. Let's start with energy. You suggested that readers buy puts, and you don't often use options. But you suggested they buy puts on XLE, that's the energy ETF, as a way to short energy. You said sentiment was too bullish. Demand for oil was going to shrink. The economy was going to slow down, in about two weeks, which is a pretty quick turnaround I would say. I don't think any of us ever expected that. But your options trade returned over a hundred percent. It's an extreme example of a win, admittedly. But can you walk us through that trade, and what your thought process was there?
Jared Dillian: Yeah, I think it was actually like 243%, or something like that, in two weeks. I mean, look, there was a little bit of luck involved with that. I was bearish on energy for sentiment reasons. Because there were so many energy bulls at the time. Very loud and annoying energy bulls. And you had all of these calls for oil to go to 200, and it was insane. So I did some chart work to find what I thought was the right entry point on that trade. Got it perfectly. It's usually not that good. Usually it's ugly. But that time it was not ugly. Got it almost to the day. And basically took that entire move, it was a 20% move, in two weeks. We captured that perfectly.
Ed D'Agostino: How do you feel about energy today? Because a lot of people are bullish on it now. A lot of the macro guys are bullish on energy.
Jared Dillian: Yeah, I think it's actually in the buy zone. I still think you need to work off the last bit of bullish sentiment. There's a couple of permabulls out there. But I think there's a natural floor at about 70 bucks, which is where Biden said he was going to refill the SPR. So oil doesn't trade much below 70 bucks. It gets into the high sixties, the mid-sixties, and then it kind of bounces. So I think you'd have a low-risk entry point to get into XLE here. And I've actually, I've seen some charts in the last couple of days that suggest we're pretty close to a bottom.
Ed D'Agostino: Oh, interesting.
Jared Dillian: Yeah.
Ed D'Agostino: Okay. So energy could be a buy?
Jared Dillian: Yeah.
Ed D'Agostino: Right now.
Jared Dillian: Yeah.
Ed D'Agostino: Okay. In general, how do you decide to exit a trade? Say it's not an option trade, but you bought a stock, you bought ABC. What has to happen for you, sentiment-wise, to decide now is the time to get out?
Jared Dillian: Selling stuff is much harder than buying stuff. When you buy a stock, it's a very easy decision. You're like XYZ, I like that stock, I'm going to buy it. You don't really think too much about the entry point. You just want to buy it, get exposure to it. But let's say, pretend it goes up a hundred percent. And now you have this decision as to where you're going to sell it. And there's two competing concerns. One is you don't want to leave money on the table. If it goes up 20%, and you sell it, and then it goes up another hundred percent, you're going to have future regret, basically. And so a lot of people have fear of future regret.
But at the same time, if you hold onto a position too long, and it does the round-trip and you end up losing money, that's also bad. And I did that with Airbnb in The Daily Dirtnap portfolio. I was up 50% on that stock, and just held onto it too long, and ended up losing money. So a lot of the world's really great traders will tell you that you want to be a pig. And I think that, in general, people do tend to sell too early. Basically the way I come up with it is, when I've made enough money, I get out. Okay, I don't need to make infinity dollars. When I've made enough money for me, that's when I get out.
And that's advice that the crypto guys should have learned in 2021. Because they thought Bitcoin was going to a hundred thousand. They thought it was going to a million. A lot of them said they would never sell. And well, guess what happens if you never sell? Everything, every stock that's in the Dow Jones Industrial Average today, will eventually go to zero. They'll all go to zero eventually, or get bought. But even those stocks will go to zero. Everything will go to zero eventually. GE eventually got kicked out of the Dow. So investing in stocks is all about timing.
Ed D'Agostino: Okay. Let's look at another example. You mentioned Airbnb as one that didn't work out. Another one that did, last year, retail. Nobody wanted to be in retail. The Gap, it dropped 52% for the year, had one of the worst one-year returns out of all big companies in retail. And you wrote to your readers that everyone was too bearish and they should buy Gap stock. That was a 40% return. Pretty remarkable.
Jared Dillian: They tell you you should never catch a falling knife. But I've made a pretty good living catching falling knives.
Ed D'Agostino: So let's talk about that. Let's unpack that, right? You can be too, if you're too early when you catch a falling knife, it hurts really quick.
