Podcast Transcript: Alberto Gallo on Investor Complacency, Crisis Risks and Fed’s Dilemma
- By Bilal Hafeez
- Sign-up to discuss on Slack
- 40 min read
This is an edited transcript of our podcast episode with Alberto Gallo, published 9 June 2023. Gallo is Chief Investment Officer and Co-founder at Andromeda Capital Management. Prior to that, Alberto initiated and ran the Global Credit Opportunities fund at Algebris Investments. Previously, he ran macro credit research at RBS in London, and served in senior research roles at Goldman Sachs in New York, Bear Stearns in New York and London and Merrill Lynch in London. In this podcast, we discuss transition from sell-side to buy-side, creating an edge in investing, why have we not seen more crises so far, and much more. While we have tried to make the transcript as accurate as possible, if you do notice any errors, let me know by email.
Introduction
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Now, onto this episode’s guest, Alberto Gallo. Alberto is the chief investment officer and co-founder at Andromeda Capital Management. Prior to that, Alberto initiated and ran the Global Credit Opportunities Fund at Algebris Investments. And previously, he ran macro credit research at RBS in London and served in senior research roles at Goldman Sachs in New York, Bear Stearns in New York and London, and Merrills in London. Now, onto our conversation. So, greetings and welcome, Alberto. It’s great to have you on the podcast show.
Alberto Gallo (01:30):
Thank you. Thank you for having me.
Bilal Hafeez (01:31):
Now, before we go into the heart of our conversation, I always do like to ask my guests something about their origin story. So, could you tell me something about your background, what you studied at university? Was it inevitable you’d end up in finance and some of the key milestones that you’ve had until you’re where you are now?
Alberto Gallo (01:48):
So, I’ll keep it short. I was born in Naples in the ’80s during the time where Maradona was playing, and I remember probably Naples was a very poor football team, but there was this idea that you could succeed. And at very early age I realised that I had to leave to find my fortune. And so, I left at 14, I went to the Navy. I was a very keen sailor and I went to school pretty early. I remember-
Bilal Hafeez (02:18):
Leaving for the Navy at 14, that sounds early to me. Is that how it’s done in Italy, you have the option of joining at that age?
Alberto Gallo (02:25):
They definitely made an exception. And I went to school early, and so, I left. And the Navy was a great life lesson because it teaches you to learn your different cultures. It teaches you to explore the world, and also that to lead you have to serve first.
And then, I went to university, I did economics. I always wanted to understand the world and not only position for changes in the world, but also eventually trying to improve some of the policy and the environment for people around me. For a while, I studied economics and then did research in US banks, first briefly New York, then in London, then I moved to New York again for a number of US banks. I started at Merrill Lynch, then I worked with Goldman and then I went back to Europe.
And eventually we always wanted to turn research into an investment process. We launched a fund in 2016, we run that fund in an external asset manager. And finally, in 2022, last year, we launched our own firm, which is called Andromeda. And the name is after a woman that fought against a dangerous sea monster. It’s the figure of someone that is contrarian, potentially, against the odds, winning. And it’s also in our symbol, which is modelled after the Fearless Girl on Wall Street.
Bilal Hafeez (03:54):
Okay, that’s great. And so, you were doing research and then you transitioned to the buy-side. What was that transition like?
Alberto Gallo (03:59):
I think that there is a lot of intellectual beauty in doing research and it’s very stimulating, but the pitfalls of doing a lot of research is that you can fall in love with your ideas. And there’s always a difference between making money and being smart. So, you can be smart and lose money. And here we have learned in our process it’s very important to understand what the market technicals are, what positioning is and when to initiate a trade and how to size it.
We want to make money first and also understand the world, but it’s a slightly different priority. But it’s higher satisfaction to see ideas being rewarded in an investment vehicle. What trading teaches you though, is how to be wrong. 50% of the time, and hopefully less than that, we are wrong every day and it’s definitely a life lesson, how to deal with your losses, how to be wrong, how to resize positions, how to be able to make money even if your views are not right at that time. So that’s, I think, the biggest lesson that I’ve learned from research to trading.
Bilal Hafeez (05:17):
And you talk about process. Your process you have at Andromeda, can you talk a bit more about it? I mean, is it systematic, is it qualitative? How would you describe the process?
