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LDI: the New Subprime?
Daily Rap 09-29-2022
While the party created by yesterday's BOE intervention didn't last long (more about that below), I thought I would touch on what triggered the panic on the part of the Bank of England. It was caused by "LDI," or liability-driven investment strategies. This arose because there was no yield to be had thanks to ridiculous central bank policies of NIRP and ZIRP, which were exacerbated by QE. Thus, people who had long-tailed liabilities, whether they be insurance companies or pension funds, had no way to achieve their returns without taking an ungodly amount of risk. And that's what they did, because if you tried to be disciplined and not do the wrong thing, you would have been fired for underperforming.
Today's Special: Central Bank Surprise
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Last year's posts for Ask Fleck
Q: i owned a full positioned of gold mining stocks before the Ukraine War, therefor my investment thesis has nothing to do with the war.
Im curious if the war has influenced your investment decisions.
For instance, if madman Putin drops a nuclear bomb, i suspect stock market would collapse and the circuit breakers would halt trading.
maybe gold would catch a bid, maybe it wouldn't. hopefully the US isn't stupid enough to retaliate.
my question is: are you even thinking about the possibility of nuclear war when you make investments decisions or is this event so unlikely that it shouldn't even be entertained.
Fleck: War never factored into my position, but if things get even uglier, which they easily could, it isn't bearish for gold, as we will see one of these days.
(posted: 9/28/2022)
Q: Bill:
With all the focus on the $US dollar as the world's least unfavoured currency, and this for several reasons, but a major one being relativley high and rising rates, I've noticed that there is much less discussion about the other side of that equation; that is, rising interest on the national debt (now in the $31 trillion range, and projected to increase by $1.6 trillion per year through 2032.
If the $USD is going to fall out of bed one morning, I'm assuming that it will be because it becomes clear that the Treasury cannot pay its bills, due to rising interest payments and, at some point (with "the next" recession), falling tax revenues.
Is my thinking on the right track, or are there other equally or more important variables, in your view?
Fleck: At some point the dollar will be so over-owned by hot money and it will be so ridiculous (like now) that a piece of news will matter. You're correct, we face huge problems debt-wise, but for now the world is focused on the other fiscal basket cases. Not us, but it will happen to us, too.
(posted: 9/28/2022)
Q: I'm not smart enough to figure this one out.... USD ramping higher while Treasuries tank... Is the buying of dollars going to pay of debts, sitting in cash or some other place? Or is it going into treasuries but being overwhelmed with sellers? I've been around for a while but cant recall a currency ramping and a country's bond mkt seemingly no bid at the time.
Fleck: Two totally different markets. Currently the USD is almost a meme stock, while few want Treasuries despite their yield hikes due to an even higher level of inflation.
(posted: 9/28/2022)
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