Sasquatch Syndrome

Commercial Real Estate: Sasquatch Syndrome

Things were tough for Moscovians back in the Ice Age day.

The Trans-Siberian Railroad was still about 20,000 years from construction completion. And dinner in the form of wooly mammoths had this nasty habit of migrating east, as in so far east, it landed in what would one day be the United States’ Pacific Northwest. Passage was arguably simplified via the Bering Land Bridge, which hypothetically connected the two continents.

Folklore has it that the mammoths were not alone, but were accompanied by the Gigantopithecus. In that Gigantopithecus fossils have yet to be found outside Asia, stalwart believers maintain that a small population managed to flourish in their new home.

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ICYMI.greenspan, Danielle DiMartino Booth

In Case You Missed It — 8.11.17

Dear friends,

Little did we know on this day in 1987 that a bad day in bedrock could last 30 years, and then some. But so it was to be with the Senate’s confirmation of one Alan Greenspan to chair the Federal Reserve Board. We can only hope this one man’s legacy has not exacted irreparable damage on our financial markets’ ability to fully function as uninhibited price discovery mechanisms.

Linked here is my latest Bloomberg View column, Greenspan’s Legacy Explains Current ConundrumsI’ve penned to commemorate this momentous day in our nation’s economy’s history.

Hopefully it won’t surprise you that I’ve continued to ruffle feathers about the Fed’s day to day business in the media, all in the hopes of making sure everyone is as Fed Up with the Fed as I am. Linked below is a smattering of my latest stops here and there.

TELEVISION

BNN Economics — Weekly host Andrew McCreath speaks with Danielle DiMartino Booth — 8.7.17

 

PODCASTS AND RADIO INTERVIEWS

Bloomberg P&L With Pimm Fox and Lisa Abramowicz — Retail Pain at 22:54  — 8.8.17

Cashflow Ninja with M.C. Laubscher Danielle DiMartino Booth, Author of Fed Up: An Insiders Take On Why the Federal Reserve is Bad for America

Futures Radio Show interviews Danielle on the changes coming to the Federal Reserve  — 8.8.17

The Lance Roberts Show — 8.8.17 Who will Replace Janet Yellen?
Segment 1   |   Segment 2   |  Segment 2 short

 

Wishing you well this weekend,

 

Danielle

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ECONOMICS101, Danielle DiMartino Booth, Federal Reserve

Economics 101: Divining a New Mouse Trap

If only we had more rhabdic force to go around.

Not familiar with the term? It is the Greek derivative for the word ‘rod,’ as in the ones used by Diviners to direct them to riches of the mineral or water variety in ancient days of yore. The key is placement, into the right hands, that is. Before the gifted few were scientifically overanalyzed out of existence or persecuted as witches and subsequently burned at the stake, Diviners were romanticized as the rainmakers of their day.

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ICYMI.ddb, In Case You Missed It — August 4, 2017

In Case You Missed It — August 4, 2017

Dear friends,

Happy Nonfarm Payrolls Friday from Grand Lake Stream, Maine! Grand Lake Where, you may be asking? THIS is where you fish, for small mouth bass, that is, in paradise. It’s a bit tricky to get here from Dallas, but it’s worth the trek to spend time with David Kotok, who organizes the annual campout. I also get to visit with some of the brightest minds in economics and finance I’m delighted to now call friends seven years into this annual tradition.

About those jobs…there are still plenty of them in the making. And they continue to be ho-hum in the income generation department, you know the drill – in the eating, drinking and getting sick sectors. Janet Yellen will be encouraged by the folks who’ve come off the sidelines to get the paltry paying positions. And away we go, to debate even more vigorously how the Fed’s balance sheet unwind will affect the bond market, or not.

Believe it or not, it’s not easy to get to the easternmost county in the United States. So, I made a stop in New York on the way and co-hosted a special Friends of Fermentation with my great friend, UBS’ Arthur Cashin. Friends, new and old, joined us to discuss the prospects for the market to continue moving up in 1,000-point increments and whether the Fed really will have the gumption to pull the trigger on shrinking its balance sheet (we really need to get out more and find some new materials over which to marinate ice cubes).

The consensus, if you must know, is that yes, the melt-up will continue, and that yes, the Fed seems hellbent on shrinking its mammoth balance sheet. Mind you, we also agree that the balance sheet will be blown up again in about a year’s time or so. That’s when most of us figure the economy will be in recession.

