Magic in Nashville

You’ve been getting updates from the conference, so we will save all that for later.

Some weird stuff is happening!

1. Inflation is going up, and so are bonds.

2. Credit is getting smoked.

3. Stocks are following credit.

4. People seem to be nervous about AI all of a sudden.

5. The dollar peaked (for now).

All this stuff is connected. But first, I want to talk about the bond market. There is a universal truth of trading that if something goes up on bad news, you probably want to own it. And as you know, we got some scary inflation numbers last week, and bonds put mustard on it and ate it, skyrocketing higher. 

Well, I think we found out that everyone is short. Also, getting to point #4 above—and this is the point I have been making all along—if the AI trade has really topped, then bond yields are probably going to be a lot lower 12–24 months from now, if history is any guide. I hate to be the one to say I told you so, but I will be the one to say that I did say that in the first place.

Way too early for a victory lap, though. We talked a fair amount about AI at my conference, and if I could boil it down to a sentence, let’s just say that the projections are probably overly optimistic. Let me ask some questions: What is the chance that we build exactly the right amount of data centers? What is the chance that we manufacture the right amount of chips? Do you have any experience with capitalism? Have you ever lived through an economic cycle?

There is always overinvestment at the top, and it looks like AI is peaking as I write. But we’ll see.

The Disinflation Argument

At the conference, I made what I thought was a pretty compelling argument that disinflation, rather than inflation, is the real threat. Deflation usually happens when a bunch of debt goes bad, and the tech sector has issued a lot of debt—and the tech sector isn’t supposed to issue a lot of debt. 

Why would you borrow for 30 years against an asset that is going to last for two years? Isn’t this common sense? Don’t people get killed on asset/liability mismatches? 

Now, a friend made the point that Google, etc., are cash-flowing so hard that the debt issuance (as large as it is) is just a drop in the bucket. Maybe, but that operates under certain assumptions. My job is to worry about things, so I will continue to worry about things.

Let me just reassert the fact that bear markets are no picnic. I have been rooting for one, selfishly, because I will make money off it, but there is a scene in The Big Short where old-timer Brad Pitt tells the youngsters who are giddy from all the money that they are making that bear markets and unemployment result in death. Recessions and depressions can cause war and revolution.

If you read The Awesome Portfolio, you got my argument on investing countercyclically, called The Life Hedge. I can tell you that there is no better feeling in the world than swimming around in gold coins like Scrooge McDuck while everyone else is headed down to the unemployment line. I heard some stories from the financial crisis about the equity derivatives guys, who cleaned up. One of them walked into a completely empty Best Buy and practically bought the entire store at an 80% discount. Stuff like that.

Become a “Dirt”

Anyway, back to the conference. I have done a bunch of these. This is my seventh, and it was absolutely perfect. Every single presentation was spot-on. The attendees were the finest people on earth: open-minded; ready to learn; and most of all, kind. They even put up with me spinning tunes in a nightclub on Thursday night. I mean, think about this lineup: Peter Boockvar, Tony Greer, Jan Van Eck, Eric Balchunas, Meb Faber, Chris Freiman, Barry Knapp, Matt Zeigler, Vincent Daniel and Porter Collins, John Burns, Marcin Zdunek, and the great Mark Lapolla. Now how much would you pay for these steak knives? And the food was fantastic!

The good news is that we will be doing it again next year. But here’s the thing: It’s only for Daily Dirtnap subscribers. That’s right: You have to subscribe to The Daily Dirtnap (TDD) to get an invitation to go. And it sells out in an hour. Why? Because it’s the best damn financial conference on earth! If you know what a boondoggle is, it’s the opposite of a boondoggle. We have great thinkers but no egos. No speakers from the speaker circuit. Just the smartest people in the business.

So, I would strongly consider a subscription to TDD. Then you will become one of the “dirts,” as we call them. And you will finally understand what the fuss is all about.

Nashville became the financial nerve center of the world last week. Come join us next year.

Jared Dillian, MFA

P.S. I have a lot of ideas. Some are good. A few are not. And every once in a while, something comes together that makes me wonder why we didn't do it years ago. We’ve been working on one of those things behind the scenes. It’s a pretty big undertaking, and there are a lot of moving parts, but we’re getting close. More on that very soon. I think you’re going to like it.