In this episode, the ReSolve team is joined by Jared Dillian, the editor of The Daily Dirtnap and author of the book No Worries: How to Live a Stress-Free Financial Life. They delve into a variety of topics, including the power of diversification, the importance of understanding financial stress, and the current state of global financial markets.

Topics Discussed

• Jared Dillian's perspective on the current macro views on monetary policy, hard assets, and other financial matters

• The concept of financial stress and how to minimize it, focusing on debt and risk

• The importance of time and rational decision-making in buying a house

• A discussion on the current state of advice in the financial industry

• The 'Awesome Portfolio' - a diversification strategy that includes stocks, bonds, cash, gold, and real estate

• The role of gold in a diversified portfolio and its comparison to Dennis Rodman's role in a basketball team

• The potential future of inflation and its impact on the global economy

• An exploration of emerging markets, with a focus on India and Argentina

• A discussion on potential future challenges in the financial market, including the possibility of high interest rates

This episode offers valuable insights into financial stress, diversification strategies, and the future of global financial markets. It's a must-listen for anyone interested in understanding the complexities of the financial world and gaining strategies to navigate the uncertain financial landscape.

Dennis Rodman is in the Hall of Fame, Basketball Hall

2

of Fame, and he's the lowest scoring

member of the Basketball Hall of Fame.

3

And there was actually a controversy

about whether he should even be

4

included in the Hall of Fame.

5

He scored like six points a

game or something like that.

6

If you had a team full of Dennis Rodman's,

if you had five Dennis Rodman's on a team,

7

it would be the worst team in basketball.

8

Right?

9

Because it can't score, but Dennis

Rodman can rebound and he can pass.

10

So what happens is if you take

Dennis Rodman and add him to a

11

team of four people that can score,

the team gets much, much better.

12

Right.

13

And that's really what gold is about.

14

if you had a portfolio that was just

gold, I mean, you said gold did really

15

well in the seventies, but also gold,

kind of like real estate has gone up 4

16

percent a year since, you know, the 1930s.

17

So if you had a portfolio that

would, that was just gold, it

18

would not be very exciting.

19

When you, when you take gold and you

add it to a bunch of other stuff,

20

that's when things get better.

21

Mike Philbrick: All right, welcome

to another edition of Resolve Riffs.

22

Today we've got a very special guest,

freshly minted new author of the book

23

No Worries, How to Live a Stress Free

Financial Advice, Jared Dillian, also

24

the editor of the Daily Dirt Nap, a

fantastic newsletter for I think a lot

25

of out of the box thinking and has been

26

Jared, welcome to Resolve Riffs.

27

I'm sure there'll be lots of, of our

listeners who will be pleased and excited

28

to hear what you have to say, both on,

uh, taking the stress out of money and

29

what your current macro views are on, you

the current machinations around the world

30

with respect to monetary policy, hard

assets, and all of those types of things.

31

So welcome to the channel.

32

Jared Dillian: Hey, thanks for having me.

33

Adam Butler: should mention

it's, it's, this is not Jared,

34

your first novel, right?

35

You've got a, you've got a few

other novels under your belt.

36

What are they?

37

Jared Dillian: Uh, well,

the first book was a memoir.

38

It was called Street Freak, Money

and Madness at Lehman Brothers.

39

And that was in 2011.

40

And then in 2016, I published a novel

called All the Evil of This World.

41

2023, I published an essay

collection called Those Bastards.

42

And then No Worries in 2024.

43

And I have a short story collection

coming out later this year.

44

Well,

45

Adam Butler: kind of cool.

46

So I think, you know, Mike and I lived

through many of the, same formative

47

milestones of the journey that probably

motivated the writing of your first

48

three books, maybe not your exact

experience with Lehman Brothers,

49

but the decisions made post Lehman

Brothers and, the constant creep of

50

Supervision, regulation, intervention,

markets, making markets less and less.

51

free to act on, you know, as

a price setting mechanism and

52

more, as a policy mechanism for

various government objectives.

53

but this latest book is, is quite

a departure from those themes.

54

at least that's my sense.

55

If so, what motivated that, that

shift in, in interest or curiosity,

56

that thread that you wanted to pull?

57

Jared Dillian: I really wanted to

write a book about personal finance.

58

around 2018 I started reading

all the classics, right?

59

So rich dad, poor dad and the millionaire

next door and the Dave Ramsey book.

60

And I read all those and I kind of came

to the conclusion that The advice that

61

people were getting, you know, average

people were getting from these personal

62

finance gurus was pretty terrible.

63

and at the time I had a radio show, uh,

actually had a radio show on personal

64

finance that was, not a big show, but I

was, I was on every night for two hours.

65

And the themes I kept coming back

to was this idea of financial

66

stress and how to minimize it.

67

And a lot of the advice

that people are given.

68

may help them get more money in

the long run, but it does at a

69

cost and that cost is your sanity.

70

So really the two sources of

financial stress are debt and risk.

71

So the idea is you want to minimize your

debt and minimize your risk to the best

72

extent that you can, and then you can

be happy with your financial situation.

73

Mike Philbrick: Is there any,

is there anything in particular

74

that really bothers you about the

current state of advice going on?

75

Any, any particular examples that

are, uh, get under your skin?

76

Jared Dillian: Well, a lot of

it focuses on Cutting expenses.

77

This, this obsessive focus on

cutting, cutting small expenses.

78

And the classic example that everybody

knows because Susie Orman talked about

79

it is, buying coffee at Starbucks, right?

80

She says if you buy coffee at

Starbucks, it is like peeing a

81

million dollars down the drain.

82

Because if you, if you saved 4, every day

for the next 40 years and you invested

83

it, you could have 100, 000 or whatever.

84

So, stop drinking coffee.

85

And what I found was, you know, if

you do the math on it, it really

86

doesn't make a lot of sense.

87

through one decision, like buying a house,

if you get a house that's 500 square

88

feet smaller, And it's correspondingly

cheaper than you're paying a lot less in

89

interest over the life of the mortgage.

90

And it ends up being way more money

than what you might've saved by not

91

being, not by not buying coffee.

92

So it's really, the goal is to focus on

the big things and not the little things.

93

The little things don't matter.

94

The big things matter.

95

Mike Philbrick: It reminds me a little

bit of you know, the, the willpower

96

sort of some of the books on willpower,

where you have these, you know, these

97

small things that you're going to deprive

yourself on a regular basis, but they

98

chip away at the ability for you to

actually stick to that sort of stuff.

