DiMartinoBooth, Money Strong, Quill Intelligence, Central Bankers

Do Central Bankers Have the Capacity to Apologize?

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It would seem that Sorry is the hardest word to say and hear. It was rare that Sir Elton John took the lead on writing his lyrics. “Sorry Seems to be the Hardest Word” was an exception. Long-time collaborator and co-writer Bernie Taupin reminisced that the lyrics captured, “That whole idealistic feeling people get when they want to save something from dying, when they basically know deep down inside that it’s already dead. It’s that heartbreaking, sickening part of love that you wouldn’t wish on anyone if you didn’t know that it’s inevitable, that they’re going to experience it one day.” The 1976 blockbuster hit was certified gold on January 25, 1977.

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Danielle DiMartino Booth is CEO and Director of Intelligence at Quill Intelligence LLC.

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A Moment with Danielle DiMartino Booth — The American Dreams Show with Alan Olsen

A Moment with Danielle diMartino Booth

Author of Fed Up: How the Federal Reserve is Bad for America


Question: Can you tell us a little about your background?Danielle: I’m a good old-fashioned product of the community college system in this country. I worked my way through school. I ended up with an MBA in finance and knocked on every door on Wall Street until somebody finally relented so I had a wonderful career there. 9/11 changed my perspective and I ended up leaving and using my second masters which was in journalism from Columbia. I’d gone to night school, I was probably the oldest night school student they’d ever seen and I ended up writing in a newspaper in the Dallas in the Dallas Morning News which is where Warren Buffett discovered my writing and eventually Richard Fisher, who was president of the Dallas Fed, learned of my work and he asked me to come join the Federal Reserve and I felt it was my duty to God and country so I did. When he retired, I retired with him and now I’ve written a book called Fed Up. It is it is a primer on financial literacy, it is opening the doors for millions of people and it’s a great source of pride. I also write and blog every week, every day on this mission to really expand improve financial literacy in this country.


Question: Can you share some of your thoughts on the recent financial crisis?  

Danielle: Well first of all I think people should understand that the basis of the financial crisis was created within the Fed. So Alan Greenspan- this came out in his biography- Alan Greenspan was aware of the magnitude of what was building in this subprime mortgage bubble that then became a crisis, but that was neither here nor there. When you were on the inside of the Fed it was DEFCON 1. You absolutely had to do something because we saw the dominos lining up. We knew that the financial system globally was at grave risk of collapsing and we absolutely had to do something to prevent that because things that take Wall Street down inevitably harm those on Main Street much much more. And so at the time it was absolutely the right thing to do when we were in the thick of the crisis and Lehman was going and AIG went right after it but at some point we should have stopped. I mean you spend time and Wall Street as a trader on the floor. I was in sales, and I was introduced back then to the idea of private equity which has now become this mammoth industry that lives outside of the conventional banking system. I started at a firm called Donaldson Lufkin & Jenrette and it was a highly entrepreneurial firm that taught me everything I know about running a business because they let each person work inside of their own silo that was that there. Prior to 9/11, I worked a lot in fixed income in the bond market and so I knew people who came down with that building. One of my sales assistants who was sitting outside actually watched the second plane fly into her father’s floor at Morgan Stanley, now he had gotten out which was a wonderful thing but it there was something about 9/11 that woke up my inner patriot and I knew what I was doing was great for me and it was fun to be single in New York City and have a lucrative career, but it told me that there was a purpose- that there was a deeper purpose for me and I didn’t know what it was at the time. I didn’t know what it was until the Federal Reserve came calling but when that happened I realized that I had been placed in the right place at the right time. 9/11 shifted my perspective. I left about a year after 9/11, moved to Dallas and got married- but I don’t think I’ve missed a month since then, I’m constantly back in my second home, New York City, and it is the city I love and embrace.

Question: What was is like to work inside the Federal Reserve?

Danielle: Inside it was really like day and night. Trading floors are places where you smell the red meat. You eat what you kill, you are what you produce and you’re only as good as you are today and tomorrow everything the clock resets. I was very surprised when I stepped into the Fed because it was a quiet, sterile, almost hospital like feel. There wasn’t much noise, there wasn’t a lot of soul. Everything moved at a very different pace and I’m clinically hyperactive, I have to move all the time and it was quite a culture shock for me to be in that kind of an organization because I still had to keep moving whereas everybody around me it felt like was in suspended animation. I followed Richard Fisher into the Fed and I followed Richard Fisher out of the Fed. I was not exactly welcome after he left and I had a much different, unorthodox role within the Fed because of him.

