JACK FARLEY: Welcome to the Real Vision Daily Briefing. It is Wednesday, May 26th. I am joined by Jared Dillian, trader, Bloomberg opinion columnist and publisher of The Daily Dirtnap. Jared, how are you doing?
JARED DILLIAN: I'm great. Great to be talking to you again. It's been three weeks. We skipped a week.
JACK FARLEY: It's been too long. How's the weather down there in South Carolina?
JARED DILLIAN: It's going to be hot on Friday, it's going to be 95.
JACK FARLEY: Well, I see you've got the shirt, so you're ready.
JARED DILLIAN: Yeah.
JACK FARLEY: Jared, there's a lot we can talk about. We can talk about the reopening trade, is that fully priced in, is that over-- there is the inflation trade, which you've been very bullish on, we're now in a bit of a holding pattern. I understand, Jared, you got something you have to get off your chest right away, that's about risk management. I'll just set you up here. In your newsletter today, the Daily Dirtnap, you wrote, everything is a trade, everything is meant to be sold. What do you mean by that?
JARED DILLIAN: There's nothing you want to hold forever. Now, first, let me say that the decision of when to buy something is very simple. It's a very easy decision. The decision of when to sell something is a thousand times harder. It's much harder to decide when to sell something. I'll tell you the whole story about my adventures with gold.
I was trading ETFs at Lehman Brothers, this was 2005. These guys came by from State Street, the World Gold Council, and they said they were going to start a gold ETF. I said, this is the greatest thing in the world, because at the time, I didn't really know how to buy gold, but I was super interested in it. We launched the ETF. We were an authorized participant.
In my personal account, I started accumulating a position in gold. Not to get too much into the weeds as to what was going on at the time, but this was around the midterms in 2006, it went heavily towards the Democrats and looked like we were going to get some left leaning policies and I said okay, like this is the right environment for gold, and then we had the financial crisis. Gold topped out. My cost basis was around in the 500s, maybe 600. It peaked at $1000, $1,000 an ounce when Bear Stearns went bankrupt, which was March 17th, 2008.
Then going into the financial crisis, it went down. In the teeth of the financial crisis, gold was down 30% from the highs, it was $700 an ounce, that was right about the time that I started the Daily Dirtnap. Really my first trade idea in the Daily Dirtnap was gold is massively mispriced, massively mispriced, financial crisis, whatever, got to buy gold. I was pounding the table on it. That was a great trade idea. Gold rallies for the next three years, and it turns into a bit of a bubble in 2011. It's $1900 an ounce.
This was around the time of the European debt crisis, but there were all these signs that it was getting very speculative. Like you started seeing these cash for gold stores and shopping malls, there was all the metals were rallying, some of the precious metals dealers were offering copper coins. I'm looking at all this stuff and I'm like, this is bad, I should get out of this trade. There was a lot of people at the time, these gold holders, they said I am never selling gold. Because the endgame here is that gold-- we're going to go back to a gold standard. We're going to revalue gold to $8,000, $10,000 an ounce and that's my exit strategy is when we go back to a gold standard.
People were saying that back then, and that sounds very familiar with what's going on today. Because you have people that say we're not going to sell Bitcoin, because eventually we're just all going to be using Bitcoin. I said, I'm not going to sell. Now, I said, I'm ready to take a drawdown, bring it on. This was my biggest position. It was like 40% of my portfolio at the time. The drawdown happened, and over the course of a couple of years, it traded down to 10, 15 an ounce so it was like a 40%, 45% drawdown, and it was painful. I had a lot of regret. I said, shit, I knew that it was at the highs, I should have sold it and I talked myself out of it. I said I'm going to take the drawdown and I took the drawdown.
What happened in 2011, almost exactly 10 years ago, is a direct parallel to what is going on today in Bitcoin. From a sentiment standpoint, sentiment is what I study, you see a lot of the same parallels, you saw the laser eyes and you saw Elon Musk and Dogecoin and all this stuff. Not to do the hindsight is 2020 thing, but back when it was trading above 60,000, there was a lot of signs that there was a lot of speculative excess. It would have been a good time to take profits, but it was the same logic that people used back in 2011.
They said, well, I'm just going to take the drawdown because I don't really have the ability to trade this around, I could leave some gains on the table, so they took a 50% drawdown and that's no fun. It's no fun if you have 100 bitcoins, and you just lost $3 million. My philosophy after 2011 just radically changed, and I sell stuff. The guideposts that I used generally is sentiment. When things are getting frothy, that's when I sell.
Sometimes I sell things too early, but you can't get too tied up and I have to top tick this. Sometimes you're 10% early, 20% early, and that's okay. You sell, you take the profits, then if you care, a year, two years, five years from now, you get to buy back at a lower price. It's really, really good to take profits and pay taxes. I would rather pay taxes than have losses. Taxes are the sign that you did something good.