In the meantime, I’ve enjoyed writing my weekly column for Bloomberg, linked below. The editors are top notch and the readers, well – they’re well read.

Bloomberg: Back to School Means More Retail Agony

 

I also made a brief stop at the New York Stock Exchange to chat with CNBC’S Kelly Evans and Bill Griffeth, two journalists who can always be depended on to do their homework.

CNBC — Closing Bell Exchange: Underlying feeling the market is getting top heavy

 

Earlier in the week, I did a longer form interview on the job market, also linked below.

RT — Boom Bust — Re-Examining the Jobs Market

 

Signing off for now as my guide is itching to get going. The lake and fish (aka lunch) are a calling!

 

How could I not wish you well?

 

Danielle

 

 

 

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Danielle DiMartino Booth, Money Strong, Writing on the Wall

The Writing on the Wall

“Mene, Mene. Tekel, Parsin”

Appearing from nowhere came a disembodied hand. To the disbelief of a petrified King Belshazzar, the hand began to write words of unknown meaning on his wall. ‘Harried’ can’t begin to describe the king’s state of mind. He just had to know and promised the position of the third highest ruler in his kingdom to whom among his enchanters, astrologers and diviners could unravel the riddle of the seemingly indecipherable words. No such luck.

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ICYMI.ddb, In Case You Missed It — August 4, 2017

In Case You Missed It — July 28, 2017

Dear friends,

Calling turning points can be a fool’s game. But there is something to be said for the deathly quiet we’ve seen in the jobs market. Jobless claims volatility is at a postwar low even as companies have begun to cite cost cutting as the major driver behind job cut announcements. Is that ‘something’ finally about to give in this recovery that has left so many behind?

I’d love your feedback on my latest Bloomberg Prophets column, linked here:

Bloomberg Prophets — Like Markets, Jobs Are Due for a Jolt
Volatility for labor has reached its lowest in postwar history. What’s next?

I was also in New York ever so briefly as it was the day Fed officials met. Janet Yellen et al took the opportunity of a lame duck meeting to toughen up their language on Quantitative Tightening despite there being np press conference to explain themselves.

Will the Fed begin to shrink its mammoth balance sheet as early as September? Will the opposite of Quantitative Easing have no effect at all on markets? We will all tune in to FedSpeak in the weeks and months to come. The debate will no doubt continue to rage on.

You may be asking why I included a Bill Gross segment. As I was informed shortly after I left the set, CNBC’s Brian Sullivan gave self-deprecation new meaning when he claimed he was not as smart as me. I can assure you after many interviews sitting to his left, Brian is one smart cookie and a might bit smarter than yours truly.

A Few TV Stops in New York on Fed Day

Expert: Fed Fires ‘Shot Across the Bow’ on Balance Sheet Reduction
CNBC The Fed — Danielle DiMartino Booth

No One Knows How the Markets Will React to the Federal Reserve’s ‘Quantitative Tightening’
The Street — Danielle DiMartino Booth

Fed is Shifting its Focus to Balance Sheet Reduction instead of Interest Rates
CNBC The Fed — Bill Gross

On a personal note, I am delighted so many of you have subscribed. Next Wednesday marks the onset of a new journey and I am gratified to have you along. Bottoms up, friends and new subscribers! I raise my glass to you!

If you have not yet subscribed, please email subscription@dimartinobooth.com and type ‘Subscribe’ in the title line.

This weekend and next, wishing you well,

 

Danielle

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Moderation, Money Strong, Federal Reserve, Economy, Danielle DiMartino Booth,

The Greater Moderation

5:12 am, April 18, 1906. A foreshock rocked the San Francisco Bay area followed 20 seconds later by one of the strongest earthquakes in recorded history. The quake, which lasted a full minute, was felt from southern Oregon to south of Los Angeles and inland as far as central Nevada.

In the aftermath, the shock to the financial system was equally violent. Precious gold stores were withdrawn from the world’s major money centers to address the City by the Bay’s devastation. What followed was a run on liquidity that culminated in a recession beginning in June 1907. A decline in the U.S. stock market, combined with tight credit markets across Europe and a Bank of England in a tightening mode, set the stage.

