In this must-watch interview, Jared Dillian, editor of The Daily Dirtnap, warns Wealthion’s Andrew Brill about a massive bubble in the private equity sector that he believes could easily trigger widespread economic and market disruption. Known for his contrarian insights and ability to take the temperature of markets, Dillian also delves into why he thinks the bearish sentiment in commodities is nearing its end, the normalization of the post-pandemic economy, the anticipated September Fed rate cut, and more.
Get access to Jared’s exposé on the private equity bubble here: https://www.jareddillianmoney.com/watchtower
Investment Concerns? Get a free portfolio review with Wealthion’s endorsed financial advisors at https://www.wealthion.com
Jared Dillian 0:00 There is a bubble in private equity if, if, with if this $8 trillion goes into liquidation, it's going to force down valuations across the spectrum. If you have a private business, if you, if you are an owner of a business, my suggestion is, is to sell now, sell as quickly as you can. Andrew Brill 0:27 Welcome to wealthion. I'm your host. Andrew brill, this week, we get a speech by Fed chairman, Jerome Powell, which could give us a clue into what the Fed will do in September. We'll discuss that and a lot more coming up right now. Jared Dillon is back with us at wealthion, and I'm excited to talk to him today. I of course, read his newsletter, The Daily dirt nap. He has a lot of opinions that don't exactly conform to the norm. Jared, welcome back. Good to have you with us. Jared Dillian 0:58 Hey, it's good to be here. Thanks. Andrew Brill 1:00 this is an exciting week for you. I know that your new book is available on Amazon for pre order. I know the paperback will be out next month, but you also have a white paper coming out later this week, so we'll get to that as well. But tell me about night moves. That's your new book. Jared Dillian 1:19 Well, you asked the right question. I like talking about my book. Night Moves is a short story collection. And you know, I've been, I've been writing short stories since I was 21 years old. I submitted a lot of these to literary journals. Only got one accepted. It's it's great. It's great writing. It's great storytelling. There's 16 stories in the collection, really just a range of people and subject matter and stuff like that. So I'm very proud of this book, and like you said, it's it's up on Amazon. You can pre order the Kindle now, and the paperback will be available next month. Andrew Brill 2:03 So these short stories are these part of your life, or is this fiction stuff. Jared Dillian 2:09 This is fiction. So, you know, I have, you know, just for a couple of examples, I have a story about a 15 year old girl who gets sent to a cult in Northern California. I have a story about a DJ in Miami who has an affair with the mom next door. I have an affair with, I'm sorry. I have a story about a dentist who is trying to sell his practice. So it's, it's really a range of stuff, and it's, it's, I hope you read it. I hope you like it. So Andrew Brill 2:43 I will definitely take a read, and I'm looking forward to it. I know you've got a bunch of books that are out, and we can find those on your website. You can Google them, Jared Dillian, you'll find all the books that you've written. And this one is, this one's a little different than the ones you've written before, but probably one of the ones you're most proud of, I would assume, Jared Dillian 3:01 yeah, absolutely, yeah. This has been in the works for a long time. So, Andrew Brill 3:07 so let's, let's get down to it. Let's talk about the economy a little bit. You know, we had economic data that came out last week. What's your take on the economy right now? Where are we headed? Jared Dillian 3:17 You know, I was talking to, I was talking to my partner, Ed Agostino, about this. He asked me the same question, and I I'm not. I'm not super negative on the economy. What I don't it doesn't feel like we are going into a recession. What this feels like is normalization, and what I mean by that is we are normalizing from all the distortions and all the excesses of the pandemic. So when we see the unemployment rate rise from three and a half to 4.3 this isn't really a function of the economy collapsing. This isn't really this isn't really demonstrating that there's any cause for alarm. It's really about things are just getting back to normal after we pumped $4 trillion into the economy, most of that stimulus money, all of it, has been spent at this point, and all the money that was saved has now been dissaved, and it's going on the credit card debt. So we're back to where we were four years ago. So Andrew Brill 4:18 credit card debt, and debt in general, is going to be a huge problem, I guess, or, or it's