David Lin – Fund Manager Made Billions (Uncut) 02-01-2025

Fund Manager Made Billions Shorting 2008 Crisis, Now Prepares For Next Collapse | Steve Diggle

The real reason for volatility is usually not technical, it’s almost always psychological. And I think it’s that market psychology or the psychology of particularly the most successful people in the market over the last few years, that is the single biggest risk to downside. This DeepSeek event on Monday is a perfect example.

And if people are worried by it, then I think they’re always being willfully blind to risks in the market. Market volatility spiked on Monday earlier this week following the DeepSeek-driven market sell-off. The VIX spiked by nearly 45 percent on the day, the biggest climb in months.

It’s since come back down. But could volatility come back? Well, our next guest made a fortune. His last firm made billions of dollars betting on volatility in 2007 and 2008.

And in 2010, he got out of the volatility hedging business. But now he’s coming back. We’re going to find out why and what he thinks is next for the markets.

Steve Diggle joins us today. He is a founder of Vulpes Investment Management. Welcome to the show, Steve.

Good to see you. Nice to meet you, David. Let’s talk about your strategy.

Now, you were involved with downside market hedging and you got out of that particular side of the business in 2010, you told me offline. It’s been 14, 15 years now. You want to get back into downside volatility hedging.

So tell me what changed in the last 14 years for you. Yeah, I apologize for my voice. I’ve been coming out of a cold.

I don’t normally sound this gravely. I was co-founder of a hedge fund based in Asia in 2002 called Archadis. And we were well known in 2007, 2008 for being very much the biggest proponents of what became famous as the big short.

We were very concerned about fragility and excesses in the marketplace, felt that there was a big risk, a systemic risk in finance and had a very big bet against it, a very big bet indeed against it. We were running about $2 billion going into 2007. And by the end of 2008, the market moves to 5 billion.

So we made about $3 billion for our investors in about 18 months during that period. When the Fed and all the other central banks rose to the rescue of the financial system and started printing an unprecedentedly large amount of money, we felt that would have a depressing effect on volatility because liquidity and volatility are essentially two sides of the same coin. When there’s a lot of liquidity around, it’s very hard to have high levels of market volatility.

There’s always someone to buy the tip. When you have a complete absence of liquidity, as you did famously in September 2008, that’s when volatility spikes. And we’ve been in this period for the last 10, 15 years where central banks have been continually producing gargantuan amounts of liquidity.

And eventually, that’s led to this very serious bout of inflation we’ve had in the first years of this decade. But we’ve essentially got two things going on now, which I think will lead to more volatility. One is the extent to which the central banks will feel comfortable continuing their money printing is limited because we’ve had this very significant 50-year high inflation in 2022.

And secondly, asset prices have now grown to a point, particularly in certain areas where they just look untenable. And a very high level of risk-taking behavior is now quite present amongst some of the most successful people in the market who feel invulnerable because they’ve had a tremendously good run with very few setbacks. So we combine a limit to what the central banks can be able to do, which is important with some very significant distortions in the market.

And against that, the cost of hedging has come down. It got very, very cheap indeed in 2005, 6, 7, and then famously spiked enormously high. The VIX went from 9 to 90 in 2008.

And although it’s nowhere near that now, and it’s nowhere near the lows, it is still nevertheless abnormally cheap given how strong asset prices have been. So we would say it’s now a good time to start revisiting the idea of downside hedging because the chances of volatility have gone up, but the cost of hedging has gone down. So before we talk about what’s coming up for the market, let’s just talk about 2008 for a minute.

So this is an article that features you and your firm at the time. Trader who made billions in 2008 returns to bet on market swings. That’s you, former hedge fund manager whose firm made billions during the global financial crisis and ready to pounce on volatility.

Once again, Steve Diggle’s family office, Lopez Investment Management, seeking up to $250 million from investors. Now, how did you do it? You made $3 billion between 2007 to 2008. What were the signs you saw back then? What were the strategies you employed to actually profit from the great financial crisis? Well, markets change and financial products are way more subject to fashion changes than even fast fashion.