99

So you end up failing on the small stuff.

100

And if you're not making the big

decisions right in the first place.

101

then it's kind of total catastrophic

failure across the board.

102

And I guess your point is get these

pillars correct, get the house right,

103

get the student debt right, you know,

figure out how to get a car properly,

104

use credit cards in a smart way.

105

and then the little stuff, enjoy

your life, I guess is kind of the,

106

Jared Dillian: The reason why that

fails is because human beings can

107

give up large luxuries, but they

can't give up small luxuries, right?

108

Like you can live in a slightly

smaller house and you're

109

not, Like this house sucks.

110

I hate it.

111

I can't wait to move out of here.

112

It doesn't really matter.

113

You're sitting in the living

room watching TV anyway.

114

Like you can give up a, you can

give up a slightly larger house, but

115

you can't give up coffee every day.

116

It's these small luxuries that we need

and they don't cost a lot of money.

117

And I said, people can give

up large luxuries, but they

118

can't give up small luxuries.

119

Mike Philbrick: and I guess those, those

120

small, sorry, go ahead Adam.

121

Adam Butler: You know, it's cool.

122

I was gonna say, you know, so much

of the cost of a home is, not so

123

much related to square footage as

it is to time of travel, right?

124

Like, you want to live within a

certain time of travel to your,

125

to work, for example, right?

126

and there's, you know, there's sort

of a minimum amount of space that, a

127

new family, for example, can use to

approximate some kind of middle class

128

lifestyle, whatever that means these days.

129

So, you know, I'm just wondering

how you trade off because that time

130

factor is to my mind, quite different

than the space factor, right?

131

Because that time factor is something

that you'll just never get back.

132

You spend an extra 20 minutes in the

car every day, versus spending a little

133

more to live a little closer to work.

134

But all those homes are owned by people

who bought them 30 or 40 years ago.

135

You know, how do you try to factor

that into the home buying equation?

136

Jared Dillian: Well,

time is super important.

137

You know, the interesting thing is,

is that, in about two weeks, I'm

138

moving into a house that I built.

139

And the house has a dedicated office space

and I'm going to be working from home.

140

So my commute goes to zero, right?

141

my wife's commute gets longer.

142

she has about a 45 minute commute right

now, which is going to turn into an hour.

143

But she only has to go into work

like two or three days a week.

144

So it's not that big of a deal,

but like you said, like time

145

is, time is super important.

146

So I know I never, I never really

understood these people who lived

147

in like Easton, Pennsylvania and

commuted all the way to New York city

148

every day, like two hours each way.

149

Like, I mean, yes, you can be productive

on the bus and you have a laptop and you

150

can read books and stuff like that, but

that's a, that's a colossal waste of time.

151

Adam Butler: Yeah, I guess I agree.

152

I guess my, my point was, or question

was sort of how you, how you would

153

advise thinking through this issue?

154

Because I think, you know, the size

of the house has, to my observation,

155

kind of largely, Become secondary

to the time you get to spend with,

156

family or doing things that you

like rather than commuting, right?

157

And that as a function of that,

the, cost of time ends up being

158

the limiting factor, not the cost

of more, of more housing space.

159

Jared Dillian: Yeah.

160

And I think people tend to undervalue

time, with respect to money.

161

I think they put a higher value on

money and less value on time when

162

it should be the other way around.

163

It should be the other way around.

164

So

165

Adam Butler: Yeah.

166

No, I agree.

167

And obviously working from home, is a

growing trend or, I guess it's probably

168

in the middle of finding some kind

of equilibrium, but at the margin, it

169

seems like this is a growing trend and

that trade off will become less and

170

less important over the next few years.

171

Jared Dillian: yeah.

172

Adam Butler: see

173

Mike Philbrick: is, is as you have

debt to, you know, pay it down

174

quickly, which is interesting.

175

I don't know if, you guys ever, you

know, heard about the, uh, when interest

176

rates got to that sort of zero bound

and stay there for such a long time.

177

Something I heard from the

younger generation was Why

178

would I ever pay off, right?

179

This idea that I'm always

going to have it anyway.

180

And, and the, the management of

the, of that is so, um, it's at

181

such a low rate and so manageable,

I'll just leave her up continually.

182

And, as someone who.

183

You know, witnessed a little

bit of the 70s at the tail end

184

and can remember that in some of

the 80s and early 90s in Canada.

185

That's kind of a head scratcher.

186

People just didn't have the experience

of having a period of time where interest

187

rates ratchet up quickly, which they have.

188

So maybe this is less of a lesson

today than it was back then.

189

But walk us through some of the

thoughts on debt and how you think the

190

perception of debt over time has changed.

191

Jared Dillian: Well pretend you had a

mortgage with a 0 percent interest rate.

192

Okay.

193

So you were just making

principal payments.

194

You can still default on that mortgage.

195

Like you can still default

on it and lose the house.

196

Okay, so the value in paying off a

mortgage is to reduce your stress.

197

Now, I paid off a couple of mortgages

in my lifetime, and I can tell you that

198

when you own a house free and clear,

it reduces your stress massively.

199

If you own your house free and clear.

200

There is, you are untouchable.

201

You are in an unassailable

financial position.

202

It really, no matter what happens

to you, you have a place to live.

203

Nobody can take the house away from you.

204

So, you know, I say in the book

that everybody should strive.

205

to pay down their mortgage

in 10 years at a minimum.

206

my last mortgage, I paid off in

three and a half years, right?

207

Now the other part of that

is, that's, that was a 3.

208

75 percent mortgage.

209

so you say, well why did you pay

it off in three and a half years?

210

Well, basically, after I paid it off, I

added up all the interest I paid in three

211

and a half years, and it was 70, 000.

212

And I said to myself, what could

I have done with that 70, 000

213

aside from paying it to the bank?

214

Like interest interest is the

worst thing in the world because

215

you get no enjoyment out of it.

216

Is paying interest fun?

217

Do you get some utility out of it?

218

It's basically all you're doing

is contributing to bank profits.

219

And one of the things I say in

the book is you never want to

220

be a good customer of the bank.

221

And a good customer of the bank

is somebody who makes a minimum

222

payment every month, pays the

maximum amount of interest.

223

Never prepays, and that's a

good customer of the bank.

224

So I never do that.