Question: Can you tell us a little about the role that you had at the Fed?

Danielle: Richard Fisher started at Brown Brothers Harriman. He was an MBA in finance, I was an MBA in finance. We were some of the few people in the building who were not Ph.D. academics in economics so we looked at the world through a much different prism. So rather than take all of the markets intelligence from the New York Fed which was tradition among the other districts, he decided that he wanted to have his own markets intelligence. So he had me found his own his markets desk inside the Dallas Fed and sent me off- ferried me off to New York before every Federal Open Market Committee and walked into the room with Ben Bernanke and others armed with his own market intelligence which was much to the chagrin of a lot of people at the New York Fed. I will tell you what I did it was wonderful, I didn’t mind being the person behind the leader because I felt that he was doing something that was so very important in fighting what was going on at the Fed which really was devastating to our nation’s retirees.

Question: When Richard Fischer left the Dallas Fed, you decided to step into a new venture, can you tell us a little about that?

Danielle: Somebody who had read my book, Fed Up, was inspired by the way I thought, which again is very unorthodox. I don’t think like most people when it comes to economics and finance, so upon finishing the book, he put a call in to me and said, “we are wondering what we could do with the way you think. If we could marry it to the next generation of technology and we think that if we could plug your brain into a supercomputer that we could revolutionize the way research is created and delivered and help out every CEO, CFO, hedge fund manager, mutual fund manager in the country.” and I said, did you say supercomputer, and they said all you have to do is continue thinking the way you think, we’ll take care of the technology end of it and so almost a year later we are in the process of founding Quill Intelligence. The Quill is my written word, and the intelligence is the technology of the future. We cannot deny machine learning, we cannot deny artificial intelligence, but we can learn how to work with it to make something that is more accessible and better for everybody. If I could be cloned by a hundred and read in 396 different languages, what would my capabilities be, what would my views be, what would my analysis be if I’m already a thought leader in the field of economics and finance, what would putting that on steroids do and I think we’re going to find out.

Question: What’s your take on cryptocurrency?

Danielle: My take on crypto is that because governments have become involved it quickly became a matter of national security. So we know that the three countries that are the most advanced is Venezuela is for starters but that has more to do with China and Russia, the other two countries that are making great inroads into cryptocurrency. I think they have aims of monitoring and controlling what people buy in their countries but by that same token, Great Britain was very quick to come out and say we’ll be right behind you. The Federal Reserve under Jay Powell, who I had tremendous respect for, first non-PhD in economics to lead the Fed since Volcker was in office. They have come out and been very adamant in saying if we do roll out a national cryptocurrency, any transaction that takes place will be just as anonymous as if the two of us were to exchange a dollar bill. We’re not going to monitor our society so I think that the crypto and blockchain technology is a wonderful thing that we can learn from and venture off into the next way we transact.

Question: How successful do you think the Central Bank is going to be in intervening in cryptocurrencies?

Danielle: I don’t think there’s really a choice in the matter. I think that they’ll have to figure out a way. I know that the next generation of quantum technology is going to be a game-changer in terms of how efficiently crypto currencies behave. I’m no expert, but I don’t really think it’s a matter of choice I think it is something that will have to be figured out whether it’s the Fed, whether it’s Treasury, whether it’s a higher being not, that I want to create more bureaucracy, but we will have to figure it out.

Question: Can you give your perspective on the U.S. debt?

Danielle: I’m gravely concerned for my children for my grandchildren. It’s one of the reasons I wrote Fed Up and one of the reasons that I became so disgusted with what was going on in this country is that our founding fathers they intended for us to save and invest in the future, not for us to borrow our way to prosperity. It’s not a finite solution and I promise you that our sovereign enemies are paying attention to how we’re trying to grow. I’m very concerned at the direction we’re taking. I don’t think we should be this profligate nation and depends solely on the fact that the dollar is the world’s reserve currency and rest on our laurels based on that indefinitely. The British Pound Sterling did fall and in times of extreme income inequality which we see in our country and populism and divisive enough sometimes the settings that that bring about revolution economically that can sometimes lead to other kinds of revolution the debt situation is a ticking time bomb and I don’t mean to be that I’m not there’s no scare mongering here but it is very unamerican and I hope that we have strong leaders going forward who address it like adults.

