In this episode of The Acquirer’s Podcast Tobias chats with Dylan Grice. He is the co-founder of Calderwood Capital Research, and writes the Popular Delusion Reports. During the interview Dylan provided some great insights into:
- Popular Delusions
- Allocating To Different Managers Provides The Holy Grail Of Portfolio Robustness
- The Anatomy Of Forecast Error
- The Golden Age Of Duration
- Richard Feynman – Cargo Cult Science
- Austrian Economics
- The Diversification Benefits Of Government Bonds
- Embrace Very Unusual Line Items
- Making Your Thesis Public Makes It Too Hard To Change Later
- What Will Work For The Next 40 Years In Investing Is What Didn’t Work So Well In The Last 40
References in this episode:
Popular Delusions – December 2019 Issue
Popular Delusions – November 2019 Issue
Popular Delusions – October 2019 Issue
You can find out more about Tobias’ podcast here – The Acquirers Podcast. You can also listen to the podcast on your favorite podcast platforms here:
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Full Transcript
Tobias Carlisle:
All right, so when you’re ready let’s get underway.
Dylan Grice:
Okay, cool.
Tobias Carlisle:
Hi, I’m Tobias Carlisle, this is the Acquirers Podcast. My special guest today is Dylan Grice, he’s a partner at Calderwood Capital. You’ve been reading Dylan’s work for more than a decade. I’ve loved it. We’re going to talk to him right after this.
Speaker 3:
Tobias Carlisle is the founder and principal of Acquirers Funds. For regulatory reasons he will not discuss any of Acquirers Funds on this podcast. All opinions expressed by podcast participants are solely their own, and do not reflect the opinions of Acquirers Funds or affiliates. For more information, visit AcquirersFunds.com.
Tobias Carlisle:
Hi Dylan. How you doing?
Dylan Grice:
I’m good thanks.
Tobias Carlisle:
Tell me a little bit about Calderwood Capital.
Dylan Grice:
Calderwood Capital is, I suppose it’s quite an unusual startup, because that’s what it is. It’s an unusual business, because we are a… and we are also anti management business. So, we are aiming to launch our first hedge fund in May of this year. So, we are kind of going through the final stages of that, which includes test marketing and stuff. We are hoping that we will start it without own capital, and then some capital of friends and family, and just kind of get the thing on the road. And I think next year we’ll aim to get some… with that, and rule that out and try and raise money from a wider circle.
Popular Delusions
Dylan Grice:
But I suppose there’s nothing unusual about that. I suppose what’s unusual is that the kind of nature of the business. As I said, I think it’s quite common for hedge funds and asset management to publish research and get that research for free. We’re actually not doing that. Research is a standalone business.
Tobias Carlisle:
And that’s the popular delusions
Dylan Grice:
That’s popular delusions, which is what I used to write when I was at SocGen. It was the title of what I used to write SocGen but I think that was obviously some time ago now, and the world has change, I have changed. So, it’s more of an evolution I think.
Tobias Carlisle:
Let me give everybody some more background. So, everybody will remember James Monteer wrote Popular Delusions at SocGen, left for GMO. And I think-
Dylan Grice:
He was big into behavioral finance and so his research area was mind matters.
Tobias Carlisle:
Sorry, I didn’t realize that.
Dylan Grice:
He’ll kill me if I don’t put that in.
Tobias Carlisle:
I read his stuff when he was at Drezna Cloneward. Because he wrote this great little review of the little book that beats the market, a little note that beats the market, and he pointed out at that, that it was the value factor that drove all of the returns, and not the quality factor that drove the returns. Which I found fascinating. And then when he left, you took… so I started reading Popular Delusions, it was one of the most fascinating reads at the time. Was so hard to get your hands on a copy of it, and I finally reached out to you and you very kindly put me on your own private distribution list, so I loved reading it.
Tobias Carlisle:
And then sort of disappeared for a while. And I thought of you about a year ago. I thought, “I wonder where Dylan is.” And I reached out to you through LinkedIn, and then you popped up on Realvision as well. And so I just wondered, what have you been doing in the interim?
Dylan Grice:
Well, yeah. That’s a good question. I think I had a great time at SocGen, a really fantastic time. I know banking is kind of a funny business, and it gets bad press. And I understand why. I’ve spent enough time in banks in my time. But SocGen was different. It was a really kind of unusual place. You really allowed it to breathe. They allowed Albert and me a lot of creative license. And it works for them as well, we were successful for them.
