Inflation or Recession - Which Will the Fed Choose? } Jared Dillian

Episode Summary

Executive Summary: Jared Dillian argues the Fed will tighten aggressively because it is embarrassed by letting inflation run hot, but likely not enough to fully extinguish inflation without causing a 10%-15% equity drawdown. He expects inflation to moderate in 2022 but remain elevated longer term, favoring value, commodities, energy, gold, and select crypto over speculative growth and unprofitable tech.

Main Topics: Federal Reserve aggressiveness and policy mistakes (Priority: 5/5): Dillian says the Fed is driven by embarrassment and political pressure after being too easy in 2021, so it may tighten fast enough to shock markets while trying to avoid a recession. Inflation outlook: short-term moderation, long-term persistence (Priority: 5/5): He thinks CPI may peak near current levels and cool in 2022, but structural forces and the Fed’s reluctance to force a recession imply a longer inflationary regime. Rotation from growth to value (Priority: 5/5): He frames the selloff in unprofitable tech/ARK-type names as a factor-driven regime change tied to rising rates, with value and dividend-paying businesses likely to outperform for years. Gold, bonds, and inflation hedging (Priority: 4/5): Dillian sees gold as technically constructive and a meaningful portfolio holding, while noting bonds moved unexpectedly and that rate volatility is reshaping cross-asset behavior. Bitcoin and crypto financialization (Priority: 4/5): He views crypto as becoming more institutionalized and more correlated with macro factors, reducing its diversification value but supporting a case for a small allocation. Market structure, SPACs, and private markets (Priority: 3/5): He criticizes the growth of private unicorns and the poor quality of many SPAC listings, arguing IPO access should be easier rather than making private companies harder to remain private. Trading mindset and uncertainty (Priority: 3/5): Dillian emphasizes humility, saying certainty is often a marketing tool for forecasters, while his best calls come from high-conviction setups rather than blanket macro certainty.

Key Arguments: The Fed is likely to overcorrect after being too dovish, because central bankers care about embarrassment and political pressure more than P&L. Rising short-term rates will hurt risk assets, especially speculative growth stocks; he expects at least a 10% stock correction and possibly 15%-20%. Rate hikes can reduce inflation by suppressing demand, but to truly defeat 7% CPI may require a recession; the current Fed may stop short and deliver a worse middle outcome. The current market rotation from growth to value is a durable style shift, similar to the post-dot-com period, and may last several years. Unprofitable tech behaves like a long-duration asset; as rates rise, these equities are mechanically pressured while short-duration, dividend-paying value stocks gain relative appeal. Gold is trading better than before and occupies a large share of his portfolio, even if the price action seems counterintuitive relative to nominal rate moves. Bitcoin and other blockchains are increasingly part of the financial system; as macro-traded risk assets, they are less diversifying than many holders assume. Many SPACs and D-SPACs were lower-quality listings to begin with, so their poor performance reflects adverse selection rather than just temporary market noise. Instead of burdening private firms with more regulation, policymakers should make IPOs cheaper and easier by rolling back parts of Sarbanes-Oxley. He prefers value opportunities that are less sensitive to macro noise, such as industrials, staples, cheap commodity producers, tobacco, and select emerging-market resource stocks.

Data Points: Expected Fed rate hikes in 2022: 3.5 to 4 hikes minimum - Dillian’s baseline view for 2022 policy tightening Possible Fed funds rate by end of 2022: 1.5% - Upper-end scenario he says is possible if the Fed stays aggressive Potential stock market impact of tightening: 10% minimum decline; 15%-20% possible - His estimate of downside for risk assets from higher rates Potential impact of a 50 bp hike: 7%-8% down in two days - His response to a hypothetical surprise 50 basis point move CPI level: 7% - Current inflation rate discussed as the Fed’s problem Expected CPI path in 2022: 6s, possibly 5-handle - He expects moderation rather than a spike to 8%-9% PPI move: Dropped a little - Used as evidence that inflation’s rate of change is slowing Biotech drawdown from highs: Almost 50% - Illustrates how factor selling has hit sectors lumped into unprofitable-tech baskets Crypto market cap: $2 trillion - Current global crypto market cap cited in his allocation argument Investable assets market cap: $700 trillion - Used to argue crypto can still grow meaningfully from a small base Number of unicorns in the U.S.: 950 - Cited in his critique of private-market concentration and limited public access Gold allocation in his portfolio: About 30% - He says gold and gold-related equities are a major position Tobacco stock rally: 10%-15% - Example of cheap value names moving strongly despite weak long-term fundamentals

Pivotal Quotes: "I think they're going to do it half-ass. And stocks will be down 10% to 15%, and inflation will come down to 5% or something like that." — Jared Dillian: His forecast for the Fed’s likely middle-path response "When you're looking at unprofitable tech, you basically have this company that doesn't really have any revenues or earnings... which means it's trading like a 50-year zero coupon bond." — Jared Dillian: Explaining why rising rates hurt speculative growth stocks "We can stop it. Like, within six months, we can stop it. We can raise Fed funds to 3 percent, invert the curve... and inflation goes away." — Jared Dillian: His argument that inflation can be defeated, but only with recession risk

Implications: Listeners should expect continued pressure on speculative growth, more support for value/commodities, and a less diversifying crypto market. The biggest risk is a Fed that tightens enough to hurt risk assets but not enough to fully resolve inflation.