Jared Dillian: Yeah, I think we got pretty close to the bottom on The Gap. I mean, look, it was trading at $4 a share and everyone's... And the people were talking about bankruptcy with The Gap. And not that The Gap can't go bankrupt. And maybe it will someday, but nothing goes bankrupt in a straight line. Because a public company really only goes bankrupt when they have a liquidity problem, like Bed Bath & Beyond. But as long as they have access to cash, they can keep going. And a company can do a lot of things to get cash. They can do a secondary, they can get a line of credit. They can do a lot of things to keep going. And I looked at the chart of The Gap and I said, "Well, it has the potential to bounce significantly." We weren't in the trade for that long. I want to say it was like three or four months. And that was, we achieved the objective.
Ed D'Agostino: We've talked about The Daily Dirtnap, the trade from The Daily Dirtnap. We've talked about a couple of ideas from Street Freak. I think we should point out the three products that you have. They serve very different functions. And Street Freak is a strategy. It's not the primary strategy for an investor to use. So how do you look at your three research services? And how could an investor, or a reader, use them strategically in their own investing?
Jared Dillian: Well, the Strategic Portfolio is your core holdings. It's a portfolio of ETFs. It's low risk. Set it and forget it. It's modeled after the Awesome Portfolio, where you have those allocations of gold, bonds, stocks, cash, and real estate. So it's modeled after the Awesome Portfolio. And literally it's, this is a portfolio that maybe has 10 or 20% turnover a year. Just no brain damage. And a lot of people use it for their retirement assets, which I think is the right use for that.
Street Freak is an aggressive stock picking newsletter. It's got a real portfolio, with returns. It's very formal. We keep track of the returns. We keep track of the holding periods. I don't want to say the portfolio is super high turnover. Maybe it's 50 to a hundred percent a year. But we do, there is more turnover in that portfolio. I want to say that the holding period is medium term. Maybe three months in the low, three to nine months on average. Longer for some positions. But that is, let's go make some money. That's really the goal. That is all about implementation.
The Daily Dirtnap. Whereas Street Freak is about implementation, The Daily Dirtnap is really about enlightenment. It's about thinking about markets, and being plugged into markets, and getting fed all kinds of ideas on sentiment and psychology on a daily basis. And that, to me, is the flagship publication. And I’ve got to tell you, it's addictive. People, they have to read it every morning. They can't not get it. I’ve got to tell you, if I get into work a half hour late, and I send it a half hour late, I have emails coming in—Where is it? Where is it? Where is it? People need to have it.
Ed D'Agostino: I have to say, personally, I've learned more about the markets reading The Dirtnap than any other publication. And I, in my role as publisher of Malden Economics, I have access to a ridiculous amount of research from all of the big houses and the boutiques across Wall Street. The Dirtnap is what really brought me to another level. So thank you for that.
Jared Dillian: Yeah, thanks.
Ed D'Agostino: So, how do you think about risk management, and how does it apply to those letters? I mean, I know you said Strategic Portfolio would be potentially appropriate for someone's retirement account. So that's basically—get invested, and help you stay invested. Is that the approach with that, is don't sell at the wrong times?
Jared Dillian: Yeah, I would say so. I would also add, I forgot to mention, The Daily Dirtnap does have a portfolio. It's just informal. It's an informal portfolio. Because I don't consider the portfolio to be the main focus of the newsletter. The main focus of the newsletter is about learning. But it does have a portfolio.
Ed D'Agostino: Well, I want to get into a bunch of reader questions. And we have a ton. Before we do, so look, we just talked about your letters. We have a special offer for anyone watching right now. If you like what you've heard from Jared so far, we have a special offer where you can get all three of his letters for one consolidated price. So Jared Dillian's Strategic Portfolio, Street Freak, and The Daily Dirtnap, all for one bundle. If you already have one or two of them, that's okay. You can get a credit for those. And then we'll roll you into what I assure you would be a better price. So there's going to be a link on your screen, somewhere, viewers, where you can go and see all of the details on that offer. I hope you take us up on it.
But now let's get into some reader questions here. Because we got a ton. Rick from Estero, Florida, asks, "Where do you park your cash?"
Jared Dillian: Where do I park my cash? Except for during debt ceiling negotiations, I put it in money market funds.
Ed D'Agostino: Were you concerned about the money market stability?
Jared Dillian: I was, yeah.
Ed D'Agostino: Yeah. Okay, interesting.
Jared Dillian: So actually, for the month of June, I took it out of the money market fund. But yeah, that's usually where it sits.