Dylan Grice:
So, it was a brilliant phase, but it was ultimately it was just writing. It was writing and it was commentating. And it was just words. Words, words, more words. And there wasn’t any action. There was no acting, there was no doing anything, no decision making. It was just writing. And there’s nothing wrong with that by the way, but it’s not really me. I think I’d been a… for five years before I took over from James and teamed up with Albert.
Dylan Grice:
I think words were the action. It’s kind of like sex without love, you do need the two things to feel more kind of whole. And after that period at SocGen I was really, really… I was becoming very frustrated with not actually doing anything other than commentating. And so, I kind of took the plunge and ended up in a slight detour, but I came to Switzerland where I still am. And I was hired by a family office. So, family offices are technically quite secretive. This was a Swiss family office, so it was like secretive squared.
Tobias Carlisle:
Double secretive, right.
Dylan Grice:
So, they kind of didn’t want any profile at all, which is actually fine with me. They wanted me to build a business, they wanted me to build initially an equity business. But it then became the whole liquid allocation. And that’s exactly what I wanted to do. And I didn’t really want to be kind of doing that in the public gaze or in the public glare. So, it was almost like the complete opposite of SocGen where I was talked a lot but not doing anything. When I was at Calibrium I was doing an awful lot, without really talking much about it.
Dylan Grice:
So, I mean to kind of bring back to where you started with Calderwood Capital, the research business and the hedge fund, is actually a kind of hybrid of both. It’s much more about getting my own particular balance right. So, I still get to write, but I actually get to build portfolio as well.
Tobias Carlisle:
What’s the strategy at Calderwood? What’s the hedge fund strategy?
Dylan Grice:
So, we are actually, I can’t believe I’m saying this actually, its been a very kind of strange route to here. But we are getting up a fund, a fund. Multi strap, multi manager fund a fund. So, the reason a part of me kind of, I still… fund a fund these days.
Tobias Carlisle:
That’s a very contrarian ploy.
Dylan Grice:
Well, its been a big interest in time. It was a very interesting theory in the family office. And I learned a number of things. And I learned that allocation… so allocation is much more in keeping with my own investing personality. One of the kind of, I did feel uncomfortable as a commentator, especially a macro commentator, because commentators know everything. They know exactly what Trump means when he…, or we know exactly what the Chinese are going to do in response. They know someone who knows someone who has got the inside line on Iran and… So, lots of people who just know everything, and I kind of always felt that I don’t really know anything, genuinely don’t know very much. And so, there was almost a very defense of foundation, a defense philosophical aspect to my own thinking. And I think that that really expressed itself I think very powerfully in a fund a funds, when you can really go literally wherever you want. If you’re an equity manager, then you’re in equity, that’s fine. Right, and you use the different pipes of equity. You’re kind of in a straight jacket when you’re allocating.
Dylan Grice:
I spent a lot of time thinking about how to hedge tails, and how to hedge market events. And actually, if you’ve got proper verification, you don’t need any of that. That’s free hedge. And you can only really express that type of ignorance if you like… Building a portfolio which is to us ignorant, you can only do that if you’re willing to explore radically different income streams, or cash, whatever you want to call them, return streams.
Tobias Carlisle:
So, you won’t have any tail hedging or any crisis alpha in the portfolio?
Dylan Grice:
Mine will be as wide as possible, so you never say never. But generally speaking, no. I think that if you can some cheap… in the portfolio, it’s…. If you think about it, because you’ve got insurance. What you want is to insure your portfolio against really, really bad stuff happening. And typically you have to pay for that. You don’t get fee house insurance, you don’t get free life, you don’t get free insurance. So, is it worth paying that? And typically I think the answer is no. I think the far better approach is to say, “Well, okay, let’s just say equity risk. Yes, we want equity risk in the portfolio, and yes… is a valuable premium to have over the years. But no equity risk is not going to dominate the venture portfolio. Thre;s a whole bunch of other things that we can do.” And if they’re truly uncorrelated. If the world goes to hell in a hand basket, yes your equity risk is going to blow up. But maybe your longevity risk is going to offset, or maybe your catastrophe risk is going to offset that.
The Holy Grail Of Portfolio Robustness
Dylan Grice:
So, the real holy grail of portfolio robustness becomes much more aligned when you can actually allocate it to different managers. That was the starting point with the idea. The other thing was that I just felt, I’m trying to build the team at Calbirium, something we really struggled to find was good fund analysts. It was really, really impossible. I kind of had this epiphany, this light bulb moment, which was that people who love investing, they want to be the guy leading the venture, or they want to be the guy you’re actually picking up the pieces in a court case and doing the kind of… investment, or they want to be the one with… betting against some country’s exchange. They want to be that, on the front-line pulling the trigger. They want to be a fund annalist. Who the hell wants to do that? It’s almost like choosing quite… There’s not a huge amount of competition. Right? So that’s just another aspect to it.
