Comments
Transcript
-
ZHAnybody read Jared's piece in Bloomberg (April 22, 2019) on why shorting Canada hasn't worked? Seriously intelligent and honest. And simple. Great job.
-
KCGood listen. To RV, running on Firefox/Mozilla, when I go full screen the timer is permanently in the middle, no way to get rid of it. Tried moving the mouse out to the side, going from full screen back to browser, back to full screen. Tried clicking mouse on the outer end of the screen. Would appreciate help if there is an answer. Thanks.
-
ABI would implore Jarred to not teach the public Modern Portfolio Theory 2.0, which seems to be make a cookie cutter portfolio with more bonds than stocks, and accept a lower rate of return because you cannot weather the selloffs. Instead, teach them what makes a security valuable and breed more intelligent market participants rather than mindless droids.
-
NZTony cut him off right while he was talking about buying calls on green eurodollars...
-
JLawesome idea getting TG to interview people, thanks RV
-
SSGreat job TG & Jared. I'm looking forward to the interview series TG. Keep bringin' it.
-
SGFantastic interview...the last 10 minutes were exceptionally superb.
-
PPGreat chat. The only SIFI one can think of to engineer a global liquidity issue is a German SIFI that Raoul has flagged for a number of years and which ended last year down more than 50pct. The bigger name runs derivatives off its books to the tune of $100bn a year, and now we need an emergency merger, the German government trying to force a wedding between two home champions. Makes one wonder if the people who can take their derivatives elsewhere have done so (much like a loan book - the good borrowers can borrow elsewhere) and if there is a lot of who knows what left behind. That same German SIFI many years ago took over a lot of NY real estate exposure (perhaps the most of any US bank) when it bought out Bankers Trust - which itself allegedly had gone insolvent - why that merger was allowed.
-
RSGreat interview Tony....Really enjoyed as usual..
-
SAGood discussion, but I am a little disappointed that Jared went straight from MMT to higher gold prices. Sounds like a gold salesman preying on unsuspecting customers. Stephanie Kelton has written papers on how a critical part of making MMT effective is explicit suppression of gold and commodity prices. Big part of MMT is forcing people to work and allowing speculation in metals allows some people to skip working and thus skip paying taxes. If MMT rules the world, the authorities will have gold in a straightjacket. Other than that good interview and Jared is on point that the 80/20 portfolio is not appropriate for retail and the financial industry should pick portfolios with better sharpes.
-
IFBiggest difference between practitioners and academics; the practitioners are humble just like these gentlemen. The Jim Grants of the world, who have never traded a single market in their entire lives are arrogant, never wrong and often dangerous. NJ gents.
-
TCGreat interview between two of the (very few) people in finance for whom I would use the term "genuine". Excellent insights and well worth the listen. Thanks!
-
TMReally happy you both had the discussion about Gold and Bitcoin, as I know you've both had divergent views on these assets. Interesting that your views appear to have aligned or are aligning...
-
PGExcellent!!
-
WBGreat stuff, although I struggle with Jarred’s musical choices. But I’m old enough to be his possible grandfather, so ...
-
JMNicely done Tony!
-
NIGreat interview. Hard to picture how some beltway concoction of rate suppression, MMT, and a wealth tax wouldn't be positive for gold, silver, etc.
-
LEGreat video! Would love to hear update from Tony on COPX!
-
mlTrue story, very similar to the one JD mentioned...I was part of Lehman's Industrial Group in NY in early 2000. We (MD's down to analysts) were brought into a room in early March 2000, told that Industrials were dead as a source of banking revenue well into the future, and that we were all now Technology bankers. As we left the room, we received a large stack of Tech research reports to "get us up to speed" on our new coverage sector. The Nasdaq would peak at 5,000 less than one week later.
-
ASLove the JD Interview. This guy is a real human being and huge fan.
-
MALet Greer Steer!
-
NH35/55/10 really. When the long bond was higher this makes total sense at 2.5 on the long bond today this will turn out to be a major mistake unless the long bond goes to zero or lower.
-
JRGreat Interview. Really enjoy both Jared and Tony. I appreciate how Jared conveys his thoughts and ideas, His points and positions come across clearly -- and he doesn't have a problem taking a contrarian view. Thank you
-
RXWould have loved to hear you guys name names on who might have been under duress in December - theories abound...
-
JDVampire squid.
-
DFbuy calls on green eurodollars????
-
JEGreat guys, always enjoy Jared's analysis.
-
JP'Freaking'ing awesome! I loved it.