going to be a mountain to climb going forward. Jared Dillian 4:27 Yeah, you know, it's, you know, inflation obviously plays a role, but inflation has come down considerably. I spend a lot of time looking at the trueflation data, which is a private a private measure of inflation that is real time and trueflation has inflation at about one and a half percent. You're seeing the official numbers, the CPI at 2.9 you know it's lagging, mostly because of the shelter price inflation. So. Component, which is taking a long time to come down. So I mean, if you look at if you look at CPI X food and energy, it's about 2.3 so we're getting pretty close to target. Andrew Brill 5:13 And last week we had numbers that came out that were pretty good. The market reacted, obviously, after a couple Mondays ago, when the market really took a nosedive. The market was looking for good news, because they think that this good news will lead to the Fed cutting rates, but consumer spending seemed to be up a little bit, and Walmart had good earnings. So it's is that an anomaly where people are still spending money, but inflation is coming down. Or how try to explain that to me, because it doesn't make a lot of sense to me. Jared Dillian 5:47 first of all, you know, one thing I learned last week was that if you look at consumption by decile of income, right? So you have not even decile quintile. If you look at consumption by quintile, the top two quintiles in terms of income, account for 60% of consumption, and the bottom quintile only accounts for about 7% and I saw that chart about the time that Walmart earnings came out. So you know, I think one of the things I think we're seeing on the low end of the income scale is that wages for low income workers have come up significantly, and they've actually, they're actually doing reasonably well. You know, there's a lot of belly aching about inflation and stuff like that, and prices are higher than where they were a couple years ago. But like I said, wages for low income workers have come up a lot, which I think accounts for the increase in spending at places like Walmart. Andrew Brill 6:49 So obviously, people need to spend money. The lower income people making a little bit more money, and that's what keeps the GDP going, right? That's, that's, it's people spending money. Is about 70% of our GDP. So we need them to spend money, right? Jared Dillian 7:03 Yeah, well, I mean, we really need, we really need high income people to spend money. I mean, that's, you know, that's, I mean, nobody wants to talk about that, but that's absolutely the case. You know, it's, it's funny, like, I've, you know, I just moved into a new house three and a half months ago. And three and a half months later, we're still buying furniture, we're still buying art, we're still buying all this stuff. And, you know, I've never spent so much money in my life. And you know, it's, it's we have to do it, like we just have to spend money. But you know, sometimes I think about, you know, out of all the money that I've spent on this house, like it really is an engine of economic growth. I'm keeping restoration, hardware and pottery barn in business. You know, Andrew Brill 7:50 I can't believe it's been three and a half months. I feel like I spoke to you the week you moved in, and I can't we've spoken a couple times since. I can't believe it's three and a half months already that you're in that house. Jared Dillian 8:01 it was, it was May 6 that we moved in. And, I mean, the house is, the house is amazing. I mean, obviously you can't see right now, but this is my I actually have a dedicated podcast studio. So I have all, you know, I set up all these books behind me and stuff like that. The rest of the office is kind of a mess. All that matters is what the camera sees behind me. So. Andrew Brill 8:26 let's get into the soap opera that is the Fed that everybody's looking at, and they're all in Jackson Hole this week, and Chairman Powell speaks on Friday. What are you expecting? I know that I've read your daily dirt nap, and if anybody hasn't read it, they should go read it, because it's, it's extremely informative. You don't think we should cut rates, but you feel like a rate cut is coming. Jared Dillian 8:52 Yeah, I I think a rate cut is pretty much locked in at this point, 25 basis points, and it's, it's what is communicated as to any subsequent rate cuts that's really going to matter. So, I mean, there is a chance that we don't cut 25 I mean, if you look at it from Powell standpoint, Powell is a hawk. He's very concerned about inflation. He wants to get inflation down. The target CPI is still 2.9% I think he would rather see more progress on inflation before cutting rates. I don't think he's going to to commit to a rate cut cycle, or a 50 basis point rate