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Gold Rush Adopted by Excessive Again | opinions

The influx of liquidity from the world’s leading central banks, which has been on the rise since the financial crisis, has prompted investors to step up their risks. It seems that what this means has long been forgotten when pent-up risks are cleared up in a stock portfolio. Adventurous speculation reminds us of the golden rush days of the 19th century. While small investors are driving so-called meme stocks like GameStop to skyrocket, Credit Suisse reports billions in losses as it speculated heavily on riskier products from Greensill and hedge fund Archegos.

Something similar happened to UBS in 1998, when it lost billions when the LTCM hedge fund, run by John Meriwether, collapsed. It was commissioned by the then head of the bank, Matisse Capialavita, to head it off. Since then there have been many breakups and other scandals. However, educators and marketing artists in the financial industry never tire of telling their clients the same fairy tale over and over: You have the golden touch as an investor.

Cheap money encourages adventurous speculation

It is clear that belief in the multiples of miracle money is indestructible, and cheap money makes many investors neglectful. For example, in times of negative interest rates, many financial institutions have advised their clients to sell safe government and corporate bonds and to buy high-yield and emerging market bonds instead. Investors are desperate to look for a clear positive return when they lend Greece, which is notorious for default, at a 1% interest rate despite the high level of debt. Centenary bonds from countries such as France, Italy, Austria and Spain have also been insignificantly bought.

But since the shift in interest rates, the winds have shifted, and even the price of high-quality Austrian shares has evaporated across the country by more than half since the rally it reached at the end of 2020 – in the case of stocks one can speak of a historic crash in light of these losses. Investors with a conservative risk profile also had Russian bonds from Gazprom and Russian Railways in their portfolios until shortly before the war in Ukraine. These bonds lost four-fifths of their value almost overnight, even though they are denominated in Swiss francs and have no currency risk. It is hard to imagine what would happen if inflation continued at a stubbornly high level, interest rates continued to rise and rating agencies lowered ratings of many borrowers in the event of an economic downturn. The result will be a bloodbath in the bond markets.

Cheap money has also produced questionable forms of investment. These include shell companies, which are put up to the public in the form of the so-called SPAC (Special Purpose Acquisition Corporation), also known as blank check companies. The confidence of investors to blindly entrust their money to the initiators known as “sponsors” should be limitless. The same applies to the latest trends in the digital world, the so-called non-fungible tokens (NFT). “Every Day: The First 5,000 Days” by American artist Mike Winkelman sold at Christie’s a year ago for nearly $70 million. The artist’s reaction, recorded on YouTube when the sale price became known, speaks volumes: “I’m going to Disney World,” he said happily. The explosion in exotic investment prices doesn’t stop at the facade of luxury Hermès handbags, Rolex luxury watches or rare vintage cars. But not only the endless dreams of buyers, as well as the possible drop in prices. In March, for example, crypto entrepreneur Sina Estafi bought the digital rights to Twitter founder Jack Dorsey’s first tweet for $2.9 million. Soon, Estavi decided to sell his NFT and hoped for around $50 million in revenue. The highest bid at auction is currently around $28,000.

Pension funds are getting arrogant

Anyone who thinks that they are basically normal and gullible people who are fascinated by the allure of cheap money is wrong. On November 15 last year, Calpers, the California public servants’ provident fund, announced that it would adjust its asset allocation effective July 1, 2022. With the new allocation, the largest US pension fund, with total assets of about $500 billion, wants to ensure that it It can continue to stick to the ambitious 6.8% annual return target going into the future.

Three changes stand out. First: Significantly increasing the share of private ownership at the expense of the listed shares. Second, the asset class of private debt is added during the reduction of government bonds. Third, it was decided to allow a loan leverage of 5% on total assets. Calpers Investment Committee Chair Teresa Taylor was quoted in the press release as follows: “By adding 5% leverage over time, we will better diversify the fund to protect against the impact of a dangerous downturn during downturns.” I’m sorry. Loans, will it be possible to better diversify the portfolio and protect it from a significant fall in prices? The statement sounds like a bad joke at a time when Lombard loans and good credit speculation are at record levels among private investors.

Calpers reduces the ratio of safe and liquid treasuries in favor of risky, illiquid private debt and private equity. Officials note that the new strategy will reduce volatility. With all due respect: Professional investors must now understand that volatility is not entirely appropriate as a measure of risk in illiquid asset classes such as private equity and private debt. If there are no market prices, there can be no measurable price fluctuations. Instead, there is only an accounting value in the form of NAV (Net Asset Value), which is sporadically adjusted by the providers themselves.

Run on illiquid asset classes

Given this, the risks of the Calpers portfolio will not be reduced, on the contrary, it will increase. From past crises experience, we know that the combination of illiquid investments and borrowing is an explosive mixture. When many investors rush to the exit in a panic, illiquid assets become virtually unsellable. The director in charge of the famous Harvard Endowment Fund, Jane Mindelo, had to learn this bitterly during the financial crisis, when she had to put illiquid securities on the market at bargain prices so that she could cover the running expenses of the fund. The Fed has rightly warned of an influx of illiquid forms of investment since the spring of 2021.

Falling prices and the suspension of trading in Russian bonds can be seen as a red flag for investors who have increased their portfolio risk and exposure to illiquid products in recent years. For many, hangover poisoning will end. Noon rush hour for investors hits the bear market, which is unpredictable in terms of timing, but is as much a part of the stock market as it is of church.

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