225

Adam Butler: Right, okay.

226

So part of your, how to buy a home.

227

Is to buy a home that you have a

good shot at paying off aggressively

228

or on aggressive timescale, right?

229

you, you've got a few other points

in the book about, you know, a lot

230

of people don't make thoughtful

decisions in how they buy a home.

231

What are some other elements

that people often miss?

232

Jared Dillian: Well, you know,

buying a house for a lot of people

233

is an emotional decision, right?

234

Like they they see a house or, you

know, they get a realtor and the

235

realtor shows them a bunch of houses

and they fall in love with one.

236

They say, Oh my God, we have

to, we have to live here.

237

Right?

238

We can, the kids can play in the yard

and we can put the TV here and bedrooms

239

over here and they see themselves in the

house, then they have to have the house

240

and then it becomes an emotional decision.

241

I would say 95 percent of home

buying, really unless you're an

242

investor, is an emotional decision.

243

Once you've decided you want the house,

you have to have the house and then

244

you're willing to overpay for it.

245

And that's what happens to

the vast majority of people.

246

It has, you have to separate.

247

The emotions from buying a house.

248

It has to be just a rational decision.

249

Adam Butler: One of the things that,

cause I mean, that just seems to make

250

a ton of sense to me and I've, I've

always embraced the idea of trying to pay

251

off a mortgage as quickly as possible,

even, even during the low rate period.

252

but you know, that, that seems to

have just flown out the window.

253

And, and part of the reason that

that has, you know, people almost

254

laugh at that idea now is that it has

paid so handsomely to be imprudent.

255

Over the last 10 years, right?

256

I mean, the smartest thing in retrospect,

you could have done 10 or 15 years

257

ago is buy a home vastly outside of

your, affordability range, continue

258

to ratchet down the interest rate

that you pay on that loan as, as the

259

fed and other factors lowered rates.

260

And of course, as a function of the

fact that people began to think about

261

home prices in terms of not the cost of

the home, But the monthly payment on a

262

home that the prices of homes went up

commensurately over that time and made

263

everybody who decided to be over leveraged

to buy too much home, very rich, right?

264

So how do you, how do you

counter this experience?

265

I mean, I struggle with this.

266

From a very frustrating

perspective all the time.

267

And I'm, I'm wondering how you positioned

it in the book so that it connects to

268

people who obviously have had a very

different experience with, with prudence

269

and imprudence over the last 10, 15 years.

270

Jared Dillian: Well, I didn't talk

about this in the book, but interest

271

rates are basically a signal.

272

Okay.

273

And when interest rates are

low, they're telling you to

274

borrow money and buy assets.

275

And when interest rates are high, they're

telling you to sell assets and raise cash.

276

Right.

277

And now interest rates are high.

278

So the calculus is completely different.

279

I will say that the housing

market is still pretty strong.

280

you know, at least in the U.

281

S.

282

for, demographic reasons.

283

You know, you have a huge population

bulge, the millennials that are

284

just starting to buy houses.

285

And we also had 10 million people

come across the border, which are

286

going to need a place to live.

287

So, you know, I think housing prices

over the next 10 years in the US

288

are going to do what they did in

289

So, I think it's, I think they're

going to go parabolic here.

290

I think it's going to be crazy.

291

Adam Butler: So then, you know, how, how

do you advise, the young person now you

292

say, look, get in now doesn't really,

yeah, they're vastly overpriced already,

293

but they're never going to get cheaper.

294

So just be prepared to have far less

disposable income than your parents

295

You know, you're going to have

to spend a lot more on your home.

296

Jared Dillian: yeah, I mean, that's, look,

that's an economic forecast and there

297

are no economic forecasts in the book.

298

You know, I didn't, I didn't, you never

want to put a forecast in a book, right?

299

Because

300

Adam Butler: Yeah.

301

Jared Dillian: going to

turn out to be wrong.

302

And then you're going to look stupid.

303

Right.

304

So I didn't make, I didn't make

any forward looking statements on

305

what the housing market is going

to do over the next 10 years.

306

But, you know, usually the housing

market is, um, not, doesn't

307

really provide a great return.

308

Like if you look over the last 100 years,

housing has returned about 4 percent

309

a year, which barely beats inflation.

310

and it's, you know, having said

that, even though it hasn't been

311

a great investment for a lot of

people, it is a great investment.

312

Because a lot of people don't have

the ability to save and invest.

313

they can't put money in a bank

account, they can't buy stocks,

314

they can't buy mutual funds.

315

But what they can do is

pay off a mortgage, right?

316

And build equity over time.

317

There's a lot of people in this

country Who have, you know, they

318

bought a house for 70, 000 in 1979.

319

And in 2024, they sold it for 900, 000

and it would, the mortgage was paid off

320

and they had a hundred percent equity.

321

And they take that money and they move

to a place like South Carolina and

322

they buy a house for 250, 000 and they

just live off the rest and retirement.

323

Like that story happens

over and over again.

324

And these are people who never

bought a stock, bought a mutual fund

325

or anything, but they just, Yeah,

326

Adam Butler: Yeah, I guess the question

is, how do you, how would you advise

327

millennials at the moment who are, as

you say, at the point in their lives

328

when they do want to start a family?

329

For many, the biological clock is ticking,

but they're faced with a housing market

330

that is going from strength to strength.

331

It started from very expensive,

interest rates have risen.

332

So the monthly payment now is even

twice what it was, three years ago.

333

I'm just wondering your,

your thoughts on it.

334

Cause I, I personally struggle

with what the advice should be.

335

Jared Dillian: it's a hard decision.

336

I mean, look, it's also an

asset allocation decision.

337

You want to have some money in stocks.

338

You want to have some money in bonds.

339

You want to have some money in cash.

340

You want to have some

money in commodities.

341

You also want to have

some money in real estate.

342

And if you're renting, I mean, there's

nothing wrong with renting, but what

343

that means is you don't have any exposure

to real estate as an asset class.

344

So if real estate as an asset class

does really, really well, and you

345

own stocks and bonds, which don't do

very well, then you're missing out.

346

You're missing out on

that diversification.

347

So, since you can't predict the

future, you basically want to own

348

a little bit of every asset class.

349

Which means you're probably going

to have to buy a house and the only

350

advice in the book that I give is

that your housing costs should be less

351

than 25 percent of your income, which

is difficult to achieve, but that's

352

the goal that you should shoot for.