Alberto Gallo (05:29):
Andromeda is a credit macro fund and we launched in Q4 last year. We have a combination of fundamental and quantitative methodology, but essentially, there’s three things that we do differently compared to the typical credit fund. The first one is we start from the top down. So, we model the economy and inflation, but then we go down into the sectors and trying to identify all the catalysts that are changing the world, but more importantly, what are the winners and losers in the credit market?
The second thing we do differently is we always look for positive convexity. So, a lot of people in the credit world are looking for yield and they target a certain amount of yield, they buy bonds and then they do risk management after that. While we start with risk management and we try to understand first, how much can something gain or lose? And we always look for things that can gain at least more than one time the potential loss on a 12-month horizon.
And finally, we’re pretty quick. We’re not a 40 people team. It’s a strategy where both models and our methodology give us signals. Our book is very liquid. So, speed of execution is very important to us, especially in an environment where there is more frequent vol events, more frequent tail events, but they’re also more short-lived, as we’ve seen this year with Credit Suisse and Silicon Valley Bank.
Fed Could Hike to 6%
Bilal Hafeez (06:54):
Yeah. And actually on that, I mean, one of the surprising things has been that we’ve had so many Fed hikes or central bank hikes last year and rates have remained quite high, yet we haven’t had that big blowup in markets. So, we’ve had those one or two day blowups or one week blowups and then things normalise. What’s your reading on that?
Alberto Gallo (07:15):
So, this is a very open question, it leads to a lot of other discussions, but I would say first is, what are central bankers trying to achieve? The consensus among central bankers a year ago was that inflation was probably transitory. Today, this has been proved wrong, inflation is coming down, but it’s stickier. There are second round effects and the behaviour in the labour market is still very strong. Consumers are still spending.
So, inflation’s coming down, it is sticky. And as central banks hike rates, some things are breaking. So, we’re starting to see that there is a trade-off between price stability and financial stability. In the words of Christine Lagarde, ‘There’s no trade-off between price stability and financial stability.’ But we know that there is and there is at some level of rates, there is a level of rates at which things start breaking.
We think that the Fed will not cut, we think the Fed will have to hike more towards 6% into year-end. We’re not too worried about an imminent recession and we’re more worried about sticky, persistent inflation from the demand side. So, why is inflation sticky? It’s coming from fiscal spending, it’s coming from government spending. There is no mention of austerity anymore. I mean, when’s the last time you saw austerity on the front page of a newspaper? No one in any government has the courage to even propose austerity, even though government deficits are pretty high.
So, inflation is sticky also because of that. And because money is not being deployed through tax cuts, because government money is going to the bottom 50%, who are the actual people that spend it. So, inflation is sticky. The question now for central banks is, do you try to keep credibility and stick to your target and still continue to hike even though inflation is lower, even if it’s 4% like in the US? Or, do you pretend that inflation is going to suddenly disappear? Or, blame the war, blame COVID, blame the weather, like the Bank of England?
So, it’s a matter of willingness and ability. The Fed is definitely able to hike, the economy is strong and it’s also willing to hike. So, we think they will continue. The ECB is definitely willing to hike and it’s also relatively able to hike. The economy is in strong shape. There’s some weakness in manufacturing, but generally speaking, the Eurozone economy is in good shape.
The Bank of England, unfortunately, is not very able to hike. They’ve been trapped by leveraging the public and private sector that comes from legacy policy programmes like the Help to Buy, or support to spending, very high deficits that have brought the UK to very high debt levels versus historical standards.
So, generally, I would say that central banks definitely … Is inflation transitory? No, inflation is sticky. Do central banks want to keep credibility? Definitely, the Fed and the ECB want to do that. As a result, some new crisis might appear in the market, but why has not something big happened yet? And the answer is that short-term interest rates are not enough. They’re not enough to create tighter financial conditions.
Most households, 98% are still funding with vintage mortgages that they took with very low interest rates in the US. If you’re Microsoft or Google, you can fund at Treasury plus 10 basis points, sometimes even flat, and you can invest in T-Bills at 5%. So, inverted yield curves mean that many market participants can essentially still be fine, in some cases even create a carry trade. And as a result, to see real financial tightening, we need to see also the long end of curves going a little bit higher. What is the elephant in the room? Quantitative tightening and the exit from yield curve control by the Bank of Japan. So, those are the elements, the policy decisions that will potentially drive a real tightening in financial conditions and bigger things to break in the financial system.
