JACK FARLEY: Today, Raoul speaks to Dylan Grice, co-founder of Calderwood Capital, about how to protect your portfolio during this unprecedented pandemic. Dylan shares with Raoul and you his outlook on the market and the risks and opportunities that he sees on the horizon. Like Raoul, Dylan is extremely concerned about the pandemic and he says that it could trigger the mother of all credit events, but he makes the nuanced point that for sophisticated investors, there are opportunities to have.
You see, Raoul and Dylan agree that for retail investors who can't afford to lose money, cash is the way to go. Dylan sees a lot of bargains on the table in everything from Blue Chip stocks to collateralized loan obligations to bespoke commodities like uranium. He argues that for investors who are managing a large book, they have an obligation to seek out these risk assets and opportunities and manage their cash position based on how far down the market goes. It's a fascinating conversation about managing risks during perilous times, and we hope you enjoy it.
RAOUL PAL: Dylan Grice, finally we get you back. You're one of the first people we ever had on Real Vision. Everyone's like, oh my God, he's the smartest man in the world. Then you went undercover, and nobody's ever seen you again. Tell us, give people a bit of background about you, where you've come from and what you're doing now. It's been a really interesting journey.
DYLAN GRICE: Background from beginning when? I'm speaking to you hear from Switzerland. I've been over here for the last six or seven years. I left SocGen, where I've been a strategist on the sell side and banking. I've enjoyed that very much. It was great fun, but I think I needed to be doing, and not just talking. I had an opportunity to do that. I had an opportunity to come to Switzerland and really help out with a family office here, one of the largest family offices in Europe, a company called Calibrium based in Zurich, and they really wanted some help building what was initially an equity business, but eventually became the multi-asset and liquid allocation so I helped to build that, to establish that to really embed the investment philosophy that went into the investment decision making.
RAOUL PAL: How was that journey? Because that's a big journey of discovery from the strategist side to now helping evolve a big family office and then evolve your skill set at the same time.
DYLAN GRICE: I started out, very beginning of my career, I started out as an economist. I did economics undergrad, I did economics post grad. My ambition in life was to be an economist. That's very sad. Well, that's all I wanted to do. I know it's funny. It's funny and everything out of, but it's true. I love the idea of trying to figure out where, actually why some countries were poorer, and some countries are rich. Some people were poorer. Some people were rich. This was something that was very interesting to me as a young adult, and so economics is a way to try and better understand that.
I just ended up, I was at the LSE, everyone at the LSE was applying for jobs in banking. I didn't know what an investment bank was. I honestly thought it was basically, when you go in a bank and you would cash a cheque and there would be someone behind the glass. I thought it was something like that, but they were all banks. Anyway, without really knowing what bank was, I thought I would apply for banks anyway, which I did. Got a job as an economist and ended up thinking, well, this is actually better than doing a PhD because I'll [indiscernible] economics, and I'll get paid much better.
That was my thinking. What I rapidly figured out, it's not that I figured out how to do economics, I figured out that economics was practically useless. Theoretical economics, for all practical intents as useless, I really, really believe that. You go from trying to predict the economy to trying to predict unemployment to trying to predict markets and this is just much more difficult and frankly, much more interesting. I went from economics to property then. I was a property trader for some time, addressing and buying on the equity desk. That was a lot of fun too.
I unfortunately shut that down, which is when Albert hired me, it's all jam. I went from my whole career had really been I started out as an economist then went to be a property trader, then went back to being a strategist, so there's oscillation between thinking and doing, thinking and doing. Then on equilibrium, it was lots of doing, but there wasn't much-- there was a lot of things but there wasn't so much writing or speaking. Actually, it wasn't such a big shift to go from a strategist to actually help them to bear with that framework for multi-asset allocation, it wasn't such a big difference. There's not as big a difference as it might sound.
RAOUL PAL: Then you were running a portfolio there?
DYLAN GRICE: Yeah. Well, certainly, the first few years, actually I built the equity business in [indiscernible]. We're a family office, so obviously, we weren't pitching for money, but I built the team, hired the team, hired a couple of analysts, manage the portfolio, but it wasn't so much-- the thing that I always said to the guys at Calibrium was-- one of the things that interests me is actually in building a process, building an architecture for thinking correctly about investing, is this a good investment hypothesis?
What makes a good investment hypothesis? How do we know that the investment hypothesis is wrong? How do we size positions? This was the commitment that I made really was I'll build you a team and build you up a framework if you like. It doesn't really need me to run it. If I get hit by a bus, then you can still keep cranking the handle, you've still got the philosophy is very firmly embedded. That's what I went there to do. That was fundamentally just equities.