Tobias Carlisle:
So it’s global macro, but it’s executed through a fund to fund, so that the guys who are making the investment decisions at the pointy end are running their own business. So it’s sort of distributed global macro. Something like that.
Dylan Grice:
I would… Yeah. I wouldn’t call it.
Tobias Carlisle:
Decentralized.
Dylan Grice:
Yeah. I mean, very much decentralized. I mean, macro allocation is a kind of branch of macro, but I call it a no nothing macro. It’s kind of a macro for dumb people. So, yeah. That’s kind of what it is. I found that it was just much more in keeping with my own philosophical…, and I guess the other thing I discovered at… they always head win with the hedge fun… but I kind of realized that this kind of mood to… as an absolute priority. I think that it’s actually not… It doesn’t really work like that. Yes, you want more fees, but frankly there is such a thing as getting value for fees. Right? It’s not the same… are not always. You’re not always getting value. The way that you’re not always getting value when you buy a cheap… My partner is… actually. He used to run… London office, and the… fund charged I think it was five and 45 and…
Tobias Carlisle:
And still outperformed.
Dylan Grice:
It still generated a net refund of nearly 40%. So people could have invested… If you were allowed to invest a fund that gave you a net of 40%, you wouldn’t really care that you’re paying 5 and 45. So if you turned that down because the fees are too high, frankly you’re an idiot. This was also a realization, I think the funds to funds model is very, very discredited because I think it’s not typically done properly and this could be famous last words but our… is to actually do it properly.
Tobias Carlisle:
How do you do it properly?
Dylan Grice:
As I said, you have to be very willing to embrace very unusual line items. Right? So if you’re looking at fund to funds and you’ve got say 60% equity, or 50% equity and you’re 30% hedge funds, that’s going to give you 20% bonds. Your hedge funds will basically… equities and credits funds. Then you basically have an equity portfolio. Right? That’s what it is. I mean, even if you… suppose you actually have long shot equity, have long shot credit, we have long shot equity, we have to macro and we have to GTA, what you’ve basically got is an equity portfolio. Right? Because long-shot equity is just equity. Long-shot credit is very, very kind of… You’re taking on a lot of retention there. GTAs should be able to… but what typically happens is… Certainly, the month that any kind of crash happens your GTAs get wiped out as well because they’re on the wrong side of the trend almost inevitably.
Dylan Grice:
Macro also… a slightly different thing, but all too often you find that macro managers are… They’re basically long carries and that as a strategy gets hot when the…. So you end up with a portfolio which goes up on…, and goes down when it shuts off. Why don’t you just have an equity portfolio? What’s the value you’re really adding with that particular allocation. I think that’s one reason why it doesn’t work. Just get comfortable with just very, very unusual line items.
The Diversification Benefits Of Government Bonds
Tobias Carlisle:
It’s been a challenging period I think for asset allocation in particular because there’s so little yield in bonds and where they’re traditionally viewed as a safe haven asset that should sort of go up a little bit when equity industries collapse. They are sort of to that point where they’re very, very sensitive. So a lot of guys have been looking at that yield in debt and saying, particularly in US treasuries for example, and saying that’s a bad place to be. But it’s been one of the best trades over the last five years, even though it’s been a common… So what do you do when potentially one of the sources of hedge in the book is going to trade probably more like equity?
Dylan Grice:
Well, again, it depends on how… Actually, I’m not sure there’s a lot in that. I think to kind of work backwards, there is still a case for the kind of diversification benefits of a government bonds. Even in this kind of crappy yield because it’s not without… Again, I think this is a mistake that the people make when they’re talking about portfolio construction. You typically want high return stuff in your portfolio. Right? Obviously when something is returning decently… or one or two percent, it’s very good to see why you would have that in your portfolio. There’s no juice left, and I said, “Why do we want that?” It’s just a lot of downsides and not a lot of upsides.
Dylan Grice:
I know. I understand. But I think it’s not the right way to look at it. The right way from a portfolio construction is what does it bring to the portfolio? Is the portfolio better with this or without this? The fact is that, a portfolio which has that genuine kind of rally and… which we only get with…. And I hate this phrase, risk free. But you only get it with…. That typically improves a portfolio even with virtually zero yield. If you kind of actually run simulations… kind of optimizer, and ask it how much government bonds it wants. The answer will always be known zero because that’s going to be the… benefit. So even if it gives crappy yields, there is an algorithm… It’s not as dumb as it sounds to… your portfolio. We wouldn’t have any in our portfolio. We wouldn’t have… in our portfolio because we think we can do far better than that.