At the time, there was a great deal of income seeking behavior by both investment banks and some private client, wealthier retail investors. And they were keen to just accumulate income in almost any way. And there were two or three very particularly successful products which were being sold by investment banks.

One was called credit default swaps. Essentially, it’s selling private insurance on public credit. And just like selling insurance, you get paid a premium for that.

Those prices became crazy low, crazy low. For the biggest banks who were at the time taking a great deal of risk, you could hedge like a million dollars of exposure to that bank for like 1000 bucks a year. So the leverage was just extraordinary.

So it’s like it was literally 1000 times. So they were just picking up a few basis points as their percentage of a percentage. That was one thing.

And that was probably our single largest bet. But the other thing is that people were still very happy. The market had been reasonably robust for a long period of time.

And people were happy to sell downside insurance, essentially put options on markets and on individual companies for prices that were historically the lowest we’d ever seen. So you combine a great deal of complacency about risk being expressed through very low prices, with what we saw was a systemically rising level of risk. And it wasn’t just the US housing market, though, that ultimately was the thing that brought it down.

But the global investment banks and the other banks were involved in really reckless risk management. I mean, my old firm, Lehman Brothers, when it went under in September 2008, was 60 times levered. So it had a cent and a half of capital for every dollar it had in the markets.

That leaves you with very little margin for error. So in 2008, the epicenter of the risk was in the banks. And we knew the banks pretty well.

They were our daily customers. We’d worked in them in the previous decades. And what we saw was just a huge amount of hubris centered in the bank.

So that’s why we thought it was a good risk reward buying these things, because the amount of leverage you got for the downside was really cheap indeed. So the people playing it from the other side had no margin for error. And when things started to go wrong, the price didn’t just rise a bit, it rose exponentially.

So that’s how we made so much money so quickly. Because if you take, for example, a credit default swap on Lehman Brothers, my old shop, and we were doing business with them, so we did have credit exposure to them. Other banks would sell you a credit default swap on Lehman for what’s called 25 bps, so a quarter of 1%.

Now, that 25 cents, when Lehman actually went bust, and they had the auction for those credit default swaps in November 2008, the closing price of that auction was $91.63. So you bought something for 25 cents, and then you collected $91.63. So this is about 400 times your money. So that’s how we made so much money so quickly in 2008, because the system blew up. Before we continue with the video, I’d like to tell you about a company that has evolved with a very critical metal.

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So although Lehman Brothers went bust and never actually paid us the money that they’d lost on their volatility bets to us, we collected a great deal of money on the other side. So it wasn’t just credit default swaps and credit. Volatility went sky high and stayed sky high for six months after 2008.

So anyone who was long volatility during that period made a great deal of money, and anyone who was short volatility, which the banks all were, lost a great deal of money. How do you feel about holding VIX ETFs or VIX derivative products? Yeah, look, the VIX is a very neat way and a very simple way to express volatility, but I don’t like it as an investment because it’s so short term, and it’s very volatile indeed. As you pointed out, when something goes wrong in the markets, the VIX can shoot up very quickly, but it has a tendency not to stay there.

So if you’re going to trade the VIX, you’ve got to be really very agile indeed. And I don’t think most retail investors have enough knowledge or enough access to how fast these things change to really successfully use that. I tend to advocate that retail investors should keep it simple.

And I would suggest that if people were either looking for a hedge or wanting to express a bearish view, they’d be better off expressing it through NASDAQ or S&P put options than they would be through VIX, unless they are literally watching markets all the time. Because a more traditional option will hold its value a lot longer. And if there is going to be a higher level of volatility in 2025, which we believe it is, you probably want to be holding something with a bit more duration other than just a 30-day expiring option, which is what most VIX ones are.

So you’ve explained your outlook for 2025, more volatility. You’ve explained the reasons why. Do you think the causes of more volatility will eventually materialize into a 2008 style kind of financial crisis, this type of rack? Could it happen again? Well, it could always happen, David.

It could always happen. Financial systems are psychological systems. And any crisis of confidence can turn into a runaway train, which is what happened in 2008, the classic run on the bank.

