The War Markets Can't Price | Jared Dillian on the Regime Change Investors Miss

Episode Summary

Executive Summary: This episode of Excess Returns features Jared Dillion discussing markets' structural failure to price low-frequency, high-impact events like geopolitical risks, the regime change from declining to rising inflation that breaks the 60/40 portfolio, and the need for adaptability. He covers his long-gamma philosophy, commodity bull market, Fed policy constraints, Bitcoin as liquidity sponge, private market risks, and the 'Awesome Portfolio' concept. The conversation emphasizes psychological biases, political views masquerading as investment styles, and the challenge of adapting when market rules change.

Main Topics: Markets' Structural Failure to Price Geopolitical Risks (Priority: 5/5): Markets systematically underprice low-frequency, high-impact events like Ukraine war and Iran conflict, showing willful ignorance until events become unavoidable, then overreact later. Regime Change and Adaptability (Priority: 5/5): The shift from declining inflation (2000-2020) to rising inflation broke stock-bond negative correlation. Most investors fail to adapt to new rules, analogous to chess rules changing mid-game. Long Gamma Philosophy and Option Strategies (Priority: 4/5): Dillion's preference for being net long options, inspired by Taleb, avoiding short options due to gap risk. Contrasts with option sellers who face tail risks. Commodity Super Cycle and Hard Assets (Priority: 4/5): Commodity index bottomed September 2024, now in bull market with broad participation. Gold, energy, and agricultural commodities rallying sequentially. Fed Policy and Oil Price Dilemma (Priority: 4/5): Fed faces path of least embarrassment: can't cut with oil at $100 despite oil's potential deflationary demand destruction. Powell's hawkish stance may be misguided. Awesome Portfolio Concept (Priority: 3/5): Equal 20% allocation to stocks, bonds, cash, gold, real estate. Returns ~9% annually vs S&P 500's 11%, but with half volatility and minimal drawdowns (max 12%). Private Markets and Liquidity (Priority: 3/5): Private equity and credit marks are overstated. Liquidity will eventually find clearing prices, but process will be long and painful, unlike the shorter 2008 financial crisis.

Key Arguments: Markets are structurally bad at pricing low-frequency, high-impact events due to psychological willful ignorance. Regime change requires intellectual flexibility; most investors fail to adapt and keep playing by old rules. Oil price spikes can be deflationary via demand destruction, not just inflationary, due to elasticity in consumer spending. The 60/40 portfolio breaks when inflation rises and stock-bond correlation turns positive. Private credit will collapse before private equity; refinancing ability determines pain duration. Voting is the lowest-impact political action due to anonymity and zero personal risk; higher-impact actions require personal risk. Investment styles often reflect political views: index funds for liberals, hard assets for conservatives. The Awesome Portfolio smooths returns and reduces drawdowns enough to prevent behavioral errors that destroy actual investor returns.

Data Points: Oil Option Volatility: 150 vol - One-month at-the-money straddle in WTI oil is $20 as of March 2026. Commodity Index Move: 30% off lows - Commodity index bottomed September 2024 and is now 30% higher. Bitcoin Decline: 125k to 60k - Bitcoin dropped from $125,000 to $60,000 in the recent move. Trueflation Rate: 1.5% - Trueflation fell to ~0.7-0.8% a month or two ago, now up to ~1.5%. Awesome Portfolio Return: ~9% annually - Since 1971, returns ~9% vs S&P 500's 11%, but with half volatility and max drawdown 12%. Private Equity Development Cost: $600,000 over 2 months - Eight developers spent $600k over 2 months to A-B test software, replaced by one junior in one hour using AI. Monthly Substack Subscribers: 13,000 - Jared Dillion's 'We're Gonna Get Those Bastards' substack has 13,000 subscribers.

Pivotal Quotes: "The problem with regime change isn't the regime change, it's that most people fail to adapt, right? They're still playing by the old rules." — Jared Dillion: Discussing why investors struggle when market correlations shift from declining to rising inflation. "For the vast majority of investors, their trading style... is simply their political views expressed in mathematical form." — Jared Dillion: Explaining how investors' philosophical beliefs influence their investment strategies, often unconsciously. "I think being a chicken is a virtue. I think any good investor is a chicken. Like, no matter how much conviction I have on something, I generally don't let position sizes get out of control." — Jared Dillion: Discussing risk management and the importance of maintaining humility even with high conviction trades.

Implications: Investors must adapt to the new regime of rising inflation and positive stock-bond correlation. The Awesome Portfolio offers a robust framework for reducing drawdowns and improving risk-adjusted returns. Private market marks will continue to be unreliable, and liquidity will eventually find clearing prices slowly. Political biases distort investment decisions; self-awareness is critical.