JACK FARLEY: Speculation is everywhere. What to do when the music stops? Plus, if the reopening trade is faltering, where can investors find returns? For all of this and more, I'm joined by Jared Dillian of The Daily Dirtnap. Jared, how are you doing?
JARED DILLIAN: Doing pretty good. Thanks. Glad to be back here again.
JACK FARLEY: I'm glad to have you back. Jared, the timing today was great, because you wrote a piece in Bloomberg Opinion. I'll just read the title, Dogecoin symbolizes the conundrum facing investors. What did you mean by that?
JARED DILLIAN: Well, the first thing you should know about any article you see, not just on Bloomberg or anywhere, but the author of the article doesn't write the headline. I didn't write the headline. The article itself is basically about this idea that-- I talked about the Chuck Prince quote, back what he said in 2007. Somebody asked him how long Citigroup was going to be doing mortgage stuff. And he said, well, if the music's playing, you have to keep dancing.
One of the reasons that is, is that all your competitors keep dancing, and employees are making money. There's just all this pressure, it's much bigger than one person. One person can't stop and say, okay, this doesn't make sense anymore. It's all about reflexivity. The question is, as an investor, how long do you stay invested? Because it's like picking up nickels in front of a steamroller.
There's a lot of signs of speculation, there's Dogecoin, there SPACs, there's all kinds of stuff. How long do you stay in this trade before you pull the ripcord and it could go on for another five years. We just have no knowledge of how long this is going to go on. You just have to play along and be nimble so that when it turns, you can get out as quickly as possible. That's what you're supposed to do.
JACK FARLEY: Jared, as you prepare your portfolio, and those of people you advise to be nimble, what are you looking for in terms of the sentiment in the market? Do you see the signs that something is turning now because the speculative juice has been drained a little bit out of the SPACs, obviously, crypto has remained very firm, and we have this new phenomenon of Dogecoin, which some are saying is the GameStop moment for crypto. How are you reading the different risk appetites? What would Chuck Prince do at this time?
JARED DILLIAN: I'm very tuned in to sentiment. The market stocks are up today, they were down the last two days, not a lot, just 100 and 150 basis points, just a small pullback. I don't really see sentiment as being for like, really, really frothy, or max bullish right now. Back when the GameStop thing happened a couple of months ago, I freaked out and I sold anything to do with tech. I think we talked about it at the time. That to me was like the peak of sentiment and I think we're at a lower high right now. I'm not really seeing any really big warning signs that a correction is imminent.
The last two times in history that I've really gotten that feeling were before the pandemic. The pandemic hit right when everything was like max bullish. Also, before the vol explosion of 2018. Those were two times where my intent were really up, sentiment was just pegged. But it doesn't feel that way to me right now. I actually feel like we have more upside.
JACK FARLEY: Jared let's get into the various asset classes that you mentioned. You say, when I look at Dogecoin, I look at SPACs, I look at Tesla, GameStop, and other signs of the bubble, the one thing that ties them all together is interest rates. If rates rise these trades will implode as leverage is unwound throughout the system. That was a catalyst earlier in the year as you mentioned, Jared. When those interest rates rose, we saw a huge dump in the Teslas and the Pelotons, all those very long duration stocks, let's call them.
Since then, they've leveled out with a few exceptions like Teladoc, but they've leveled out as rates have remained in a range. How do you think that bond yields will impact that long duration sector of the market going forward?
JARED DILLIAN: I think we're definitely going to get round two of this. Rates are consolidating right now, the bond market is-- I'm not really plugged into the technicals of the bond markets. I don't know what the Japanese are doing. I don't know any of this stuff. But just from a technical standpoint, rates seem to be consolidating, but we're going to get another push higher in rates.
Three months from now, six months from now, maybe a couple of quarters, but that next push higher in rates is coming, we're going to be printing inflation numbers over 3%. We're going to get some scary CPI prints. That's going to happen, and we're going to get round two of this duration selloff in tech and biotech and stuff like that. But that's probably three to six months away, I think.
JACK FARLEY: Jared, pay me a picture of what would have to happen for alarm bells to ring in your head and say, actually, I'm going to pare back risk. Perhaps, I'll even take a stab at shorting some of these long duration names, like you did in late January, early February, what would have to happen for you for those attendants to go out for you?
JARED DILLIAN: It would have to be something like GameStop, something with that sentiment significance. I think that's going to take a while to develop. The GameStop was a big one. That was a really big one. If you go back to that period of time about three months ago, we had 40 million call options trading in a single day. It was absolutely bananas, and people were trading options at GameStop. GameStop implied vol was like 1000. It was nuts. We're not really close to that right now.
JACK FARLEY: Because you mentioned implied vol, do you think options are fairly priced, overpriced, underpriced, because the VIX remains in the teens and options are quite cheap compared to, let's say, at the beginning of the year, what's your outlook on implied vol? Is it overbid, underbid?