Bilal Hafeez (11:24):
And when you talked about the trade-off between inflation and financial stability, in the case of the Fed, they acted very quickly when we had the regional bank crisis, in terms of setting up new facilities. Was that them trying to lean towards financial stability or do you think that rescue package was separate from monetary policy?
Alberto Gallo (11:45):
Someone called it quantitative teasing. So, the short answer is, the Fed still wants to be hawkish, but they tighten and when something breaks, they stop and they give a bit of sugar to the market. But policymakers have been smart. I think they’ve learned from the 2018 experience that if you start hiking very strong gear, right away, things break and then you have to stop the hiking cycle. So, I think policymakers here are aware that if something too big breaks then inflation can go out of control and therefore, they want to hike slowly. And if you climb a mountain more slowly, maybe you can go higher up the mountain. That’s one of the reasons why we see higher for longer being the theme here and we don’t see the cuts happening anytime soon in the US.
Now, obviously, if you had a large-scale crisis like a Lehman crisis, then you could imagine Fed cuts happening. But we need to remember that there’s still plenty of liquidity in the system. Until a few quarters ago people were buying JPEGs for a few million, and this is not happening anymore. But there is the expectation in the market that interest rates are high today, they won’t be high for a while. And if you picture a world with 5% interest rates across the yield curve, so not just today but also in two-year, five-year, 10-year, there’s a lot of things that need to reprice. Think about private debt or private equity or other liquid assets.
So, that hasn’t happened yet. And I think that central bankers are aware of the fact that we had 15 years of QE and low interest rates and essentially a strong anesthetic being injected into the patient. And so, if you start running, you’re likely to fall down flat on the ground. So, they’re trying to hold the hand of the market into this higher rate environment.
Bilal Hafeez (13:45):
Just on that, you were saying that what you almost really need is the whole curve to go up towards 5%, the longer end, the mid-part of the curve, and so on. And one way of doing that would be quantitative tightening. So, why do you think they haven’t done more aggressive quantitative tightening, like reduce the size of the balance sheet?
Alberto Gallo (14:02):
What I’m saying is that would be really the tightening event. Obviously, we’re not going to see the 10-year jump into 5%, but if we see the 10-year going above four or four-and-a-half in the US, that can trigger serious volatility. So, that’s why I’m saying that’s the elephant in the room because there’s still a lot of vintage, long duration positions across financial institutions, but also non-bank financials. And there’s also a lot of business models that rely on cheap funding. If we think about all the REITs, other large names that essentially are SPVs like SoftBank, which in this case they would be hit on the asset and liability side. There’s a lot of business models that rely on persistent cheap funding.
In emerging markets, think about some of the countries that funded at 5%, now they have to pay double digits. So, what if we are in a non-mean-reverting world? This is, I think, the most important question for an allocator today. ‘Are we going back to the pre-COVID world or is it a different world?’ If you think it’s a different world, then maybe there’s a lot of things that can change. Some capital structures might not be sustainable and policy might not be driven only by central banks in the future. So, I think that’s the elephant in the room. We’re not forecasting the 10-year to go to five, but we’re definitely very wary of situations where inflation expectations might de-anchor. And I think the UK is a case in point here.
Default Rates Starting to Rise
Bilal Hafeez (15:27):
And in terms of the credit cycle, so in terms of this market mis-pricing, it’s the same thing to some extent about what the credit market is pricing, this fairly benign outcome. We haven’t really seen defaults pick up. And that’s, I suppose, partly because of the strength in the US consumer, the fiscal, and so on. Even though last year we had a big equity correction, credit has behaved relatively well.
Alberto Gallo (15:51):
So, our models are estimating the high-yield default rate to pick up going towards three, three-and-a-half percent in Europe from 2%, and towards four-and-a-half, 5% in the US. So, there is a more meaningful pickup in US defaults coming.
Bilal Hafeez (16:08):
For context, how much does it normally go up to in recessions?
Alberto Gallo (16:12):
But in a recession, default rates have historically gone up to the high single digits, sometimes low double-digit levels, so they are still relatively contained default rates. And this reflects in part the fact that corporates have reduced leverage in the past few years and extended debt maturities.