353

So your mortgage, your HOA fees.

354

Your property taxes, your insurance

should be 25 percent of your income.

355

Adam Butler: Which basically, I think

for, you know, the top dozen major,

356

major employment centers in the U.

357

S.

358

means that your average millennial family

is living about 90 minutes one way to

359

the office if they have to commute.

360

Jared Dillian: Yeah.

361

Yeah.

362

Pretty much.

363

Yeah.

364

I mean, you can stretch it a little bit.

365

You can do 30 percent of your income,

but what a lot of people do is, you

366

know, if you live in San Francisco,

then it's 50 percent of your income

367

and that crowds out your ability to

save or even spend money on fun stuff.

368

Right.

369

So look, it's a balance like, you know,

these are, these are hard choices.

370

Adam Butler: Yeah.

371

Mike Philbrick: offs,

trade offs, and trade offs.

372

Adam Butler: Yeah, for sure.

373

Mike Philbrick: Yeah.

374

I guess, yeah, those are sources of the

financial stress you talk about, and

375

you have two sources of that you talk

about in the book, you want to elaborate

376

on that a little bit more, cause you're

beating around the bush a little bit,

377

but, you want to lay them out distinctly.

378

Jared Dillian: So the two sources of

financial stress are debt and risk.

379

And we've spent a lot of time talking

about debt as it comes to housing.

380

Um, risk is the investment side,

financial markets risk, and you know,

381

the conventional wisdom in investing

is that you should put all your

382

money in the S and P 500 index fund.

383

And why should you do that?

384

Because it returns the most.

385

You should put your money in

the thing that returns the most.

386

Well, if something has a good return,

it probably also has a lot of risk.

387

And if you invest in an index, you

get the returns in the index, but you

388

also get the volatility of the index.

389

And the S& P 500 is pretty volatile.

390

It moves around a lot, about 1

percent a day, 15 20 percent a year.

391

And over the course of an investing

lifetime, there's going to be

392

one year when it's down 50%.

393

It's just going to happen.

394

So I don't think that's very good advice.

395

because number one, it causes

people a lot of stress, right?

396

Number two, they may not be able

to withstand that stress and they

397

may liquidate their investments

at the worst possible time.

398

So the goal is to be in some kind of

vehicle, which gives you a good return,

399

but cut your volatility in half.

400

Mike Philbrick: And then how, how

did you approach that in the, in the,

401

uh, sleep at night portfolio that,

um, you talked about in the book,

402

Jared Dillian: Yeah, I called the

awesome portfolio, and that's 20

403

percent stocks, bonds, cash, gold,

and real estate in this portfolio,

404

which we backtested back to 1971.

405

this has returned 8.

406

1 percent a year.

407

for the last 53 years with half the

volatility of an 80 20 portfolio and

408

the worst drawdown in any year was 12.

409

2 percent.

410

So you say look, like I'm getting one

percent less than the stock market with

411

half the volatility And the worst year

that I can possibly have is down 12%.

412

And by the way, in the year of

the financial crisis, it was

413

down 9 percent when the, when

the broad market was down 38%.

414

So even during the financial

crisis, you were protected.

415

So this is.

416

this is the solution.

417

Mike Philbrick: So it's that

old adage of diversification.

418

Yeah.

419

And then how do you, so

we're large proponents, big

420

proponents of diversification.

421

One of the challenges is the tracking

error that comes with, you know,

422

having everybody else in your friend

group who are in the S& P and having

423

the best of times at times and the

worst of times at times, and you're

424

not in that emotional rollercoaster.

425

Do you have any thoughts on

that side of the equation?

426

Jared Dillian: Yeah, I mean, this is,

this also takes some intestinal fortitude

427

because 42% of the time you are going

to underperform the s and p by 10%.

428

21% of the time you are going to

outperform the s and p by 10%.

429

As it turns out, the times when

you're outperforming the s and p,

430

you do it by a lot more than when you

underperform, but 42% of the time.

431

You're going to be talking to people

at cocktail parties and they're

432

going to be bragging about how the

market is up 30 percent this year.

433

And you're going to be up 11 percent

and you're going to be like, why

434

am I in this stupid portfolio?

435

You know, everybody else is

getting rich but me, but in the bad

436

times is when it has real value.

437

Mike Philbrick: Yeah.

438

And a lot of people have forgotten

439

the S and P where you get.

440

Two 50 percent declines in the

market and zero returns for, you

441

know, better part of 12 to 14 years.

442

So it is a, stocks are risky

and they are a certain regime.

443

Now that, that might move us

into, um, the area of gold.

444

I know Adam, you found a, a

wonderful market carpet that

445

showed the top asset classes.

446

I forget who published Bank of America,

maybe, and gold seven out of the 10

447

years in the seventies was the top

performing asset class, not by a

448

little, I know you're a proponent of,

gold, Jared, but, you know, can we walk

449

through a little bit of the, the value

of having these different pistons in

450

the engine of the awesome portfolio

versus, you know, just betting on, stocks

451

and sort of one regime all the time?

452

Jared Dillian: Well, a lot of

people, you know, people who have

453

an index fund, They say, well, I am

diversified because I have 500 stocks.

454

I'm diversified.

455

Well, I don't, I don't consider that to be

diversification at all because stocks are

456

highly correlated to one another, right?

457

So you have this big basket

of highly correlated stuff.

458

And they say, well, I'm

going to add some bonds.

459

Okay.

460

Well, there's long periods of

time where bonds are actually

461

positively correlated to stocks.

462

We saw that in 2022.

463

So basically what you have is if you have

stocks and bonds, a 60 40 portfolio, you

464

have this basket of financial assets,

but you don't have any real assets.

465

And once you start adding real

assets, like gold commodities, real

466

estate, that's when the benefits

of diversification really kick in.

467

Right.

468

And particularly gold, you know,

the, the most special thing

469

about gold is its diversification

qualities, because it is lowly.

470

It is very little

correlated to anything else.

471

And those correlations are not stable.

472

They change over time.

473

So it is the perfect

diversifier to any portfolio.

474

Once you add gold to a portfolio, The

volatility immediately comes down.

475

That's what makes it so useful.

476

Adam Butler: uh,

477

Mike Philbrick: with the, uh, the Dennis

Rodman analogy, which I think is, it bears

478

repeating cause it's such a great, it's a

great illustrative story on the power of

479

diversification, via a different avenue

than just scoring all the time, if you

480

will, maybe you can walk us through that.