cut or anything like that. So I think, I think, I think he'll communicate that we'll get 25 in September. But overall, I think the tone of the Speak will, speech will be hawkish, and I think it's, I think it's going to be very negative for markets. And maybe, you know, maybe not on an ongoing basis, but on the day of the speech, I think it's going to be negative for markets. So Andrew Brill 9:57 it seems like the market has priced in. And a bunch of rate cuts, starting with September. If you, if he's hawkish, like you say, do you expect the markets to react negatively? Jared Dillian 10:11 Well, first of all, you know, if, if you, if you look at Fed Funds Futures, you know, we have about four rate cuts, three and a half priced in before the end of the year, and we have three meetings before the end of the year. So the futures markets are implying some, at least a 50 basis point rate cut somewhere in there. And I don't think that's going to happen. I think that's massively mispriced. If you look at two year notes, we're pricing in about six rates, rate cuts total. Again, I don't, I don't think that's going to happen. I think that's mispriced. So, yeah, I think it's, I think we're going to get one before the end of the year, and that's going to be it. Andrew Brill 10:55 So did the notes get ahead of themselves? So they, they just like, okay, you know what, we're we're going to price in these cuts and be happy about it. Did they get ahead of themselves? Jared Dillian 11:05 I mean, we saw this before we saw this, back from about December of last year, we had a we had a run of weak economic data, and the market was pricing in about seven or eight rate cuts. And then, you know, sentiment changed in the market, in the economic data firmed up a little bit, and the rate cuts got priced out. You know, this is the nature of short term rates trading like it's, it's, it's all it's all about expectations, and things can move a lot. And you know, it doesn't really matter what happens. Andrew Brill 11:39 I read today that you're not in bonds, but you should be. So explain to us why you should be, but you're not exactly. Jared Dillian 11:48 well, I should be short, you know, I may take a position before, before the Jackson Hole speech, I don't know why I don't have a position. I've just been I've just been watching so, yeah, Andrew Brill 12:08 do you find yourself caught up like you watch something? You want it to be at a right price, and you're like, oh, okay, you know now is the right time to get in. Do you find yourself doing because I find myself doing that with some stocks every once in a while Jared Dillian 12:21 Yeah. I mean, it's, you know, the thing about the thing about markets, you know, I, like I said, I think a lot of stuff is mispriced right now, especially in the short term rates market. And the problem is, is that something that's mispriced can get even more mispriced, right? And that's, that's really the danger. So that's why I've been hesitant to take a position so far. Andrew Brill 12:47 You've been on the record in your daily dirt nap saying you don't think they should cut rates. Can you explain to us why you don't think they should cut rates? Jared Dillian 12:56 You know, like I said, I think this is a normalization. I don't think this is a recession. And honestly, you know, if you go back to when we first started hiking rates, back in 2021 the the wisdom at the time was that the economy, the economy, could not sustain positive interest rates. We had zero interest rates, and we raised them to 1% and everybody thought we were going to go into recession with rates at 1% and as it turns out, the economy can withstand five and a half percent interest rates pretty easily. You know real rates right now, if you look at CPI at 2.9% and Fed Funds effective at around 5.3 we have real rates of about 2.4 which is a little bit restrictive, but not incredibly restrictive. It took really, really to have monetary policy be restrictive. You would need real rates of about three or 4% so I think rates are pretty close to neutral right now. If you look at the Taylor rule, or any of the other rules based methodology, it says we should have fed funds at about 4% right now. So maybe rates are a little bit on the high side if you look at the Taylor rule, but I don't think, I don't think there's an argument out there for cutting rates to 2%. Andrew Brill 14:18 If the speech that Chairman Powell gives is hawkish and decides that he's not giving a date, he's not he's not going to commit to a September cut. And like we said, there's only three, three meetings left to the to the end of the year, and you don't think he's going to cut before the election? Is there a market haircut? Do you think that the market's going to take a severe dip if they decide, You