Dylan Grice:
Right? But some people are not willing to kind of explore… Very kind of weird asset managers, some people are not very willing to take the time to understand complex strategy. For very, very good reason. If you go up with a complex strategy, you’re setting a pension fund, you’ve allocated to some kind of credit manager. He doesn’t really understand what he’s doing but his returns are… to allocate to him, and before you know it you’re down 30% you get fired. You get fired for that. There’s not really any upside to you’re allocating to someone like that any more than there’s any upside to… in Wall street. You know? You never get fired for… IBM. Right? If you win some kind of some small cap, micro caps that dumps 50% one day, you kind of… They don’t ask what’s wrong with the stock, they ask what’s wrong with you. Why are you… in IBM, and I think allocation is kind of similar. You don’t get fired for allocating to…
Dylan Grice:
Right? The real kind of juice is actually… I think when you go more off the run. So if people aren’t willing to go off the run, and maybe not willing to do that work, if they’re not willing to get comfortable with something as… opportunities, then I think you… of government bonds and I would mix that with some… It’s not as dumb as it sounds.
Austrian Economics
Tobias Carlisle:
That’s good Segway into a discussion on your philosophy. I’ve read the… You sent me through the updated popular delusions, and I sense that your philosophy is sort of an Austrian economics approach to it. It’s been a rough decade for folks that have got a hard money Austrian view of the world. Why do you think that is and why do you think that’s going to change? Do you think that Austrian economics has a place in the investment world?
Dylan Grice:
I mean, such a great question. So yes, I do love Austrian economics. I actually slightly have an issue with the adjective. Right? For me, it’s just economics. Economics took a very strange turn maybe I think-
Dylan Grice:
It was not new. I think that you saw… In France you saw this credit model. This kind of high inflation during the Mississippi bubble, and it was John Wall who is a Scotsman. He had this idea that you could increase activity by increasing the money supply, and therefore you only need to do that with paper money and that would be… So this kind of paper money craze was born.
Dylan Grice:
A lot of John’s stuff was very creative. I don’t think… was necessarily… a lot of absolutely brilliant ideas. In my opinion, also some really dumb ones. I’m not a…. I just feel that… I think it was with Samuelson, I think the economy kind of… about having psychics envy. They really wish that it was physics. I actually believe… I’m quite passionate about the idea that economics is a fan.
Dylan Grice:
It’s fundamentally… It’s fundamentally about trying to find the order in the chaos. I just feel that economists are not really good scientists and this whole kind of physics envy thing is really just a reflection of how bad they are as scientists. I think the Austrian guys are far more honest about what they know, what they don’t know, and what some of the Austrians were able to deduce without modern computers or the ability to write algorithms and run simulations, and see how the economy might look on the different assumptions, these guys really kind of pioneer chaos theory. They pioneered the notion of the self organizing system before it started to crop up and the idea of complexity before people started to understand what complexity was. The Austrians had already figured out that that’s what an economy was. Sorry, my voice is getting a bit croaky here.
Dylan Grice:
… were talking about the information content at Brighton. Usually we’re talking about information theory, and money as a channel… was talking about economic capsulation. These guys were talking about the economy as a computation machine. These guys were kind of absolute pioneers long before… information theory, long before complexity was a branch of mathematics. These guys were already talking about it. So it’s a long winded answer, but yes, I really do feel that for some reason it’s seen as this loony fringe… and I think if you read it, you guys are absolutely right. Of course, they’re right. On that side, that’s easy.
Dylan Grice:
How do you make money out of it? How do you invest with it? I think that’s a totally different thing and I think one of the problems you get with a lot of Austrians is that they have a very clear idea of how the economy should be, and how the world should be. Investments not like that. Investing is about way the world…. So Austrians look by gold. They’re always delicious gold. The… market was just around the corner. How many Austrians souls in 2000 didn’t go to… By the way, I didn’t. I’m not going to point the finger. What I did do was reflect on why I didn’t, but I think the Austrian economics… I’m not really sure it necessarily goes with investing because the world the way it is is not the way you want it to be.
The Anatomy Of Forecast Error
Tobias Carlisle:
That’s a nice Segway into one of the articles that I liked in your more recent popular delusions was discussing the anatomy of forecast error. Can you perhaps describe for folks what that article was about, and what the conclusion that we can draw from it is?
Dylan Grice:
Well, were to start. You go back to years when i was… and like a lot of people I really didn’t like QE, hated QE, and didn’t really like the precedent that it had set. I kind of felt that this was going to end badly, that this was a mistake, and that they shouldn’t be doing it. I really really hated QE and I really don’t hate… I really hated it. I hated that it was so loved by… economists at all. Support gather already. So really not a fan of the discipline. As I said, I think that they’re very, very pro-scientist. You’ve got these kind of economics here running around. To my way of thinking at the time… by the way, these guys are just blowing up the… system. Right?