481

Jared Dillian: Yeah.

482

Well, Dennis Rodman is in Hall of

Fame Basketball Hall of Fame, and

483

he's the lowest scoring member

of the Basketball Hall of Fame.

484

And there was actually a controversy

about whether he should even be

485

included in the Hall of Fame.

486

He scored like six points a

game or something like that.

487

If you had a team full of Dennis Rodman's,

if you had five Dennis Rodman's on a team,

488

it would be the worst team in basketball.

489

Right.

490

Because it can't score, but Dennis

Rodman can rebound and he can pass.

491

So what happens is if you take

Dennis Rodman and add him to a

492

team of four people that can score,

the team gets much, much better.

493

And that's really what gold is about.

494

It if you had a portfolio that was

just gold, I mean, you said gold did

495

really well in the seventies, but

also gold kind of like real estate

496

has gone up 4 percent a year since.

497

You know, the 1930s.

498

So if you had a portfolio that would,

that was just gold, it would not

499

be very exciting when you take gold

and you add it to a bunch of other

500

stuff, that's when things get better.

501

Adam Butler: what does gold

respond to that makes it so

502

different from stocks and bonds?

503

Jared Dillian: I, nobody knows.

504

Nobody knows.

505

Seriously.

506

I mean, gold responds to a

bunch of different things.

507

I mean, theoretically inflation,

but not really, lately

508

geopolitical risk, but not really.

509

the thing that it has the highest

correlation to is budget deficits.

510

That is the one thing that it

has the highest correlation to

511

is budget deficits over time.

512

Adam Butler: So the idea being

that governments have a really

513

hard time scaling back spending.

514

Eventually, it becomes very hard to fund

deficits through tax receipts because of

515

the crowding out effect or what have you.

516

And, they become more and more

incentivized to monetize some of

517

that and then because the amount

of currency outstanding or Dollars

518

outstanding, say relative to a fixed

amount of gold, which really doesn't

519

change much from year to year.

520

They don't mind hardly any

of it out of the ground.

521

then, you know, over time, it's not

that gold so much as rising as it, as

522

other stores of wealth are falling.

523

Right?

524

And, and gold stands out

from that perspective.

525

That might be one narrative that,

helps explain why it's a nice

526

diversifier against stocks and bonds.

527

Jared Dillian: Yeah, that's right.

528

I actually had a tweet thread

about that a couple of weeks

529

ago that was pretty popular.

530

I just, that's the exact concept

that I was talking about.

531

So,

532

Adam Butler: Gotcha.

533

And then real estate, typically

people own real estate with

534

quite a bit of leverage, right?

535

Because they're, you know, they're

buying it, with a mortgage, right?

536

I mean, obviously, if they pay it

down really quickly, then that, that

537

leverage factor declines conventionally.

538

But for many years, they end up with this.

539

Like highly levered bet on, on real

estate and obviously equities are

540

much more risky than bonds are.

541

Any thought to the fact that you've

got, you know, different types of

542

assets which are diverse in their nature

and what drives them from day to day

543

and week to week and month to month.

544

but they have very

different, Risk profiles.

545

And that a lot of the time, you know,

leave a real estate or, the equity

546

side of the, basket will dominate

what happens in the portfolio and the

547

diversification opportunity from stuff

like bonds and cash are, they don't

548

really have a chance to shine through.

549

Jared Dillian: well, I mean, the funny

thing is, is that, you know, that 12.

550

2 percent drawdown that I talked

about in the awesome portfolio,

551

uh, that actually happened in 2022.

552

that was, that was the worst

year for the awesome portfolio.

553

Stocks were down, bonds were down,

real estate was on, you started to

554

earn more money on cash and it was

also a pretty bad year for gold too.

555

so that the one vulnerability to

any kind of diversification is

556

rapidly rising interest rates.

557

In a period of rapidly rising

interest rates, really, the

558

only place to hide is cash.

559

The only place to hide is cash.

560

So that actually might happen again.

561

You know, that, that

562

It's possible that interest

rates could go up a lot more.

563

We go through that again.

564

so yeah, I mean, in times when interest

rates go up a lot, then everything

565

becomes correlated to the downside.

566

Adam Butler: Right.

567

So let's, let's discuss some themes here.

568

I mean, you mentioned that we, we

could see another, inflation push

569

over the next couple of years or so.

570

what might drive that?

571

In your view, and then we'll also sort

of move around a little bit into some

572

of the other themes you're watching.

573

Jared Dillian: well, I mean, really

inflation is, you know, as Milton

574

Friedman said, a monetary phenomenon,

but it's also a psychological phenomenon.

575

And for years, even though the fed

was printing a lot of money, we

576

had a disinflationary psychology.

577

People did not expect price rises.

578

The, this is how people behave.

579

If you think that prices are

going to rise, then you act in

580

such a way to make prices rise.

581

Yeah.

582

Let's say you're going to Home

Depot and you're going to buy a bag

583

of fertilizer and it costs like 8.

584

And you get to Home Depot and you're

like, well, you know, we have inflation

585

and, I don't know what this bag of

fertilizer is going to cost a year

586

from now and I might need some more.

587

So instead of buying one, I'm

going to buy 10 and I'm just

588

going to keep them in my basement.

589

And the act of me buying 10 and

everybody else buying 10 pushes

590

up the cost of fertilizer.

591

It accelerates economic activity, right?

592

So even though inflation has come

down from the highs, which were

593

about 9 percent and now we're at 3.

594

5%, we still have an

inflationary psychology, which

595

I'm sure you would agree with.

596

People are expecting

prices to go higher, right?

597

If you go back to the late 70s, early

80s when Paul Volcker was chairman,

598

the thing that he did that was so

special was he raised interest rates

599

so much and so fast that it broke

that inflationary psychology, right?

600

And we haven't done that yet.

601

And if you go back to the 70s,

and if you look, There were

602

really three waves of inflation.

603

In 1969, you had a bump of inflation

to about four or five percent.

604

Then in 1973, 74 went up to

about eight or nine percent.

605

And then in 1979, it went

up to like 14 percent.

606

So we are currently in, we just passed

the second wave of inflation, and I think

607

that we are going to get another one

that is bigger than the previous one.

608

So, because we did not break

that inflationary psychology.