Ed D'Agostino: And what kind of rate are you seeing in a money market? And why would you prefer that to, I don't know, a CD, or something like that?
Jared Dillian: Because it's liquid, it's more liquid than a CD. I mean, I think I'm getting high fours, like 4.7, 4.8, something like that.
Ed D'Agostino: Yeah, it's a dream.
Jared Dillian: Yeah, I mean I can access that liquidity immediately. I don't really see the benefit of, I don't think I've ever bought a CD in my life. I just really have a need for liquidity, to be able to get that cash in case I need it. So I don't think I've ever bought a CD.
Ed D'Agostino: And why would you? Up until a year ago, there was no reason to. Okay. Marcus from Hermitage, PA, says, "Jared, in terms of the Awesome Portfolio, how much does a downturn in commercial real estate concern you?" It's a good question. Should real estate investment trusts be avoided if they have a high concentration to commercial properties? So how are you feeling about commercial real estate?
Jared Dillian: So we were just talking about sentiment, okay.
Ed D'Agostino: Yes.
Jared Dillian: And did you see the cover of Bloomberg Business Week yesterday?
Ed D'Agostino: I missed it, no.
Jared Dillian: It's was basically The Shining, with the two little girls at the end of the hall. And it said…
Ed D'Agostino: The Red Rum girls.
Jared Dillian: The Red Rum girls. And it said, "Commercial real estate is getting scary. " I actually, as of about, I want to say six weeks ago, I thought that sentiment around commercial real estate... maybe two months ago... Sentiment around commercial real estate had reached extreme levels. Basically going back to the Silicon Valley Bank failure, and the regional banks selling off 30 or 40% in this revelation, and all these regional banks had commercial real estate investments.
So I actually got bullish on commercial real estate. And in The Daily Dirtnap, we bought SL Green, which is really at the center of this. Because everyone's like, all of these office buildings, nobody's going to use them. Everybody's working from home. All of these office REITs are going to go bankrupt. And SL Green, which is a New York City office REIT, this is a company that had a 16% dividend, and yet it had a 20% short interest. You had people willing to short this stock with a 16% dividend. That should tell you how sentiment got around commercial real estate. So in the newsletter, we bought SL Green. I don't know the exact level, somewhere between $21 and $23 a share. And today it's at $30 or $31. So that's a 50% return in a couple of months.
Ed D'Agostino: And you locked in that dividend at the same time?
Jared Dillian: Yeah.
Ed D'Agostino: So not everyone might understand the nuance of what you just said. What is the significance of a 16% dividend and 20% short interest?
Jared Dillian: Well, if you short a stock... If you buy a stock, you receive the dividend. But if you short a stock, you have to pay the dividend. Which means if you have to pay out 16% a year, you need SL Green to go down more than 16% in a year, which is lunacy. That's a very high bar.
Ed D'Agostino: Carl, from New Jersey, writes, "When can we expect medium-term interest rates to peak? And what are the best vehicles to capitalize?"
Jared Dillian: Well, I think they peaked about 10 or 11 months ago. And I think they're making, they're in the process of making a lower peak right now. What was the last part of the question?
Ed D'Agostino: What would be the best way to make money from it, basically?
Jared Dillian: Oh, well, you know, you can buy the bond ETFs—you can buy TLT, IEF, stuff like that. I'm bullish on bonds here, absolutely, because of The Economist cover, and the charts, and everything else. So I think we have a payroll number coming up next week, the first week of July. And as you know, payrolls have beat expectations 14 months in a row. We've had some claims numbers in the last couple of weeks, which have been a bit weak. I think this is really the first chance that we might have a weak payroll number in a while. I think you want to be invested in bonds for this payroll number. That's my call.
Ed D'Agostino: And just again, to make sure we're keeping everyone with us—when you say bonds, you're talking about long term. You're not talking about Treasury bills, talking about 20-, 30-year duration bonds, basically. Correct?
Jared Dillian: Basically 10. Basically 10.
Ed D'Agostino: Tens?
Jared Dillian: Yeah.
Ed D'Agostino: Okay.
Jared Dillian: Yeah.
Ed D'Agostino: So would a TLT, the ETF that I think everybody thinks about, would that work?
Jared Dillian: No, it would be IEF, which is the 7- to 10-year ETF. But also there's a single bond ETF called UTEN, U-T-E-N, which is an on-the-run, 10-year note. And my friend Alex Morris, from FM Acceleration, launched that last year. I love the single bond ETFs. So those are great for trading.