Dylan Grice:
The whole thing was largely caused by their incompetence, and them really not knowing what they were doing… 2006 said that there was no housing bubble. Couldn’t be a housing bubble because house prices had never fallen. It has never happened before, therefore, it could never happen. So this is just like kind of logical error. One-on-one, right? I just couldn’t believe that these guys got away with it.
Dylan Grice:
So the… thing was QE and I hated it. I really also think one of my kind of little kind of hobbies is financial history, and I really kind of… I love financial history. I do know something about hyper inflation, and bubbles, and stuff like that. I kind of just joined the two things together and said, “This is how hyper inflation starts.” I did explore hyper inflation, historic inflation, and how they work, and I came to the conclusion that it was very unlikely that we were going to kind of key in hyper inflation. Although I thought that the main… somewhere that I thought the… was Venezuela. But yeah, the one that bothered me the most was Japan. They’re completely monetizing their… but I kind of felt it doesn’t have to be hyper inflation for this to be an inflation problem.
Dylan Grice:
What’s going to happen… for example, in the ’70s is an inflation problem. Right? Hyper inflation… it effected the investment landscape meaningfully. So I kind of thought that this is where we were going, and I kind of said… Actually, it was 2010. In terms of… we will see the white of inflation dies. We will see a… inflation problem. So this is a very kind of form prevention that I need. Whereas I said, you’ll always see an inflation problem. Here we are 10 years later, and I think that… break even and inflation rates are like 50 basis points below where they were when I made my connection. So I guess that just set off a kind of… Also, kind of speaking to some friends of mine that agree with me and who also thought that inflation was clearly going to be the next big issue. So I said, “What did I get wrong? Why did I get that one so wrong?” That piece was really me trying to pick where I went wrong.
Dylan Grice:
I think that the main… where I went wrong, which is something that a lot of people do, but I guess there were three things really. One, I just fell in love with the idea. I fell in love with the theory. I really enjoy learning about hyper inflation. I really enjoy… and the closer I looked the more obvious the patterns became, and I just enjoyed that process, right? I liked my own theory. In academia, they have some phrase for it. It’s something like theories are kind of like toothbrushes. You’ve got to have your own one and everyone only uses their own one, and everyone loves their own one. So I kind of fell into that trap without realizing it. Another trap I fell into was that… And this is a big one, and this is something that I’m much more wary of today.
Dylan Grice:
But I really felt that… I would write… these guys are… and all their doing, and I managed to still be kind of struck a chord, and people just love this. Especially coming from a kind of investment bank. So at the time I think it was quite a kind of unusual thing for a bank to say. So it kind of went viral and I went home, and I had a following of people who loved to hear me… on this stuff. Before I knew it, I can’t… I didn’t realize this until years later, but I once actually played to the crowd. And I started too… Again, this is why, I don’t want to mention any names, but I’ve seen it, you’ve seen it, investors when they go public with a thesis, it’s a disaster. Keep it to yourself. Shut up.
Dylan Grice:
It just becomes so much more difficult to change your view when you’ve got a bunch of followers who are always following you because of that view. I think actually I really kind of… Interesting story. So tough example of… with a friend of mine… Henry who used to… 2008 crash, made a lot of money out of it, and did really, really well for his investors and was seen as the… guy. He was all over TV, he was all over Blue book, he was on very high-profile news shows in the UK, and some of footage of those shows kind of went kind of viral because he was… it was wonderful.
Dylan Grice:
It was like, finally someone with a brain is on our side and he’s actually calling out these… for what they are. So far so good, but he was now seen as that… guy. When he turned bullish a few years later… He said, “What’s the point in you?”… you were a… little hedge. So this is the danger. You have to be very careful what followers you get. Right? If you get followers who will follow you because of this particular view, then that then impairs your ability to update your view as facts come out. I think if you’re investing and you’re trying to get a lot of right then it’s really just a continuous process of updating and you’re not really doing yourself any favors. This was another thing that happened to me.
Dylan Grice:
The main one that I really should have seen because I see it often. Another argument I see another discourse… is very famous. No quality too of arguing, which is… Forget the argument, just attack the person. And you see it. When you do see it you kind of think, “Ah, did you just do that? That’s a terrible thing. You just lost the argument. You’re attacking the person.” Donald Trump does it all the time. I think it’s just a very low quality thing to do and again, I didn’t realize it at the time but I was doing that. In particular, I was allowing my dislike of the… and particularly guys like… all these kind of, I just think they’re phonies. I don’t really think they know as much as they say they do. But these guys were worried about deflation. So I kind of just felt… then obviously I’m going to worry about inflation, right?
