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Harvard Endowment Chief Warns Of Market Froth, Compares Rate Hike To Bubble-Bursting Catalyst
It's not just Fed chair Janet Yellen warning about valuations which are "quite high" - add Harvard University's endowment President and CEO Stephen Blyth to the list of voice warning about overstretched markets.
In the just released annual endowment report Blyth warns that that "market is potentially frothy", not only in the public equity space, but in PE and VCs as well. In other words, everywhere. He also warns that nobody knows what happens when central bank training wheels are finally removed from the market.
Finally, and most ominously for all those screaming they demand a Fed rate hike, Blyth compares a Fed rate hike to the catalyst the unleashed the great financial crisis: falling house prices. Just in case there is still any confusion as to the real reason why nine years later, the Fed is so terrified to hike rates.
From the letter:
The debate about highly-valued assets continues to get louder: private equity valuations are now, on average, at higher levels than in 2007. There are over eighty “unicorns” (venture-capital portfolio companies with valuations over $1 billion), as many as in the last three years combined. Venture capital continues to receive ample funding, and private company valuations are also bolstered by public mutual funds entering late stage funding rounds in significant size. This environment is likely to result in lower future returns than in the recent past.
It is hard to know the impact of the eventual rise of interest rates in the US on asset classes domestically and globally. Monetary accommodation in the US has been in place for almost eight years, since the first Federal Reserve intervention on 11 December 2007, the Term Auction Facility (TAF). An extensive number of policy interventions, with a long lexicon of acronyms, followed. As hard as it was to predict the impact of these policy actions, it will be equally hard to predict the effect of their removal. We are analyzing potential effects of higher rates throughout the portfolio, in particular examining the possibility of second order effects if many asset classes (e.g., bonds, high-yielding stocks, high-yield debt, emerging markets and real estate) were to decline simultaneously. An interesting question emerges: could rising interest rates in 2016 have an analogous impact to falling house prices in 2007, where a range of largely unanticipated second-order effects was triggered?
We are proceeding with caution in several areas of the portfolio: many of our absolute return managers are accumulating increasing amounts of cash; we are being careful about not over-committing into illiquid investments in potentially frothy markets, while still ensuring we will be involved if market dislocations arise; and we are being particularly discriminating about underwriting and return assumptions given current valuations. In addition, we have renewed focus on identifying public equity managers with demonstrable investment expertise on both the long and short sides of the market. And we are concentrating on investment opportunities with idiosyncratic features that still offer value creation, such as the life science laboratory space, and the retail sector where transformation continues at rapid pace.
We doubt he will be invited on CNBC.
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I'd say 2,000 pts off the DOW and 200 pts off the S&P since the end of QE3 give us a pretty good idea what will happen if the training wheels ever came off the "market".
Training wheels work great on smooth surfaces but go off the street curb and its game over.
If it's not a bubble, raising rates won't pop it. If he's worried about rates popping it, it's too late and it's going to pop anyway.
And
"many of our absolute return managers are accumulating increasing amounts of cash; " <= Selling
"In addition, we have renewed focus on identifying public equity managers with demonstrable investment expertise on both the long and short sides of the market. "<=Shorting
Tyler, I would love to see a historical chart of all market returns. which combines stock dividends and debt interest. I guess we could say stock earnings...but earnings numbers are bogus. I would like to know how much investor earnings (net) have been destroyed by zirp.
An investor has not earned a return until they cash out.
Market returns is an oxymoron.
Harvard should copy Texas and move a few billion of its endowment into PMs.
Are we talking the same endowment once run by Larry Summers?
Can a Harvard guy talk like this and still be invited to establishment gatherings? Or keep his job? Seems kind of risky. Unless he's pre-emptively trying to save his neck for the day the crash finally comes.
CNN to Bernie Sanders: Pope is ‘#FeelingTheBern!’
http://tinyurl.com/p2jpbk3
And the bubble will burst, rates through the roof next couple of months/years. Money out of bonds into stocks, common sense.
Wait for 2016-2017 for the Stock bubble to pop.
http://tripstrading.com/2015/09/19/sp500-weekly-chart-2-or-5/
Blythe: Yet another voice to add to the negative sentiment chorus. Everybody on Fast Money CNBC today was negative as well. Even the shoeshine boy and the WalMart greeters are negative. What happens in this situation usually?