Credit spreads have been volatile this year. Today they are pricing … Very benign environment, especially in the US against this backdrop. So, when you’re thinking about fixed income, the government world and the risky bond world, you really want to be selective here. In government bonds, generally there’s not many things we like. Most long end parts of curves are yielding below inflation. Even risky bonds like BTPs have a very tight spread. And essentially, again, there is very strong dovish bias in rates markets with the expectations that yields will come down or that if periphery spreads in Europe will widen, the ECB will be there.
So, essentially, you’re not getting paid a lot, you’re still betting on an economic deterioration which might or might not happen, but it’s pretty consensus that we’re going to have a recession. In credit, however, there are some areas where there was a lot of risk premium and there has been a lot of risk premium priced. And one of them has been Europe, especially at the end of last year with the Ukraine war, but even around March with Credit Suisse, have been part of the European credit market that have been priced for extreme risk for recession. And that’s where generally we find value.
So, in our process, in our strategy, we tend to be relatively liquid and in moments of higher realised volatility, we’re happy to deploy, we’re happy to buy, we generally do it relatively quickly. So, where’s the value in our view? In defensive high-yield sectors like gaming, like some of the industrial sector, some of the defence sector. I mean, many of these sectors can offer high single-digit or double-digit yield, so you’re definitely beating inflation and you also have some alpha.
And there’s also value in banks with the Credit Suisse window having opened up a good amount of spread. And in Greece from a country perspective, Greece following the elections with President Mitsotakis winning a mandate is positioning for an investment grade upgrade. So, there are some pockets of value and this is something that we call defensive alpha. So, they’re names that have some upside and have good yield, but where we really make our alpha is from the convex longs and the convex shorts which move a lot more. There’s a good amount of convex shorts in fixed income, some of the business models that are not sustainable in a higher-
Bilal Hafeez (18:50):
You mean, tech and things like that?
Alberto Gallo (18:52):
For example, some emerging market countries, some of the tech-like SPV vehicles like SoftBank, for example, or the REITs which have underperformed, the real estate sector, names that were funding at 0, 1%, now have to live with much higher yield. And there’s also a few longs that become interesting, especially when markets are in panic and pricing a much higher default rate environment than the one we see.
Bilal Hafeez (19:18):
And in terms of, you said you like to invest in a liquid format, how do you do that? Because, often credit can be quite illiquid, especially in cash bonds and getting access and EM. What’s your instrument of choice or how do you ensure that you do have that liquidity or the liquidity in the investments that you have?
Alberto Gallo (19:37):
And so, we use CDS a lot and generally, liquid indices and sovereigns and single-names. So, that’s pretty liquid. What’s happened in markets is there’s been a good level of liquidity in CDS, both single-names, sovereigns and indices. And sometimes that level of liquidity is even higher than cash bonds. The other half of our portfolio is also in cash bonds. We prefer performance and liquidity over size, and we don’t plan to be a massive fund in the future. We want to be nimble, but that’s a good problem to have. And for now, we are still far from capacity. So, I think it’s really about how you structure the fund for this environment. In an environment where vol is low, when nothing happens, we’re not the fund to go to, and you’re better off with any carry strategy. But in an environment where there is more unexpected events and there’s more realised volatility, it’s much better to be liquid, and the optionality of being liquid and be able to turn positions around, pays off.
The Problem With EM: Brazil, Egypt, Turkey
Bilal Hafeez (20:45):
And you mentioned emerging markets, I mean, are there certain countries that you think have more of a positive credit environment or more of a negative one?
Alberto Gallo (20:52):
Emerging markets, unfortunately, are not in a good spot. We have a combination of persistent inflation in the US and developed markets, and a more hawkish Fed, and a slowdown in China. And China’s reopening growth burst is already fading. Yes, there is some stimulus on the monetary side at the Bank of China level, but the transmission mechanism is still pretty weak.
So, for emerging markets as a whole, and it’s obviously a generalisation, but the environment is not great and many have already had to restructure hard currency debt because of unsustainable levels. Sri Lanka, Pakistan, Ghana, Zambia. There is a few that are on the edge like Egypt or potentially Turkey, depending on politics.
So, generally, the value in emergent markets is limited. And what’s been happening is that as the investible universe shrinks, starting from China with the property sector and then some of the defaults that I’ve mentioned, as this investible universe shrinks, investors concentrate in fewer relatively better assets, which start trading much tighter. Brazil, Mexico, South Africa, might not be in the best situation, not all of them, but they’re very tight.
