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An Entire Generation of Fund Managers is Unprepared For the Next Crisis

Phoenix Capital Research's picture




 

Last week we touched upon the “white elephant” in the room: that the biggest, most important bubble investors should worry about is in bonds, NOT stocks.

 

Consider the following…

 

The financial system is based on debt. US Treasuries, the benchmark for an allegedly “risk free” rate of return, is the asset against which all other assets are priced based on their relative riskiness.

 

This “risk free” rate has been falling steadily for over 25 years.

 

 

The Wall Street Journal estimates that a third of traders have never witness a rate hike. However, the real problem is far greater than this.

 

Bonds have been in a bull market for over 30 years. Forget rate hikes… an entire generation of investors and money managers (anyone under the age of 55) has been investing in an era in which risk has generally gotten cheaper and cheaper.

 

This, in turn, has driven the rise in leverage in the financial system. As the risk-free rate fell, so did all other rates of return. Thus investors turned to leverage or using borrowed money to try to gain greater rates of return on their capital.

 

The ultimate example of this is the derivatives market, which is now over $700 trillion in size. This entire mess is backstopped by about $100 trillion (at most) in bonds posted as collateral.

 

This formula of ever increasing leverage works relatively well when the underlying asset backstopping a trade is rising in value (think of the housing bubble, which worked fine as long as housing prices rose). However, if the asset ever loses value, you very quickly run into trouble because you need to post more as collateral to backstop your trade. If you can’t do this easily, the margin calls start coming and you can find yourself having to unwind a massive position in a hurry.

This is how crashes occur. This is what caused 2008. And it’s what will cause the next crisis as well.

 

Despite all of the rhetoric, the world has not deleveraged in any meaningful way. The only industrialized country to deleverage since 2008 is Germany.

 

 

This is not unique to sovereign nations either. As McKinsey recently noted, there has been no meaningful deleveraging in any sector of the global economy (the best we’ve got is households and financial firms which have basically flat-lined since 2008).

 

 

In the simplest of terms, the 2008 collapse occurred because of too much leverage fueled by cheap debt. This worked fine until the assets backstopping the leveraged trades fell in value, which brought about margin calls and a selling panic.

 

The big problem however is that NO ONE got the message that leverage was a problem. Instead, everyone has become even MORE leveraged than they were in 2008. And they did this against an ever-smaller pool of quality assets (the Fed and other Central Banks’ QE programs have actually removed high grade collateral from the financial markets).

 

Thus, we now have a financial system that is even more leveraged than in 2007… backstopped by even less high quality collateral. And this time around, most industrialized sovereign nations themselves are bankrupt, meaning that when the bond bubble pops, the selling panic and liquidations will be even more extreme.

 

The next round of the crisis is coming, and it’s going to make 2008 look like a picnic.

 

If you’ve yet to take action to prepare for the second round of the financial crisis, we offer a FREE investment report Financial Crisis "Round Two" Survival Guide that outlines easy, simple to follow strategies you can use to not only protect your portfolio from a market downturn, but actually produce profits.

 

You can pick up a FREE copy at:

 

http://www.phoenixcapitalmarketing.com/roundtwo.html

 

 

Best Regards

 

Graham Summers

 

Phoenix Capital Research

 

 

 

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Thu, 01/29/2015 - 12:17 | 5720216 Chat_noir
Chat_noir's picture

Gold Crashing as it should...

Thu, 01/29/2015 - 12:16 | 5720209 buzzsaw99
buzzsaw99's picture

rubbish

Thu, 01/29/2015 - 09:38 | 5719343 laomei
laomei's picture

If "risk free" is benchmarked so low... then everything above that number is, by default "risky".  It's effectively stating that "you should expect no more than X% or you are risking losing it all".  So those cards demanding 30%+ should be totally cool with you simply refusing to pay, I mean, that's what those rates are there for, because they expected to lose it all to begin with.

Thu, 01/29/2015 - 03:26 | 5719037 basho
basho's picture

an entire generation?

my, my what a shame.

these lemmings will just follow the fed as they have always followed the fed.

no brainer BTFD all the way down.

Thu, 01/29/2015 - 12:59 | 5720445 Mike Honcho
Mike Honcho's picture

"Entire Generations are Unprepared for the Next Crisis"

Wed, 01/28/2015 - 22:19 | 5718549 Spungo
Spungo's picture

I wouldn't worry about rising interest rates. Raising the rates would plunge the economy into a very deep recession and it would lead to baby boomers getting their social security and medicare benefits slashed. That's politically impossible. We'll see debt monetization long before we see rising interest rates.

Thu, 01/29/2015 - 10:14 | 5719473 Comte d'herblay
Comte d'herblay's picture

It's not so much whether rates will rise as it is Threatening to raise them.  This causes market fluctuations, without which it's impossible to make any money. 

If IBM fer instance stabilizes at 110, and never varies, you can't make any money on it.  It has to be made to fluctuate and that will happen when the FED uses its power to TALK about raising (or lowering) rates.