Against the backdrop of rising income inequality spawned by the Gilded Age, distrust towards the financial community had burgeoned among working class Americans. Into this precarious fray, a scandal erupted centered on one F. Augustus Heinze’s machinations to corner the stock of United Copper Company. The collapse of Heinze’s scheme exposed an incestuous and corrupt circle of bank, brokerage house and trust company directors to a wary public. What started as an orderly movement of deposits from bank to bank devolved into a full scale run on Friday, October 18, 1907. Revelations that Charles Barney, president of Knickerbocker Trust Company, the third largest trust in New York, had also been ensnared in Heinze’s scheme sufficed to ignite systemic risk. Absent a backstop for depositors, J.P. Morgan famously organized a bailout to prevent the collapse of the financial system. Chief among his advisers on aid-worthy solvent institutions was Benjamin Strong, who would become the first president of the Federal Reserve Bank of New York.

Nearly 100 years later to the day, on May 2, 2006, California-based subprime lender Ameriquest announced it would lay off 3,800 of its nationwide workforce and close all 229 of its retail branches. There’s no need to rehash what followed. It remains fresh in many of our minds. Still, as we few skeptics who were on the inside of the Federal Reserve at the time can attest, that watershed moment also shattered the image of the false era that had sowed so many doubts, dubbed simply, The Great Moderation.

It is said that the Great Inflation gave way to the Great Moderation, so named due to the decrease in macroeconomic volatility the U.S. economy enjoyed from the 1980s through the onset of that third ‘Great,’ The Great Financial Crisis.

This from a 2004 speech given by none other than Ben Bernanke, who presided over this magnificent epoch:

“My view is that improvements in monetary policy, though certainly not the only factor, have probably been an important source of the Great Moderation.”

How very modestly moderate of him. To be precise, standard deviation gauges the volatility of a given data set by measuring how far from its long-run trend it swings; the higher the number, the more volatile, and vice versa. According to Bernanke’s own research, the standard deviation of GDP fell by half and that of inflation by two-thirds over this period of supreme calm.

In late 2013, Fed historians published a retrospective on The Great Moderation, which concluded as such:

“Only the future will tell for certain whether the Great Moderation is gone or is set to continue after the harrowing interruption of recent years. As long as the changes in the structure of the economy and good policy explained at least part of the Great Moderation, and have not been undone, then we should expect to return at least partially to the Great Moderation. And perhaps with financial stability being a more prominent objective and better integrated with monetary policy, financial shocks such as those seen over the past several years will be less common and have less severe impacts. If the Great Moderation is still with us, its reemergence in the aftermath of the Great Recession will be as welcome now as its first emergence was following the turbulence of the Great Inflation. As for its causes, economists may disagree on the relative importance of different factors, but there is little question that ‘good policy’ played a role. The Great Moderation set a high standard for today’s policymakers to strive toward.”

Strive they have, and succeeded spectacularly, by their set standards.

It matters little. Insert the observable phenomenon with anything that pertains to the macroeconomy and the financial markets, and you will see that volatility is all but extinct.

The volatility on stocks, as gauged by the VIX index, hit its lowest intraday level on record July 25 of this year. As for how much stocks are jostling about on any given day, that’s sunk to the lowest in 50 years. Treasury market volatility is at a…record low. A lack of volatility in the price of oil is peeving those manning the commodities pits. Even go-go assets are dormant. The risk premium, or extra compensation you receive to own junk bonds, is negative. Negative!

But this non-news spreads far beyond asset prices and presumably hits policymakers’ sweetest spot. According to some excellent reporting by the Wall Street Journal’s Justin Lahart, “Over the past three years, the standard deviation of the annualized change in U.S. gross domestic product…is just 1.5 percentage points, or about as low as it has ever been. It is a trend that is being matched elsewhere, with global GDP exhibiting the lowest volatility in history.”

Lahart goes on to add that job growth and corporate profits also seem stunned into submission. And then he goes for the jugular: “In the years since the financial crisis, the Federal Reserve and other central banks have acted like overprotective parents of a toddler, rushing in whenever the economy looks as if it might stumble. That risk-averse behavior has extended to businesses, making them unwilling to take chances.”

The WSJ goes on to report that at no time in at least 30 years has not one of the three major stock indexes in the U.S., Asia and Europe avoided a five percent decline in a calendar year…until what we’ve seen thus far in 2017, that is.

Is it any wonder the ranks of those who would profit from stocks declining have fallen to a four-year low? Why bother in such a perfect world?

