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.

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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 of the 80-20 portfolio and has half the risk.

TONY GREER: Is that right?

JARED DILLIAN: Has half the risk.

TONY GREER: Have you back tested it?

JARED DILLIAN: Yes.

TONY GREER: Wow.

JARED DILLIAN: Over the last 20 years. So you can do a lot of things with portfolio construction other than just naively having a portfolio that's massively loaded up on stocks. And the other thing about it is that stress is a big issue for people. And what causes stress with people? Debt causes stress and risk causes stress. And the goal of this thing is, like, if you have a portfolio that is going to scare the shit out of you, like, once every five to 10 years, like, that's not--

TONY GREER: Not worth it.

JARED DILLIAN: --productive, where you're calling your broker like get me out, get me out. Like, who needs to live like that?

TONY GREER: Yeah.

JARED DILLIAN: So basically, you're going to have a lower return, slightly lower return. It means you have to save more.

TONY GREER: Yeah.

JARED DILLIAN: And that's how you compensate.

TONY GREER: Yeah. I enjoyed reading that point in the article because I try to force myself to do the same thing, and it's hard culturally, right? We're not programmed to save as Americans. It's really difficult thing to do. But I think that you're shaking a lot of common sense into people with this idea.

JARED DILLIAN: Yeah, and the other thing is that, if I say to you you're going to get an 8% return on your 80-20 portfolio, and you're like, OK, like, then I don't need to save as much, because you think this actuarial return of 8% is going to exist for the next 50 years. It might not. Stocks might return less. Bonds might return more.

TONY GREER: Yeah. Yep. No, it's a great idea. And I just like the fact that you really take that gut-wrenching out of it. You know, you really take that out of it. So I like the idea. Also along the lines of helping the sort of everyman investor, I know that you're starting a radio show on personal finance. And I'm really interested in listening to it. I'd love to hear just sort of what was the brainchild behind it, and when is it going to get going and what are your sort of basic thoughts about it.

JARED DILLIAN: It's still in development, so I can't say too much. I hope to be on the air in the next couple of months or so. It's going to be syndicated nationally, you know, at some point. We're putting together syndication right now. But it's going to be a show on personal finance. I'm going to compete with folks like Dave Ramsey and Suze Orman and stuff like that.

TONY GREER: Yeah.

JARED DILLIAN: I'm not totally getting away from the institutional world. I'm going to have a dual focus. But like I said, this is going to be a focus of mine for the next couple of years, is helping people who really need help.

TONY GREER: I think it's great. I think it's great, and I think you have a great chance to make an impact with young people and start teaching them--

JARED DILLIAN: I mean, if you think about the generation that's coming up right now, and the financial issues that they're dealing with with student debt and stuff like that, like it's--

TONY GREER: They're unprepared.

JARED DILLIAN: --yeah.

TONY GREER: You know? And that's why I think that you've got a great opportunity there.

JARED DILLIAN: Yeah.

TONY GREER: So let's move on and talk about Mr. Market. Q4 2018, the S&P is hemorrhaging from 2,800 down to a low print of 2,316, and the Mnuchin call happens, the call out to the six banks-- Morgan Stanley, Goldman Sachs, Citigroup, JPMorgan, Wells Fargo. And he told the whole world that we had ample liquidity there. What did you think that was all about?

JARED DILLIAN: Well, I think I had the same reaction as everybody at the time, that Mnuchin is causing unnecessary panic. I mean, you know, we had a 20% meltdown in stocks, but it's not the financial crisis. So what is the concern? Why are we talking about liquidity? I kind of put that away for about a month, and then the Fed started to pivot. Powell had his speech, and he starts walking back there. We had four rate hikes planned for this year. They're gone.

TONY GREER: Yep.

JARED DILLIAN: And then you had Clarida talking about all these emergency tools, like capping rates and negative rates and other stuff. And you know, I started to think, I'm like, maybe Mnuchin's call from Cabo San Lucas was- maybe something was actually going on.

TONY GREER: Like a distress signal?

JARED DILLIAN: Well, maybe there was a financial institution that was actually in trouble.

TONY GREER: A hedge fund, bank?

JARED DILLIAN: Either, but probably not a systemically important financial institution, probably a small to medium-sized financial institution. But I mean, if you think about this, what's the more likely possibility, that Mnuchin is deaf to market sentiment and is causing panic for no reason or there was actually a problem?

TONY GREER: Something that had to get done.

JARED DILLIAN: There was actually a liquidity problem somewhere. And I think that that explains a lot of the behavior out of the Fed since then. I actually think the government, the Treasury and the Fed, I think they were scared of something that happened in December. And like, I don't have any insight into what that is, but it explains all their behavior since then.

TONY GREER: Yeah, it absolutely does. I mean, for me, the Powell 180, which I call basically an exorcism, was unbelievable to me. I mean, he came into office with his chin up talking about rate hikes, running off the balance sheet. And like you said, in one month's time, we wound up talking about pinning rates and, like, the media was talking about another round of QE, et cetera, et cetera. And what's mind-boggling is that the US economy is still doing fine.

So clearly, Powell has got another motive beyond the Fed's dual duty, which is price stability and full employment. So now that Powell has gone and done a 180, I feel like they're at tremendous risk if the economy continues to improve because he's