-
JKWe've been managing money along the lines of 35/55/3/3/4 lines for 30+ years. It's nice to hear someone else talk about it. There is surprisingly little research easily available on it. Nice to know we aren't the only ones on the island. Thanks Jared.
-
WWPerhaps I misunderstood, but back-testing a portfolio over a single 20-year period? And, wasn't that 20-year period one in which the DJ Corp Bond Index total return was higher than the S&P 500 total return? Lastly, no matter the makeup, it seems to me that all "one-size-fits-all" portfolios fall into the passive investing camp which has no regard for price discovery--an essential component of a market.
-
GOLove the opening bit about the heyday at Lehman. Solid interview
-
TRI loved this. Plain and simple. Extremely useful
-
HJI love the mix Dillon speaks of. Great conversation after 40 plus years in the business I see the wisdom. Thanks RV, get Dillon to come back... Great job
-
DFGreat stuff , down to earth , honest , thank you Tony and JD
-
FCI’m fortunate to be a long time subscriber to, and friend of, both Jared and Tony. Authentic as they come, both professionally and personally. Loved this.
-
SHDid Dillian go to Yale, his philosophy sounds like R. Shiller.
-
MBgreat and refreshing discussion. I would like to challenge Jared though on his point that gold supply - demand matters. He is correct in noting the coming supply decline but physical only makes max 5% of daily trading volume while 95% is paper. Therefore as long as rehypothecation is allowed or continued I struggle to envision that players will be bothered by the declining mine supply. Ultimately in the end game, yes it may but then I am sure that bullion banks and CB will try to monetize some of the above ground supply hidden in savings, be that in India or even in the US (as they did before). What is true that the physical flow is still west to east and that physical is not returning any time soon.
-
fcNice content in this talk! thanks
-
WBI have to admit that I enjoy blowing up JD on twitter every now and then but both these guys are really likable. I do take issue with the bond trade though. If they cap rates on bonds I think on real basis you likely get destroyed. I agree don't short them, but I don't think in a scenario where they cap yields (to let inflation run to inflate away debts) you want to be in bonds. Great interview though.
-
AAReal guys Real Issues! Great interview.
-
MPA guest that actually makes calls, very refreshing
-
DHThis is a great film: Human. Honest. Open. Fascinating. Educational. Cool.... Great work Tony and Jared.
-
JZEnjoyed this... REAL talk, well-done lads.
-
BDThe weather will fix the commodities market, just look around in our country. Secure food WILL be the next battle fought, watch China.....
-
XPAmazing thank you both!! (I need to find myself a job where I can swear and break phones!)
-
RPGreat job Tony and Jared! Riveting from the first minute....Its not even 5.30am and Im glued to this!
-
VSLoved the trading anecdote at the beggining. Didn’t understand it in full, sure, but loved it!
-
JAQuality. Could have just as much been a talk over 5 beers as an interview and reminds me very much of my own personal relationshipsand friends in finance. Go energy xle !
JARED DILLIAN: Every day, it was like Grand Theft Auto. You're in this, like, multiplayer video game, and you're just getting bombs dropped on your head every day.
The idea is to build a portfolio that has a better Sharpe ratio, that has smaller drawdowns so you can stay invested over time.
Stress is a big issue for people. And what causes stress with people? Debt causes stress and risk causes stress.
It is pointless to short bonds.
TONY GREER: Right.
JARED DILLIAN: And this is coming from somebody who was really bearish on bonds and kind of wrong for a long time.
[MUSIC PLAYING]
TONY GREER: Hi. This is Tony Greer of TG Macro. We are going to interview Jared Dillian for Real Vision. We're going to talk about his early days at Lehman Brothers, we're going to talk about his second professional act as a financial author and journalist, and we are going to talk about global markets. I'm excited to get started.
I'm excited to be here with my good friend and inspiration, Jared Dillian. Jared is the editor of The Daily Dirtnap. Jared is a contributor to Mauldin Economics, Bloomberg, and Forbes. Jared spent nine years on Wall Street, two years at the pea coast, seven years at Lehman. He has authored two amazing books. Street Freak is one of them, and the second one is All the Evil of This World. He is an adjunct professor at Coastal Carolina, and one of the most knowledgeable people that I know about markets.
So let's start digging in, Jared Dillian. Thanks for coming on the show today.
JARED DILLIAN: What's up?
[LAUGHTER]
TONY GREER: Oh, it's fantastic to get to do this, isn't it?
JARED DILLIAN: Yeah.