JARED DILLIAN: Actually, it's a little rich. I expect it to go down a little bit more. I think that the market is clogged with a lot of long options positions. The VIX spent an entire year above 20 and there was a lot of realized vol, and people got accustomed to this high vol environment. And now, there's a lot of pressure on vol as people exit those positions. I wouldn't be surprised. Let's say the S&P grinds higher another 5% to 7% and the VIX gets down to like 14 or something like that, that seems possible.
JACK FARLEY: Jared, let's move on to the reopening trade. This is something you've been banging the drum about for a long time. It worked extraordinarily well up until let's say, two weeks ago. We've had a little bit of a falter there. In fact, I did a little back of the envelope math that over the past 10 trading days, so two weeks, there have been 14 stocks that were down to less than 10%. And eight or nine of them were classic reopening stock. I'm thinking airlines, I'm thinking an oil stock, cruise liners, Live Nation, and concert stocks.
The reopening trade to me-- by the way, a fair number of them were Archegos trades, like Discovery and Viacom, so they really shouldn't count. How are you thinking about the reopening trade? It worked very well but it's faltering a little bit now, are you moving out to other positions? What's your view?
JARED DILLIAN: Basically, I have three reopening trades. One of them is Delta Airlines, which I'm exiting. These are for those reasons that are specific to delta. But when I enter these trades, three to six months ago, the reason I entered these trades, I said to myself at the time that the reopening is not fully priced in. Back when I entered these trades, it wasn't, and now my fear is that it is.
I saw that the airlines are expecting that this summer travel is going to be 90% of what it was in 2019. When you start seeing stuff like that, then that's in the collective consciousness, that means that it has to exceed that in order for the trade to work more. I think it's time to start exiting the reopening trades.
JACK FARLEY: By the way, I believe based on your newsletter, you formally put out this position last night and it happens today that the IATA, that the transport thing that represents all of the carriers. Today, they put out a release saying that they expected their carriers, their airlines meaning, to lose $48 billion this year. And that was an increase from $38 billion loss that they projected in December. Your timing was pretty good.
JARED DILLIAN: That's pure luck. That's just pure luck.
JACK FARLEY: Okay. You have the airlines, you're exiting those. How are you feeling about your other reopening stocks?
JARED DILLIAN: Well, one of them is a theme park operator. There's only two, so you have a 50/50 chance of getting it. That, I'm going to hang on to a little bit longer. I've been hearing some stuff from people that parking lots are absolutely full like they're jam packed with people. I'm waiting to see one or two more earnings out of that to see if that works. The other one is, which we've talked about on Daily Briefing before, is SL Green. I bought SL green around 60. It's up around 71, 72, something like that.
I would say not a huge winner or anything, but I like owning real estate and I like getting the income. I've never been super comfortable with this trade, because I'm not comfortable with New York City governance. I'm not confident that it's going to improve after de Blasio is gone. I really have an itchy trigger finger on this trade, but I plan to hang on to it for a little bit longer.
JACK FARLEY: You said you had an itchy trigger finger. I want to get into that because I saw a report, a chart from Bloomberg today that year-over-year rents in commercial New York real estate, so like Soho, Herald Square, Bass Avenue, are down considerably. And this is not surprising, of course, given there's the pandemic.
Soho's down almost 20%, Herald Square, 19%, 18%. What is your outlook on this sector? Does it depend on a true bloom a flourishing of Roaring 20, of everyone putting their suits back on, going back to the office, or is it more of a safety play saying the contracts are ironclad, it's impossible to get out of these contracts if you are leasing them, so it's just this free money? What's your outlook?
JARED DILLIAN: Well, it's both. But it's really the first one. When I put on the trade, occupancy rates were around 10% for SL Green. I put on the trade with the expectation that they would get up to 40% or 45% by the end of the year. I think this is going to take a long time to play out. I'm not a believer that because of the pandemic, that everybody is going to be on Zoom, working from home. I think incrementally yes, there is going to be some more working from home. But I do think, for certain industries, especially finance, you want people back in the office. I do think that occupancy rate is going to go up. It's just going to take some time.
JACK FARLEY: Definitely. If you're an insurance salesman, you definitely want to be across the table from the other person. It's hard to do that over the phone.
JARED DILLIAN: Yep.
JACK FARLEY: That's good on the reopening plays. But you're now transitioning your portfolio to a more direct exposure to reflation, rather than just reopening in terms of activities, you're really targeting inflation. You got your target on that. Tell us about that. You think inflation is coming, how are you positioning your portfolio to benefit from inflation?
JARED DILLIAN: Well, it's funny because in my newsletter today, I published the portfolio, which I do about once a month. I had a subscriber up in Toronto, and he emails me, he's like, Jesus. This is a big bet. The whole portfolio is dependent on the inflation trade. Let's just say for example, Lacy Hunt or David Rosenberg is right, and bond yields go down, and we have deflation, I'm screwed. It's bad. It's really bad. This is a big, big bet.