Dylan Grice:
Again, it gets a few laughs from your audience, but that’s no way to update your… That’s not an argument. That’s just dumb. This is another mistake that I knew and they were the main categories of errors.
Tobias Carlisle:
It’s a very honest assessment because I think you could have said, “Well, inflation isn’t counted properly by CPI statistics. It’s probably understated… adjustments. A sort of nonsense,” and then you also could have said, “Is that Austrian view that inflation doesn’t necessarily run through the CPI, it could run through asset processes?” There’s a pretty strong argument that we’ve seen some pretty material inflation and asset process.
Dylan Grice:
That’s true. That’s absolutely true. I really do believe that, and I think that you can even measure it. I think you can kind of measure it to what extent assent prices are all the way inflated. So in terms of whether or not CPI is great for measuring… maybe there’s some truth to that, but I’m not to sure on that argument. I’ve seen estimates. I can’t remember the guy’s name. He said that inflation actually runs at 10%.
Tobias Carlisle:
That’s the shadow sets. John Williams I think.
Dylan Grice:
Yeah, I just have difficulty believing that actually the economy is contracted by… If inflation is being 10% then I think… must have been mind of minus five, or six, or something. That’s not what i see. That’s just a question mark. I don’t know. I don’t know the right way to measure it. I feel like the point is, inflation is an estimate. It’s ultimately a judgment. Right? It’s not actually measurable and when you try and build them asset prices and… you just find that there’s a whole kind of worms. Conceptually it’s not measurable and this is the Austrian preceptor. This is dumb. It’s absolutely dumb to try and measure something as complex as… because all these prices going up and all these prices going down… economy, but an economy wide increase in prices it’s very… As increasing the money supply will trigger some kind of change and will to prices somewhere because it must do when people start spending money to buy increase. Therefore, that’s inflation. Whether it shows up in the GPI or sort of, we don’t really know. That’s the kind of Austrian perspective and that’s the whole folly of central bank targeting, this made up number in the first place. It’s just bloody stupid, right?
Dylan Grice:
But that’s what they do, and to go back to your point… said all of those things and I believe them, but that wasn’t my connection. My connection was that we were going to see GPI inflation, right? We would see it within 10 years. So there’s no point trying to wiggle out of it because you could also say, “Well, it just hasn’t happened yet.” Then that’s not a forecast. If you say, “What’s the weather going to be like tomorrow.” You say, “Tomorrow.” Right? You’re specifying a time. A forecast has to have some kind of time dimension. You can’t just keep saying, “I’m just waiting for it to happen. I’m definitely right.” The time is it’s always going to happen tomorrow. It’s going to happen the day after. So I don’t think that you should wriggle out of things that way either. My forecast was very, very specific. It was … inflation and it was within 10 years, and I think I even said that it would be more than 4%. So… and I think it’s very… It was a very constructive thing for me personally to kind of rub my own nose in that and say, “Right, what did I get wrong? How can I not do that one again?”
Tobias Carlisle:
I think there’s been a lot of intersecting by Austrian economists and value investors particularly over the last decade or so.
Dylan Grice:
Yeah.
Richard Feynman – Cargo Cult Science
Tobias Carlisle:
One of the interesting things, I watched… MIT had this billion price project. Did you ever follow that where they had this idea that they would track all these different prices through the economy and that would create this CPI?
Dylan Grice:
Yeah.
Tobias Carlisle:
When that first launched that seemed to be tracking well above official numbers. MIT has taken that was, “Well, our calculation must be wrong. We’ll go back in and we’ll make some changes to that.” I was reminded of it as I was reading your… You’ve got that great story about Richard Feynman and then updating the… I think it was Planck’s constant. One of the… In your popular delusions. Am I getting the wrong-
Dylan Grice:
No, that’s right. No it wasn’t Planck’s constant. I think this was something to do when they were measuring the charge of an electron, and the original guy who did the experiment, I forget his name now, he was an Nobel Prize winner and he kind of got it basically right but not quite right. It’s because the way he measured this charge, he used some kind of… ] I think he used some oil and he hadn’t quite gotten the… of the oil right and that was slightly biasing his results. Then what happened over the next 10 or 20 years was that when physicists tried to replicate his measurement, they were coming up with a different answer. They would find a way to lower it, so that it was like his original answer.
Dylan Grice:
This kept happening until someone realized the mistake. No one actually wanted to stand up and say, “No, I think that’s wrong.” Why is that wrong?