In other words, we’ve never had it this good, or perhaps this bad. In that case, this must be The Greater Moderation. And by the looks of things, it’s gone global.

It’s no secret that the Bank of England, Bank of Japan and European Central Bank have been aggressively flooding their respective economies and in turn, the global financial system, with liquidity in some form of quantitative easing. If there is one lesson to be learned from The Great Moderation, it is that liquidity acts as a shock absorber.

In a less liquid world, the crash in oil prices would have resulted in a bankruptcy bloodbath. In a less liquid world, the bursting of the housing bubble would have led to millions of foreclosed homes clearing at fire sale prices. In a less liquid world, highly leveraged firms would have been rendered insolvent and incapable of covering their interest costs.

In short, a less liquid world would be smaller, for a time. But when the time came to allow nature to take its course, central bankers could not bear the pain, nor muster the discipline, to allow creative destruction to cull the weakest from the herd. Their policies have forced us to pay a dear price to maintain a population of inefficient operators.

The Economist recently featured a report on “corporate zombies”, firms that in a normal world would not walk among the living. Defining a ‘zombie’ as a company whose earnings before tax do not cover its interest expenses, the Bank for International Settlements placed 14 developed countries under the microscope. On this basis, the average proportion of zombies among publicly listed companies grew from less than six percent in 2007 to 10.5 percent in 2015.

So we have one-in-ten firms effectively sucking the life out of the world economy’s ability to regenerate itself. There is no such thing as a productivity conundrum against a backdrop of such widespread misallocation of capital and labor. There is no mystery cloaking the breakdown in new business formation. And there is no enigma, much less any reason to assign armies of economists to investigate, shrouding the new abnormality we’ve come to know as a low growth world.

There is simply no room for an economy to excel when its growth potential is choked off by an overabundance of liquidity that is perverting incentives. What is left behind is a yield drought, one that has left the whole of the world painfully parched for income and returns and yet too weary to conduct fundamental risk analysis.

You have Greece returning to the debt markets after a three-year exile and investors falling over themselves to get their hands on the junk-rated bonds; the offering was more than two times oversubscribed. Argentina preceded this feat, selling the first-of-its kind, junk-rated 100-year-maturity, or ‘century’ bond; it was 3.5 times oversubscribed.

Closer to home, Moody’s reports that lending to corporations has gone off the rails. Two-in-three loans offer no safeguards to lenders in the event a borrower hits financial distress; that’s up from 27 percent in 2015. Meanwhile, the kingpins of private equity have assumed such great powers, they’ve built in provisions that prohibit secondary market buyers of loans from assembling to make demands on their firms’ managements. Corporate lending standards in Europe are looser yet.

What are investors, big and small, to do? Apparently, sit back and do as they’re told to do: Buy in, but passively, and let the machines do their bidding. For institutions, add in alternative investments at hefty fees and throw in leverage to assist in elevating returns.

In late June, the recently retired Robert Rodriguez, a 33-year veteran of the markets, sat down for a lengthy interview with Advisor Perspectives (linked here). Among his many accolades, Rodriguez carries the unique distinction of being crowned Morningstar Manager of the Year for his outstanding management of both equity and bond funds. He likens the current era to that of the nine years ended 1951, a period during which the Fed and Treasury held interest rates at artificially low levels to finance World War II. His main concern today is that price discovery has been so distorted by the Fed that the stage is set for a ‘perfect storm.’ His personal allocation to equities is at the lowest level since 1971.

The combination of meteorological forces to bring on said storm, you ask? It may well be an act of God, an earthquake. It could just as easily be a geopolitical tremor the system cannot absorb; it’s easy enough to name a handful of potential aggressors. Or history may simply rhyme with the unrelenting shock waves that catalyzed the subprime mortgage crisis, coupled per chance with a plain vanilla recession.

We may simply and slowly wake to the realization that the assumptions we’ve used to delude ourselves into buying the most expensive credit markets in the history of mankind are built on so much quicksand.

The point is panics do not randomly come to pass; they must be shocked into existence as was the case in advance of 1907 and 2007.

One of Rodriguez’s observations struck a raw nerve for yours truly, who prides herself on being a reformed central banker: “The last great central banker that we had in the last 110 years other than Volcker was J.P. Morgan. The difference is, when Morgan tried to contain the 1907 crisis, he wasn’t using zeros and ones of imaginary computer money; he was using his own capital.”