TONY GREER: So I miss breaking phones. I'm going to be honest with you, that's one of the things that I miss about our days as institutional desk traders. When those scenes, being upstairs on the trading desk, got hairy-- the markets were moving. You had clients picking you off. You were trying to hedge. And all of a sudden, one client would pick you off on a monstrous position. And you would go to cover it, and the market would be gone. And you had every right in the world to go bang and smash that thing right onto the keyboard and have everybody in the room go, what the hell happened to Jared's desk.
JARED DILLIAN: Yeah.
TONY GREER: Right? So tell me about some of those days at Lehman.
JARED DILLIAN: Yeah, I broke about half a dozen phones. I broke some mouses, or mice. I broke tape dispensers. I broke a lot of stuff, threw stuff across the room.
TONY GREER: Yep.
JARED DILLIAN: I can tell you about the worst day that I had.
TONY GREER: Yeah, let's hear it.
JARED DILLIAN: And I even remember the date. It was February 27th, 2007. And this was kind of going into the financial crisis. The financial crisis, I would say, started the summer of '07. And basically, we had had a period of time where the S&P was moving 20 basis points a day. Extremely low vol, VIX below 10, nothing going on, just creeping higher every single day. No volatility.
And one day, we get to work and China had raised their reserve requirements. And if you remember the ABX, the subprime mortgage index, the ABX had, like, cracked. It was down 10 handles. So I get to work, and the SPOOS are down nine points, something like that. Not outrageous, but it was a pretty big move.
And I barely sit down, and we get this call from an account in London that wants to sell 400,000 EEMs premarket. And this is before EEM split. So EEM was like $120.
TONY GREER: Yeah.
JARED DILLIAN: Big trade.
TONY GREER: Yep.
JARED DILLIAN: And I had just seen this account, like, three weeks before. I was in London. This is their first trade, so I have to show them a good bid. And I even remember, I think it was EEMs were like 118 last. I bid them 116, down about 2%. They decorated my bid.
TONY GREER: Yep.
JARED DILLIAN: And they opened 114 offered.
TONY GREER: Yep, yep, yep. That's how that goes.
JARED DILLIAN: And keep in mind, this is really before a lot of high-frequency trading and a lot of liquidity. It was very hard to get out of that trade. By the time I got out, they were trading at, like, 111. So we had lost a couple million bucks on that trade. The market was down 3% or 4%. We were getting pasted all day long. We had lost two, three million bucks.
Finally, the end of the day, I decide I'm going to be the hero and I'm going to try to pick a bottom. And I literally stand up on the floor, I'm like, offer side bid, 2 million spies, call your clients. And I'm making all this noise.
Nobody hits me, so I sit down and I buy, like, 3,000 E-minis. And then the trap door opens up and the market drops, like, 20 handles, and Globex breaks. Like, it actually-- Globex shuts down, and the only thing that's trading is the big contract. And the big contract is trading, like, 10 up, 10 handles wide. And I'm long all these deltas and I can't get out. Mark to market, I'm down, like, five or six million bucks.
TONY GREER: Holy smokes.
JARED DILLIAN: And I literally sat there and I'm like, I'm going to get fired.
TONY GREER: Yeah.
JARED DILLIAN: This is the day that I get fired.
TONY GREER: Yeah.
JARED DILLIAN: And just by a pure miracle, market rips back, ramps into the close. I get out for basically UNCH. I mean, it was a terrible day, but like-- I mean, but that was-- even though that was the worst day, that was not atypical of some of the stuff that was going on in that period of time. Every day, it was like Grand Theft Auto. You're in this, like, multiplayer video game, and you're just getting bombs dropped on your head every day.
TONY GREER: Yeah.
JARED DILLIAN: And that's what my life was like for, like, four years.
TONY GREER: Yeah. It's very consuming when you're in that seat, because in order to manage that book, you've got to be thinking about it 24/7, essentially. There's no out, right? There's no letdown until the weekend comes, and then you're probably still thinking about it because you're so deep in it, right? Those were indeed I think the golden age of desk trading. I think we got a couple of good experiences in there before that seems to be changing quite a bit.
So I got to meet you probably shortly after that, I think. Somebody forwarded me on Bloomberg an infamous Bloomberg that you wrote shortly, I guess, after Ben Bernanke's first rate cut, I believe. And I'm going to read a small passage from that. "Buy a ball-peen hammer. Buy an air compressor. Buy a cheese grater. Buy a German shepherd. Buy a racehorse named Currency Debasement. Buy one of those things you shake up and it snows inside. Buy one of those things you push and you make the lines on a baseball field." What was that all about? Can you set that up? Because when I got this email, I wrote back to you and I said, that was amazing, put me on your list, and off we went.
