It Was a Good Run

It Was a Good Run

I think the long bull run in stocks has finally come to an end.

Keep in mind that I say this at great personal peril, because if I’m wrong, well, there is no room to be wrong as a market pundit. Once something goes on the internet, it’s forever, and people will link back to it for years. Look at this idiot who was wrong. Forecasting is hard, especially about the future.

Anyway, here are some bulleted thoughts on why stocks may have peaked:

  1. Inflation is honest-to-goodness out of control. It shows no sign of getting better. And yes, supply chains are fouled throughout the world, but it’s not all supply chains. It’s a profound shift in psychology, and the Fed is powerless to stop it.
  2. Speaking of the Fed, this trading scandal involving Kaplan and Rosengren is a big deal. There are people who have never been happy that the regional Fed presidents are chosen by the respective banks’ boards of directors. The Fed will be pressured to influence the replacement of Kaplan and Rosengren, who were two of the more hawkish members of the Fed. Soon, the entire Fed system will be filled with progressives—just when inflation is going parabolic.
  3. China will be the source of the next crisis, as President Xi Jinping views capitalism as a threat to his power. He’s been kneecapping billionaires and successful internet companies, and that will continue. I think Xi wants a closed society, much like the 1960s Soviet Union. I wouldn’t be surprised if China didn’t have capital markets in 10 years. There are big implications here.
  4. The bond market looks vulnerable. Rates ticked up a little bit—and it has caused a lot of problems in the stock market. I’ve been doing this a while, and I’ve never seen a stock market that was so sensitive to tiny changes in interest rates. If 10-year yields go back up to 2%, there are going to be some big problems. I’m downplaying that a little bit. It is going to be a disaster.
  5. And finally, sentiment. I’ve been watching sentiment carefully, and I was really freaked out by the meme stocks back in January, followed by bitcoin and dogecoin, then the NFT market and collectibles. Most of this calendar year has been an orgy of speculation, and it is starting to feel tired. This is the most important reason to sell stocks—it’s a big secular top in bullish sentiment.


What do you do with this knowledge?

Market Timing

They say you shouldn’t try and time the market. You’ll end up chopping yourself to bits. This is true. Mostly because people are really bad at it.

But I do believe that even small changes to an asset allocation at the top or bottom of cycles can make a big difference in performance, and I believe that smart people with lots of experience should try.

This is one of those times.

Making the right adjustments is difficult in a high inflation environment, since stocks and bonds are likely to simultaneously do poorly.

Think about the 1970s. Bad decade for stocks, bad decade for bonds… but great decade for commodities. And while I don’t think that the 1970s are a perfect analogue for what’s going on today, it’s a pretty good approximation for how you should invest in a period of high inflation.

What we’re starting to see in equities is that yes, firms can pass along price increases—but they can’t keep up with how fast their costs are rising. Margins are being compressed.

In 2020 and early 2021, inflation was benign, and it was a positive tailwind for stocks, but now, inflation is a malignant force.

So, if you have a 60/40 allocation to stocks and bonds, it’s time to make some adjustments.

Now most people are going to read this and say, “Crap! I’m going to panic sell everything and panic buy commodities.”

You don’t need to do that—very subtle changes in asset allocation can make a big difference in your returns. If you went from 60% stocks/40% bonds to 50% stocks/30% bonds/20% commodities, that would make a huge difference.

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Investing in commodities can get a bit scary for people, but there are all kinds of exchange-traded products out there that can help—you don’t need to open up a futures account. Although the futures are fun.

So yes, I think you should time the market—about two or three times in your life. At big, obvious turning points. This may not seem obvious to you, but it does to me. I could be wrong, but see paragraph 2.

The Next Party

The last party in NYC was a massive success, really one of the greatest I’ve ever done. The next one will be, too—and you’re all invited! I’ll be kicking ass with progressive house, Adam Silver will be kicking ass with house, and my good friend Saad Khan from Toronto is capable of some of the best warmup sets in the world.

Friday, November 12, Doux Supper Club, 59 W 21st St, 7pm–12am. And it’s for a good cause—we’re saving cats. I’ll post a link for tickets in a couple of weeks. See you there.

Jared Dillian


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