Dylan Grice, Calderwood Capital – Popular Delusions, The End of Duration & Esoteric Investment Opportunities | #406

Episode Summary

Executive Summary: Dylan Grice argues that a 40-year “duration bull market” in bonds and other long-duration assets has inflated valuations across stocks, real estate, private equity, and credit, making conventional 60/40 portfolios vulnerable. He advocates a “cockroach portfolio” built from simple, diversified exposures and highlights niche, underfollowed strategies—mortgage prepayments, reinsurance, uranium, biotech, and SPACs—as potential sources of uncorrelated returns.

Main Topics: The end of the duration tailwind (Priority: 5/5): Grice explains how falling interest rates from the 1980s onward boosted nearly all major asset classes, and warns that if rates rise materially, the same assets could suffer broad valuation compression. The cockroach portfolio (Priority: 5/5): A simple, know-nothing portfolio split across cash, bonds/credit, gold, and equities, designed to survive multiple macro regimes rather than maximize returns in one regime. Why diversification is hard (Priority: 4/5): He argues true diversification requires holding assets that behave differently from equities, which often means being contrarian and leaving mainstream allocations behind. Unconventional return streams (Priority: 5/5): Grice outlines niche strategies that can offer uncorrelated returns, including mortgage prepayments, reinsurance, CAT bonds, trade finance, and correlation/credit-related trades. Uranium, energy, and nuclear renaissance (Priority: 4/5): He revisits his bullish uranium thesis based on years of underinvestment, a collapsed commodity cycle, and structural energy-security demand, especially in China and India. Biotech and SPAC dislocations (Priority: 3/5): He sees opportunity in sectors where valuations have collapsed and capital has fled, but only for investors willing to do deep fundamental work rather than buy broad ETFs. Macro distrust and regime change (Priority: 4/5): Grice worries the world is moving from a cooperative global order toward a more fragmented, distrustful phase, which makes resilient portfolio construction even more important.

Key Arguments: The last 40 years created an exceptional tailwind for duration assets because interest rates fell from very high levels to near zero. A rise in rates from low levels creates asymmetric downside for valuations across stocks, bonds, credit, private equity, and real estate. A resilient portfolio should prioritize survival and robustness over forecasting and optimization. True diversification requires exposure to return streams that are genuinely different from equities, which usually means contrarian positions. The cockroach portfolio is a simple benchmark that can outperform many mainstream portfolios on a risk-adjusted basis across decades. Most investors confuse familiarity with safety; unconventional assets can be less risky than they look if the embedded risk premium is real and understood. Mortgage prepayment risk is a legitimate, paid-for risk premium that is difficult to access without specialist managers. Reinsurance and CAT bonds offer non-correlated, short-duration risk premia tied to weather/geological events rather than financial markets. Uranium was attractive because the industry was starved of capital after a long bear market while nuclear demand remained structurally strong. Biotech and SPACs may offer opportunity after major valuation resets, but only through selective bottom-up analysis, not passive indexing.

Data Points: Duration bull market period: ~40 years - Interest rates fell from about 20% to near zero, driving returns in bonds and other duration-sensitive assets. Government bond performance vs equities: Total return on government bonds over the last 40 years exceeded the annualized total return of equities over the previous 100 years - Used to illustrate how extraordinary the bond rally has been. Cropland loss: ~4.8 acres per minute - AcreTrader ad copy about farmland scarcity and urbanization between 1997 and 2022. AcreTrader minimum investment: $15,000 - Ad copy describing passive farmland access for investors. Portfolio weights in cockroach portfolio: 25% each - Equal-weighting across four assets when no information is known. Market cap of uranium sector at peak: ~$150 billion - Grice describes uranium as having been a huge sector before the long collapse. Market cap of uranium sector in 2019: ~$7 billion - Illustrates the scale of the bear market in uranium equities. Market cap of uranium sector today: ~$50 billion - Grice notes the sector has rebounded but may still be early in the bull cycle. Chernobyl death estimates: Few tens to ~50,000; likely ~3,000 to 5,000 - Used to compare perceived versus actual nuclear risk. Hydro disaster death toll example: 147,000 deaths - A dam collapse in China cited to show hydro can be far deadlier than nuclear in practice. Biotech performance horizon: ~5 years down - Grice notes biotech has lagged massively despite a broad stock bull market. SPAC/biotech no-return period: ~7 years - He says some biotech ETFs have seen nearly seven years of no returns. Fortescue Metals stock price: ~45 Australian cents at entry - Example of a hated, discarded investment that later performed extremely well. Fortescue appreciation: ~$18 after split - Illustrates the magnitude of the winner in old-share-price terms. Gold investor sentiment poll result: <5% in real assets - Meb references a Twitter poll showing very low allocations to real assets like commodities/TIPS/real estate.

Pivotal Quotes: "What rose furthest in the golden age, government, corporate bonds, public equities, private equity, venture, and real estate will fall furthest in its passing." — Dylan Grice: Used to summarize the valuation risk embedded in the end of the duration supercycle. "Suppose you didn't know anything. How would you build a portfolio?" — Dylan Grice: Introduces the logic behind the cockroach portfolio as a know-nothing, survival-first allocation. "Build a portfolio which is going to be robust to your undeniable ignorance." — Dylan Grice: Core philosophy on portfolio construction amid macro uncertainty and forecasting limits.

Implications: Listeners should expect lower forward returns from traditional balanced portfolios and consider broader, more contrarian sources of diversification. For allocators, the message is to prioritize resilience, liquidity, and uncorrelated return streams over familiar but crowded assets.