What You Start to See Is a Death Spiral

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Your Survival Guy is never surprised about these headlines during troubled markets. Here’s a beauty from yesterday in the WSJ, “Pension Strategy Left Funds Vulnerable to Rate Increases.” Apparently, pension managers were using leverage and collateral to hedge against rate increases, but when the collateral loses value, margin calls come a-knockin’. And like clockwork, when bad stuff happens, it always seems to be a surprise.

• State Pension Funds Brace for Private Equity Losses

From the WSJ:

Pension funds adopted the so-called liability-driven investment strategy, or LDI, to address regulatory changes and help to close the gap between assets and liabilities.  But the strategy faltered as interest rates surged and bond prices fell, forcing more selling and driving prices still lower.

“A vicious cycle kicks in and pension funds are selling and selling,” said Calum Mackenzie, an investment partner at pension-fund adviser Aon PLC. “What you start to see is a death spiral.”

Why is it that the pension managers are the ones who get involved in this crap? They’re supposed to be the stewards of the assets for retired teachers, police officers, and firemen. And here they are—once again—explaining a crash in an investment vehicle they have no idea how to drive.

• How Long Will Your Pension Fund Last?

What a racket.

And these are the ones who put Main Street America’s money into ESG, touted bitcoin, and bought office properties by the droves. Now what, now that the truth hits and values plummet? Human nature at its worst.

Speaking of the worst in human nature, in the aftermath of Hurricane Ian— as is always the case in natural disasters—the looters are coming out to prey on the weak and unprotected. The vulnerable are trapped. They have nowhere to go. And now they need to worry about being robbed. It’s terrible. Meanwhile, losing pensioners’ money with financial engineering is a slow-motion looting. You’re still losing your property, but the people doing it have the legal authority to do so.

• What Can We Learn from Hurricane Season?

Action Line: Look, it’s a rough world out there. Investing isn’t easy when you don’t know who to trust. Death spirals always seem to come as a surprise, and it’s the most vulnerable who take the hit.

P.S. And then there’s the British bond bailout to help deal with the reckless activity I just described above. Too little too late? Talk about looting the taxpayer.

From the WSJ:

James Carville should have wished he could be the currency market.

The famous 1994 remark by Bill Clinton’s political adviser that he would like to be reincarnated as the bond market encapsulates a widespread perception among investors and officials that, when currencies are left to float freely, soaring public debt becomes the key constraint on government spending. The U.K.’s budget crisis shows why they are wrong.

On Wednesday, the Bank of England stepped in to stop a big selloff in U.K. debt caused by the government announcing a fiscal package that could cost a whopping £291 billion ($312 billion) for little obvious economic gain. In a complete U-turn from its plan to sell bonds in an effort to tamp down inflation, the central bank said it would instead buy long-dated gilts. Yields quickly dropped.

There is nothing new about this intervention. The BOE was created in 1694 to finance a war against France, and managing public debt has been a core job of all central banks since.

As much as central bankers refuse to admit it openly, they must intervene whenever sovereign-bond yields get out of whack with interest rates. It is what UWE Bristol Professor Daniela Gabor has dubbed “prudential monetary financing”: The BOE acted because bond volatility risked torpedoing Britain’s massive pension-fund industry, which matches its long-term liabilities with long-maturity debt and derivatives. The haven role of government paper means that its stability must be preserved at all costs, or it would be impossible to set interest rates for households and businesses.

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E.J. Smith - Your Survival Guy

E.J. Smith is Founder of YourSurvivalGuy.com, Managing Director at Richard C. Young & Co., Ltd., a Managing Editor of Richardcyoung.com, and Editor-in-Chief of Youngresearch.com. His focus at all times is on preparing clients and readers for “Times Like These.” E.J. graduated from Babson College in Wellesley, Massachusetts, with a B.S. in finance and investments. In 1995, E.J. began his investment career at Fidelity Investments in Boston before joining Richard C. Young & Co., Ltd. in 1998. E.J. has trained at Sig Sauer Academy in Epping, NH. His first drum set was a 5-piece Slingerland with Zildjians. He grew-up worshiping Neil Peart (RIP) of the band Rush, and loves the song Tom Sawyer—the name of his family’s boat, a Grady-White Canyon 306. He grew up in Mattapoisett, MA, an idyllic small town on the water near Cape Cod. He spends time in Newport, RI and Bartlett, NH—both as far away from Wall Street as one could mentally get. The Newport office is on a quiet, tree lined street not far from the harbor and the log cabin in Bartlett, NH, the “Live Free or Die” state, sits on the edge of the White Mountain National Forest. He enjoys spending time in Key West (RIP JB) and Paris. Please get in touch with E.J. at ejsmith@yoursurvivalguy.com To sign up for my free monthly Survive & Thrive letter, click here.

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