So you could never rule it out. But I think it’s unlikely for two reasons. One is the epicenter of risk now is no longer in the banks.

The banks have essentially come under government control. They’re never going to be leveraged as they were in 2008. I think that means that the banking system is an awful lot more robust than it was in 2008.

Secondly, the central banks are watching, particularly the banks, but being a general broad pillars of the financial system and stand ready to add liquidity a lot faster than they did in 2008. So our base case is not we’re going to see a 2008 financial crisis. I think what’s more likely is we’ll see a 2000 Nasdaq collapse style crisis.

You know, in 1999 and 2000, into early 2000, equities, especially tech stocks got very, very expensive, even more expensive than they are now. And we had a very major set off, you know, Nasdaq fell 40% in 2000. And it’s more likely, I believe, we believe, it’s more likely that if we’re going to get a super spike in volatility, which we don’t rule out, it won’t be a systemic financial crisis.

It’ll be centered in these areas that have had this, you know, extraordinary exponential rise in value. You know, Nasdaq was up 50% in 23 and 30% in 24. These are huge numbers.

And we’ve now got some gigantic companies sitting on relatively small or fragile revenues. And, you know, you mentioned DeepSeek, the DeepSeek effect on Monday. Well, you know, that’s a really interesting phenomena.

You know, Monday is a day in history, because no stock in the history of the world ever has lost as much money as Nvidia did on Monday. And when you actually look at DeepSeek, you know, it’s this tiny little company, it’s got less than 200 employees, it’s had less than $20 million going into its creation, it seems to be producing, I mean, no one had heard of this company on the last week. Now everyone’s heard of it.

I mean, it’s a relatively generic, it seems to be a relatively generic, chat GPT type AI bot. Now, people who know a lot more about this than me say it’s pretty impressive for the cost. But when a tiny little 200 person company can cause a gigantic, the most valuable stock in the world to lose $560 billion in a single session.

You know, if that’s not a sign that things are fragile, then I don’t know what is. I mean, you know, this is a very, very minor event in Nvidia’s history. And yet there it is, you know, it’s an historic day, the largest single loss of value in a single company in history of capitalism.

So, you know, we’re definitely getting more warning signs. And on top of that, it’s not just that we have, you know, a small number of stocks that have investors’ imaginations disproportionately and the valuations of them have run up to being very vulnerable to profit taking. But we also have a macroeconomic background with the new president in the United States who is, you know, seems to be in a hurry, has a fairly radical agenda, and is very unpredictable.

And it’s very unlikely that Donald Trump’s presence in the White House is going to reduce market volatility, it’s almost certain to increase it. So you combine those two things, an increase in macro volatility caused by policy changes, and policy unpredictability. No one knows what Trump’s going to do day to day, maybe even he doesn’t.

You know, with the fact that you’ve got these valuations that have, you know, risen sky high. And it creates a confluence of risk. But I just want to emphasize, I mean, we’re not in the prediction business.

We’re not in the prophecy business. We’re in the probability business. And what we’re saying is relative to the cost of where you can put your hedges on now, the probability that that’s going to make you some money, or act very usefully, you know, as insurance has gone way up from where it’s been in the last few years.

And this higher probability, is that based solely on the fact that valuations for these tech companies are very rich? Or are you starting to see a narrative change for why people may or may not invest in tech companies? Case in point, Nvidia, if we know that a Chinese company could create a chat CPT equivalent for a fraction of the cost without needing expensive Nvidia chips, investors don’t need to buy Nvidia stock anymore, right? That’s a narrative change. Yeah, but I mean, Nvidia is making a great deal of money out of this and well done to them. I mean, extraordinary successful, but it’s on 50 times earnings, David, and you know, that’s abnormally high.

Now, the S&P is on 25 times earnings, which is also abnormally high. So you know, what people are prepared to pay for normal earnings has become clearly, you know, a risk But it’s not solely down to that. I mean, you know, the US economy is in a robust shape.