JACK FARLEY: Wow. A lot to unpack in there. Jared, let's go back to 2011. What was the sentiment there? Tell us what the signs of the top tick now that you were looking back on it. One thinks, I think there was maybe one or two days where the GLD, the Gold ETF was actually larger in market cap then SPY for the S&P 500. Looking back, that is perhaps a top tick. What are the signs now, Jared, in 2021 looking back, where you said, this is a sign of some extreme froth in the crypto markets? Tell us more about your thoughts when you're making that parallel.
JARED DILLIAN: Well, I sold too early. In the spirit of-- I wasn't trying to top tick Bitcoin, I did avoid a drawdown, but I sold too early, and that's fine. I had a sizable profit, and I got cash, and I'm using the cash for stuff. That's perfectly acceptable. I always have the option of getting back in.
We've talked about this on the show before. You've asked me when I would get back in and I think it has to go a lot lower. In terms of some of the sentiment signs we're seeing right now, we have Bitcoin down 40-ish percent from the highs and Anthony Pompliano has a pizza party, and 1000 people show up. That tells me that people haven't felt enough pain yet. The market always finds that point of maximum pain. It always does. That's not a directional call. I'm not saying Bitcoin's going to go down, I'm just saying from a sentiment standpoint, people haven't felt enough pain yet.
JACK FARLEY: Well, the pain was definitely acute when you had that fourth selloff, the likely forced liquidation as a result of leverage players losing their hand, being forced to sell, and you had it really crashing down to just above $30,000. But to push back on this year, and one thinks, the pain, it was acute, but it didn't last long. What did you make of the somewhat very impressive pullback that we've seen from Bitcoin's snapback, what did you make of that?
JARED DILLIAN: It's short term, there's a lot of volatility. With gold, I didn't get back to the previous levels for nine years. It was a nine-year pullback. That's a long time to wait. I think there's a lot of short-term volatility here. Gold trading in $100 range is like Bitcoin trading in a $20,000 range, so I think it's not apples to apples.
JACK FARLEY: Jared, what are the signs of the top in the crypto market that you see, not necessarily at the top but of the froth? Like, for example, I think the Coinbase direct listing was literally the top tick for Bitcoin, the top day of Bitcoin, what else are you seeing? You mentioned, Elon Musk, do you make anything of the celebrity NFTs that are--
JARED DILLIAN: It's all that stuff. You're doing a better job listing all these things than I am. The Coinbase, the direct listing, that was really the big one. Brent Donnelly pointed this out, he woke me up to it, but if you go back to, I think it was 2007 when Glencore went public, that was the top tick of the commodities market. When Blackstone went public, that was a top pick of private equity. Those types of things, it happens every time. There were plenty of indications that that was going to happen. I was just early, which is fine, which is fine.
JACK FARLEY: As you say, it's tough to nail the dismount. Jared, what would you say to someone who has a sizable profit in Bitcoin or crypto, that profit has shrink somewhat since we've seen this drawdown-- obviously, you wouldn't say to sell the entire thing, because there are a lot of laser eyes, but you're selling to the manage risk, can you give us more detail on what are your thoughts on risk management, ideal risk management at this point?
JARED DILLIAN: I would say that if you're a holder of Bitcoin, and your cost basis is very low, let's say below 10,000 or below 5000, you have this phenomenon where somebody has a very low cost basis, it distorts their thinking, because they say, well, I can take a 50% drawdown, but I still have a massive profit. If you think in terms of the dollar amount of the drawdown, it can be quite large. I don't really like to give away that money. I like to be stingy with gains.
My advice would be to average out of that position over time, sell some today, sell 10%, and wait and see what happens. In a couple of weeks, sell another 10%, and start to average out of this position. That's assuming that-- if you're a believer in the thesis that Bitcoin goes to 100,000, or a million or whatever, I can't really change your mind, you don't have to sell the whole thing. You just sell some. You can just sell a small piece and take some profits.
JACK FARLEY: Let's move on to something that you were bullish on. Tom V. asks, Jared, what are you bullish on right now?
JARED DILLIAN: I'm bullish on the same stuff as the last time we talked. I'm feeling a little bit uncomfortable. The last couple times we talked, I've just been pounding the table on inflation, inflation, inflation, and that trade has cooled off a little bit. A lot of the stuff that I own is in consolidation mode. Then you have these voices in your head, you're like, well, is this the top? How much more do I expect to get out of this? Should I take some profits? What I will always fall back on with regard to the inflation change, is the fact that psychology has changed, and that people are now expecting higher prices.
The short-term supply bottlenecks with like chlorine tablets, and lumber and stuff like that, that will work itself out. But from a long-term secular basis, I think that the inflation psychology has changed. I still think it has many more years to run, it's just that now, it's a little bit uncomfortable. It's a little uncomfortable to have that idea.
JACK FARLEY: You said the inflation psychology has changed. What did you mean by that?
JARED DILLIAN: Well, if you go back 10 years ago, and you were going to buy a TV or a bag of fertilizer or coffee table or something like that, there was no hurry. Because prices were declining, prices on everything were going down. So, you didn't have to buy today. You could wait a year and prices would be cheaper. Now, that whole psychology is running in reverse.