So, it’s a very polarised market. Finding value is not easy. So, I’ll tell you two shorts and one long. We’ve been short on Turkey into elections, we have closed that and we still think that Turkey will continue unsustainable policies. Into the run-up to elections it was trading relatively tight at around 500 bips. That’s another spread for a European, good quality high-yield or a US good quality high-yield firm with potentially even shareholder or government backing in some cases.
And so, we positioned for an Erdogan victory even though the polls at some point were suggesting change. In the end, that’s the result that we had. And the CS has widened, Turkey widened. We don’t think it is a default story, but there is less economic orthodoxy ahead of us.
Another unfortunate story of unsustainability is Egypt. Egypt is under an IMF directions and what the IMF is telling them is to sell assets to shrink the balance sheet, obviously devalue the currency. They’ve been in a current account deficit for a while. They’re the biggest importer of wheat and they import 90% of wheat. They subsidise housing and food. Egypt’s population has been growing very fast. And so, at over 100% of debt-to-GDP, you argue whether it is sustainable.
Bilal Hafeez (23:28):
And Egypt was one of the darlings for investors a number of years ago, wasn’t it?
Alberto Gallo (23:31):
That’s right, both in hard currency and in local currency. But essentially, it’s been a magnet for hedge fund carry trades in local currency, which have made very strong yields on their local currency bonds at the cost of Egypt essentially growing imbalances as the local banks and the government were essentially paying reserves to defend the peg. Egypt devalued, but not enough. And now they find themselves with the short-end bonds trading in the 90s and long-end bonds training in the 60s.
So, the market is pricing, they’re restructuring, they are pursuing an asset sale, but the reality is not always the IMF recommendations are right. And we have seen what happened in Greece. So, there is still an environment where there’s still a belief that current capital structures might be sustainable, because rates might go back down, but maybe the world tomorrow is not going to be the same and maybe it’s time to rethink these capital structures. So, there are some, unfortunately, other EMs that are on the brink and that we are pretty worried about.
On the long side, we find value in Ukraine and that’s because you have both willingness and ability, and that’s part of our process when we look at a sovereign. In the case of Turkey, you have willingness to pay, but ability depends on politics. In the case of Egypt, you have definitely the willingness to pay, but the ability is constrained. In the case of Ukraine, you definitely have willingness to pay. The ability depends on a ceasefire in the war. And we think that eventually as we go through the spring offensive and potentially more ground being gained by the Ukrainians, hopefully there would be a sit down moment with Russia. And on the Russian side there’s also been some weakening.
We still think that we are in a phase of elevated geopolitical risk. We see more US-China tensions. But in Ukraine you have the upside of a country that has been where the bonds have been essentially priced for default, similar to, close to countries that are not willing to pay, but with the difference that Ukraine will receive substantial aid. And even with a restructuring, even with a lot of benevolence from bond holders in reducing the power value, there’s still upside of the current prices.
Which Markets Are Too Expensive
Bilal Hafeez (25:59):
And earlier you touched on this point about investability in EM. So, there’s some markets, like Turkey, that are in some ways uninvestible now for many investors. Russia, obviously, because of sanctions. China, many investors, especially in the US are reluctant to invest in China full stop, but then also there’s the debt sustainability issue. And what does that mean for EM as an asset class in general, if you lose some of these big markets? I mean, Turkey, for a long, long time was one of the biggest markets in EM.
Alberto Gallo (26:27):
Unfortunately, the dream of the BRICS is in part a child of low interest rates and an easy monetary policy, and a lot of emerging markets have been surviving because of liquidity. Once this liquidity is withdrawn for a persistent amount of time, we will see fewer investible countries.
There are still some pockets of value, but we are generally not involved in the stressed EM opportunities today, except for Ukraine. I would say that the development that will shape emerging markets even more going forward is China’s involvement in Taiwan. And while this is important for China itself, it can be important also for a number of other emerging markets which have essentially positioned themselves towards China. We don’t think this is an imminent development, but there is generally an increase in tensions and it is possible to foresee more aggressiveness towards Taiwan in the future.
