Chaps,
So as many of you may have noticed, it's all getting a bit frothy out there. We're seeing div recaps, PIK, cov lite, 100% Italian businesses' CCC+ bonds priced at 8% and books full / oversubscribed.
We all know it's a chase for yield, that it's a land grab, forced buyers everywhere and so there's no liquidity in secondary (at least in Eur). But it still brings me to my inquiry.
I'm a big follower of Howard Marks, and so asking this question is slightly inane, but i'll ask it anyway: Will we ever learn? Will pension funds ever adjust their return criteria? And what would the catalyst be? I mean, com'on, haven't the past 5/6 years been enough? When will we become a more flexible economy?
Does human nature and emotions change? There is your simplest answer.
I'm not saying I don't have thoughts of my own, just that I don't want to anchor the direction of the thread with my views.
It is a constant chase for return when they are not there. Ever ask your folks to go to cash instead of being invested. It is what will I buy, I need the return. Everyone is chasing return regardless of risk because they need it or demanded by investors, or somehow it was ingrained in their brains you can get 10% a year in market. Times have changed and this isnt the case anymore. Risks are now disregarded in place of high returns, but another lesson is coming to them
No, we won't, because we refuse to allow for the busts that come with boom periods. We think we can engineer a business cycle that has only ups and no downs. People, institutions, etc are obvioiusly being forced out the risk curve because they have nowhere else to go but I doubt this would be happening if people had a fear of the Fed suddenly deciding to stop QE or, god forbid, the government let someone fail. The principle issue is that all of the structural issues, emotional issues, theoretical issues that existed a few years ago are still there. I also think there is a problem with the idea that we can restructure capital markets in a way that reduces this behavior. I don't really think there is an issue with the markets themselves as they normally sort themselves out pretty quickly. Take too much risk and bet wrong? See ya. Scorn your product quality and workers by over leveraging to pay out huge special dividends and end up eroding your capital structure over time? See ya. I mean, I think the issue is not one of markets working correctly or incorrectly but rather a reshaping of our views on how markets should work. I mean hell, people just expect that over time markets rise inexorably into the heavens. Most generations don't know any better and have been insulated in a massive growth trend fueled by credit expansion and a bazillion other factors.
I'm not quite sure what you mean by 'flexible'? Do you mean that in the sense that we always go back to the same watering hole even after it is shown to not end particularly well?
and that we still expect a certain level of returns that we're accustomed to with no fundamental reason why we deserve them anymore. It's also linked into the theme of cycles and human nature; the constant battle between the micro and the macro thought process.
Brilliant post. +1 SB.
Well what can people do? Save more? Plan more for the future rather than live in the here and now, beholden to there minimal retirement contributions compounding at high rates over time? That would mean less shiny Apple products to play with.
But now with less sarcasm, the worst thing that has happened to the United States is being uncontested at the top for so long with a stranglehold on everything. We have the luxury of being able to sit around and do whatever the hell we want with money, growth etc never being an issue. We were uncontested economically, militarily etc for so long that we have forgotten what it took to build this county. I remember watching the story of us on the national geographic channel (could be history channel) and I was in awe of the projects and incredible innovations coming out of America. You don't see shit like that today. We don't try and focus our energy on improving our lives or innovating towards great goals; we focus our energy on whether snookie is having another baby and how many sluts we can bang when we are having drinks with our friends counting our stacks of cash. Look, I'm not knocking modern society or the comforts it has given me as I'd be a hypocrite to say I don't enjoy not having to worry about anything like being blown up or where the next drink of clean water is coming from. We have become complacent as a society and are willing to simply go through the motions and do whatever the hell we want to do, with little personal accountability for any of it.
Sorry, that turned into a totally different rant. Haha.
Pension Funds cannot adjust the return criteria. Simply put, pensions are a throwback to a time when paying money into a system or fund was a social contact. Fund mangers are under enormous pressure from retirees to fund current obligations at the old (suggested/implied) rate. I really think its a double edged sword. The growth and demand for PE over the past 20 years has been fueled by this chase. Conversely, having too high expectations will lead to write downs or underfund obligations as they will be no room in an asset class for those yields. This will eventually allow for other asset classes to grow in a cycle. I think, long term, there needs to be a rather large "discovery" or movement into a new kind of asset. A la PE 20 years ago. What that is, I'm not sure. I will say the expectations for our generation is lower than the one about to retire. Everyone our age is not expecting a Social Security check, signaling a possible easing of expectations long term.
Very well said. You beat me to it. Now if only we can find a way to not pay into FICA we will be all set.
I think all of us in our 20s are ready to be done with Social Security.
for those who haven't read it yet, search "howard marks ditto"
Nice post.
Portugal's 10 yr yield this morning is where Spain's was 2 months ago.....
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