We started out with an equity portfolio. That went quite well. We then designed another equity mandate, it's a little bit different but that also went quite well, with the same team. From there, there were a couple changes at the firm, but I ended up being asked to do what we've done for the equity team for the overall liquids team. Rather than being a stock picker, which is effectively what we're doing, we were now making allocation decisions. How much between equities versus credit, versus rates, versus precious metals, et cetera, et cetera, et cetera.
This played into something that I'm very interested in, which is that, I think that even though domains are very different, so an equity guy might think that the skill set is very different from a credit guy who might think that the skill set is very different from a macro guy, or even from a quant guy. On one level, yes, the skill sets are very different but on a more fundamental level, the principle is the same. The principles are always the same.
The principles are, do I understand what's going on? Given this radical uncertainty, do I actually understand what's going on? Do I understand well enough to know when the odds are in my favor? Do I understand well enough to know when I've made a mistake? These are the fundamentals of any investment and so applying those fundamentals to an equity team wasn't actually so different to applying it to a multi-asset class team.
RAOUL PAL: Now, you also build the whole philosophy around how you think about investing. You've spent a lot of time thinking about stuff and how, because you've now built a new business, so talk a little bit about that. Then your philosophy about what you're trying to achieve now, because I think it's very interesting when you and I caught up recently.
DYLAN GRICE: Of course, we started Calderwood Capital at the back end of last year. The idea is that it will really be there'll be two parts of the business. One part is the research side. The other part will be a fund management side. Fund management's a much more difficult business to get up and running than research and so we got research went live last year, and that we published in a monthly newsletter, a relaunch of
The Popular Delusions, which is what I used to write at SocGen. Obviously, it's come on a little bit in those years because I've had this family office experience and this family office background, it's really had a very big effect on the way I see things really. The Popular Delusions is partly influenced maybe by the practicalities of actually, how do you actually invest? You may have a view on what's going to happen to the world, you might have a view on what's going to happen to central banks, or the next election or all of these things, but how do you actually build a portfolio? It's not just what's the trade, it's where do I put this in the portfolio? How do I put it in the portfolio? How do I size this in the portfolio? These are more practical questions that interests me and that's what the research business is really about. It's really about trying to tackle those questions.
RAOUL PAL: You also come with a specific deep value framework as well?
DYLAN GRICE: Well, yes. I think a valuation framework, yes. I think when you see deep value, then it has certain connotations. I think people think that it means that you won't buy anything that has a PE of more than five. I'm like no, it's not actually what is, but valuation is absolutely completely very, very value oriented. I don't know how else to think about investing, if you're not actually thinking about the expected returns. Yes, we absolutely bring that to add to the research, but as I said on the website, we are in the process of building an asset management business.
The stuff that goes into the research is these are these are practical questions that we ourselves are trying to answer. These are questions that we ourselves are wrestling with, and because these are things that ultimately will end up in the portfolio or ultimately will influence the portfolio in the asset management business.
RAOUL PAL: You're launching, you're in the process of launching an asset management business in basically a nuclear event. What I really want to do, pick your brains on how you are seeing this event, both from using your macro perspective of which you're very good with that but also, what are the opportunities that it's throwing up as well? Because there's two ways to look at this. There's a whole bunch of risk, as we know, but there's obviously a whole bunch of opportunity, and it's trying to sift through that, then I know that's really your strength. That's your skill set in all of this.
DYLAN GRICE: Yeah, well, I think there are two parts of that question, where do we think this is going, and where the interesting opportunity is? I think that the first one is actually a much more difficult question to answer because we all have our views on where we think it's going, and I think maybe we're not so different. I don't know, I'm very concerned that we're about to see the mother of all credit events.
RAOUL PAL: Yeah, that's exactly my view.
DYLAN GRICE: It hasn't really showed up yet. I think that we've seen a huge rally, and really because of a relief, and maybe even optimism that the stimulus packages are just so enormous.
RAOUL PAL: Also, the narrative has now caught up, because it was so far behind the reality. The narrative's caught up and even Donald Trump yesterday saying, well, 200,000 people might die. He's now potentially even overestimating so the narrative has now caught up, therefore you can rally essentially.
DYLAN GRICE: That's right. We've fallen so far so fast. It's difficult really to see how many sellers were left, there could well be some technical aspect to it but yeah, it feels like the narrative has caught up. That's exactly it. I think that you've had this relief that the stimulus has arrived, that the stimulus is here, that the speed with which the policymakers have got their act together compared to in 2008 when they seemed to take an age and I think that the numbers are very big. People are, I think, relieved that the numbers are also back.
For what it's worth, I just feel that there's-- Jim Deakins talking about these fiscal blockages, and it was just going to take a lot a long time for this money to actually hit the economy. In the meantime, we just fell off a cliff. Those weekly claims were absolutely staggering. Since you asked me, I think nobody really, nobody runs a business, you may stress test your business and think well, if things really, really go wrong, revenues may be down 50 or even 60, 70 but no one really stress tests a business for revenues to go down 100% overnight.