know what, September is not a cut for us. We don't need to do it because we need more data. We need more economic data going in the right direction. Yeah, Jared Dillian 14:52 I think, I mean, I think the day of you would see, I mean, I think the stock market would be down. 2% I think it would be a two standard deviation move, maybe even more severe if he doesn't commit to a September cut. The market is going to throw a temper tantrum. For sure. It's it's going to be ugly if he commits to a September cut, but nothing beyond that. It's still going to be ugly if, if he commits to rate cuts above and beyond what we have in September, then the market's probably going to rally. So Andrew Brill 15:28 are we in a recent Are we headed towards a recession? Do you think we're there? I've spoken to economists. I've spoken to investors, you know, managers. They seem to think that there's parts of the economy that are already in a recession. Are we headed that in that direction? Jared Dillian 15:48 If you asked me that about a month ago, I would have said yes, and I've kind of changed my mind a little bit, you know, like I said, I think this is normalization, but look like the PMIs, the manufacturing surveys have been very negative for months. You know, the claims data is picking up, unemployment, non farm payrolls is is collapsing, but it's still, you know, just anecdotally, you know, I took a trip last week, and the airports were full and the restaurants were full. And, you know, just as I look around, people are spending money like I really don't see any evidence of a recession. So, Andrew Brill 16:28 yeah, and that's evidenced by the consumer spending. It's amazing that people are it just doesn't, you know, you listen to the data and you hear things are getting the economy slowing down, but when you go out your front door and you do the normal activities, it just everything seems to look normal, except if you go out to dinner, you're paying seems double what you used to pay. I know that for a fact, yeah, so let's get into your white paper a little bit. And I know that this is exciting news. Also, you have about a 50 page paper coming out on the 22nd and we will provide a link, so anybody watching that wants to check out jared's work, you can, and it's, it's a little alarming, I guess, because you think that there's, there's some trouble coming down the line, and it's because of private equity. Can you explain to us a what private equity is and what the trouble might be? Jared Dillian 17:25 Well, private equity is when you have an entity that forms a portfolio of private companies. Okay, so there's the obviously, there's a difference between private companies and public companies. Public companies, you can buy their stock on an exchange, private companies, you can't they're just privately held. And what private equity does is they buy private companies and assemble a portfolio, and they quote, unquote, apply management techniques to try to increase efficiency and increase profitability. And they hold these companies for about three to five years, and afterwards they sell them at a higher valuation, hopefully, private equity has grown at at a growth and then seeing growth rate over the last 10 years. It's now an $8 trillion industry. It's, it's, it's approaching the size of the actual listed markets. There are 17,300 private equity firms in the US. They're all competing for deals. See, the thing is, is that private equity actually made a lot of sense in the 2010s, because you could borrow at 0% interest rates and buy a company of four or five times earnings and and sell it out at a higher multiple later. Now you're borrowing at five and a half percent, 6% and you you have you're buying companies that are trading at 10 or 12 times earnings. So there's so much competition for deals, the quality of deals is going down and down, and what you've seen is, is that the returns of private equity are going progressively lower. Part of the story for private equity is actually about the demand side. There's a huge demand for private equity among pension funds and family offices and university endowments, particularly University endowments, the typical university endowment has 30% of its assets in private equity. It's illiquid. They can't sell it. They can't get cash out of it, there's no more cash distributions. So because of this demand, that's really what's I mean, there's so much money flowing into the space, it's created a bubble. There is a bubble in private equity. I'm not entirely sure how it's going to unwind, but if it does, I'm. Unwind, it could have huge effects for the economy. Andrew Brill 20:02 Now, what are those effects? Obviously, if you're talking about pension funds and university endowments that get caught up in assets that a