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Jared Dillian shares why he focuses on market sentiment (2:30). Private equity's systemic risk (5:30). The Fed wants to cut interest rates and add liquidity before the US election, but the market's not cooperating. No clear signal on bonds (7:35). Why investors should avoid leveraged ETFs (11:00). How to think about the market's 2nd half of 2024 (14:55).
Rena Sherbill: Jared Dillian, welcome to Seeking Alpha. Great to have you on the show. Thanks for making the time.
Jared Dillian: Yeah. Thanks for having me. Appreciate it.
RS: Yeah. It’s great to have you on Seeking Alpha. Great to have you on Investing Experts. Would you share with listeners a little bit about your background for those who don't know you, for those who haven't heard, and then summarize or articulate how you're looking at the markets and what you're thinking about there?
JD: Yeah, I first started my career on Wall Street in 1999. I was a clerk on the P. Coast Options Exchange for a couple years. I was getting my MBA part-time at the University of San Francisco. And after that, I got hired by Lehman Brothers. I was working in equities. I did index arbitrage for three years. And then I was Head of the ETF trading desk from 2004 to 2008 until the bankruptcy. Had a great career at Lehman. It was fantastic. Did really well.
After Lehman, I decided to start my Newsletter, which is called The Daily Dirtnap. And The Daily Dirtnap has been running for 16 years. It's an institution at this point. It's been a great business. I published my first book, Street Freak in 2011. My second book, All the Evil of This World in 2016. My third book, Those Bastards in 2023. And most recently, No Worries: How to Live a Stress-Free Financial Life in January. I have another book coming out in November, which is going to be a short story collection. I wrote for Forbes for a couple of years. I was an op-ed columnist at Bloomberg for 5.5 years, done a bunch of other stuff. Yeah, that's pretty much my background.
RS: Just out of curiosity, I know we're taking a bit of a detour, but what do you think - I mean, you seem to be a writer in your heart, in your soul. What do you think that gives you, as somebody looking at the market, somebody that's investing, how does that help you?
JD: Well, most of the finance world is filled with quantitative people. Everything can be solved by putting it in the spreadsheet. And I tend to focus on the qualitative stuff. In my newsletter, what I really specialize in is sentiment. How people feel about the markets.
And I think, I really consider myself to be a writer first and an analyst second. There's plenty of other people who are much smarter than me about the markets. What I am really good at is articulating it, articulating these opinions and figuring out where sentiment is and trading off of that. So, I think that gives me at least it's – I do something that nobody else really does. So…
RS: So, what would you say about market sentiment right now? How are you looking at things? How would you articulate that?
JD: Well, I mean, gosh, it's super bullish. I think everybody knows that. One thing I'm focused on at the moment is private equity. I think we are in the midst of a big bubble in private equity. There's a lot of sentiment indicators around that.
Even just today, there was a Bloomberg article that said that CalPERS was moving $34 billion into private equity. And that's, as you know, CalPERS is generally the mush. They're not very good at investing.
There was a magazine cover a couple of days ago, Forbes, with Jon Gray, Head of Blackstone, calling it remastering the universe. Actually, the thing that clued me into this trade was the Blackstone video, their Christmas video from the end of the year, which if you haven't seen it, you got to see it.
So yeah, I mean, private equity made sense when you were buying companies at 4x or 5x multiples and interest rates are 0, but now interest rates are 5% and they're buying companies at 10x or 12x or even 15x multiples. And it's reached the point of absurdity.
Through my newsletter, I've gotten a lot of anecdotes from people about private equity rolling up pizzerias and car washes and dental practices. And it's reached the point of absurdity.
So, when I look at private equity, I don't really know how it's a systemic risk, but I believe it to be a systemic risk. I have a short position in Blackstone (BX) that I've had for a couple of months. And that's how I'm expressing the trade at the moment. I have puts on Blackstone, but yeah.
RS: How would you advise investors to be thinking about, well, I guess I want to separate into two parts. In terms of looking at private equity and what they're showing to investors as a retail investor, what do you think that they should be paying most attention to or why should they be paying attention to that?
And what do you think it means for the coming year in terms of private equity and that component of the market?