Ed D'Agostino: Greg, from Georgia: "Is now a good time for precious metals/commodities?" So it's almost two questions.
Jared Dillian: The answer is no. But you kind of have to be involved anyway, at least with gold. It's funny, I was actually having a discussion with another newsletter writer, who you probably know. And he was like, "I walk into work every morning and they're smashing copper and oil." And I'm like, "Yeah, it's because we are in a disinflationary impulse." Inflation is coming down. This is a disinflationary impulse. So it's bad for commodities. And it's probably going to be pretty rough for commodities until we get an inflationary impulse. Either the Fed pauses, or we get, God forbid, stimulus, or something like that. But that's what I'm waiting for is the next inflationary impulse.
Ed D'Agostino: Greg has a second question: "What about cheap China tech stocks? Is it speculation?" Cheap China tech stocks.
Jared Dillian: It's funny, I had Perth at my conference a couple years ago. You know Perth.
Ed D'Agostino: Yeah.
Jared Dillian: Yeah. She has the FRDM Emerging Markets ETF. And she put up a chart during her presentation, which I thought was amazing. But basically she did this chart of Chinese GDP going up, and the stock market going sideways. And basically just saying that all of the gains of these private companies are being accrued by the government and not flowing through to shareholders. So I don't like buying Chinese stocks. I don't like buying Chinese stocks at all. Even for a trade. I've never done it.
Ed D'Agostino: Dean from Colorado, this is a long question: "In the event of a deep recession, we are encouraged to have at least 10% investment in gold. It's easy to understand that gold valuation is based on the perceived value of our currency. But how will gold actually be used if a recession hits the economy? I doubt gold will all of a sudden be used for the purchasing of daily needs. How does it work?"
Jared Dillian: How does it work?
Ed D'Agostino: How does it work?
Jared Dillian: Nobody knows how it works.
Ed D'Agostino: What's it for?
Jared Dillian: Nobody knows how it works. It just works.
Ed D'Agostino: It's a mystery and an enigma, right?
Jared Dillian: Yeah. I mean there probably aren't too many scenarios where people would actually accept gold or silver coins as currency.
Ed D'Agostino: Yeah.
Jared Dillian: I think if we were in one of those scenarios, it would be very bad. I think that you'd…
Ed D'Agostino: You'd have a lot more than your portfolio to worry about.
Jared Dillian: Yeah. But having said that, gold has, throughout 2,000 years, has been a safe-haven asset. And gosh, even at the beginning of the Ukraine War, when that was developing, gold ran up to the all-time highs of 2,060. So gold is just a good hedge against bad stuff happening, and it always has been.
Ed D'Agostino: It’s a default currency for when things get bad.
Jared Dillian: Yep.
Ed D'Agostino: Lonnie from California. Lonnie, thank you for your question. "Hi Jared. Thanks for doing this. My question is how to position to protect principle, yet grow as safely as possible, a small portion, a small amount of money?" So how can she get some exposure, grow a small nest egg, essentially. And I would respectfully suggest perhaps the Jared Dillian Strategic Portfolio would be a good place to start.
Jared Dillian: Yeah. I would also... I mean, there's a lot of ways to skin this cat. You can either take a little bit of risk with all of your money. Or you can take no risk with most of your money, and then a lot of risk with a little bit of your money. Those are basically the two ways to do it. So you could build a bond portfolio with some investment-grade credits, and munis, and Treasuries, and stuff like that. And make, at least in this interest rate environment, five or 6% a year. Or you can have 80% of your money in cash. And you can have the rest of it in the Nasdaq, and you'd probably have the same result with a lot more volatility. So that's, basically every financial advisor gets that question when somebody walks through their door, and they all kind of tackle it in different ways. But those are the two basic ways you can do it.
Ed D'Agostino: Larry from Delmar with a concise question: "Is now a good time to buy Bitcoin?"
Jared Dillian: I don't know. It looks like this BlackRock ETF is going to get approved. That's already priced in. Just in the last week Bitcoin was up 5,000 bucks, just on that news. But having said that, if the SEC is going to approve a BlackRock ETF, and maybe some other ETFs, if Grayscale wins their lawsuit and they improve VanEck or some of the other ETFs, institutional adoption of Bitcoin is going to make it go up a lot. I think people probably have underestimated the amount of assets that are going to go into Bitcoin once it goes into ETF form. So I guess the long answer to the question is—it probably is a good time to buy Bitcoin, actually, now that I think about it.