One of the positions that we added last week or two weeks ago, which I'm comfortable sharing, is the new inflation ETF from Horizon Kinetics, which has a lot of commodity streamers, and exchanges, and stuff like that, but all stocks that have gearing to inflation. I really liked that ETF. I'm going to do some more work on it. That's a big position in the portfolio. I think this is a 10-year theme. It's funny, because on Monday and Tuesday, we had a pullback. We haven't really had a meaningful pullback. We haven't had a slight pullback, like the biggest pullback in the last month was like 80 basis points.
You have this pullback, then you do this whole psychological thing. You start questioning yourself like, oh my God, what if I'm wrong? What if this is the wrong trade? I keep seeing signs of this everywhere. I went down, there's a place called The Bagel Factory here in Myrtle Beach, and it's a guy from New York who actually used to work in my building. He used to work in the Lehman building. He had a courier business. He opened this bagel place in Myrtle Beach, and it's great. It's like New York bagels. But they put a sign up and they're like, yeah, due to increase costs of bread and rubber gloves and all this stuff, we have to increase our prices, seeing that everywhere, absolutely everywhere. I'm still confident in thesis.
JACK FARLEY: Absolutely. I saw Coca-Cola had a similar announcement. But Jared, you mentioned Lehman Brothers and that makes me think of your newsletter, you noted how- you didn't invent the word piker. But you did realized the use of the word piker at Lehman Brothers. Can you explain what a piker is and what trade do you associate with that phrase?
JARED DILLIAN: Well, a piker is a cautious gambler. That's the technical definition. When I started working at Lehman Brothers, I had a very distorted perception of risk. I was coming from the military. I was coming from the Coast Guard and the C-Services are known for being very risk averse. I was a very risk averse individual. I used to trade futures at the time. I would not go any bigger than a 10 lot of S&P futures, which was the 50 lot of E-minis.
You could trade 10 lots of futures. This is the pig trading futures. You can trade 10 lots of futures, and if you were good, you might make $20,000 or $30,000 in a day. That just does not change the shape of the earth, that doesn't do anything. Over time, I had to increase my risk tolerance. It was an effort, but I started trading bigger and bigger and bigger, up to the point where I was trading 10 or 20 times the size I was before or more.
JACK FARLEY: You identified several different positions with that phrase of being a piker. There's one position you said how you really regretted not sizing it up, do you have any advice for people listening about when to know, when to go small on such a piker position and when to really size up?
JARED DILLIAN: Well, position sizing is the hardest thing to get down. It really is. The decision of what to buy is pretty easy. The decision of when to buy is pretty easy. The decision of how much to buy is the hardest. And there's a lot of different considerations that you take into account when you're sizing a position.
The biggest one is conviction. How sure are you on the thesis? The stock that you're referencing, I don't own him anymore, so I don't mind talking about it. It was Vulcan Materials, which is an infrastructure stock, it makes asphalt. This was back leading up to the 2020 election. I said, gosh, no matter who wins here, we're going to get infrastructure after the election. If Biden wins, it's probably going to get more, so he won.
That was pretty much a sure thing. That was an easy trade. I made it 1% of my portfolio. And I'm really, really sorry that I did not make that bigger. Look, I'm a piker. I'm a very cautious gambler and I tend to undersized positions. Look, there have been situations where I have lots of conviction, and I've made a position really big, and it's turned out to be wrong. That's happened one or two times, so it is the hardest thing in the world.
JACK FARLEY: Definitely. Well, thanks for sharing that insight. Jared, the next thing I want to talk about is a chart that you featured in one of your recent newsletters about the CPI, and how the various products trade within that. The stuff that you need to buy all the time increases in value a ton, but the stuff that you don't need to buy often, that's the blue line, actually experiences deflation. Can you experience how that factors into your thoughts in inflation and how you're positioning your portfolio.
JARED DILLIAN: I got that chart actually from StockCats. The guy on Twitter, and he has a lot of cats. I have a lot of cats. I feel a connection to this guy. He puts out some pretty good stuff. It's funny because we have CPIX food, food is ripping, we have CPIX energy, energy is ripping. Maybe we're going to have CPIX lumber. We keep carving out all these exceptions for inflation. And yeah, food and energy are the stuff that you need to buy and that's the stuff that's going up.
JACK FARLEY: There you go. Can you tell us a little bit more about your other plays that are leveraged to inflation that we haven't mentioned, such as oil?
JARED DILLIAN: I've had a position in energy going back to-- it was before the pandemic. I was definitely early, let's put it that way. I made the position very large. If you remember the day that the Saudis and the Russians both started pumping in oil crash like 10%, I literally had made the position very large the day before that happened. The timing was exceptionally bad. But it's actually up quite a bit since then.
Oil is around 60 bucks right now, and it's consolidating. I do think that oil is going to go to 100 probably within a year. I think that's going to happen. It's just a matter of having patience at this point. It sucks a little bit because energy is volatile, you're up and down 3% or 4% a day, you have to withstand some volatility, but I do see a lot of upside in energy.
JACK FARLEY: Any thoughts, Jared, on the futures curve of crude oil, which is in backwardation now?
JARED DILLIAN: Well, backwardation is usually bullish. That's the extent of my thoughts.