private equity firm can't sell and make money off of the private equity, they're going to have to refinance their debt, and at this point, that's hard to do unless rates start coming down, because they borrowed it. If they did this in 2019, and they bought companies and they expected to sell them, it's now five years, but expected to sell them in two to three years. Well, they've hold on to them for an extra couple of years, and now they're paying more in interest payments. That's going to spell some trouble when these things can't get sold or get they have to sell them at a fire sale. Jared Dillian 20:48 and that's, that's really what I'm concerned about, is the fire sale, if there is some kind of unwinding of this and these companies have to be sold at distress prices, you know, private valuations should mirror public valuations, right? So we all know valuations are high, right now, if public markets go down 20% private markets should also go down 20% and what I'm concerned about is if the returns suck going forward, if they're if they're terrible, then what you could see is forced redemptions out of, you know, the endowments and the pension funds and the family offices and stuff like that. And then you're talking about companies being sold at distress prices. So there's, there's really two parts of this. One is, if you have a private business, if you if you are an owner of a business, my suggestion is, is to sell now, sell as quickly as you can, because you're going to be able to sell at a higher multiple now, but you won't a couple of years from now. So that's number one. If you're thinking of retiring or getting out of the business, I would encourage you to sell now. But two, if, if, with if this $8 trillion goes into liquidation, it's going to force down valuations across the spectrum. And what it's going to do is, if we have a bear market in stocks, it's going to exacerbate the bear market and extend it over a very long period of time. The thing about bear markets is they usually don't last very long. I mean, even the financial crisis only lasted 21 months, right? Like that's not it's really less than two years. That's not really a long time. But if you had a recession that lasted for three, four or five years because of this, that's what I'm really concerned about. Andrew Brill 22:47 I guess, if that's that were to happen, and the perfect storm of these private equity firms, obviously, some of them are going to have to fold up. I mean, 17,000 firms, obviously, not that many deals out there to be had. It's going to cause some serious economic hardships for not all these firms, but people who are have their money, their pension fund money, in this stuff, and then universal endowments are going to hurt as well. Jared Dillian 23:14 Yeah. I mean, it's some of these. There are private equity firms that are folding up right now. And if you want to talk about the quality of deals, you know, KKR recently rolled up a bunch of car washes based in Texas. They're called Quick quack, right? So that was, that was, that was a big deal for KKR. It was like two 30 million on quick quack car washes. You know, that's where we are right now. Andrew Brill 23:47 I know, on your your podcast, the Be Smart podcast, you did a podcast about The Big Short and you taught your partner talked about a smoothie company that was, you know, bought for $2 billion and you know that that could turn into a huge problem for somebody, because there's 1400 stores that are worth a little bit over a million dollars each, and they don't do a million dollars in sales each. So it's about, you know, I guess for these private equity companies, they try and lean out these companies that they buy and then try and resell them, right? Is that the case trying to resell them at a profit? Jared Dillian 24:27 the problem is, is that there's nobody to resell them to at this point, there's the IPO window is closed, so there's no IPOs. There's no appetite for a lot of these overpriced, underperforming companies. So one of the things you're seeing in the private equity industry is that exits are at an all time low, like they simply cannot exit these companies, and because they can't exit, they're not getting cash to give to investors as distributions, and because investors are not getting cash. In some cases they actually have to put cash in. So it's not a good situation. Andrew Brill 25:06 So how do we protect ourselves going forward? Obviously, there's, there's Friday, there's, there's news coming out of Jackson Hole Wyoming next month. There's maybe a rate cut, maybe not if Jared, if it was up to you, there wouldn't be a right cut, because, see, things seem to be okay. But how do we protect ourselves? Where are we sticking our money right now to protect ourselves? Jared Dillian 25:32 