And you know, it’s been it’s been very resilient. But, you know, it’s growing at what might be described as a normal pace, right? It grew up, you know, two and a half percent in 23, 2.8% in 24. But the stock market broadly, you know, went up 20% in each of those years, and NASDAQ went up, you know, 80% in those two years.

So, you know, you’ve got a reassuringly solid, you know, US equity performance, but a combination of three things, all of which look unstable to us have led to these, you know, excessive valuations. One is retail investors are very active in the US market, in a relatively small number of names, but very, very active indeed. And they’re, they’re day trading, they’re buying zero, you know, one day options, they’re speculating on margin.

So retail investors are a very significant factor in markets right now. Secondly, we’ve got a huge amount of technology, you know, large hedge funds or program trading funds that are trading, you know, a gargantuan amounts of stock on models, a lot of those models are very similar, a lot of them are momentum driven. So they tend to buy what’s going up, they tend to short what’s going down.

And then on top of that, we’ve had the very high level, very, very unprecedentedly high level of completely passive investing, which means that, you know, if Nvidia is the largest stock in the market, then every ETF that is matching the market is buying Nvidia. If Tesla is, is going up, then every ETF that’s matching the market is buying Tesla. And, you know, these, these three phenomena, large retail investment, significant algo trading, and very high levels of passive investing are just unstable, unstable.

So, you know, if you’ve got an S&P, you know, ETF, and Nvidia is down 17%, you’re selling on that day, because you have to because, you know, its percentage index is going down. So the risk of these imbalances has to our mind clearly gone up. And it’s not just one thing, it’s a confluence of things.

But the real, um, the real reason for volatility is usually not technical, it’s almost always psychological. And I think it’s that market psychology or the psychology of particularly the most successful people in the market over the last few years, that is the single biggest risk to downside, because people who’ve been buying Tesla and Nvidia and long crypto feel absolutely like smartest guys in the room, they have no interest in hearing from an old guy like me, saying that the risks are higher, because you know, what’s my performance been over the last five years compared to them. So you’ve got this absolutely bulletproof adamantine face in a relatively small number of assets that have gone up a great deal.

And that’s led to, you know, extreme risk taking behavior. I mean, there’s a, there’s a 3x ETF on Nvidia. You know, yeah, that was down 50% on Monday.

Why anyone would, I mean, you know, Nvidia is a very successful company, sure, by, you know, the stock, but why you’d want to be taking a 3x bet on a stock that’s already the largest company on earth, you know, that seems to me to be highly reckless. So that’s, you know, that’s the market background. Now, it doesn’t mean that we’re saying it’s definitely going to happen.

What we’re saying is, you know, that there’s going to be a serious crunch. What we’re saying is that the risk reward now is turned in favor of, you know, people who are looking at increased volatility at the very least, and probably significant downside at some point for some of these most popular assets. Well, here’s the, here’s a chart of the Nasdaq.

And people have been saying that it’s been overvalued at any given point along this graph. People have been making arguments, even when in 2022, that this valuation bubble was popping. And so my question is, why now? I mean, was there, were you thinking about getting back into the volatility, hedging business for a while, and you’re just executing it now? Or was it just timing-wise, a confluence of factors have merged now? Yeah, it’s exactly as you say, David.

It’s a confluence of factors now. You know, look, I mean, it’s been hard, you can’t see deep value in Nasdaq, and you haven’t been able to for some time. But you know, the most successful companies in Nasdaq haven’t necessarily been companies that have been making the most money.

You know, and Tesla is a particular focus for us in terms of market psychology. You know, a gigantic company with, you know, a pretty small earnings base, you know, a tough industry. And electric vehicles are a tough industry.

They came out with results today, you know, which show that that’s a tough industry, you know, the margins on their products are falling. But people just love Elon Musk, and they have a faith in him, that he’s going to somehow, you know, turn this struggling EV company, a successful company, but, you know, one that value bears no resemblance to its earnings base. And it’s a good example of, you know, here’s a stock that went up by 50% after Donald Trump was elected.

You know, that added $500 billion to the value of Tesla. Well, the whole value of General Motors is 55 billion. So it went up like nine times the entire value of General Motors, on a basis that somehow, you know, the fact that Trump and Musk these days are best friends, was somehow going to be to Tesla’s advantage.