It is only fair and true to honor history and add that Morgan’s efforts rescued depositors. Income inequality in the years that followed 1907 declined before resuming its ascent to its prior peak, reached at the climax of the Roaring Twenties.

The Fed’s intrusions since 2007, built on the false premise of a fanciful wealth effect concocted using models that have no place in the real world, have accomplished the opposite. Income inequality has not only grown in the aftermath of The Great Financial Crisis and throughout The Greater Moderation; it has long since smashed through its former 1927 record and kept rising. The Fed’s actions have not saved the little guy; they’ve skewered him.

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The Time Has Come…

Dear Friends,

It’s hard to believe, but the time has come. This Wednesday’s edition of Money Strong will be your last, unless you decide to accompany me on this next leg of my post Federal Reserve journey, and continue as a Money Strong subscriber!

As mentioned in my last few preambles, the move to a paid subscription service begins in August.  I can only hope that you have enjoyed reading my weekly insights as much as I have enjoyed providing them for you.

I would like to thank you for our time together and hope that it will continue through a subscription. Your feedback, guidance, and above all, inspiration have been tremendously supportive and appreciated.

Here are the details:

Rates –

 – Individual subscriptions are $150 per month plus tax.  We also offer an annual subscription rate of $1,500 plus tax for those of you wishing to pay in advance.  Please contact us at subscription@dimartinobooth.com for institutional group pricing.

       Terms –

– Money Strong is published every Wednesday.  Should you have any questions during your subscription, you are welcome to send them to us via email at subscription@dimartinobooth.com

– Money Strong is intended for the sole use of subscribers, and it may not be distributed to any third party, in whole or in part, in any form and by any means.  Thus, it may not be forwarded to clients, colleagues, friends, family etc.

If you would like to begin a subscription, please email subscription@dimartinobooth.com. We will contact you with our subscription agreement and any additional information you may require.

That, friends, is pretty much it! I hope my opinions and insight have proven their value and that you find Money Strong valuable enough to subscribe going forward.

 

As will always be the case, wishing you well,

 

Danielle

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The Smell of Dry Paint in the Morning, Danielle DiMartino Booth, Money Strong LLC

The Smell of Dry Paint in the Morning

Irish Playwright Oscar Wilde defied Aristotle’s memorable mimesis: Art imitates Life. In his 1889 essay The Decay of Lying, Wilde opined that, “Life imitates Art far more than Art imitates Life.” Jackson Pollock, the American painter, aesthetically rejected both philosophies as facile. We are left to ponder the genius of his work, which in hindsight, leaves no doubt that Art intimidated Life.

Engulfed in the flames of depression and the demons it awakened, Pollock’s work is often assumed to have peaked in 1950. The multihued vibrancy of his earlier abstract masterpieces descends into black and white, symbolically heralding his violent death in 1956 at the tender age of 44. Or does it? Look closer the next time you visit The Art Institute of Chicago. Greyed Rainbow, his mammoth 1953 tour de force, will at once arrest and hypnotize you. As you struggle to tear your eyes from it, you’ll ask yourself what the critics could have been thinking, to have drawn such premature conclusions as to his peak. Such is the pained beauty of the work. Rather than feign containment, the paint looks as if it will burst the frames’ binding. And the color is there for the taking, if you have the patience to slow your minds’ eye and see what’s staring back at you.

Perhaps it was the being written off aspect that drove Pollock to embark upon the final leg of his tour de force. We’ll never know. Renaissances to sublimity are the preserve of those with gifts beyond most our grasps. Hence the curious hubris driving so many pensions to reinvent themselves to full solvency by taking on undue risks. Heedless of what should be so many warning signs, so many managers continue to herd blindly into unconventional terrain hoping to find that perfect portfolio mix. The more likely upshot is their choices will drive them straight off a rocky cliff.

For now, the craggy landscape of pension canvases continue to be painted. Or in the case of the country’s largest pension, the stage continues to be set. This from Ted Eliopoulos, chief investment officer of the California Public Employees Retirement System (CalPERS): “We will be conducting quite elaborate choreography, looking at asset allocation, our liabilities and the risk tolerance of our board in conjunction with our expected rates of return for our various candidate portfolios.”

