From The Market.ch, February 17:
Dylan Grice, co-founder of Calderwood Capital, sees frothiness all over today's financial markets. He thinks valuations in hot sectors like electric vehicles are insane, but he sees investment opportunities in areas like uranium and oil.
Dylan Grice is concerned. The co-founder of Calderwood Capital and former strategist at Société Générale sees smaller and larger bubbles emerging all over financial markets. «There are clear signs of excess», says the author of the monthly «Popular Delusions» report.
Still, Grice characterizes his current investment stance as reluctantly bullish: «Central banks will overcook the economy, everything is set for a few years of overstimulation in monetary and fiscal policy.» This won't end well, he adds, but until then the equity market boom could continue.
In an in-depth conversation with The Market NZZ, Grice explains how investors could navigate the current environment and where attractive investment opportunities still exist. Grice is particularly bullish on the uranium and oil & gas sectors.
Mr. Grice, in your latest Popular Delusions report, you call yourself «reluctantly bullish». Why?
I like to feel that if I’m underwriting risk, I’m getting well paid for it. And right now I don’t think that’s the case. It doesn’t really matter which segment of the market you look at, risk premia are almost universally tight. Risk premia are back to where they were pre-Covid, in some cases even tighter, and they were already unattractive before.
So if you put on your value investor hat, you can’t see any value?
Generally not. There isn’t any broad value except for some specific pockets. Back in March of last year, we were very bullish. To be clear, that was not because we thought we could identify the bottom, but because we could see panic and dislocation. It is a core belief of mine that you have to take the other side of a market that is in panic selling mode. That’s when you have to be buying.
Many investors were surprised by the strong recovery that has taken place since. What did you make of that?
We remained bullish in the months after March, because you could see that everyone hated the rally. Twitter was full of people who were angry. Angry that the Fed had injected money into markets, angry that the Fed had created all sorts of distortions. All of these arguments, which I have quite some sympathy for, were irrelevant to the investment case. As an investor you must not blind yourself with what you think policy makers should do. You must look at what policy makers are doing, and instead of making a moral judgement on whether that’s good or bad, you have to understand what the consequences of those policy actions are. This anger clouded the judgement of many investors. So, I was happy to be bullish throughout this period.
What has changed now?
My reluctance is because I feel it’s all incredibly frothy now. There are signs of excess, and yet we are still in the middle of a pandemic, we haven’t even started the economic recovery yet.
What signs of excess?
I think that this GameStop fiasco is kind of an indication of wider problems. Also when I look at the exuberance in hot sectors like electric vehicles, which investors seem to forget is a very capital intensive business. Valuations there are crazy, this is getting demonstrably insane. I would completely avoid that. This is not the kind of market which a fundamentally value driven investor should be bullish of.
Is the boom in SPAC issues also a sign of excess to you?
I don’t have an opinion on the SPAC market, I just don’t know enough about it. I know some very smart investors who are investing in it. But I can also see that this is a market which is potentially designed to fuel excesses, given the fact that investors give SPACs money without asking any questions. It reminds me of the Initial Coin Offerings a few years ago. The SPAC sector has the potential to become an enormous bubble, even if it isn’t one at the moment.
Despite your reluctance, you say you are bullish. Why?
Because I think central banks are going to overcook the economy. Ever since Jackson Hole in August, Fed chairman Jerome Powell has made it very clear that they are going to push the economy harder than they have in the past. Powell, in several speeches, has emphasized how devastating it is for low income communities to have high unemployment. The Fed considers it its mandate to make sure that these communities have jobs. Therefore the Fed believes it is doing a good thing by running the economy harder than it has in the past....
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