Not obvious how that is the case, particularly given Donald Trump’s well known hostility towards electric vehicles, and the likelihood he’s actually going to cancel some subsidies. But anyway, it’s so you combine, you combine the significant rally with the falling cost of hedging. And then you add in the extra factor of a Trump presidency.

And you get a for what, for us seems like a market that has very little room to disappoint, mm hmm. With a significantly higher chance of unexpected shocks to the system. And this deep seek event on Monday, is a perfect example.

And if people aren’t worried by it, then, you know, I think they’re almost being willfully blind to risks in the market. And it’s interesting if you look at what’s happened in the past few days, you know, it’s down 17% on Monday, the biggest loss of any value of any company in history. Decent bounce on, on the Tuesday, you know, almost half of the loss back.

But in the last couple of days, it’s been sliding back and sliding back again, today. So you know, buying the bounce, which has been completely the successful thing to do. If you look at that chart of you out on NASDAQ, you know, buy every dip, buy every dip, you’ve done very well, indeed.

But, you know, eventually, following these rules, you’re gonna, you’re gonna come unstuck. And, you know, there’s an awful long way down before NASDAQ starts to look like good value. You know, the same is true of the S&P.

So, so, you know, like I say, I want to emphasize, we’re not predicting a crash. What we’re saying is that, you know, for the past many years, anyone who’s been involved in hedging their position has really been throwing good money after bad. And as a consequence, an awful lot of people, both professional and retail investors have given up.

We’re saying there are lots of good reasons now to revisit the idea of, you know, what your portfolio insurance is, if the market takes a tumble. So you said that there’s, we’re looking like 2000. So I have two follow up questions on that.

First, what happened in 2000 was a collapse of the NASDAQ by the order of 70-80%. Now, what’s happening this time? Are you, again, we’re not prognosticating here, but are we, is it looking like a similar collapse of the entire index? Or is there going to be a bifurcation of the index where certain stocks this time outperform and, you know, the not so good companies lose value? Well, you know, it’s, you know, the phenomena of contagion is, is interesting. And, you know, it was interesting on Monday, you know, we had a very bad day for NASDAQ.

It was down 3.14%. But the Dow was up on the day, which is interesting, because, you know, so contagion in the market so far doesn’t appear to be very high indeed. Now, in 2000, we had a market where everyone was in love with tech, especially internet stocks, a lot of infamously, you know, badly run, poor business propositions with very high valuations. Pets.com is the one everyone quotes, but there were plenty of others.

And when that confidence started to slide, there was no cash flow generation to come in and stabilize it. And there’s quite a lot, quite a few companies that also have very little cash flow generation that have done very well in this recent rally. Where speculation has been focused has been on a very small number of stocks.

And some of them are very successful companies. Indeed, you know, I mean, Apple is, is, you know, there’s a company with absolutely gargantuan, unprecedentedly strong levels of, of cash generation. So you’re not going to see Apple for 80%.

But you could see Tesla for 80%. You know, the company is, is worth $1.3 trillion. You know, Volkswagen’s worth 3% of that.

They seem to be pretty successful over the, over the years making cars. You know, so there is a huge amount of downside if people’s faith, you know, and that word is not one that really ought to come up in investing, investing should always be a, you know, an inter, you know, a skeptical, you know, a skeptical investigation of markets, you know, faith in Elon Musk has made investors very wealthy, but it’s, it’s, it’s a poor recipe for a logical approach to what, how they’re going to actually fulfill their expectations. So yeah, we, you know, there is no reason why the NASDAQ could not fall 50% and still be quite a long way from compelling, deep, you know, value.

If there were to be a change in mindset, or be a change in circumstances, you know, and then, you know, we would, we just don’t know what would happen if Donald Trump does start a serious tariff war, particularly with China. You know, China’s the second largest economy in the world. It’s very significantly integrated into the whole world.

You know, a large number of the world’s components and necessary ingredients come from China. You know, a serious tariff war with China would unleash, well, we don’t know, we just don’t know. Because, you know, we’ve never seen this tariff war.