JARED DILLIAN: So it was right after the first rate cut. And so I had a email list at the time, a list of people I sent Bloombergs to. And it was pretty popular, I had a couple of thousand people on my list.
TONY GREER: Yeah.
JARED DILLIAN: And it was mostly for entertainment purposes, although there was some content in there, too. If you recall what the political climate was like in 2007, you know, we've swung very far left since then economically.
TONY GREER: Before Occupy Wall Street.
JARED DILLIAN: Yeah, it was way before Occupy Wall Street. But at the beginning of the housing crisis, we were blaming borrowers. Believe it or not, but we were blaming borrowers. And we were talking about these deadbeats that weren't paying their mortgages.
TONY GREER: I remember.
JARED DILLIAN: You know, they took out these giant mortgages and they couldn't-- you know, eventually, at the end of the crisis, we were blaming the lender. But in the beginning of the crisis, we were blaming the borrower, which I think was not misplaced. So that Bloomberg was a response to that, that we were bailing out people who had borrowed all this money and were not going to pay it back. And it sort of tapped into a sense of outrage that people had as to what was going on. And so fed funds were at about 5.5%, and that was the first rate cut, and they were on their way to zero.
TONY GREER: Right.
JARED DILLIAN: And really, it was almost like a foreshadowing of what monetary policy was going to be for many, many, many years to come.
TONY GREER: Yeah. I agree. I retroactively thought-- I enjoyed it when I read it, and then when we first started quantitative easing, I thought back at it again, and it was sort of retroactively brilliant to me because, you know, when you're talking about currency debasement, quantitative easing, you know, you were talking about buy everything because we're going to start debasing our currency brutally now. And while it's, you know, hanging in there against the others, the purchasing power is obviously even much weaker than it was 10 years ago.
I'm very impressed with the fact that you always make yourself available to help others with finances. It's a very, very tricky topic. People tend to shy away from what they don't quite understand. And I read your article about changing portfolio weighting away from the 80-20 classic portfolio to 35-65, which is 35% stocks only and 65% bonds. Could you tell me a little bit about that?
JARED DILLIAN: Yeah. First of all, you know, I've been doing the newsletter and associated things for about 10 or 11 years. And professionally, you know, I love to write. It's fulfilling. You know, I like helping people make money. But I'm kind of helping people that don't really need help, you know? And I think I got to a point in my career where I wanted to have more of an impact, and I wanted to help people who really, their sophistication level is very low. And I wanted to help them more.
So I've been shifting my focus a little bit, not of my main newsletter, the Daily Dirtnap, but other stuff. I've been shifting my focus to personal finance.
TONY GREER: Yeah, I noticed.
JARED DILLIAN: And I did a piece for the opinion page on Bloomberg, and it was about the optimal portfolio. And there's sort of this conventional wisdom that you're supposed to have an 80-20 or 70-30 portfolio, a portfolio that has a lot of stocks, because that portfolio returns about 8% a year, and that gets you to a certain number in retirement, and OK.
So one of the things I found is that investors may choose this portfolio that's 80-20 where it's mostly stocks, but they don't actually realize those returns because that is a very volatile portfolio. And it causes suboptimal behavior. For example, during the financial crisis, the S&P 500 was down 57% from 07 to '09. How many people hung on for 57% dollar cost average the whole way down, stayed long. Nobody did. People barfed. They absolutely barfed.
And you can tell people, you can coach them and say, oh, if the market goes down, just-- but people, they just can't mentally deal with a drawdown of that size. And if you have a portfolio that's mostly stocks, over a 40 to 50-year period, your earnings career, you are going to experience at least one drawdown of that size. And you only make money if you're compounding. And once you sell, you're no longer compounding.
So the idea is to build a portfolio that has a better Sharpe ratio, that has smaller drawdowns so you can stay invested over time. So I've done a lot of work into this, and a 35-65 portfolio is a portfolio that, along the efficient frontier, has the highest Sharpe ratio. And you basically, your drawdowns are half the size or less of an 80-20 portfolio. And actually, during the financial crisis, you would have only had a drawdown of 24%. And most people can live through a drawdown of 24%.
Here's the interesting thing. This is totally, totally cool. So the 35-65 portfolio, let's modify it a little bit. 35% stocks, 55% bonds, 3% broad commodities, 3% gold, and 4% REITs. So 35, 55, 3, 3, 4.
TONY GREER: OK.
JARED DILLIAN: That portfolio gives you almost exactly the return