We have a smaller amount of investible assets in the world, China, Russia, Turkey. And generally, investors are finding refuge in fewer risky assets, including US stocks, including safer emerging markets like Brazil or Mexico. And these safe assets, they’re expensive. Probably one of the most overweight asset is US investment grade. Everyone is long, high-quality credit, but high quality credit it is not. There is a lot of Triple-Bs, there’s a lot of cyclical names. And so, our job is to find the real value in not the safest assets where generally investors go for refuge, but going long or short assets that are riskier, that can move more.
Bilal Hafeez (28:12):
And what do you make of some of these secular bullish stories like India, say? I mean, many people talk about India as the replacement to China. It’s more investible, it’s democracy, population growth rate. I mean, we all know the story.
Alberto Gallo (28:26):
I would say that generally, unfortunately, there is a gap. There are a few hopes, India is one of them. Even Indonesia with a 300 million population, very solid framework for policy, is one of the situations in Asia which is very promising. But there is a gap between these countries developing to where China was 15, 20 years ago. And essentially the question is, who will pick up the baton of China, which stimulated the world while the US and the developed world were doing austerity over the last few years? And for that reason, it is possible that we will see lower growth rates.
I would say that there’s also a domestic policy point. With low interest rates, low corporate profits, and low inflation, there was a Goldilocks environment in developed markets and we had strong corporate profits without inflation. We had markets going up without companies having to pay higher real wages. Today, we might face a situation where this Goldilocks environment is no longer here, both because there is geopolitical tensions and China cannot export deflation, does not want to export deflation. Chinese consumers want higher wages.
But also because domestic policy is changing and millennials, people below 45, have only 20% of the world’s wealth, both in property and financial assets. And so, we’re talking about more than half of the voting population in developed economies. These guys have been left out of the last 20, 30 years of policy. Most of the people in government are still modelling policy based on the priorities of the past, which was the dream of a house, education, a mortgage, ownership. And millennials don’t know what ownership is. And so, policy will be more redistributive.
The effective tax rate for US companies is around 15%. Historically, the corporate tax rate was a lot higher. It was more than double that. And if we have more redistribution, we have lower growth rates because China is not ready to be the engine of the world anymore. Then maybe bonds are not such a bad asset, but then which bonds do you buy? Government bonds are yielding below inflation and governments are helping companies to survive. They’re bailing out a number of sectors.
Finland bailed out Finnair. France helped Burger King France, and Germany helped TUI. And Italy helped Telecom Italia and Monte Paschi. And so, the private sector bonds are more interesting if they benefit from government support and the survival of these companies. So, that’s where we are today. We’re seeing a world which is shifting from growth at all costs towards inequality, more fiscal spending and higher taxes. And perhaps it’s not a bad thing, because during the QE decades resources were mis-allocated. We invested in crypto and JPEGs, and productivity stagnated.
And we have learned from the Jackson Hole paper by Sufi, Mian, and Straub a couple of years ago that sometimes secular stagnation is not just an exogenous factor, an exogenous variable. Sometimes, excess saving in the top 1% is also linked to lower productivity, simply because there’s so many things you can buy and there’s so much you can spend once you hoard a lot of profits. And so, having more distribution, more fiscal spending, more taxes might not be necessarily a bad thing for productivity. But I think for now, credit is looking better than equity in our view.
Politics of QE
Bilal Hafeez (32:23):
And a general theme, actually, from everything we’ve talked about is this idea that we’re not going to go back to where we were before. So, before COVID, we had these low rates, low inflation environment. And what you are essentially saying is that investors haven’t quite appreciated that we may not revert back to that mean, that something has changed and that’s the new paradigm that we’re going to be in for years to come.
Alberto Gallo (32:46):
There’s definitely a strong dovish bias in bond markets and we think that’s a bit overdone. But also politically, I ask you, if there is a crisis tomorrow, would a quantitative easing number 15 or 16 or 17, would that be politically acceptable as a policy response and would it also fix problems?
I find it quite hard to believe that voters would buy that as the only political response. Yes, of course, there will be rate cuts if there is a crisis, but going back to negative rates in Europe or going back to near zero in the US, I think that would not solve the problem. And also, central bankers might not have the freedom to do so if inflation stays above target.
So, we are in a stagflationary environment, and some countries even more than others, if you think about the example of the UK where inflation is still at double digits. And so, it’s not so much about whether central banks will want to cut, but they might not have the ability, the room to cut as much as before.