BTFD
Shiller told CNBC on Tuesday.
Just before the dot-com bubble burst, investors had very little confidence in stock valuations, but they were confident in the market in the short term, he said.
"That's the sign of the bubble. They're worried but they're thinking they'll get out," "This can suddenly turn, and we're looking somewhat like that now."
How endowed is the Harvard Economists?
Somewhere north of $30 billion and most of it has to be invested, so I'd be sweating bullets if I was him.....
That's Hah-vaaad to you!
If that is the case, he has a hanging pair that are also largely endowed.
A rate hike would happen to cool the economy. No rate hike means we have a cool economy. We're 'merica, everything is cool. Even the sexy fbi teevee programming.
+1 If you like Scooby's comments. The green arrow.
lets put it this way. i had my eye on a beautiful new property here in NJ that was listed a few months ago. it came to market at $800,000. my plan has been to stalk it. this month, the price dropped to $650,000. credit is drying up. brian sullivan on CNBC said he was talking to high-yield trader who specializes the energy space. he said "its not that liquidity is drying up ... there is no bid."
in a deflationary environment (like the one have been in as of recent and are likely continuing into as UUP moves higher), he who is liquid wins. he who holds "the stuff" loses. thats what happened in 2007-2008. IMO thats what will happen this time. just need to stay patient and let prices come to u because as UUP moves up, your dollars become more valuable and the market price of "their stuff" becomes cheaper.
ie. just over-lay a chart of the USD over oil. pretty much says it all. only thing thats gonna save the "stuff holders" is QE4/negative rates which i fully expect to hit. UUP chart setting up for a potential rollover. my guess is they are snuffing that out. either that or all towels just get thrown in which given how much debt is outstanding on planet earth made my decision easy for me - passing on buying anything (specifically big ticket items). risk-reward is not there.
In a few years the beautiful NJ property will look like this:
https://www.google.com/maps/@34.734962,36.7166286,20z/data=!3m1!1e3
I don't mean that in a bad way.
Duh huh...
like those bozos have a clue - last time they made interest rate prognostications Larry Summers was in charge and they lost a fortune.
"Stephen Blyth is an extraordinarily talented investment professional with admired leadership qualities, uncommon savvy about markets and a deep dedication to the purposes of higher education," said James F. Rothenberg, chairman of the Harvard Management board of directors, which conducted the nationwide search.
http://finance.yahoo.com/news/harvard-taps-stephen-blyth-run-202247541.html
http://www.hmc.harvard.edu/about-hmc/board-of-directors.html
The sort of inflation they ought to be most worried about at fair Harvard is grade inflation.
Ha!
HAHAHA buy now....they are getting in cash waiting for a market drop.... It wont. They will be chasing the shit out of it come January
Harvard people are supposed to be smart and so they should be able to manage a healthy endowment fund without Fed charity and crony paracitism.
"Could rising interest rates in 2016... ?"
Subtext: Foregone conclusion for no rate hike in 2015, seeds planted for no rising rates in 2016. Carry on.
Thanks beat me to it. Only reason to raise rates is to break everything to so that the counterfeiters can do it all over again right after they grab up everything else they dont already own for nickels and dimes on the dollar. Then its QE 4,5,6 to the tune of 10 trillion.
If anyone out there truly believes that all the debt and obligations can be paid off they're insane.
That's all well and good, but what does CalPERS have to say?
'our absolute return managers are accumulating increasing amounts of cash'
That will work very short term til inflation destroys their stack of fiat.
Harvard's Professors threatened to go on strike earlier this year because they would have to pay a TEN DOLLAR co-pay for their health insurance!!!
Harvard is a corrupt, Tribal stronghold where Whites are given short shrift.
THE TRUTH AT HARVARD
FED will buy stocks across the board if the want to. Apparently Goldman Sachs wants the market lower because a lower market is easier to manipulate.
"We are proceeding with caution in several areas of the portfolio"
Gartmanesque! With a ship with a "port" in every area - one could be right once a day - like any clock!
We should be impressed by, and listen to, such well-endowed men with doctoral degrees from ivy-covered institutions.