Oh, but for the days of antiquated notions such as matching assets to liabilities. But that’s so 80s. Today, a given public pension’s portfolio is anything but dominated by the Treasury bonds once held to satisfy its future liabilities. Rather, half of a typical portfolio’s assets are invested in stocks, a quarter in bonds and cash, and the balance in ‘alternative investments,’ including private equity, hedge funds, real estate and commodities. (Yes, we are still on the subject of matching current and future retiree paychecks to appropriate investments.)

To CalPERS credit, this ‘elaborate’ mix turned in stellar performance in its most recent fiscal year ended June 30. The $323 billion fund generated a net 11.2 percent return buoyed by a 19.7 percent return on its stocks. Returns of 14 percent on its private equity holdings and 7.6 percent on real estate rounded out the outperformance.

Eliopoulos stressed that, “as pleased as we are with this one-year return, our focus is always on the long-term. We invest for decades, not years.”

As pointed out in Barron’s, it’s been touch and go for the past few decades. CalPERS returned 4.4 percent compared to the S&P 500’s 7.1 percent, and over the past 20 years, 6.6 percent vs. the market’s 7.1 percent. Neither achieved return, it should be pointed out, exceeds the fund’s currently assumed rate of return of 7.5 percent or the assumed rate to which it will be lowered, seven percent, by the end of 2019.

The ultralow interest rate environment engineered by the Federal Reserve and unattained return goals leave CalPERS 68 percent funded. That puts it just about in line with Wilshire Consulting’s most recent calculations, which found the average aggregate funding ratio for state pension plans to be 69 percent.

So very few pensions are where they need to be. And fewer still will ever get there. Pension managers are deluding themselves into believing creativity in asset allocation holds the key to greatness in the after-working-life.

Afraid to say the miracle of alternative investments cannot make up for the average four-percent differential required to make pensions whole – just this year. How so on the math? A blended portfolio of cash, investment-grade and junk bonds today earns 3.5-percent; this compares to pensions’ average assumed rate of return of 7.5 percent. Of course, this gap has been widening for years care of dim-witted central bankers who excel at calculus but can’t manage simple math.

How unfair is it to leave out portfolios’ spice girls of equities and alternatives? Hate to turn down the party music, but starting points do matter. So do fees (hold that thought).

There’s nothing to say pensions won’t eke out another exceptional year of stock gains. The Fed could well be tantalizing investors with chatter of QE4 if the economic data continue to soften. But there’s no silver lining in that potential outcome. Remember that rocky cliff over which current reckless allocations can drive returns? Let’s just say the cliff gets taller, and the fall longer, for every year into which this aged-bull-market rally stretches.

As for those alternatives, for better or for worse, commodities are passé. Meanwhile, pensions have been abandoning hedge funds for years as passive investing takes victim active managers who dare value an asset and invest accordingly. And real estate is on fire. As in, valuations have never been this steep in the history of mankind. You can draw your own conclusions on that front.

That leaves us with private equity, that darling of asset classes and the issue of those pesky steep fees. According to the Pew Charitable Trusts, states bled $10 billion in fees and investment-related costs in 2014, the latest year for which data are available. Not only is this lovely line item funds’ largest expense; fees are up by about a third over the past decade, which conveniently coincides with the greater adoption of alternatives. Gotta love being a taxpayer!

But surely pensioners are privileged to have access to these tony private equity funds? Over the long haul, PE always outperforms those stodgy asset classes every Tom, Dick and Harry can buy online. So what if they’re illiquid. Right?

It’s hard to imagine the shivers sent down the spines of many pension fund managers when they heard the news that EnerVest Ltd, a $2 billion PE fund, had lost all its value. “Though private-equity investments regularly flop,” the Wall Street Journal reported, “industry consultants and fund investors say this situation could mark the first time that a fund larger than $1 billion has lost essentially all of its value.”

Well at least the oil bust is long over. Ill-fated, ill-timed, ill-valued energy investments are to blame for EnerVest’s demise. And surely that’s a comfort. It positively proves the fund’s evisceration is an isolated idiosyncratic incident.

Those other Wall Street Journal (WSJ) headlines don’t mean a thing. Why worry that, “Shale Produces Oil, So Why Doesn’t It Produce Cash, Too?” To wit, over the past decade, eight of the most established shale players have generated a respectable $414 billion in revenue but nary a penny in free cash flow. In fact, this eightsome has had negative cash flow of $68 billion.

Still think EnerVest will be a one-off event? Try this other WSJ headline from early July: “Wall Street Cash Pumps Up Oil Production Even As Prices Sag,” an article that went on to cite one analyst’s observation of, “insufficient discrimination on the part of sources of capital.”