Bilal Hafeez (34:00):
Yeah. Yeah. Now, I did want to ask a few more personal questions. One was, you’ve obviously been in markets for a long time, many, many years now. What’s the best investment advice you’ve ever received from anyone?
Alberto Gallo (34:11):
I think one of the most important things that you want to have in the ecosystem for an investor, which is, it’s made of information, it’s made of infrastructure, whether you use any quantitative infrastructure of colleagues, research and capital. It’s an ecosystem to construct in the best possible way for the journey.
I think one of the best pieces of advice is to be able to lose money, be able to stay in the trade, because there can be a lot of changes in weather and a lot of people might not be in a situation where they can stay in the trade, so they get stopped out because of a tight stop loss or because they haven’t set up their vehicle in the right way. So, having the ability to stay in the trade, having the ability to be wrong and to manage that is the most important lesson and the humblest lesson to learn to be a long-term investor, in my view.
Bilal Hafeez (35:06):
No, that’s a great piece of advice. And another one is some of our listeners are youngsters, or at least young to me, they’re leaving university soon and they’ll be entering the job market. What advice would you give to people leaving university now?
Alberto Gallo (35:21):
So, I would say that learning is the most important thing, and that has driven me personally at the beginning, doing research and reading and learning about the world, not just about how to make money today.
There’s been perhaps a very lucky trend in the last 10 years, a lot of assets went up. So, if you extrapolate that, then sometimes the temptation is to say, ’I’m going to be in this asset or that asset, and everything is going up. I don’t need to learn.’ But we’re really thinking about the long term here. And in the long term, it’s the ability to create alpha on a consistent basis. So, I would say that, yeah, we had a bit of a spectacular decade in terms of asset returns, but it’s really important to understand macro, to understand fundamentals and be focused on intellectual curiosity and understanding how the world works.
Books
Bilal Hafeez (36:16):
Yeah. And then on books, are there any particular books that have really influenced you over the years?
Alberto Gallo (36:22):
So, I would say there’s a lot, but I’ll give you three books. One is a classic, it’s the Odyssey by Homer. And I was born on the seaside and I studied classics. And it’s something about knowledge, where you are looking at the horizon every day when you’re sailing and preparing for lots of difficult things that can happen. So, it’s about knowledge, it’s about preparation. Yeah, the Odyssey is definitely full of metaphors and full of lessons. In the end, it’s about the journey and how much you learn. We’re not here just to make a profit, but we’re here for the journey and to take this journey together with our investors.
The second book is a philosophy book. It’s The Open Society and Its Enemies by Karl Popper. I loved philosophy at university and at school, and it’s one of the things that was definitely not a mandatory read, but it’s about learning, it’s about freedom and politics and how we need to essentially understand and defend democracy. Today, a lot of the developments that we are seeing in the world threaten to some extent democracy.
And the policy paradigm that we see in China, in Russia, the common prosperity motto by Xi Jinping is almost a challenge to the Western democracy model, but the Western democracy model of the US and the UK has failed in generating prosperity. It only has generated prosperity for a limited number of people, but we know that real wages on average have stagnated over the last decades. So, how do we defend democracy, which remains the least bad model here, and how do we think about incentives?
And a lot of the problems that we have in the West are due to the fact that policymakers have thought with a short-term timeframe, with a one, two, three-year timeframe about being reelected. And so, this is definitely one of the philosophy books that has shaped my thinking the most, and obviously was also one of the inspirations of Soros’ book on the open society.
And more on finance, on risk, and technical aspects, I would say, Antifragile is probably an interesting read, maybe the best book by Nassim Nicholas Taleb, which is about the theory, but also the practical management of risk in academia, but also in theory, but also in real life. And that’s a good part of our approach in our strategy. And for more of that, we have a good list of readings on our website as well.
Bilal Hafeez (39:07):
Okay. No, that’s great. And actually, speaking of websites, what’s the best way for people to follow you and your work in the fund?
Alberto Gallo (39:13):
So, I would say on Twitter, macrocredit is my hashtag, or on our website, which is andromedainvestors.com.
Bilal Hafeez (39:21):
Okay, that’s great. So, with that, thanks a lot. That was really, really insightful on all the dimensions, whether it was the markets or on books, and good luck with everything with the new fund, and I’m sure you’ll do very well.
Alberto Gallo (39:32):
Thank you so much for having me. It’s a pleasure.
Bilal Hafeez (39:36):
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