Question: What’s your take on the tariffs with china and how is it going to affect us?

Danielle: I’m beginning to feel like this is a high-stakes poker game that is going to have true ramifications. It was one thing when they were banding about twenty thirty billion dollars it’s a whole different story when you’re talking about two hundred billion dollars in magnitude that is a bonafide trade war and trade wars have often ended in true hot wars and that is really what bothers me. The most you look back in your history it’s terribly inflationary for US consumers as well and jobs will be lost and jobs will be sent overseas. There are tremendous negative consequences to what we’re doing and I’m not so sure that China is necessarily as worried as we think they are because we’re doing this because they’re going to accomplish what they’re going to accomplish. They look at the world through a much different prism, Their level of patience is unlike American politicians and I have serious concerns about where this headed.

Question: Why haven’t we seen major reactions to this on Wall Street?

Danielle: Well what we have seen is a major reaction to this in the bond market and one of the things that has been a hallmark of the current volatile year 2018 has been after 2017 was the year of complacency one of the hallmarks is that the bond market has been very steadily advertising that things are going wrong. Well the stock market in a very bumpy way is advertising the opposite so these things will be rectified, we just don’t know how but right now the bond market is flashing a very distinct signal that this going to slow the US economy. When Alan Greenspan took office and started allowing the markets to be manipulated under his watch, it’s documented, I’d like to see us go back to a more normal world where one market reflects where we’re headed and another market reflects the opposite- they’re supposed to move inversely to one another. I’m not so sure that the investing community is prepared for that, it’s interesting because it’s been over 30 years and this whole generation has grown up without seeing this. There are 13 million new entrants to the financial services industry since 2007, it’s safe to say there’s an entire generation that doesn’t even know what a rational bond market behave on market behaves like.

Question: How should average person prepare for the next crisis?

Danielle: If there’s one thing that is improved over the last 12 months or so, it’s that there’s no longer a stigmatization associated with holding cash. You can actually put your money into cash and make a decent return. You don’t have to be exposed to these markets, there’s no hard fast rule that says as long as you’re diversified and you’re invested for the long haul that you’re going to be fine. I have grave concern for the baby boomers because I think the next big market correction that we have is going to be a body blow to this generation the last time this happened a decade ago they were able to make the decision, they live longer, we’re all living longer, they were able to make the financial decisions, stay in  the workforce for another decade. I don’t think that it’s going to be the same for baby boomers as they segway into their 70’s. I think the optionality is lower, so again there’s nothing wrong with getting a return on cash at all. Though I did a study a few years back on demographics and of course in the U.S. the big person preaching demographic trends is Harry Dent, yes cult followers of him.

Question: How does a person get signed up for your blog and connected with you.

Danielle: Just go on Quill Intelligence.com and you’ll see everything you need to know about me and all of our offerings and how you can begin your journey to financial literacy.

-Edited for Concision

@dimartinobooth, Danielle DiMartino Booth, Fed Up: An Insider's Guide to why the Federal Reserve is Bad for America, Money Strong LLC, economy, federal reserve, William Safire

Channeling Safire: “If it’s broke, fix it.”

Bert Lance must have left office thinking his legacy was in the soup.

Instead, the wise words of one of the country’s shortest-serving Directors of the Office of Management and Budget would go on to first merit inclusion in Random House’s Dictionary of Popular Proverbs and Sayings and then today, Google status. The expression, “If it ain’t broke, don’t fix it,” achieved such acceptance, conservative legend William Safire would go on to crown Lance’s idiom, “a source of inspiration to all anti-activists.”

For Safire, a gifted word spinner if there ever was one, his acknowledgement of pith perfected in no way implied admiration of the source. Indeed, Safire’s crowning glory as a New Yok Times columnist arrived with his 1978 Pulitzer Prize for “Carter’s Broken Lance.” …

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DiMartino Booth, Big Boys, CRE, Money Strong, Fed Up

The Big Boys of Summer

Do you feel it in the air? Is summer out of reach?