Ed D'Agostino: Larry from Miami Shores, Florida: "Jared, what are your thoughts on the supply chain? And are you still stockpiling cat food?"
Jared Dillian: I'm not stockpiling cat food to the extent that I was before. I was hoarding it before because there were shortages. You'd walk into the grocery store, the whole cat food aisle would be cleaned out. So I was really hoarding it before. I think the supply chain stuff is pretty much done at this point. I think that's an old story. Having said that, the pandemic definitely exposed the weaknesses of the supply chains. So something to think about if, not to say that we'd ever have another pandemic, but war, or anything like that ever again, those are things to think about.
Ed D'Agostino: More resiliency, I think, is something that the economy, the government, and individuals should be thinking a lot more about. Quickly to remind viewers, there's a special offer for all of Jared's research, his three letters, Dirtnap, Street Freak, the Strategic Portfolio. There's a button somewhere on this page that you're watching on. Click that if you want to check out a special offer for his research. And now back to the questions. Joseph from Diamondhead, Mississippi. He says, "Between QT, so quantitative tightening, by the Fed, and artificial intelligence-driven trading, by the institutions, the retail investor has no chance trading. So is buy-and-hold back in style?"
Jared Dillian: Well, there's actually a lot to talk about with that question. First of all, buy-and-hold is always the best thing to do. Because the computers can't think out past a couple of minutes. The longer your holding period is, the more of an advantage you have over the computers. That's always been true. The other thing I will say is that sentiment works in an environment driven by computer-driven trading. Why? Because ultimately, behind every computer is a human that programmed it and a human that can override it. And it's still people in the marketplace making emotional decisions, even if it's done with computers. So sentiment trading still works. And actually, I think it works even better.
Ed D'Agostino: Similar question, Paul from Ridgefield, Connecticut, my home state. Your home state. "For an investor who will need to tap their assets within the next five years, are valuations low enough to create a sufficient margin of safety to invest in US equities now?"
Jared Dillian: The short answer is no, valuations are not low enough. But I think if... You could miss out on a lot of performance waiting for valuations to be low enough. You know what I mean? You would've missed out on most of the 2010s. You would've missed out on the first couple of years of this decade. Really. I mean, 2010, 11, 12, were the only years where valuations were low enough that would, where you could say, okay, as a value investor, I can do this. I like to say in my newsletter that valuations, really, they're just a guideline. You know what I mean? It's kind of purchasing power parity and the dollar. Purchasing power parity tells you on a fundamental basis whether the dollar is overvalued or undervalued. You can't really use it for trading purposes. You can't use valuation for trading purposes. It's just a guideline.
Ed D'Agostino: Lindsay from New Brunswick, Canada: "Jared, hello. Thank you for doing this. Many markets around the world are not in this technical bull market. I am Canadian, and I would love to get your global perspective."
Jared Dillian: Well, I saw a chart of the TSX a couple days ago, and it definitely doesn't look good. I really kind of stopped following Canada a couple of years ago. See, here's the problem. All of the tech stocks are in the United States. And as you've seen in 2023, all of the performance is coming from seven tech stocks, and they're in the United States. If you want to know the main reason that the US outperformed Europe for the last 15 years, it's not because Europe sucks. It's not because they're socialists. It's because we have the tech stocks and they don't. That's the main reason. And that's the main reason with global equities. That's why US equities have done so well. So that's the answer.
Ed D'Agostino: The Canadian market is heavily concentrated in commodities, if I recall, right.
Jared Dillian: Commodities and banks. Commodities and banks.
Ed D'Agostino: Yeah.
Jared Dillian: Yeah.
Ed D'Agostino: Tough sectors right now. Andrew from New Hampshire: "Jared, what do you think the resolution of the debt problem will look like? Will it be hyperinflation, or some combination of printing, plus higher interest rates? What do you see?"
Jared Dillian: I don't know. All of these discussions about the debt tend to be kind of academic, not really rooted in reality. Because we're talking about something that's going to happen 50, a hundred years from now. So I mean, we can speculate as to how it's going to play out, but we don't really know. I mean, it's tough to look out more than a couple of years. But we just went through the debt ceiling negotiations. We were able to constrain spending a little bit. But we're still talking about deficits that are five to 6% of GDP. So we didn't really, meaningfully, do anything about the deficit. So the question is, how long can we continue on this path before we get a margin call? And I don't know. It might be 50 years. Might be a really long time. Yeah. So I don't know.