JD: See, this is the part that I'm not really sure about. If you're a retail investor, why do you care about private equity? Well, you care because you're looking at a business that's buying other businesses at very high multiples and could be distressed sellers at very low multiples. And I don't really, we've never seen this before. Like this is a very new phenomenon.
The other thing I'll say is that, I've been on Wall Street for a long time and I've seen a couple of iterations of this where in the mid-2000s, everybody wanted to work for hedge funds. And we had like 15,000 hedge funds. And that industry underwent a huge shake up and consolidation.
And right now we have 17,300 private equity funds in the United States. And there's going to be a huge shakeup and consolidation. And of course, now everybody wants to work in private equity, like all the kids coming out of undergrad and business school want to work in private equity. It's the hot thing. And generally you want to go the other direction that the business schools are going. So…
RS: In terms of an economic indicator, it's contrarian?
JD: Yeah.
RS: And what would you say in terms of the coming year and interest rates and the Fed and what they are going to do, what they aren't going to do, how much they're going to manipulate the system, and how much they're going to prop up the consumer? What do you think it's going to look like and how do you think investors should be thinking about it, planning for it?
JD: Well, I think the Fed wants to cut interest rates before the election. I think they want to add liquidity before the election. I'm not sure the market is cooperating. Inflation bottomed about 6 months or 8 months ago, and it's been poking up a little bit. Just in the last couple of weeks, you've seen commodities really find a base and copper has exploded higher and oil has exploded higher and the agricultural commodities have sort of bottomed and are ticking up. Like, this feels to me like we're having the – this is the very beginning of a second round of inflation.
And if you've seen those charts that were getting passed around on Twitter of inflation in the 1970s, basically how we had three rounds of inflation, one in 1969 and one in 1973, 1974, and one in 1979, I don't think we've defeated the inflationary psychology. I think the inflationary psychology still exists and I think we're going to get another round of inflation.
So, I don't have a position in bonds at the moment, but I would be leaning towards higher interest rates over the next 6 months to 12 months, but technically bonds are in the middle of the range and I don't see any clear signals. So, I have a tough time taking a position, but I do think I do have a bias towards higher interest rates.
RS: And what would you say about getting into certain sectors accordingly?
JD: Well, I mean, this has been sort of a popular trade for a long time. Like, everybody wants to be long energy and short tech, and that just hasn't worked over the last year or two or three, but I think now actually we're closer to the point where that could be working. I don't know if you've noticed, but basic materials, (XLB) is actually putting in new highs after a three-year consolidation.
And you look like even Stan Druckenmiller has been selling off some of his tech positions and buying gold miners. And there was a great chart going around Twitter yesterday about how gold miners are the cheapest relative to gold in history. So, I think commodities and commodity related stocks are super cheap. I don't really, I think it's unwise to chase tech stocks here, especially where sentiment is. So, that's how I'm leaning.
RS: And what would you say as having ETFs in your background and having knowledge about that industry, what would you say about getting into specific ETFs and then in general, the preponderance of ETFs that are happening right now? What would you say about that and how to be savvy and navigate that?
JD: Well, when I first started on the ETF desk, there were 250 ETFs. When I left, there were 600. Now, there's like 3,000 or 4,000 or something like that. Actually, I don't really keep up with all the new ETF launches. I don't – it's impossible for me to keep track of all the tickers. Out of the ETFs that are launched, I would say only about 10% of them really have any relevance.
There was an ETF that was launched, I guess a week or two ago, it was a 4x leveraged S&P ETF, the ticker is (XXXX). As a retail investor, I would ignore stuff like that. That's not going to be good for your portfolio, but yeah.
RS: Because of the leverage, so stay away from…
JD: Oh yeah, leveraged ETFs should never have been issued. I am shocked that the SEC approved them. The math, the mathematics in those ETFs is very complicated for retail investors to understand. The daily rebalancing causes them to lose value over time. People don't understand why they underperform and this has been going on for 15 years and people still haven't figured it out.
RS: Can you think of a good reason for them to be there aside to get people's money?
JD: They're not even really good at getting people's money because of the daily rebalancing they're constantly losing assets due to the rebalancing. So, they're not even really good at gathering assets. I mean, I understand the rationale. We actually used to have single stock futures in the U.S., but they never really took off. I think single stock futures would actually be a better way to get leverage on individual stocks or sectors than the Leveraged ETFs.