Couldn’t the last Trump presidency be a president? We couldn’t use the last Trump presidency as an example of what could happen this time? Where’s the difference? Well, yeah, I mean, look, I, you know, I mean, we always said in the, during Trump one, that you had to ignore what he said, and just focus only what he did. And a lot of things that he did, we actually quite liked. I mean, you know, we’re capitalists, with, you know, the tax cuts at the time got a lot of abuse.

But, you know, they worked, and they were pretty successful. Now, there was a slow ratcheting up of economic measures against China. But two things.

One is an awful lot of that was just bypassed by re-exports. You know, an awful lot of Chinese components ended up in America via Mexico and Vietnam, and other places where they were just relabeled. And I think everyone knew that was going on.

It wasn’t like that was a secret. But the rhetoric was maybe more important than the actual results. If we’re actually going to see a true trade war, where Chinese components and Chinese exports are heavily taxed, and anyone who re-exports them is also heavily taxed, then that’s an unknown.

So, you know, we’re not suggesting that there’s anything, you know, we’re not anti-Trump. I don’t have a political agenda. I think, you know, people like Scott and Howard Lutnick are people, you know, I’ve met and are impressively smart, professional people.

It’s not a group of amateurs. I think you could well argue that, you know, the first Trump administration, you know, came into power with very little idea of what to do with it. As one wag said, you know, the early days of the Trump administration was the dog who caught the car, you know, having done it, they really didn’t know what to do with it.

Trump too is a lot more ideological. It’s a lot better planned. And the supporting team is an awful lot more professional.

Now, that’s a good thing. But it also means they can get stuff done in a way that the early days of Trump one couldn’t, because they, you know, because essentially, Trump didn’t really understand how the levers of power in Washington worked. Now he does.

So his ability to get stuff done is up. Now, I’m not saying that’s good or bad. But I’m saying that the prospect that unleashes unexpected consequences on a global economy are increased.

So Steve, there is a philosophy out there that it is not useful to bet against, or bet on volatility rather long term, because the Federal Reserve or other central banks will just step in to stimulate financial markets. The unofficial mandate of the Fed is to stabilize financial markets. Why bet against the Fed? Yeah, no, I think I think it’s a very good point.

And, you know, it was a very significant reason why we got out of the long volatility business in 2010. And there is no doubt that that is still true. And if there were to be a financial crisis, the Fed would, would be cutting rates.

And given where rates are, it’s got a lot of room, it’s got a lot of room to cut. There are two things I’d say about that, though. One is, you know, this, this very significant part of inflation in 2022, 23, will act as a constraint on all central bank money printing.

And secondly, if you know that’s going to happen, then that’s an event that you can, that you can play as well. So, you know, for the past couple of years, you know, I’ve been suggesting when people saying, you know, you know, how do I, how would I have a lot of downside bet? You know, I’ve said that it might be better rather than buying S&P puts, that you buy call options or long dated treasury securities. Because if there is a bout of market instability, and we see some stock market weakness, and the Fed comes in with 7,500 basis point cuts, that long end of the bond market, that 10 year and 30 year, they’re going to soar.

You know, the last time, you know, the, you know, 2008 to 2010, the 10 year went from like yielding 4% to almost zero. So, anyone longer that stuff, you know, made a great deal of money. So, it may be that the way you express volatility in a post 2008 way is not just a bet that asset prices will, you know, deflate, you actually might want to bet on inflation on things that would be caused by a slashing of rates.

You know, and the long end of the US treasury market is a good example. So, I think the Fed put is a reality. But the Fed put is not there to protect speculators in single stocks, or the magnificent seven.

It’s there to protect the economy. And there’s no reason as we saw on Monday, I’d want a trillion dollars wiped off the value of companies in a single day on a tiny little event. There’s no reason why we couldn’t see several trillion dollars valuation come out of a narrow group of stocks without provoking any Fed response.

It’s only if it became broader and more risky to the economy that we’d actually see the Fed necessarily step in. And with the strong US economy, and clearly reduced but not dead inflation, the Fed’s going to want a very compelling reason to come in and be aggressive. So, yeah, I’m not going to disagree with you.