Ed D'Agostino: This is a great question for you. Tina from Utah says, "Do you suggest selling investments to pay off debt?"
Jared Dillian: The answer is, in general, yes. Because debt is bad, and debt causes stress, and all of that type of stuff. But there's tax implications. So if you're sitting on something that's up 500% and you have $400,000 in capital gains, maybe it's not a great idea to sell that to pay off debt. Because you're going to owe a lot of money on that. So there's tax considerations. But yeah, I would say, in general, I'm in favor of that. Yeah.
Ed D'Agostino: She asks another question, too, which gets into a lot of what you discussed with personal finance. She says, "Is $30,000 enough to start your investing plan?"
Jared Dillian: Is $30,000 enough? Absolutely. But I will say it's not enough to buy individual stocks, right? Because if you're buying individual stocks, you really need a portfolio of about 20 stocks to be diversified. And $30,000 just isn't enough to buy 20 stocks in any meaningful quantities. So you can start with $30,000. My recommendation is that you just do it in mutual funds.
Ed D'Agostino: Do you want to talk a little bit about your thoughts on an emergency fund? What you have to have in place before you start investing?
Jared Dillian: Yeah. I mean, as an emergency fund, you should have six to 12 months expenses saved up before you start investing. I remember when I was doing the radio show, I got a call from a guy, I think it was an Uber driver. And this was…
Ed D'Agostino: I remember that.
Jared Dillian: This was 2020-ish. And he was all excited. He wanted to buy stocks. He's like, "I'm ready to buy stocks. What stocks should I buy?" And I was like, "Well, how much cash do you have for emergency funds?" He's like, "2,000 bucks." And I'm like, "Okay, man, stop." I was like, "Save up six months’ of expenses, then call me back. And then we'll get to talk about stocks."
Ed D'Agostino: Did he call you back?
Jared Dillian: No, he never did.
Ed D'Agostino: Oh, okay.
Jared Dillian: Yeah.
Ed D'Agostino: We'll take one more. "What do you think drives sentiment the most? Is it the news, the economy, stock prices, or something else?" And that's from Scott in Tucson.
Jared Dillian: It's sort of a feedback loop. It's sentiment drives price, and price drives sentiment. You can draw a circle, right? And price, for example, what was I looking at today? Oh, Tesla, right. So Ed, do you remember four or five months ago, when Tesla was cratering, and I was in The Daily Dirtnap, I'm like, "This is it. You've got to buy it." And everybody hated Elon Musk, and everybody was freaking out. It was when Twitter was going bad and all of that stuff.
Ed D'Agostino: Yes.
Jared Dillian: So Tesla got down to a hundred bucks a share. Now it's at $260. Are you people still bearish on Tesla? Like, you were bearish at a hundred, but you're not at $260? Price drives sentiment. Price absolutely drives sentiment.
Ed D'Agostino: How do you feel about Tesla at today's levels?
Jared Dillian: I think that that was such a major sentiment low. It's probably still got some more upside. Probably still got some more upside above 300. I think so, yeah.
Ed D'Agostino: Okay. Well, viewers, if you're not convinced by now, I don't know what it's going to take. But I highly recommend you check out this special offer for all three of Jared's letters. A great price for you. Hope you check it out. There should be a link somewhere on your page. Go there and you'll see the offer. Jared Dillian, I mean, I could do this for another hour with you. Believe it or not, we still have probably 50 questions. But I'm starting to lose my voice, so I think we should wrap it up. I really appreciate you doing this, Jared.
Jared Dillian: Thanks. Thanks, Ed. Thank you.
Ed D'Agostino: Anything to add for viewers to sign off? You get the last word.
Jared Dillian: Oh gosh. I mean, I've got to tell you, a lot of people when they subscribe to my stuff, they say, "I don't know what took me so long to sign up. This is the best thing ever. I thought about this for years, and I never did it. And I finally did it, and I'm glad I did it." So that's usually what I get from people.
Ed D'Agostino: There's a money-back guarantee. And you'll make your money back. The subscription price will more than pay for itself.
Jared Dillian: Yeah.
Ed D'Agostino: For sure. We've demonstrated that over the last eight, nine years. So I hope you check it out. Again, Jared, thanks for your time. And viewers, thank you so much for hanging in there with us. We really appreciate your support. I'm Ed D'Agostino. See you soon.