Tobias Carlisle:
So Richard Feynman has… There’s another great experiment in there where somebody… This is something I followed pretty closely, the replication crisis. I’m kind of interested in it because there’s so many things that have been particular in the psychological studies and social sats, but also in medical, in medicine, and various other things like that. There have been these findings that they were unable to replicate, and Feynman makes a good point that they made be an incentive not to try to replicate it at all, and then he says if you’re going to conduct an experiment where you’re changing some part of the experiment, you need to first of all, you need to replicate the original experiment, and then under your own conditions with your own apparatus go and change it.
Dylan Grice:
Right. Absolutely correct.
Tobias Carlisle:
You included that in one of the popular delusions, the great discussion on it. I don’t know if you can remember the story.
Dylan Grice:
I mean, you just said it. These are the basics of… I mean, obviously finding a Nobel Prize winner physicist and his love was physics. His passion was physics and his criticism… This was a speech, 1974 speech he gave at Caltech, and he was actually criticizing the academic establishment for not being diligent enough with replicating other people’s work. He gave a couple of examples. I think there was an astrophysicist. I think it was someone else who was working on a kind of Aspen Collider and in each case when that person had basically asked to replicate the work that they were hoping to build on, they were told not to waste the time. They don’t have the budget, they don’t have the resources. It finally is, you just go on and do what you were going to do. There was this pressure… There is this pressure. Simon was talking about this pressure that academic institutions are under to find something new. To generate new conclusions, new results, to find new science. Right?
Dylan Grice:
He then in the same speech talked about the same kind of thing happening in psychology and he basically gave a warning. He called it… science. The… are the kind of the… who had never really… I believe that it’s actually just kind of a standard phenomenon that anthropologists talk about and it’s reasons are well documented. Is when you have a low-tech society comes into contact with a high-tech society, and the high-tech society then disappears. So kind of think new world explorers, for example. Think some kind of British explorers 17, 18th century. It’s all kind oof the same kind of phenomenon, but the one that Feynman talked about was the… during the second world war, where the Americans had come and used the island as a landing base. They kind of dropped their cargo… The planes would kind of land. They made a runway, they managed to make a runway, planes would land, take off again, and then.., so they packed their bags and went home.
Dylan Grice:
At the cargo… locals kind of built a new runway, and they built a runway to make it look like the old one, and they built a control tower to look like the old one. They built a controller, a kind of… that looked like the controller. They actually had kind of bamboo shoot headphones and a bamboo shoot microphone. So everything was replicated to look just like the setup that the Americans had put down because the idea was that if they could make it look like the Americans did, we’ll get the cargo. We’ll get the good stuff. Richard Feynman would say, if you make your science look like science, you’ll get the same result that the cargo cult guys got, which is nothing. Just because it looks like the thing doesn’t mean it is the thing.
Dylan Grice:
Effectively his warning, which went on TV, was I think is now known as the replication class crisis because people are not doing science. They’re not doing honest inquiry. They’re trying to find something new for the sake of it because the pressure academic institutions are under to find something new is exactly the same kind of pressure and that’s why I find this interesting, is the exact same kind of pressure that financial players are under. Right? To launch a fund and to demonstrate why this is such a brilliant idea. Right? Have to launch an EPF and to demonstrate why… Because look, we’ve done the back…, we’ve done the science, we’ve actually brought in some academics from some Ivy League University, and they are now an advisor to our board.
Dylan Grice:
So we’re putting the science into… No, that’s what we’re asking. Is this science any better? Is this real science? Is it real financial science or is it cargo cult science. I think my view is it’s cargo cult science. A lot of these factor ETFs, a lot of these… ETFs, it’s amazing how many of them are no longer working now they’ve gone live. But a lot of these factors, a lot of these risk premier, they’re just not there. They’re not there when you actually try and test them in a real world and the answer I think is because this wasn’t science. This was cargo cult science.
The Golden Age Of Duration
Tobias Carlisle:
Last question and then I’ll let you go, but it’s sort of a bigger one. It was actually one of my first questions but it’s taken us this long to get there. You talked about a golden age in duration, a bull market in duration and you think that it might be coming to an end and then you’ve got some predictions for that. So what was the golden age in duration and what are the implications if that goes away?