People have come to expect higher prices in the future so they're accelerating their consumption, they're buying today instead of tomorrow. When that psychology changes, it actually sets off this reflexivity, because people buying sooner actually causes prices to go up, which exacerbates the inflationary psychology, which gets people to buy sooner and so on, it's a vicious cycle. That's what I mean when I talk about the inflationary psychology.
JACK FARLEY: I want to dig into that, Jared. You included in one of your earlier newsletters, a quote from Peter Lynch, who said, the day after the market crashed on the 19th of October 1987, people began to worry that the market was going to crash. The stereotype is everyone wants to buy puts right after the market crashed, and that's what you saw on March 23rd of last year in 2020. My question for you is, do you think that people are feeling a little antsy after that CPI print that we saw last month, and now they went a little bit too far, and they were bracing for the next battle? What do you think about that? To what do you attribute to the slowdown in the inflation trade, like things like oil and bonds going down, things like that?
JARED DILLIAN: Well, when I put that quote in the newsletter, what I was really referring to is this phenomenon where people tend to be backward looking. You know what I mean? The thing with the crash, like the market crashes and then everybody wants to buy puts, that stuff happens all the time. It's actually a good question. I haven't thought of it in that context before. Barron's had the inflation cover. Now, Barron's is not a perfect contrarian indicator. The Economist is. The economist absolutely is a perfect contrarian indicator.
If the economist came out with an inflation cover, I would seriously rethink my positions. I would seriously rethink it, but Barron's is right some of the time. I think that might be more of a coinciding indicator, but this is present in everybody's psychology. Whereas, eight months ago, it wasn't present in people's psychology. I think that the trend has changed. What I really don't see is an environment where we go back to yields on pans going back below 1% and CPI going back below 2%. I don't think the deflation trade is coming back. I just think the economy has changed.
JACK FARLEY: Jared, you mentioned the 10 Year, now the 10 Year is about at 1.57%. That is the yield there. Somewhat lower than the high we reached in the mid-1.7% range a few months ago. What is your outlook on bonds going forward? The normal distribution, you think it's highly unlikely that the 10 Year goes below 1%, what do you about it increasing? To what do you attribute the possibility of an extreme selloff in bonds of higher than 2% on the 10 Year, which a few months ago, a lot of people seem to think it's coming?
JARED DILLIAN: I don't have a position in US Treasurys. I'm just an observer at this point. I will say that I was max bearish Treasurys on the high yields for sure. Just like everybody else, I was max bearish. There's some stuff about the Treasury market I don't understand. When I talk to people who trade rates, they talk about things like pension funds in Japan and stuff like that. I don't really understand the flows. I think that the flows are driving this because we did have a really hot CPI print and it tends to rally a little bit. I do ultimately think that 10s get to 2%.
If you go back a couple of months ago, everybody was talking about yield curve control and nobody's talking about yield curve control right now. Everybody's attitudes have totally changed. Also, now that 10s have rallied about 20 basis points, people are starting to speculate, well, maybe 10s will go to 1%. There was a speaker at the SIC conference who shocked everybody. He said the 10s were going to go back to 1%. I would be very surprised if that happens. I'm not going to say it can't happen, because the rates market does some crazy stuff, but I would be very surprised if that happens.
JACK FARLEY: Jared, I think that's a perfect segue to, you've talked about rates, that is on the long end of the curve, the 10 Year, the 30 Year, perhaps, but what do you think about the short end of the curve that the Fed has almost complete control of, the effective Federal Funds Rate? So many people are expecting about whether the Fed is going to hike, and obviously that would have profound economic implications. Could you briefly explain why it is important, and what is your timeline on when or even if the Fed is going to hike rates?
JARED DILLIAN: We've had some Fed speakers lately, I forget what day it was, but we had four speakers in a day. We had Bullard, and Brainier, and Bostic, and somebody else. They were all pretty dovish speeches, but they're all hinting at this tapering. The Fed speakers are coordinated. They do have a coordinated message. This is a very slow-moving Fed.
One thing I told you in a previous episode of this was that if you go back 20 years ago, they just used to do an intervening rate hike of like 50 basis points, and like, they don't do that anymore. They're very careful to manage the market's expectations. What they've effectively done is they planted the seed for tapering in people's minds. So that when they do start to do it, it's not going to be a surprise, and it's not going to shock the market.
Actually, just from an ethical standpoint, I don't see anything wrong with shocking the market, I think you should shock the market. I think they should do an intermediate rate hike. This Fed, I guess, over the last 10 to 15 years, is very careful about market expectations, and they want to keep markets functioning smoothly. So, they planted the seed, which means that if they really do intend to paper, it's going to happen six months from now at a minimum, and they're going to do that over three or four quarters, which means that the first-rate hike is one and a half to two years from now.
There's no reason to pick up the bat phone and call the White House and sell everything right now, this is a very slow-moving phenomenon. You have to keep an eye on this, because all it takes is one comment out of Jay Powell or somebody to really shock the market on an intraday basis, so you