Why, the question must be posed, bother discriminating when you’re sitting on $1.5 trillion in dry powder? Wait, are we still talking about energy? Well, no. That’s the point.

Go back to that last WSJ article for a moment, to what the reporters wrote: “Wall Street has become an enabler that pushes companies to grow production at any cost, while punishing those that try to live within their means.”

Set aside the fact that the analogy strikes closely to that of a drug dealer. Now nix the word, ‘production’ and fill in the blank with whatever your heart desires. THAT is the power of $1.5 trillion in private equity dry powder in all the forms it has the capacity to assume.

Again, starting points matter. That is, unless you are a deep-pocketed price agnostic buyer, one that collects fees for assets under management, regardless of how well the investment decisions fare. Being valuation-insensitive, however, also means you can incinerate your investors, especially pensions, and still walk away all the richer for it.

To its credit, Pew expressed particular concern with respect to desperate pensions playing the game of returns catch-up, as in those that have most recently plowed headlong into alternatives. No surprise, they happen to be one in the same with those sporting the weakest 10-year returns.

Ever heard someone tell you to not put all of your eggs in one basket? This rule of thumb applies in spades to pensions, or at least it should. While alternatives may provide a degree of diversification, Pew reports that that the use of alternatives among the nation’s 73 largest state-sponsored pension funds ranges from zero to over 50 percent.

Arizona tops the far end of that range, with 56 percent of its assets in alternatives. Missouri and Pennsylvania are not far behind with over 50 percent in this ‘basket,’ and Illinois, Michigan, Ohio, South Carolina and Utah stand out as having close to 40 percent in alternatives. Click for link to PEWTrusts.org report.

In the weeks to come, many pensions will excel in the back-slapping department, reporting double-digit returns for the fiscal year ended June 30th. Please keep your salt shaker handy.

For the third time, starting points matter. In late June, Moody’s ran some figures and scenarios to quantify where pensions are today, and where they’re headed. In 2016, total net pension liabilities (NPLs) surpassed $4 trillion. Looking ahead, Moody’s expects reported NPLs to fall one percent by 2019 in an upside scenario, but rise 59 percent in a downside scenario.

Perhaps the fine folks at Moody’s have contemplated what happens when, not if, pensions’ liquid equity and bond holdings lose 20 percent. Maybe they’ve even taken their scenarios one step further and envisioned the return implications for all of these elegant alternatives when a liquidity freeze takes hold amid plummeting valuations.

What’s a pension to do? Fraught managers are apt to throw more of your money at alternatives as tax revenues rise to compensate for what pensions cannot make up in returns. Know this: the more that $1.5-trillion store of dry powder grows, the more it devolves into that much napalm in the morning. The conflagration that spreads will not be containable, and you won’t be able to tear your eyes from it. As the tragic Pollock said of his paintings, and we will one day say of pensions, they have no beginnings or endings, they have lives of their own.

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ICYMI.ddb, In Case You Missed It — August 4, 2017

In Case You Missed It — July 15, 2017

Dear friends,
 
Janet Yellen headed for the Hill this past week for what could be her last appearance before Congress. Of course, that prompted me to grace sweltering Manhattan with my presence to chime in and opine on her viewpoint of the world. As you will see in more than a few of the links below, Yellen’s confusion left me scratching my head.
 
The job market continues to strengthen and wage growth still can’t get off the floor. The economy has withstood as much as it can in the form of interest rate hikes and it’s time to get busy shrinking the balance sheet ‘appreciably,’ to borrow her term? ‘Egregious and unacceptable’ practices have occurred on her watch and yet no action has been taken.
 
The sensation was akin to being swallowed whole by inconsistency itself. If you have a moment, enjoy my jaunt across media outlets. Some are longer than others. But those asking the questions had done their homework and that’s always a plus for the gal on the receiving end.
  
The TV Parade 

CNBC World Exchange — Janet Yellen returns to the Hill
  

Now that we’ve got your Saturday covered, add to your lazy afternoon at the beach Sunday reading the interview Economics Wire posted Friday. It’s a keeper.

In-Depth Interview
 
Economy Wire :  Is the Federal Reserve Bad for America? A Conversation with Danielle DiMartino Booth
 
 
Hoping your feet are in the sand and wishing you well,

Danielle
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