I think the Fed put is a reality. And it’s going to be a reality for a long time yet. But that doesn’t mean that there aren’t ways, successful ways of incorporating that into your hedging strategy.

So, what can retail investors do for hedging? You mentioned that the VIX is probably not ideal for many retail investors. You know, people don’t trade options, put options long dated are not ideal either for similar reasons. What can they do? So, there’s only been twice in the history of the S&P when the yield on cash was higher than the yield on the market.

And the last time was 2000. So, you know, that in terms of an EP, I don’t mean the actual cash yield, I mean, in terms of the EP, but you’ve essentially got an S&P at 25 times earnings. So, you reverse 25 times, you turn the E into a P, you know, that’s essentially, you know, an expected return of about 4%.

Well, cash is yielded more than that. So, the best, the single best way a retail investor can hedge himself is to raise some cash. And if he’s been broadly invested, he’s had a phenomenal run.

And the best way is just simply to lock in some profits and raise some cash. Now, that does three things for you. One is, say right now, cash is accretive.

It’s actually going to yield you more than twice the actual cash yield of the S&P. And in fact, more than the EP. So, you know, being in cash is not the painful place it’s been in the past, right? I mean, it’s yielding significantly more than inflation.

And let’s say, is actually yielded more than the S&P is now. So, raising cash is probably accretive to your portfolio. Secondly, it relieves you of this financial, of significant psychological stress that if you’re fully invested and the market’s falling, you know, what do you do? You know, do you cut your losses? It’s psychologically very difficult to do.

When you’ve got a cash buffer, you’re actually going to be thinking a lot clearer. And also, you know, if we do get a serious crisis and prices fall a lot, then if you are going to buy the dip, which in 2009 was absolutely the right thing to do, then if you’ve got some cash, you’re in a much better position to do that than if you’re struggling to, you know, to deal with losses. So, you know, for retail investors, particularly if they’re not active traders, raising some cash is the best hedge of all.

It’s the easiest thing to do, it’s psychologically gratifying. Right now, it’s actually, as I say, cash accretive. So, I’m not the worst thing in the world just to have, you know, an increased cash buffer.

I’m guessing you’re not worried about inflation then that will yield a negative real return on cash. Look, I think inflation is not dead. And if we’re going to have a tariff war, that’s inflationary.

You know, I mean, America doesn’t make everything it consumes and it can’t. It imports, you know, a large number of things, a huge number of things from Canada, not least. You put 25% tariffs on Canadian products, you’re going to get inflation in the building industry, for example.

You know, you put 25% tariffs on Mexican goods, you’re going to see consumer inflation in America. So, the risks of inflation are still there. If you see the Fed aggressively cutting rates in response to market weakness, then that’s going to be inflationary as well.

So, I am worried about inflation because if you really want the nightmare scenario for global markets generally, but the US market especially, it’s inflation that’s too high to allow the Fed to cut. But an assumption in markets that the Fed is going to come out and help them, and it’s not coming because the Fed feels constrained by spiking inflation. Now, if those two things were to happen at the same time, then you really could have, and I say this is not my base case, but it’s not an impossible scenario for those two things to be happening at the same time.

And all of a sudden, the Fed put, which everyone is relying on, is not coming in because Powell feels that the risks of stoking inflation are too high. You know, and inflation has not been at 9%, which is where we got to in the summer of 2022, since the 70s. And the long term damage of that can be seen.

It’s very, very significant. So, I’m not unworried about inflation. Overall, inflation between 2% and 3% is not going to erode confidence in the financial system.

And that’s roughly where we are now. But sticking on the downside, yeah, I wouldn’t discount it at all. I cut you off earlier.

What are you doing to hedge against inflation that’s different from what the retail crowd could do? Well, you know, I mean, one of the things that we did… Sorry, not inflation, volatility. Hedge against volatility. That’s what I meant to say.

Hedge against volatility. Yeah, I mean, so we’re restarting a fund. It’s what me and my team have done for a living.

