Jared Dillian - “If You Think 2016 is the Opposite of 1981, then You Should Do the Opposite” | #5

Episode Summary

Executive Summary: Meb Faber interviews investor/writer Jared Dillian about his unconventional path from Coast Guard and options trading to Lehman and newsletter publishing, then dives into macro themes: inflation versus deflation, the legacy of regulation, why today may invert the 1981 playbook, why Canada and other commodity-linked housing markets look vulnerable, and how he thinks about volatility, tails, and long-horizon contrarian trades. The episode also covers his writing discipline, new novel, and personal tools and preferences.

Main Topics: Jared Dillian’s path to Wall Street (Priority: 5/5): Dillian explains his Coast Guard background, his entry into business school and the options pits while still in uniform, and how that led to Lehman Brothers and his ETF/index-arb career before launching The Daily Dirt Nap after Lehman’s bankruptcy. 1981 as the template for today’s macro setup (Priority: 5/5): He argues the famous 1981 anti-inflation thesis was right because falling inflation, deregulation, and declining rates made bonds and stocks strong and commodities weak; he believes 2016 is the opposite environment, implying higher inflation, weaker bonds, and stronger commodities. Inflation, deflation, and regulation (Priority: 5/5): Dillian distinguishes 'good' deflation from capitalism/innovation from 'bad' deflation seen in Japan-like stagnation, arguing central banks have fought beneficial price declines while regulations create cost inflation and distort markets. Canada and other commodity-currency housing bubbles (Priority: 5/5): He makes a bearish case on Canadian housing and related markets in Australia/New Zealand, emphasizing stretched real estate valuations, easy policy, and the currency as the cleanest trade expression, with bank shorts as a harder but potentially powerful second leg. Contrarian sector trades and coal (Priority: 4/5): Dillian discusses buying coal-related exposures after prolonged bear markets, using rare multi-year down streaks as a signal that sectors like coal, gold miners, and yen may be ripe for mean reversion. Volatility, tail risk, and portfolio hedging (Priority: 4/5): He critiques simplistic long-volatility products like VXX due to heavy carry and explains his preference for trading listed options directly, while also urging investors to think about upside tails, not just crash protection. Writing process and new book (Priority: 3/5): Dillian describes a disciplined, office-based writing routine and previews his novel All the Evil in This World, a dark fictionalized market story centered on the 3Com/Palm Pilot-era bubble trade.

Key Arguments: The 1981 inflation regime was followed by falling inflation, deregulation, and major gains in bonds and stocks; if today is the reverse of 1981, the logical trades are to sell bonds, buy commodities, and be cautious on stocks. Regulation is inflationary because it adds costs across the economy; deregulation in the early 1980s was a powerful disinflationary force, and today’s heavier regulatory environment could eventually push prices higher. Central banks have confused good deflation from competition and innovation with bad deflation from economic collapse, and their attempts to suppress price declines can distort markets. Canadian housing, and by extension some other commodity-linked countries, appears to be in a large bubble supported by low rates and foreign demand; the currency is the most straightforward way to express a bearish view. Multi-year underperformance in sectors or asset classes can mark rare and attractive contrarian opportunities, especially when combined with political or macro catalysts. Long-vol hedges are often expensive and misused; investors should think carefully about carry costs and should also consider upside-tail exposure, not only crash protection. A disciplined writing routine is essential; content production is treated like a job rather than a creative mood, enabling consistent output across newsletters, columns, and books.

Data Points: Coast Guard Academy class year: 1996 - Dillian graduated from the Coast Guard Academy in 1996. Annual newsletter output: Daily since 2008 - He says The Daily Dirt Nap has been published pretty much every day since 2008. Estimated newsletter price: $600/year - Subscription cost for The Daily Dirt Nap. Cheaper newsletter tier: $200/year - Monthly piece available through Malden Economics. Canada median house price: $510,000 - He cites this as the median house price across Canada. Vancouver house price growth: 37% year over year - Used to illustrate the intensity of the Canadian housing bubble. Toronto house price growth: 15% year over year - Another example of Canadian housing strength. Canadian overnight rate: 0.5% - He notes very low policy rates in Canada supporting housing valuations. Canadian 10-year bond yield: ~1.2% - Used to show how bid-up Canadian fixed income is. Dollar CAD level at time of discussion: 1.28 - He says he shorted CAD around parity and it had moved to 1.28. Potential CAD downside in crisis: 1.60 or higher - He suggests dollar CAD could rise substantially if Canada faces a housing/financial crisis. VXX carry cost: 25% to 30% annually - He cites this as the cost of holding certain volatility products. Typical daily writing volume: 2,000 to 4,000 words - He estimates his daily writing output across newsletters and books. U.S. tax rate change in Reagan era: 70% to 28% - Used to illustrate the magnitude of 1981 free-market reforms.

Pivotal Quotes: "If you think 2016 is the opposite of 1981, then you should do the opposite." — Jared Dillian: Core macro framework: reverse the 1981 playbook and favor commodities over bonds. "Deflation is people doing good, inflation is people screwing up." — Jared Dillian: His moral and economic distinction between productive price declines and harmful inflation. "The Fed would pursue the path of least embarrassment." — Meb Faber: A memorable description of central bank behavior as driven by reputation management more than optimal policy.

Implications: Listeners should think in regime shifts, not short-term forecasts: inflation, regulation, and policy incentives may favor commodities over bonds; housing bubbles can be expressed via currencies; and hedging should account for carry and upside participation as much as crash risk.