Well, Andrew Brill 25:32 besides under the mattress. Jared Dillian 25:34 Yeah, that's that's a good question. I mean, I know I'm very worried about the stock market. I'm actually a little bit worried about gold. Sentiment for gold sentiment for gold has gotten very hot. It went over $2,500 an ounce. By the way, there was a very cool article on Bloomberg that said that a gold bar, a 400 ounce bar, is now worth a million dollars for the first time in history. So a 400 ounce bar is now worth a million dollars. I'm not big on stocks, I'm not big on gold. I'm not really big on bonds. I mean, I'm not really, I'm not really super excited about anything at this point. I don't know you kind of got me. I'm still bullish on cash. Actually, I take that back. I'm very much focused on what I believe to be the end of the commodities bear market. I think the end of the commodities bear market is very close. Been following the Bloomberg commodity index, which is mostly oil and gold. It's about 40% oil and gold, but I'm starting to see some signs of life in commodities. And you know, there's periods of time in our financial history where really the only thing that works is commodities. It was true in the 1970s I mean, the stock market was trading at six times. Bond yields were at 14% but commodities actually did pretty well in the 70s, and depending on what happens in the election, commodities might actually be a good place to be if we see a resurgence of inflation. So that's that's kind of the one thing that I'm bullish on right now. Andrew Brill 27:19 What about the dollar, Jared, you said you're bullish on cash, but the value of that cash is going down. Jared Dillian 27:26 Yeah, the dollar is, dollar is sold off pretty significantly over the last couple weeks. A lot of it's going to depend on Jackson Hole, if, if Powell is hawkish, the dollar should firm up a bit. But I think long term. I think long term, you know, especially if Trump and JD Vance get elected, I mean, they are protectionists, and I think they'll really beat down the dollar. So, yeah, Andrew Brill 27:51 There's, there's two sides every coin, I guess. And you know, there's no way really to protect yourself at this point. And you know, being all cash or being some stocks, but it would seem the stock market does have to take a haircut at some point, because these valuations are pretty high. Jared Dillian 28:11 and risk appetite is off the charts. You know, when we had that mini crash two weeks ago, it I've never seen the market recover so fast. The VIX went to 65 but more importantly, it went from 65 to 15 in eight days. That's never happened. We're back up at the highs. Two weeks later, risk appetite is off the charts. So I have, I have no explanation for that. Andrew Brill 28:43 Jared, thanks so much for joining me. It's the daily dirt nap. Is your daily newsletter. I read that everybody should, if you don't, you should head over to to that and subscribe the white paper. When does that? That comes out on the 22nd? Jared Dillian 28:58 I think so I don't know off the top of my head Andrew Brill 29:01 but we will have a link to that so you can, you can get on that is quickly, is, you know, just hitting the link that we provide. The be smart podcast. I really enjoy it. I think it's, it's great information, right? That's, does that come out weekly? Jared Dillian 29:14 Yes, every week, yep. Andrew Brill 29:18 And at the Daily dirt nap on Twitter. You put a bunch of good stuff on there. Thanks. Thanks. Where else can we find you? Is there any place else we should be looking to find Jared dillian? Jared Dillian 29:31 There's other places, but I think that'll work. And yeah, don't forget about the book. Don't forget about Night Moves. Andrew Brill 29:37 Right Night moves. Head over to Amazon. You can pre order that if you want on your Kindle, you can do that too. You if you need to have it in your hands, you're gonna have to wait till next month. But I always like to take a good paper back with me on vacation, so I'm gonna grab that and start reading that when I ride the subway to work. But Jared, thanks so much for joining me. I really appreciate it, and it's always informative, and keep up the good. Work, and we look forward to seeing you again soon. Jared Dillian 30:04 Thanks very much. Andrew Brill 30:05 Thanks so much for watching our discussion here on wealthion with Jared dillian. I hope you got as much out of this conversation as I did as always. If you need help being financial resilient, please head over to wealthion.com hit the button in the top right corner that says, find an advisor and sign up for a free, no obligation portfolio review. And of course, if you could like subscribe to the channel and turn on notifications. 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