609

And this is going to continue until we do.

610

Adam Butler: Right, and what would be

some signs that we were beginning to break

611

that inflationary society, um, psychology?

612

Do we need a major uptick in

unemployment or a major fall in prices,

613

say in equity prices or, , you know,

in aggregate prices in order to.

614

To believe that, that cycle may be over.

615

Jared Dillian: You need all those things,

but interestingly, interestingly, one

616

big component of inflation is regulation.

617

And regulation is known

as inflation by fiat.

618

So if you regulate an industry, you impose

costs on it, and the industry has to raise

619

prices in order to cover those costs.

620

So if you have a period of

time where you have increasing

621

regulation, Increased costs.

622

And what you, another thing that

you saw correspondingly in the

623

late seventies and early eighties

was a big wave of deregulation.

624

We saw that in the airlines, we

saw that in a lot of industries

625

and prices dropped a lot.

626

And it was actually

because of deregulation.

627

So that's a big part of it.

628

Adam Butler: Gotcha.

629

And we don't seem to be in a

cycle where the government is

630

hurrying to get out of the way.

631

They, they seem to be moving, steadfastly

in, in the opposite direction.

632

Jared Dillian: no.

633

And if, and if we did, if the government

did get out of the way and started a

634

wave of deregulation, you would want

to buy bonds until your head caves in.

635

So

636

Adam Butler: what are some of the other

themes that you're watching though?

637

Jared Dillian: Uh, well, gold for sure.

638

private equity is probably the biggest

one I'm focused on at the moment.

639

I am of the belief that we have a

private equity bubble, like, so I saw,

640

An article today that private equity

is going to be buying NFL teams.

641

they've already bought minor

league baseball teams, but they've

642

been buying dental practices and

pizza parlors and car washes.

643

And, you know, the funny thing about

finance, Is that somebody comes up with

644

a good idea and implements it and they

make money and then it turns into monkey

645

see monkey do and everybody is doing it.

646

We have 17, 000 private equity firms in

the United States and this all made sense

647

when You know, interest rates were zero

and you could buy a business for four or

648

five times multiples, but now interest

rates are 5 percent and you're buying

649

businesses at 10 or 12 times multiples.

650

Like, this is not going to end well.

651

And it's going to have systemic effects.

652

It's going to crash.

653

It's going to be a problem.

654

So

655

Adam Butler: when private equity

gets involved is that, and it's this,

656

it's this weird cycle where, you

know, so much of private equity is,

657

investors are, are pension funds and

sovereign wealth funds and endowments.

658

And so you've got these, pension

funds who are acting on behalf of.

659

Their stakeholders, you know, ex employees

of a company or, you know, but just your

660

average everyday citizens, and this is

their retirement savings and you give

661

them money to private equity and they go

out and they buy homes and they go out

662

and they buy gas stations and they buy

dental practices and they buy, um, health

663

insurance providers, et cetera, et cetera.

664

And then they proceed to make the margins

in all of those different businesses.

665

wider, the, you know, cut the

customer service out in order

666

to, to get those wider margins.

667

And, you know, these are all

relatively essential services to

668

the very people that Are funding

these private equity investments

669

via their pension contributions.

670

And it just goes round and around

and makes everybody's life worse.

671

Jared Dillian: Well, I can tell you

that Pension funds and endowments,

672

you know, places like CalPERS,

like, the, the goal in those

673

places is to avoid accountability.

674

the, those decisions are being made by

committees of lots of different people

675

and, uh, everybody, you know, the,

the goal is to, Prevent embarrassment.

676

So people do what is

popular or fashionable.

677

So, you know, CalPERS actually

just put another 34 billion into

678

private equity, on the highs.

679

So, yeah.

680

Adam Butler: Might be a good segue

into, um, we touched on it a little bit

681

earlier, but you know, Mike and I, and

well, we have just in general on this

682

podcast and at Resolve and of the view

that, that benchmarking in general is one

683

of the most insidiously evil, pursuits.

684

That, seem to be absolutely pervasive

in the investment management industry.

685

any, any thoughts on, on

benchmarking in general?

686

I mean, obviously, benchmarking is

driving the phenomenon that you were

687

describing in private equity, but

it kind of drives a lot of those.

688

You know, in the end, very

bad investments, right?

689

Jared Dillian: what do

you mean by benchmarking?

690

I don't understand.

691

Adam Butler: Just like having a

policy portfolio, making sure that

692

your policy portfolio is close to

the other policy portfolios or asset

693

allocation mixes of your peer group,

and then being held accountable not to

694

whether that asset allocation actually

makes sense or is aligned with the

695

objectives of your stakeholders, but

using that benchmark allocation or

696

the The underlying equity benchmarks

within the equity sleeve of the policy

697

portfolio, or the bond benchmark within

that bond sleeve as an end in itself.

698

Jared Dillian: Well, I, you know, I, I,

look, I think about things in terms of

699

absolute return and not relative return.

700

You know, like the mutual fund

world is very weird to me.

701

You know, if you have a small cap manager,

and they lose 15% in a year, and the index

702

is down 20%, then they're thrilled, right?

703

Like, they're happy.

704

And I'm like, guys, you've lost money.

705

Like, I, you know, like, I don't get it.

706

so I've always been, you know,

of the absolute return mindset.

707

I don't, I don't really

understand that at all.

708

So,

709

Adam Butler: Yeah.

710

I mean, the strange thing about that

example is that if the small cap

711

manager who, you know, 95 percent of

people who allocated to that small

712

cap manager wanted that manager to be

down just slightly less than the small

713

cap index, and if the manager had.

714

Too much tracking error to that index

and, did wildly differently, but

715

even in a good way in that year, many

allocators would be pulling money from

716

Jared Dillian: yeah, absolutely.

717

Yeah.

718

Adam Butler: Yeah.

719

That's the insidiously strange and evil

dimension, or one of them anyways, of

720

this obsession with, with benchmarking.

721

Really makes no sense.

722

Mike Philbrick: So what do

you, also let's, uh, expand.

723

We gold, obviously you're a big

proponent of gold, both as a long

724

term diversifier, as well as

potentially a short term opportunity.

725

I think you're on sort of record for that.

726

Anything you want to add there?

727

And I'd like to broaden

the gold discussion out to

728

commodities more generally.

729

If you're seeing things, um, in the energy

space that are particularly interesting

730

and how you're interpreting the impact

of oil and the oil shocks might have

731

on, your current global macro thesis.

