Dylan Grice: Witch Hunts, Inflation Fears, and Why I’m Bearish in 2013

For someone who started his remarks proposing to “kill all the economists,” Dylan Grice can wax surprisingly sentimental, with a fresh, human take on monetary policy that leads him to some worrisome conclusions. Making a case for gold, cash, and other safe havens, Grice said the biggest threat to investors today is a problem that has plagued societies throughout history – mistrust.

Grice, who is leaving Societe Generale’s Global Strategy Team to take a buy-side position, argued that recent bouts of quantitative easing (QE) and other “monetary experimentation” in the world’s major economies may be sowing the seeds for a worldwide breakdown of social cohesion – which, among its unsavory consequences, could translate to a big spike in interest rates. He delivered his remarks – part market commentary, part history lesson, and part philosophy seminar – last week at a strategy conference hosted by his soon-to-be-former employer in London.

The core of Grice’s thesis was his view of money: He doesn’t define it merely in technical terms, as a unit of exchange or a store of value, but rather as something deeper. “Next to language, money is the most important way that we communicate with one another as a society,” he said. “It’s how we implicitly express our values: the value of other people’s labor, the value of what other people have, and the extent of exchange that we have with each other.”

As a result, Grice said, questions of trust are “fundamentally embedded” in the marketplace. “You’re not going to exchange with someone if you don’t trust them,” Grice told his audience. “You work for your employer because you trust them to pay you. You get into a airplane because you trust the pilot not to crash. It’s trust that moves the economy.”

This feature of money, Grice warned, is why inflation can have pernicious and unseen effects, and that’s what Grice is worried about today. “You cannot have this trust if you do not have money that you can trust,” Grice said. “When you devalue money, you devalue trust.”

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Related links:

Dylan Grice Is Heading To Zurich To Manage A Fund

DYLAN GRICE: Here Are 22 Books Everyone Must Read

Gearing up and buying back

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In the article above, Grice says:

“With quality equities, gold, some cash, you have – I think – a reasonably robust portfolio of safe havens, which will actually do reasonably well for you.”

I was speaking with a friend this weekend who, like me, shares many of Grice's concerns. When trying to think of a barbell-type of approach to take, this is what popped into my mind at the time, which is similar to what Grice mentioned:

• 20-30% in quality stocks that can hold up in tougher times and preferably ones that pay a dividend.
• 20-30% in the DoubleLine Total Return Bond Fund, or a diversification among other similar funds (any suggestions?) that focus on the mortgage market, keep short duration, and are also worried about inflation.
• 10% in gold (just in case).
• 30-50% cash, patiently awaiting for fat pitches, lower market valuations, and rampant fear.

Seems like a fairly robust allocation to me.