Dylan Grice:
So we have a very inclusion economy in the 1970s and that was global phenomenon, that was a widespread phenomenon, and what happened as we know is the ’80s, ’90s… and overlapping years, the inflation continues to surprise on the downside. Continues to surprise on the downside. What that is, is it ultimately drove bonds to much higher levels… prices to much higher… Obviously, the longer the duration and the government bond the better the return. One of the kind of interesting things to me that I’ve discovered that I wasn’t fully aware of, and during this period if you go back and you use… data for returns, and this isn’t… You would need to be able to work to make sure that this is actually the right message onwards… would have the data. But if you go to the… premium, if you like, so the excess return of equity is over bond. It’s something from the 1870s to the present day, it’s something like 4.3 or something, 4.4%. That’s when your excess return for holding equity’s over bond. Right?
Tobias Carlisle:
Right.
Dylan Grice:
Since the 1980s that risk premium has actually been about 3.6. So the equity premium has actually been quite low during this period. The excess return of equity has actually been quite modest during this period. The real action has been in the bond market. The return to bonds have just been absolutely… and of course that carries everything with it. Right? Because equity is a duration asset. Right?
Tobias Carlisle:
Right.
Dylan Grice:
… infinite duration, but then there’s duration assets. The bond yields go up, your MTV comes down. So when bonds go up, then capitulations will fall. So this kind of MTV uplift that you got into equity from bonds was certainly, certainly very… but the real bull market in equity since the ’80s to my mind was actually a bull market in bonds and they are bull market in duration, and what you’ve seen over the last 40 years, ’80s, ’90s, north east and 10s, you’ve seen this bull market in all duration assets. Whether it’s public equities, whether it’s private equities, venture equity, government bonds, corporate bonds, all of these things have just been… You’ve just been in a phenomenal, phenomenal period of returns then these assets classes and it’s all driven by government bonds. You don’t need to predict a massive inflation problem to see that the likelihood that… It’s very difficult to see how that happens again. How do you get the same sale when bond yields go up from 20 to 2 over 40 years. How do you get that kind of structure or tailwind for duration assets? The honest answer is that you don’t.
What Will Work For The Next 40 Years In Investing Is What Didn’t Work So Well In The Last 40
Dylan Grice:
So when you don’t get any tailwind, best case scenario you get no tailwind. Worse cases scenario is that turns into a … because you use do see a tick up in inflation, you do see a tick up in bond yield, and everything goes into reverse. But the basic idea was that as pension funds run… allocate more to private equity, and to venture, I think is over. That game is over. That whole thing is over. So I think the whole duration bull market is over. Equity, bonds, corporate bonds, private equity. It’s just dead. There are not going to be any returns. For the next 40 years what’s going to work is things that didn’t really work so well in the last 40 years.
Tobias Carlisle:
What’s that commodities?
Dylan Grice:
That’s going to be our new fund.
Tobias Carlisle:
That’s great. I was going to see if I can pin you down for a prediction. I’ll get you back on in 10 years time and we can analyze that one.
Dylan Grice:
I do feel that… Again, I keep saying it. I…. You don’t have to be… It’s not all about… It’s not all about… It’s not all about equity risks. There are other risk premiums that you could take now. If you’ve got 40 billion and down, okay, then that’s a difficult one. That’s a very difficult problem to solve. I’m not sure that there’s that much that you can do, but if you can be small and nimble I just think there’s… This is why we sit on the business. It’s just incredible. It’s incredibly… to be an investor at the moment, I think.
Tobias Carlisle:
I think that’s a great nut to leave it on. Dylan, if I just want to get in contact with you, what’s the best way to go about doing that?
Dylan Grice:
Well, I’m kind of on… I guess Twitter. I mean, I’m kind of used to Twitter. Actually, I only really started kind of using it a few months ago, but I think it’s just…
Tobias Carlisle:
I’ll blow you up a little bit on Twitter then with this one.
Dylan Grice:
Twitter’s good. I don’t use it that much, but I do check it every few days. So it will work fine for me if you send something on LinkedIn. I mean, If you track down my Calderwood website. We have a couple of sample issues of our research and my email address is all over that. So you can go and have a look at some of the stuff that we’ve been talking about and read that, and maybe it’ll be interesting to you. Maybe it’ll just go straight into your trash.
Tobias Carlisle:
What’s your Twitter handle?
Dylan Grice:
@dylangrice.
Tobias Carlisle:
I’ll link that in the show notes, so if folks want to get in contact with that. Dylan thanks so much for your time. Any fighting words?
Dylan Grice:
No. This is actually my first ever podcast. So I kind of… I feel I’ve done quite well. Did it go quite well? Would you…
Tobias Carlisle:
That’s great. That’s great. Usually I tell folks after we sign off. Yeah, you did really well.
Dylan Grice:
This is a milestone. This is a milestone.
Tobias Carlisle:
Well, I’m very happy to have done that. Dylan Grice of Calderwood Capital. Thank you very much.
Dylan Grice:
Thanks so much.
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