I view what is going on today as a sequel to the train wreck that unfolded in 2008. The obvious problem now is that the risk is being assumed by entities responsible for protecting their citizens – sovereigns.
- Rates and spreads were low creating all types of stupid transactions.
- What might these be? Merger Monday blockbusters, Leveraged versions of anything vanilla, and blind faith in the underlying.
- Inverted yield curves? No big deal.
What was different is that market participants were assuming the risk, both long and short. If you believed the industry experts at S&P and Moody’s – you have no money left. If you didn’t, you’re just fine today.
Fast forward and the same set up is here. Rates? Low. Stupid transactions? POMO. ( I just had a client put $500k into the development of an online bitcoin casino. Bean babies made more sense to me). Faith? Governments will figure it out.
Two years ago the inventory of foreclosed homes was so high, we were talking about a decade to clear them. Today, the Street has already purchased said distressed assets, packaged them, and is in the process of selling them back to the same people that thought flipping pre-construction condos in Naples was an investment strategy. REITs, levered closed end funds, *MBS everything - look what is being sold always feels right because its working. However, the Street doesn’t sell things that have performed terribly – because 90% of their customers won’t buy those ideas/products. They sell you Facebook. They sell you single family home REITs, floating rate funds that invest in companies that won’t survive if there is a recession. Stop buying.
Ok so the yield curve. The yield curve isn’t inverted, but negative real rates are just as significant. Why? Conventional wisdom leads you to believe that while you don’t fully understand it – Central Banks have the situation under control. Investors in the most liquid securities in the world are calling BS.
Risk isn’t Beta, Standard Deviation, or any other consultant driven formula. Risk is exposing your assets to permanent impairment. Since Central Banks have it all figured out – there is no reason to worry – everything will go up and if it doesn’t, they’ll figure out a way to make it happen.
Riddle me this? What happens if your Central Bank doesn’t recognize their exposure to permanent impairment?