Punks

Most people think of themselves as contrarian, but they are really not contrarian.

I had an interesting exchange with one of my subscribers recently about the bond market. He wrote to me that we have $40 trillion in debt, a $2 trillion deficit, with no end in sight; how you can you be bullish on Treasuries? I told him that the bear case is well-known and very consensus, and that there is no bull case—and that is the bull case. You become bullish on something when there is absolutely no reason to be bullish on it, when there are piles of evidence against you and it seems like there is no possible scenario in which the trade will work. That is contrarianism.

Most people can’t do it—they simply aren’t mentally and emotionally equipped for it. Do you know how hard it is to stand there like in Lord of the Rings, surrounded by charging orcs, and all you have is a pocketknife and a middle finger? That is what contrarianism is. Not this fake contrarianism. 

Contrarianism is complete insanity, when people tell you that you have lost your mind, when they come for your shoelaces. Contrarianism is when you get laughed off the set of CNBC. I bet if I went on CNBC and told them that there is no bull case for bonds, therefore I am bullish, I would not be invited back. You must have reasons for things. Well, I have a reason: Everyone else is on the other side of the boat.

Punk in the Capital Markets

I don’t want to spend another newsletter talking about bonds. That is my pet trade at the moment, and I have spent the last few months writing about it. What I am talking about is the desire to be different, to be punk. 

Punk is a good word. You know, some of the punks from the ’70s and ’80s are now conservatives, like John Lydon of the Sex Pistols. Why? Because it is punk to be conservative! No kidding—in high school, I had a T-shirt with a USSR flag on it. I had no opinion on communism or capitalism at the time—I just liked to tweak people. I also had seven earrings in high school and hair down to my shoulders, in a time when you simply did not do these things. Now, with the world going socialist, it is punk to be capitalist. The Zoomers are a lost cause, but don’t be surprised if you see good things out of Gen Alpha. I have hope, after seeing videos of 13-year-olds roasting Gen Z on social media. Time is a flat circle.

But what I’m referring to is being punk in the capital markets. Take the AI trade, for instance. There are a lot of bears on AI—if you are bearish, that is not terribly original. But if you said that the AI trade was a direct analog of the dot-com bubble and that tech stocks would go down 80%, that would be punk. Not many people are saying that. 

Or take energy. The war won’t end, and lots of people have reasons for saying that oil will go much higher. What if you said that it was not only going lower, but we were going to have an oil glut, and oil would go back to $30/barrel? That is punk. I am part of a small minority of gold bulls. There are plenty of gold bulls out there—not terribly original—but how many of them are saying that it is going to go to $10,000/ounce in the not-too-distant future? That is punk.

What Would Surprise People the Most?

Of course, the punks are the crazy people. If memory serves me correctly, there is a strategist who has always been a mega-bear, and some of his price targets on stocks have been outlandishly low. He’s been wrong, but that’s not the point—he’s a voice worth listening to. One of these days, the guy standing on the street corner with a sign that says The World Is Ending is going to be right. And oddly enough, the crazy guys end up being right more often than probability dictates.

That’s because the financial markets do whatever surprises people the most. With respect to bonds, what would surprise people more at this point: a sovereign debt crisis or interest rates dropping 200 basis points? What would surprise people more: the SPX going to 5,000 or 10,000? Honestly, that’s a tough one—the S&P 500 going to 10,000 would surprise a lot of people, I suspect. This is the framework through which I view things—I am constantly asking myself what would surprise people the most. And then I position myself accordingly.

Do you have what it takes to be contrarian? To do absolutely insane things that make no sense whatsoever? Probably not. Just being honest here. I’ve been a punk my whole life, an authority-hating rebel, which is one of the reasons I decided not to make a career out of the military—I didn’t have much of a future in that organization. Finance is relatively conformist, but it’s an intellectually free environment, and there is room for the divergent thinkers. And you’ll still have to deal with the rotten eggs being thrown at you.

Be Receptive to New Ideas

I want to add one word about The Awesome Portfolio—it is a very punk book. Here is the thing about books, especially nonfiction books or financial books: They tend to do well when they confirm people’s priors. 

Take The Millionaire Next Door, for example—people believed they had to scrimp and save and eat 69-cent cans of pork and beans to get rich, and that’s what the book told them to do; ergo, bestseller. People are rarely receptive to new ideas, but occasionally something breaks through. 

Let’s make The Awesome Portfolio the one that breaks through. Preorder here; it comes out on September 8.

Jared Dillian, MFA