So, really I just encourage people, if they want to take a leveraged position in something, I just use Reg T margin or use options.
RS: And in terms of what you were saying about tech and where it sits right now and where it probably is headed, and we've had a number of guests on the podcast talking about the challenges that are coming down the pike, even though there's been a lot of good news, broadly speaking, in the markets.
What would you say in terms of people invested in the tech space right now and either the big names or the smaller names, do you think it's worth being in that space now, it's worth getting out? And then also, are there certain stocks to like even in sectors that you don't or are there certain stocks that you would be calling out for retail investors?
JD: Well, really, it all comes down to Nvidia (NVDA). Like we had the Magnificent 7 and then the Fabulous 4 and it's really going to just come down to Nvidia. This looks a lot like Cisco (CSCO) in the 2000s where Cisco was the last tech stock that was holding up the market. And when it finally imploded, that was the end of the dot com bubble. I think something similar is going to happen with Nvidia.
It's never been my MO to, I don't really chase stocks. I'm more of a value person. I try to pick bottoms. I buy stocks that are cheap. Nvidia to me looks like fly paper for idiots. I'm reading articles about people YOLOing options on Nvidia and stuff like that. It's a football. I don't want to have anything to do with it.
RS: What else would you say in terms of looking at the markets and looking at the economy and how this year might shape up in terms of the election to contend with and other factors? How would you say that investors should be thinking about the latter half of the year?
JD: Well, I thought things would be a little bumpier in the first half of the year that hasn't really happened. In getting back to my views on the Fed, I do think the Fed is going to add liquidity before the election, but that also means that they're probably going to withdraw liquidity after the election.
So, it's possible that stocks will hold up until November. I hope that isn't the case, but I think it's possible, but I think, going into the election and after the election, it's probably going to be very rocky. So, that's just my view.
RS: Why do you think it's been less bumpy thus far than you had imagined?
JD: I'm not really sure. Look, there's a lot of potential negative catalysts around the election. There's more uncertainty around this than I think any election in recent memory. There's a lot of crazy stuff that can happen without going into detail. I thought that the market would begin to discount that, but it hasn't. So, I really don't know the answer to that question. I don't know why.
RS: And what would you say in terms of retail investors - what do you think is – in terms of signal to noise, what do you think is the biggest noise that investors get tripped up by?
JD: Signal to noise. I mean, as an analyst, as somebody who writes a newsletter every day, I don't have a TV in my office. I don't watch TV. I basically, I don't consume opinions. I only consume news through what I get on Twitter and through what I get on Bloomberg and stuff like that. That really tends to cut down on the noise.
I have a whole theory about information when you're investing. I think that too much information is actually a bad thing. I think it's possible to have too much information and too much information can lead to bad decision-making. So I actually try to curtail my information flow as much as possible.
RS: Yeah, I think that's a lot of good advice that we get from people that have been around the markets and seen a lot of people touting a lot of things and a lot of it, more noise than signal. So I think that would behoove investors to think about how much information they're consuming and how much of it is really worthy information.
What do you feel like is maybe a misnomer that you had in your mind as you got more out of the industry and more into writing about the industry? And what do you think has been the smartest takeaway since leaving the day-to-day minutiae of the market?
JD: Really what I try to do is, with any trade, the thesis behind any trade should be able to be boiled down in a single sentence. If you can't express a trade idea in a single sentence, then it's too complex and it's not worth doing.
So, really, I mean, look, there's all different types of styles. And if you have a multi-billion dollar hedge fund, they're going to have a lot of employees, they're going to have a lot of analysts, they're going to dig into a bunch of data and they're going to arrive at a conclusion. And I will probably arrive at the same conclusion through a completely different method.
Like I said, like what I focus on is sentiment and I look at news, I look at news articles, I look at headlines, and I look for words like unstoppable and relentless and this will never end and key phrases like that. And that's my methodology and it works pretty well, but like I said, like there's sort of a belief that if you have a process, then your process is the right process and everybody else's process is wrong, which absolutely isn't true.
Like there's a lot of different ways to make money in the markets. If you have a process that works and you make money, that's great, but it doesn't mean that other people are doing it wrong. And I think a lot of people get into arguments about process when really like people just have different ways of doing things.