RAOUL PAL: For three months.
DYLAN GRICE: For three months. I have a suspicion that this pain is going to be substantial and severe, it's going to check [indiscernible] of this credit problem, these credit excesses we're already bigger than ever.
RAOUL PAL: My fear within this is if you speak to any market participant, the basic assumption is it's a six weeks to three-month thing, and then we go back. The problem is A, human behavior has changed. The chances of people resuming their consumption patterns, their social patterns and other things quickly is low. The Prime Minister of Singapore made a really good point on this. He's like, look, we're going to keep our borders closed probably for a year and we're going to have to get used to that, and it will affect us.
He said, I think this is probably a one or two-year issue. Now, that's all well and good, but if you have negative growth over an extended period of time, and you've got all of the debt to service, it's game over. That's all I think about. I can simplify it all down to if people have sold the tail above three months, they're probably making a big mistake.
DYLAN GRICE: Yeah, I think related to that, as the US numbers look completely out of control and you look at the measures they've taken, and they just haven't did not enough. It seems to me when you look at the-- when you rebased the fatality count to once you've had more than 30 or 40, it's America today actually looks far more like Italy and Spain than it does China.
I think that I know from my own personal experience, we watched this-- and by the way, I think we were, as a household, I think we were switched on to this I think before most, not because I was perfectly switched on to it but because my wife was, Mona. She got very weary very quickly about this and we actually started stockpiling and canceling trips. This was back in late January.
RAOUL PAL: Yeah, we did the same.
DYLAN GRICE: I have to confess I didn't really see this coming, but I did feel that this was one of those situations where it was probably rational to panic. Actually, it wasn't irrational to overreact. It was rational to, it was completely rational to overreact. The reason why we came to that conclusion is because that's exactly how your immune system works. There is a biological rationale to overreacting when you're faced with an enemy of uncertain strength. If you don't really know how strong the enemy is, there's no point in going in with that half-baked defense or half-baked attack, there's no point in allowing your enemy the chance to come back stronger.
You have to completely obliterate the enemy, you have to completely overreact. That's exactly what your immune system does in the face of-- this is how vaccine works. I felt, okay, let's-- Mona wanted to stockpile, I wasn't so sure, but let's overreact, so we did all of this. Then we watched the numbers come in. We actually started getting a little bit nervous about it, a little bit scared about it, but it was all very abstract. What then happened was it started, it came to Europe, and then it was Italy and then Northern Italy was in lockdown and then suddenly, it was all Europe and then it was here in Switzerland.
Then suddenly, we knew people that have it. Now, suddenly we know people who died from it. Suddenly, it's not gone from this abstract thing. It's gone from something very real. That even when we saw it coming, that has actually been quite traumatic. I just feel that that's what America is just about to go through. I struggled to see, really, I still want to see the market doing okay when that hits America.
RAOUL PAL: I totally agree. The weird thing is I think my wife's had it. She's in Grand Cayman. I'm in Little Cayman. We couldn't get together. She's been quite ill, but she's over it now. We think a bunch of our staff got it, no tests. Now, the problem is she doesn't even know when she's safe to travel again to come over here. She doesn't know who she can meet, and what she can do. For me, do I have to reset the clock, do I have to go into quarantine again? Even me going to the store is a nightmare now because nobody trusts each other.
I just look at the behavior already in how much has changed, and America is going to go through this enormously. It's a real mental scarring for people. I know people, for example, in Southeast Asia who went through SARS, have some mental scarring. This is clearly a lot bigger than SARS was. I just don't think people are factoring in some of the human behavior, because as you said, this has now gone from being abstract to a reality, and it's going to be a defining moment in your life that you will never forget, nor will any of the people around you. That's truly extraordinary. It's like war.
DYLAN GRICE: Yeah, I think that's right. It feels as though roughly 25%, 30% peak to trough drawdown doesn't really seem to match that type of emotional scarring. That's why I feel that that's probably-- and I see probably, okay, because we're still on the first question. What do you think is going to happen? I think that that's actually the form of difficult question.
RAOUL PAL: Let me just ask you that because there's outcome and then there's time horizon. What is your view in how-- and again, this is all probabilistic analysis, none of us have a clue, but best guess, how do you think this plays out in terms of what the market does?
DYLAN GRICE: My best guess-- my very best guess, which again, probably isn't worth very much, but what it's worth I think that as the US loses control of this, or as seem to have lost control, I think it's already lost control, frankly. I think as over the next few days and weeks, these numbers, there will come a point where people see these fatalities and think holy shit, when does this end? When does this end? When does this stop?