 

Thu, 01/29/2015 - 00:46 | 5718894 willwork4food
willwork4food's picture

Unless they wanted it to collapse. Pefect timing, perfect alibi and a perfect way to rape what's left of the low hanging fruit from a massive deflationary event. Que: DIA artwork.

Wed, 01/28/2015 - 22:07 | 5718514 WhyWait
WhyWait's picture

Another generational thing: working folk used to experience a depression roughly every 20-30 years, so people knew what to expect, how to deal with it. Including how to respond politically!

The economists I studied with in the '60's were an arrogant but defensive bunch, utterly committed to there never being another depression.  We've had some hard times in the late '70's, early '80's and early '90's, but the economists and their masters were good to their word, they did anything it took to not have another depression. This collapse that's been going on since '02, and especially since '08 is shaping up as a real depression, about to get much worse, and made much worse by everything that's been done to postpone it. Working folk don't know what to make of it,how to respond, how to think about it because this hasn't happened pretty much in living memory, and the sugar-coated stories about the Great Depression they learned in school or on the History Channel are little help.

For that matter, few living economists have seen a depression in their lifetimes - or even their parents' lifetimes either!

The working class in America is in terrible shape right now, almost everyone blames themselves for what is happening to them. There is an awareness of a serious system problem, but no real conversation about what to do about it.

Wed, 01/28/2015 - 21:49 | 5718459 DOGGONE
Wed, 01/28/2015 - 19:50 | 5718081 Dragon HAwk
Dragon HAwk's picture

Everyone at the card table can not win.. adding a hundred people to the table doesn't make that statement any less true. We have too many parasites who think they are going to win.

Wed, 01/28/2015 - 19:19 | 5717932 disabledvet
disabledvet's picture

Well...thanks for your consistent "buy treasuries" calls.

 

Gold miners have been off like a rocket to start the year...we'll see how well they can manage here.

 

There is a lot of debt or "failure to deleverage" as you say.  I fail to see how low rates are a sign of a lack of risk however.

 

If I'm getting no return period on money I'm taking tremendous risk actually.  There is a fear of return OF capital when rates are this low.

 

So your point as to the leverage thing seems misplaced.  The market is in fact saying the market is "over bought" and is using treasury yields to discount the risk.

 

Interestingly the Fed appears to be looking beyond the "valley" so to speak.

 

A better question to ask/answer therefore is whether the Fed is delusional in some way.

 

We all should know by now how Wall Street makes their money and its not by going long gold or treasuries.

 

Whatever is happening sure sounds like a Wall Street problem right now and not a main street one.

 

Wed, 01/28/2015 - 23:04 | 5718688 lordkoos
lordkoos's picture

So you think Wall Street problems don't become Main Street problems?  Bailout, anyone? 

Wed, 01/28/2015 - 18:24 | 5717697 Stroke
Stroke's picture

Duck & cover....What will the world look like in a year or so?

 

I wouldn't want to live near a city when it all goes tits up

Wed, 01/28/2015 - 23:04 | 5718686 Buck Johnson
Buck Johnson's picture

I think your right, a war is coming and many want it to happen.  The problem is that they don't know how it will end or how we as a nation will survive once it's done.

 

 

Thu, 01/29/2015 - 10:38 | 5719609 JRobby
JRobby's picture

War has been the traditional tool for "resetting debts". I don't think these clowns have much imagination as the current cluster fuck would indicate.

And a debt reset is required so..................

Wed, 01/28/2015 - 18:19 | 5717681 Comte d'herblay
Comte d'herblay's picture

You would be more believable, have some cred if you didn't offer Round Two, for "Free".

 

Ain't nothin' free, but a good mother's love.

Wed, 01/28/2015 - 18:07 | 5717652 Stuck on Zero
Stuck on Zero's picture

On the up side of an exponential rise all derivatives to nth order are positive. 

Thu, 01/29/2015 - 13:39 | 5720743 KnuckleDragger-X
KnuckleDragger-X's picture

When I started investing back in the 70's you could get a lot of info on how the casino worked and rule one was 'there's risk'. Now we have people on Wall St. who don't have a clue and a good meltdown would be an education...

Wed, 01/28/2015 - 20:48 | 5718283 MalteseFalcon
MalteseFalcon's picture

It doesn't matter that an entire generation of fund managers haven't seen a rate increase.

It ain't happening.

Thu, 01/29/2015 - 14:29 | 5721046 zuuma
zuuma's picture

 

I see the term "Fund Manager" and wonder what they do.

You have all these bots buying an selling instantly with an algorithm. The average hold time for share of stock fluctuates between, what? 3 to 11 seconds, or so?

Add to that big banks pumping trillions of QE money into said bots and what would some "manager" do to steer around that?  Or take advantage?

Fundamentals are so yesterday.

Do the young guys "managing funds" actually think they're doing anything other than skitching a ride on a passing bot?  Sometimes you go really fast. Wheeeeeeee!!  Next time, you fuck up & break your neck.

It's worse than rigged. More like the bus is on auto pilot heading for the cliff.

I actually feel kinda sorry for peeps that have their life savings in Casino wallstreet - thinking it's a real market with price discovery 'n risk n' stuff.

Today, I'm drinkin' early.

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