The Only Guy Making Money Is Jimmy Buffett

Jared Dillian | The 10th Man
June 16, 2022

Over the weekend, I was up in Pennsylvania for my wife’s grandfather’s 100th birthday party. I so admire this man. What an incredible human being.

I was the only investment guy there, so naturally, one of my brothers-in-law came up to me asking where to put cash.

“Everything is bad,” I said.

“Stocks?” he asked.

“Probably more downside,” I said.

“Bonds?”

“Better, but the real returns are negative.”

“CDs?”

“That’s probably your least-worst option, but you’re still losing 8% a year due to inflation.”

Nothing is good.

I would say the only people who are happy this year—the only people—are the people with their entire net worth in energy stocks, which are up around 45% this year. There are a few of those people around. Hats off, I guess. They saw it coming and shoved all-in. But even that party is coming to an end, I think, as we’re about to price in a recession, and the demand destruction will kick in. Ultimately, there will be nowhere to hide.

Historically, I have been pretty good at playing defense. Not this time. I rotated back into tech stocks a bit early, and now I’m feeling the pain. I liquidated my energy exposure about six to eight months ago. I did buy put options on the S&P 500 but monetized them too early. I’ve made a hash out of this, and it’s only by the grace of gold that I’m not down even more.

If you look around the hedge fund universe, only the commodity hedge funds have done well. Everyone else is experiencing pain. You have probably heard about Tiger Global and Maverick, two large tech hedge funds that are in serious trouble. If the most sophisticated among us are having trouble with this market, imagine how the average person is doing.

Well, in many cases, the average person is doing better—off the top of my head, a typical 60/40 stock/bond allocation would put you down about 17% this year. Bad but not catastrophic, considering this is the worst year for bonds… ever.

I think I said this at a conference recently—how should you structure your long-term investments? Zoom out. We have high inflation. So, let’s look at another period of high inflation: 1969–1982. What did stocks do then? They went sideways. No returns over 13 years. How did bonds do? Pretty terribly. How did commodities do? Pretty great. How did real estate do? Better than stocks and bonds.

When the central banks are torching the dollar, the obvious conclusion is to “invest” in something that is a store of value. I put air quotes around “invest,” because you don’t really invest in commodities. Commodities have a negative carry, because it costs money to store them, and you typically don’t invest in things with negative carry. But that is the answer. The 60/40 portfolio is inadequate and insufficient.

The Answer

The only person who can make money in an environment like this is Jimmy Buffett. Come up with an exceptionally stupid song that people like to get drunk to and sing along with. Trademark it and open a chain of hotels and restaurants about a shaker of salt. Presto, you’re worth $700 million.

(One of the reasons I left the Coast Guard was because of Jimmy Buffett. The Coast Guard loves Jimmy Buffett. Absolutely no taste whatsoever.)

I’m only half-kidding. You can’t even hide out in Walmart (WMT) these days. Even it’s getting squeezed by inflation.

Here is what I tell people in an environment like this: Focus on your JOB. Go to work, make money, save a bit, dollar-cost average for the next 10 years, and things will work out in the long run.

Also, pay down your mortgage. This reduces your risk and gives you more exposure to an asset class that should theoretically do well in an inflationary environment.

You can take risks, as long as you understand they may not pay off for a period of years.

We are experiencing hard economic times, which is reflected in the consumer confidence data. I have been through actual hard economic times three times in my adult life. The financial crisis was the worst of the three. In early 2009, I made dinner reservations at a popular restaurant in NYC on a Thursday night. We were the only ones there. Things will get bad, but they will not get that bad. Or more precisely, they will be a different kind of bad.

I am seeing some crash talk on Twitter. Usually, crash talk is the territory of tinfoil hat macro doom guys, but not this time. I can’t help but notice the extreme bearish sentiment out there, but I am also observing that the Fed is in checkmate: It can’t stop hiking rates, at a point when the financial markets have the most sensitivity to rising interest rates.

Like I said last week, I’m an optimist, but I’m preparing for the worst.

Jared Dillian

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