I mean, we have the luxury of, you know, being financial professionals. You know, we’ve been doing this for a very long time. And we have access to instruments that most retail investors don’t have.

So, there are spots of volatility that look cheap. The downside looks quite cheap right now. I don’t think there’s anything wrong with buying a 90% one-year S&P put right now.

It’s going to cost you about 2.25% of the S&P. That seems an okay price. It’s not cheap, but it’s certainly not expensive.

And I think, you know, the chances that spikes higher at some point this year are pretty good. I mean, for the market to crawl 10%, it’s only back to where it was in September. And that could happen at any moment.

I think that some exposure to the bond market is a good idea because I do think the market, you know, the bond market will rally aggressively in the case of a big fall in equities. You know, cash, once again, looks like a very sensible hedge. It’s not something we’d hold in a fund because it’s not what we’re paid to do, but it makes sense in any portfolio.

But, you know, a lot of the things that we would – we would be expressing our own fund views are just not available to recent investors. Things like outperformance options or underperformance options or worst-ofs or lookbacks. You know, there’s a whole panoply of over-the-counter products which banks are trading in again, which can give people who are, you know, in the industry some very significant leverage exposure to the downside.

We want to finish off on some things that you do like and are invested in. So, take a look at your opportunities on your homepage here on the website, Full-Pace Investment Management, Life Sciences. You like biotech, particularly biotech companies based in the UK.

Can you elaborate on your thesis here? Yeah, sure. I mean, biotech for us is something of a passion. And it’s been something that we’ve been invested in for quite a while.

I’ve now relocated from Singapore, where I was based for a long time, for over 20 years, to Oxford because we are significantly invested in quite a number of Oxford University spin-outs. And we got involved in that more than 10 years ago. Right now, it’s been an absolutely dreadful period for biotech.

You know, the difference between growth in biotech and growth in tech could not be wider. You know, tech has been extremely strong. And we’ve done pretty well out of our tech investments.

But biotech has been in this terrible bear market since COVID. And we’ve got, you know, really world-class intellectual property that could be worth hundreds of millions, if not billions of dollars lying around for, you know, tens or even single millions of dollars in quite a few companies. Because there’s just been this complete collapse in confidence.

It strikes us right now that there is literally never been a more advantageous time to invest in biotech generally. Valuations in the UK, as they are broadly, are much, much lower than they are in the US. At least half, probably more than half.

And yet, you know, these are global products, right? I mean, you know, healthcare is a global industry. It’s not a local industry. You know, if you have a product that’s going to address osteoarthritis, it’s not only available in your own market, it will be available globally.

So, and it’s global pharma companies that will be buying these. So, we see a great risk reward in biotech right now. Now, the reason why we’re specialized in the UK is partly for value, but it’s also partly because it’s what we know.

You know, this is here, this is our backyard. We’re immersed in the local infrastructure of companies spinning out of Oxford University. So, being on the ground, we get, you know, a very good and very close look at what comes out of there.

And between Oxford, Cambridge, and London universities, those three represent about over 50% of the university creation of biotech. And virtually every biotech comes out of a university. So, you know, we get a pretty good exposure to that market.

So, the risk reward right now for us strikes us as being unprecedentedly good. It’s a tough business, because it’s a long path to cash, much longer than tech, because you’re dealing with reno stuff that goes in the human body and can affect their health. So, the regulatory environment is tougher, but the rewards are there.

And right now, the cost of picking up world class IP has never been cheaper. Okay, excellent. Thank you very much.

Where can we learn more from you and Volpe’s investment management? Yeah, I mean, look, we have a website. I mean, we largely manage money for professional investors and family offices. But most of our views are there on our website.

And, you know, I’d be delighted to, you know, come and revisit this idea and see where we are maybe in six months’ time to see if our prediction that markets are going to get choppier is coming true. All right, we’ll keep tabs on that. And then we’ll have you back soon to discuss market volatility in action.

Thank you very much, Steve. And be sure to follow Steve in the links down below. Appreciate it, Steve.

Great to meet you, David. Great to meet you as well. And thank you for watching.

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