732

Jared Dillian: gosh, I don't have a,

I don't have a global macro thesis.

733

I'm just, uh, I'm, I'm just a trader.

734

I just, I, I mean, I would just

say that commodities broadly have,

735

you probably seen that chart.

736

of commodities relative to financial

assets over like the last 15

737

years or something like that.

738

And financial assets were very

expensive and commodities were very

739

cheap and that chart was on the lows

and now it's starting to tick up again.

740

So if we really do have an

inflationary environment, which I

741

think we will over the next couple

years, commodities are going to

742

outperform and they're starting to.

743

gold and copper for sure.

744

Oil has come up a lot.

745

the one thing that really has,

we've seen cocoa and, uh, orange

746

juice obviously have exploded.

747

Some of the soft commodities,

coffee has gone up a lot.

748

Uh, the one thing that really hasn't

gone up, Is agriculture, which

749

is kind of a function of, climate

change, which has been beneficial

750

for agricultural production and also

crop yields and stuff like that.

751

So, but yeah, commodities have

come up a lot and I expect

752

them to come up even more.

753

Mike Philbrick: And then, yeah, so

that this idea of diversity as well,

754

I think, you know, there's been a few

folks out there talking about, for

755

example, the S& P 500, 500 stocks, but

you know, 4 percent is designated, 4.

756

5 percent designated to sort of

the energy sector and another 2

757

percent to the material sector.

758

And so if you're thinking that.

759

Your stock portfolio has

any hedge to energy prices.

760

It's really not true.

761

I mean, you have to go back to 2008

when, the exposure to the energy

762

sector was up in the 16 percent range.

763

At least then you had some exposure.

764

Today's exposure exposure is de minimis

and the cashflow is coming from the energy

765

sector, you know, sort of three times.

766

The size of the free cashflow coming

from Microsoft and Microsoft, you know,

767

three times the valuation in the index.

768

So it's, we are set in a particularly

strange way for, you know, a dis

769

inflationary environment, sort

of peaking in the S and P 500.

770

And if we get an inflationary environment.

771

You know, underneath the surface,

the index can churn a long time,

772

not go very far as the sectors

underlying sort of readjust to

773

where cash flows are coming from.

774

Jared Dillian: yeah, I mean,

uh, a lot of things there.

775

First of all, the good news is, is that

unlike the seventies, you can, it's now

776

super easy with the click of a button.

777

You can get exposure to the energy sector.

778

We have ETFs, right?

779

So, you know, you can, you

can build whatever portfolio

780

of sector ETFs you want.

781

you don't have to just accept

what's in the S& P 500.

782

So that's really easy to do.

783

Yeah.

784

Mike Philbrick: Yeah, so you

should, you should empower yourself.

785

And then the awesome portfolio, it

seems a little bit, it's somewhat

786

similar to the Talmud as well.

787

I don't know if you've, if you've

ever seen the Talmud portfolio from

788

several thousand years ago, I think

it was a A third businesses, a

789

third gold and a third, is it cash?

790

Something along those lines.

791

Jared Dillian: I don't know about this.

792

Mike Philbrick: You know, it's,

793

portfolio, like of a, of a similar

elk you've, you've, dissected a

794

little more at a little bit more, uh,

795

Adam Butler: certainly in the same family

as the permanent portfolio and, you know,

796

the idea of global risk parity, you know,

you know, this sort of the idea being that

797

we want to be diversified Against regimes

that are unfriendly to equities, right?

798

I think that's, that's the basic theme.

799

Jared Dillian: Yup.

800

Yup.

801

Adam Butler: that we can, that we

can see through history and that are

802

favorable for different asset classes.

803

And, and you should be positioned

to benefit from that and not be

804

completely at the whims of whether you

happen to be in a positive tailwind

805

environment for equities, right?

806

What about international equities?

807

Jared Dillian: Well, that's

a great question because US

808

stocks are super expensive and

foreign stocks are really cheap.

809

So gee whiz, like you should definitely

be overweighted to international stocks.

810

And so I actually got this question

recently about the awesome portfolio.

811

Like somebody who's like, why

don't you have any international

812

stocks in the awesome portfolio?

813

I mean, Think of the Awesome

Portfolio as an index, and you

814

can depart from that index.

815

I actually, I have almost

nothing in the way of U.

816

S.

817

stocks.

818

In fact, I am probably net short U.

819

S.

820

stocks.

821

In fact, I know I am.

822

I'm net short U.

823

S.

824

stocks.

825

I have Investments in India and Argentina

and EM broadly and Europe broadly.

826

but I I'm net short the U S which is

kind of by design, but kind of not.

827

but certainly.

828

You know on valuations like U.

829

S.

830

stocks are just so overvalued

relative to overseas.

831

And one of the reasons

that is, is because the U.

832

S.

833

is the only country with big tech stocks.

834

You know, and big tech

stocks have done the best.

835

Europe doesn't have big tech stocks, so.

836

Adam Butler: So let's

explore some of those.

837

I mean, I'm a big bet in India.

838

And, emerging markets.

839

What is behind those?

840

Any, any particular narrative

you're following there?

841

Jared Dillian: Well, India, India,

India is really, it's become sort of

842

consensus in the last couple of months.

843

it's a great chart.

844

It's been doing well.

845

Modi is still popular in India.

846

He's still an economic reformer.

847

the demographics are good, unlike China.

848

You know, the thing about the

emerging market CTFs is that they're

849

all heavily weighted towards China.

850

Like the EEM has like 35 percent

in China or something like that.

851

And China has the worst

demographics of any EEM country.

852

No, not to mention all kinds

of other bad stuff, you know?

853

So I think with EEM, you

can't really generalize.

854

Like you could generalize in 2002.

855

You could say, I'm just going

to buy all emerging markets.

856

Because they all have the

same characteristics, but

857

you can't do that today.

858

You have to pick and

choose in emerging markets.

859

So

860

Adam Butler: And Argentina,

you're bullish on.

861

Jared Dillian: yeah, I actually, uh,

I've been in Argentina for a while.

862

as soon as I heard of Javier

Millet, I bought Argentina.

863

I had him picked to be the next

president and, that bet worked

864

out and that's been a great trade.

865

So,

866

Adam Butler: Yeah, it seems to me

that that model that he is doing a

867

pretty darn good job of executing

on, is kind of a sandbox for what

868

the global economy is eventually

going to need to reconcile with.

