Have you ever questioned why exactly it is that once every 8-10 months, we get a market flush that wipes out a quarter of the market and creates such a wonderful buying opportunity?
It’s all thanks and praise to zero percent interest rates on government bonds.
You see, treasury bonds are the training wheels of finance. They are the crutch that untalented personal finance consultants lean on to keep their mundane products afloat.
Take a look under the hood of a big mutual fund some time – every single product they offer is the same thing.
Mutual funds are the Baskin Robbins of investing; there’s a core of original flavors, hundreds of “unusual tastes”, and it’s all just sugar and milk.
Once you cut through the bullshit prospectus for the “foreign” fund and the “domestic” fund and the “short/yield” fund and the “growth” fund and the “aggressive” fund…you realize pretty quickly that they’re all just holding Apple, Abbot Laboratories, Bank of America, etc.
It’s all the same shit.
And the glue that holds this comical assortment of unsatisfactory services together is the US Treasury.
Now, the government is very interested in keeping yields suppressed, mostly because of answers being spit out by some deranged equations a handful of socially reclusive economics majors assembled deep within their dark offices over the last fifty years. The various branches of the US government are naturally very desperate to keep distressed paper for toppling over, for fear it would force a hard bankruptcy of about 15% of the country.
But the unintended consequence of this has been to leave half of the finance industry without their knee pads. And they’re getting pretty roughed up.
Look at the layoffs at the big banks. Look at the funding gaps on pensions. And look at the volatility of investment funds. The signs are all there – so long as the government pampers debtors, the core “vanilla” finance sectors are going to suffer…badly.
Any group that usually finances itself and its liabilities with yield, either wholly or partially, is in the uncomfortable position of needing to offset a large loss of revenue. There are only a handful of places they can go that have the volume needed to handle the presence of such large demand. The end result is equity runs.
And, as is to be expected from anything that’s profitability comes from making .7% on all assets under management, these groups are very large, very slow, and very stupid.
Once a year, when they all need to gather the cash they’ll require to meet claims for that year, they are faced with the unfortunate non-choice of going to market with securities – the potential buyers of which are simply too smart to purchase at anything less than a steep bargain.
When such large entities have to meet their enormous budget needs by the random fluctuations of stock prices, those fluctuations will be anything but random. They’ll miss every single time.
The effect of this is that, if you are reading my work, you are a member of a gentleman’s hunting club; most distinguished that it is. Once every 8-10 months, the hounds Fate, Folly, and Impatience flush out the game from the tall brush, into the waiting aim of our party.
We are making a killing of retirees.
I personally don’t have any qualms with this. The system will get what it has coming to it. In many ways, the demands of these same retirees have helped craft themselves as the game.
I simply wanted you to know where your meals have been coming from.If you enjoy the content at iBankCoin, please follow us on Twitter
Mr. Thaler, I found your post thought provoking. Thanks, as always for being here.
Bully good post, Mr. Thaler (tipping my top hat). Great insight into the impact of current interest rate levels on the financial industry.
Saving this out to my journal for future reference.
This post should be stored in an exhalted archive of ibc.
A library where the posts full of wisdom are retained.