Jared Dillian, editor of The Daily Dirtnap newsletter and author of The Awesome Portfolio, told Full Signal that AI sentiment looks like a market top and that he is bullish on bonds. He also laid out a five-asset portfolio of 20% stocks, bonds, cash, gold and real estate built to hold up in a downturn.
I sat down with Dillian on Full Signal to talk about where we are in the AI market cycle, what to make of the bond market, and why he thinks most Americans save for retirement the wrong way.
Dillian calls himself a sentiment trader, so his read starts with headlines rather than earnings.
Dillian sees AI sentiment at the "tippy top"
Asked where we are in the AI cycle, Dillian said "we're at the tippy top." He pointed to a run of AI magazine covers, including an Economist cover of Nvidia CEO Jensen Huang, and an upcoming movie about Sam Altman as signs of peak enthusiasm.
His own portfolio leans defensive with bonds, and he prefers owning downside through options over shorting outright. He said index volatility is low right now, which makes options cheap. "Think of it as the cost of insurance," he said.
On the data center buildout, Dillian drew a line back to Global Crossing and the fiber boom of 2000. "Every shortage is followed by a glut," he said, so he expects overcapacity at some point even though there is a shortage today.
He also admitted he cannot say for sure whether AI is a bubble. As a trader, he said, he watches the charts for distribution and for things to roll over.
Why Dillian is bullish on bonds
"I am super bullish on bonds right now," Dillian said.
He cited yields of about 5.3% on bonds and 4.8% on 10-year notes, and said the deficit sits near 6% of GDP, which he called far from catastrophic.
His argument is that investors fixate on supply and ignore demand. "If the stock market goes down 20 or 30%, people will show up to buy the bonds," he said.
On Treasury Secretary Scott Bessent's buyback program, Dillian said he does not want to be on the other side of the government and expects the operation to grow. He did note Stanley Druckenmiller's objection that pushing yields lower removes pressure on Washington to fix the budget. I covered the plan in Scott Bessent wants to put a floor beneath the bond market.
A slowing economy beneath the AI spending
Dillian pointed to GDP growth of 1.5% despite hundreds of billions in AI investment. That "leads me to believe that the rest of the economy is actually in a mild recession," he said.
He cited anecdotes from his subscribers and lighter traffic in his vacation town, and said he watches Costco shares as a recession tell.
He acknowledged that he tends toward pessimism and that many macro investors take the other side.
How the Awesome Portfolio works
Dillian's book proposes 20% each in stocks, bonds, cash, gold and real estate, rebalanced once a year. He said it has returned about 9% a year since inception against 10% to 11% for the S&P 500, with a worst drawdown of 12%.
In 2008, he said, stocks fell about 36.5% while the portfolio fell about 9%. If stocks dropped 20% in an AI bust, he estimated the portfolio would fall 4% to 6%.
He chose gold over commodity indexes because futures contracts carry a cost that eats returns. He defended the 20% in cash as optionality, saying "cash is an option to buy something cheap in the future."
He also said "liquid net worth is the most powerful force in the universe."
Homeowners can count their home equity as the real estate sleeve, and everyone else can buy a REIT ETF like VNQ. Dillian left out Bitcoin because it is so volatile that investors would end up staring at it all day.
The hard part, he said, is that the portfolio lags the S&P 500 about two-thirds of the time. "You are going to have FOMO like you have never experienced in your life," he said.
He argued that outperformance is not the point. "It's not about making the most money. It's about being happy with your financial situation."
Tune in to the full conversation with Jared Dillian on YouTube, Spotify and Apple Podcasts.
For more on bond yields, read Why stocks are ignoring bond yields surging to 19-year highs, and subscribe to the free Opening Bell Daily newsletter for a daily briefing on stocks, macro and Wall Street.
This article is for informational purposes only and is not investment advice. The views expressed are Jared Dillian's, and the market figures cited are his statements in the conversation, not independently verified.