869

and I, you know, when I was.

870

Reading about his policies, it seemed

to me that it was more likely that

871

they're going to go through a period

of extreme contraction and pain

872

before they come out the other side

with a clean balance sheet, a strong

873

currency, a healthy private sector,

a healthy, contained public sector.

874

It seems like the market is sort

of That valley and into the healthy

875

state that it, you know, might emerge

into and sort of two to three years.

876

Did you have that intuition at all?

877

Or did you think this was going

to be, roses right from the start?

878

Jared Dillian: well, I mean, there,

if you talk to anyone in Argentina,

879

things are very painful right now.

880

you know, they've cut a massive

amount of government employees, which

881

has affected retail in particular,

like people just don't have money.

882

so I mean, you know, look, Malay

managed to balance the budget within

883

a couple of months of taking office.

884

I mean, it's just an

incredible achievement.

885

I am, it's funny because, I have a

subscriber in Miami who emailed me

886

last week and he says, look, I have

a friend who's, who knows Malay.

887

Do you want me to ask him any questions?

888

And I said, no, not really.

889

You know, just does he think he can do it?

890

And he said, yes, he thinks he can do

it, but he is up against the unions.

891

He's up against, the Congress

like it's, but I, you know, he's

892

been very successful so far.

893

So

894

Adam Butler: Yeah, it seems to me

that, you know, as this progresses,

895

right, that, you know, the government's

spending is the private sector's

896

income and the government's.

897

Debt is the private sector savings.

898

And so in order to sort of clean this up

and balance the budget, there's a lot less

899

income to go around in the short term.

900

again, huge long term

benefits that the West.

901

Has managed to, avoid at all

costs for the last 20, 25 years.

902

and I see this as coming out the other

side, if it can be fulfilled and if

903

people can endure the short term, you

know, two or three years of, of pain,

904

as being very positive, but it'll,

it remains to be seen whether or not

905

Jared Dillian: let me give you one,

let me give you one quick statistic,

906

So in the United States, in the

United States, the stock market.

907

Market cap is 170 percent of GDP.

908

In Argentina, it's 9 percent of GDP.

909

Right.

910

which is the lowest in the world.

911

So if you think that if Malay is

successful, and by the way, the

912

mean is about 100 percent of GDP.

913

If, if Malay is even moderately

successful and gets the stock market to

914

50 percent of GDP, that's a five bagger,

915

Adam Butler: Yeah, no, that's a

really, really interesting statistic.

916

That's very interesting.

917

any other themes besides, India and

Argentina that stand out in your

918

portfolio, even if they're just tactical?

919

Jared Dillian: No, not really.

920

I would say that's about it.

921

Mike Philbrick: And anything, anything

on the negative side that you're, I mean,

922

obviously private equity, you mentioned,

you don't have a lot of us exposure, so.

923

You would be sort of eschewing

the, the semiconductors of shooing

924

the market cap side of things.

925

Is that sort of the, the feel and more.

926

Getting that commodities and, and

economies that are, demographically

927

have positive, waves behind them along

928

Jared Dillian: Yeah, pretty simple.

929

Pretty simple.

930

Mike Philbrick: I mean, it's not

that simple and it's, and it's not

931

that, sort of well adopted yet.

932

I mean, something that, gets me excited

about a trade setup, if you will,

933

is you have, you know, gold as an

934

You've got, the ETF products

across the board in pretty

935

substantial reductions in AUM.

936

And at the same time, you

have breakouts to new highs.

937

Of this, uh, shiny metal.

938

And so you really don't have,

you know, the, average investor.

939

And I mean, the average investor,

both retail and institutional,

940

because institutional investors

do not buy physical gold, they're

941

going to buy gold largely through.

942

A proxy, like an exchange traded

fund or product of some kind.

943

So somebody's buying it, obviously,

you know, we're seeing that through

944

some central banks in the world.

945

And then we had some news over the

weekend and the, um, the appropriated

946

funds of the Russians being, potentially

sent over to the Ukrainians, which is

947

an interesting set of circumstances,

which is going to make everyone question

948

the sovereignty of their assets and

where they're held and what they're held

949

Jared Dillian: Oh, yeah that and and

that's you know, look like as Gold is

950

actually having a bad day today as you

know I'm not terribly worried about it

951

I think that you know central banks are

gonna continue to buy it, but that's not

952

even my core thesis You know, my core

thesis is really about the monetization.

953

So

954

Mike Philbrick: So, so that, that's

more of a pegging of the yield

955

curve, 30s, 40s type situation.

956

You want to just walk us through that for

the last, for, we'll wrap on that point.

957

Does that

958

Jared Dillian: Yeah, so this

happened in the 30s United States

959

pegged the yield curve for the Fed.

960

long bond yields were held at 2 percent

for the period, for a period of want to

961

say like 13 years or something like that.

962

and at the end of it, at the end of

world war II, inflation ripped to like

963

18 percent or something like that.

964

We had a big wave of inflation.

965

so this is going to be

potentially much bigger.

966

This, this is, uh, You know, what we're

talking about is the stuff that gold

967

bugs talk about, like, Weimar Germany

or, Zimbabwe or something like that.

968

but you know, we really could see a big

developed economy like the US, engage

969

in full on debt monetization in order

to keep interest rates at a manageable

970

level, like that actually could happen.

971

Like you can see the future,

you know, it's coming.

972

So,

973

Mike Philbrick: Right.

974

And with, you know, 1.

975

1 trillion in, in the cost of the

debt alone, it's going to be some

976

interesting math to go through

as we progress into the future.

977

All right.

978

Awesome.

979

Well, Jared, thank you for taking the

time and, and, covering the book for us.

980

And, as I said, you're the editor

of the Daily Dirt Nap and you

981

mentioned you're on Twitter.

982

Where else can people find you

that's beyond the, just the

983

websites for the various, properties

we've mentioned previously.

984

Jared Dillian: Twitter

I'm on at daily dirt nap.

985

And the best place to find

me is Jared Dillian money.

986

com.

987

Mike Philbrick: Perfect.

988

Adam Butler: Brilliant, Darren,

thanks so much for coming on, man.

989

Jared Dillian: Great, great talk.

990

Enjoy talking to you guys.

991

Adam Butler: Yeah, us too.

992

Have a great one.