RS: Let me ask you this: Is there a general demographic of who your subscribers are?
JD: They tend to lean a little bit older. I mean, I just turned 50 a couple of weeks ago. So, I have a lot of Gen Xers. I also do have a lot of older people, people in their 60s and 70s, but I also have younger investors too. So, it really runs the gamut. I would say mostly 45 and up is what I would say.
RS: And what are they mostly asking you or interested in or looking to find answers to? Obviously, everybody wants to make money, but what are they most curious about?
JD: Well, at the moment, they're really curious about private equity. I mean, that's been the big theme in the newsletter, but it totally depends. It totally depends. I mean, if you go back towards the second half of last year, there was a really big bet on interest rates, short-term interest rates coming down in the newsletter.
So we were really focused on economic data and the bond market and that was the big trade for the second half of 2023, but it all depends.
RS: Are you a believer in economic data? Is there certain data that you're more loyal to than others?
JD: Am I a believer in economic data? Well, I think that economic data trends much in the same way that anything else in the financial markets trend, okay?
So if you have an uptick, this is kind of a dumb example, but let's say you have an uptick in the unemployment rate and it persists for two or three months, that is probably the beginning of a trend. So, what I look for is, trends in economic data. I don't really put too much credence in any one particular number.
RS: But in terms of the data coming out, you generally feel like that's a nice reflection of what's happening?
JD: I mean, I'm not an economic data truther, if that's what you mean. Like, I don't believe that the data is being manipulated in any way. There are countries where the economic data is being manipulated to sort of paint a certain picture. I don't think that happens in the U.S., at least not yet. So, I do think it's – I think it's trustworthy and I think it's reliable and I think it's good for decision-making.
RS: Are you looking at the international picture at all? Is there anything that you focus on or pay attention to as hints or markers?
JD: Well, I do think that the dollar is going to weaken in the coming months. I do think that's going to be going to be good for emerging markets. And I think that U.S. stocks are massively overvalued relative to the rest of the world.
So, in the newsletter, we do have some exposure to other places in the world. One of those places has been Argentina. That's been one of the great trades in The Daily Dirtnap.
I think anybody reading the newsletter would tell you that we were early to identify Javier Milei as a potential winner in that election long before anyone else and took a position accordingly. And that's been a big winner. So, yeah, like – actually, I would say, a lot of my long exposure is outside the country just because U.S. stocks are so expensive.
RS: And is that in ETFs? Is that where the trade is?
JD: Argentina has an ETF (ARGT), but it's not very good because it's heavily weighted in one stock. It has about a 45% weighting in MercadoLibre (MELI), so it's kind of useless. So, I've been taking positions in ADRs in Argentina, but elsewhere in the world, yeah, ETFs work great.
RS: And how would you articulate why the U.S. dollar is weakening?
JD: That's tough to articulate, but, let's put it this way. If we were to have the election today and Trump were to win, the dollar would probably depreciate by 5% to 10% within a couple of weeks.
That was the one thing we learned about the first Trump presidency, back in his first term. And, he's very much in favor of a weaker dollar. And he jawboned the dollar down to good 10% or 15% when he was President. And something similar is likely to happen in the future.
RS: And what if Trump doesn't win? How do you see it going?
JD: Well, then, we're probably – it's probably going to be the status quo or something close to it. Strong dollars, strong tech stocks, weak commodities, but not really sure.
RS: And in terms of other currencies out there, what would you say is at the top of the strong list?
JD: I haven't really been focusing on FX a lot and I haven't probably in about 7 or 8 years, but I would say that EM FX is very cheap. I mean, just EM in general, like I think, EM FX, EM equities, local currency bonds, like all of this should do well in an environment where the dollar is getting weaker. It's a free option, so.
RS: Was there a particular reason why you stopped monitoring the currencies?
JD: I mean, it just stopped being interesting. I mean, for example, the Canadian dollar has been in a range for years in the 130s, and there just really hasn't been a whole lot to do. So, I just haven't really focused on it.
RS: Well, Jared, I appreciate you coming on today and sharing so much insight about the markets and how you're looking at things. Thank you very much and appreciate your time and look forward to the next time we talk, hopefully.