Many of us came of age, or thought we did, the first time we heard Don Henley’s mega-hit The Boys of Summer, released in October 1984. But can a song be reincarnated to mean even more? Can one brush with destiny change everything? This week more than any other, it’s right and true to look back and answer that question in the affirmative.

For those of us in New York 16 years ago, September 12th and 13th stretched on for many more than the 24 hours the clock conveyed. It wasn’t until the early morning hours of the 14th, when Dick Grasso announced the New York Stock Exchange would remain closed through the weekend, that many of us were released, on many levels. Walking the beach that weekend, looking for signs in the sand, Henley’s mournful song stopped me in my tracks. “Those days are gone forever” forever took on new meaning.

An old friend dropped me a line recently. His none-too-subtle message reminded me yet again of Henley’s song, but in yet a different way. It would appear the innocent boys of summer have departed the investing world as well, leaving in their stead conditions in which only “big boys” should engage, his words. Though this market veteran has been around long enough to know most asset classes are vulnerable, the article he shared spoke specifically to tail risks building in ccommercial real estate  (CRE), which we’ll get to in relatively short order.

Longtime readers of these weeklies know the two asset classes I foresee investors will grapple with the most in the next recession are high grade corporate bonds and apartments. The math and logic backing this warning are simple as they most resemble that which supported the explosion of subprime mortgage issuance during its heyday. Accept credit quality as a given, so long as it brandishes an investment grade rating, and green light record levels of issuance at just about any price. No, this will not end well.

But what about other CRE subsectors? After all, rent declines throughout the three most recent recessions were the deepest in office and industrial markets. Multifamily, meanwhile, was the least distressed sector. Retail is a unique case in point:  rent declines were near nonexistent during the 2001 recession, but worse than office and on par with industrials during the Great Recession thanks to pricing pressures accelerating the rise of ecommerce.

Since then, things have gotten mighty interesting in what has, by all accounts, been the lesser manipulated of the two types of domestic real estate markets. Hint: it isn’t housing. The Federal Reserve’s misguided policies and interest rate suppression tactics are manifest in residential real estate, where Morgan Stanley figures prices have recovered 90 percent of their peak-to-trough values (‘Peak’ is defined as 2007-2008 highs, while ‘trough’ reflects 2009-2010 lows).

As for CRE, it’s recouped nearly double that of residential – peak-to-trough prices are up 168 percent. Critically, these are the ‘headline’ figures that catalyze concerns among the superficialists. But it’s the subsectors that serve up the real smokin’ hot spice factor. A quick perusal of the nearby table highlights how haywire things have become in multifamily, which we already know, and about which you should consider yourself amply forewarned.

But look just beneath manic multifamily and you see that in any other world, what’s happened in major market and central business district (CBD) office properties would be garnering plenty of angst if not for apartments hogging the overvaluation limelight. And that’s purely through the prism of price behavior.

Factor in what’s driven those price gains and you really start to get worried. We’re talking the zero interest rate policy that the Fed has facilitated. At the extreme, we’re talking about $60 billion in 2015 CRE sales…in Manhattan alone, a record high and 14 percent above 2007’s prior peak.

Lending standards, of course, played their part and dutifully tanked, hitting their most lenient laxity in mid-2015. Foreign investors, in this cycle more than any predecessor, clocked record transaction volumes, which topped out at 18 percent in late 2015.

This highly favorable dynamic was most visible in capitalization, or cap rates, which is the net operating income of any given property divided by its price. The less in the way of income a buyer is willing to accept for a given price, the lower the cap rate. In 2015, cap rates sank to lower levels than they did at their 2007 lows. Valuations were, in other words, at unprecedented peaks, with the key word being ‘were.’

Since peaking, quarterly transaction volumes have slumped to around $100 billion from late 2015’s briskest pace, when sales hit $160 billion. In the meantime, standards have tightened for eight consecutive quarters and foreign investors’ share of transaction volumes has declined to 13 percent. And finally, as has been broadcast widely, the Fed has been in a tightening mode.

What happens when the favorable dynamic that drove cap rates into the ground reverses? The only answer is rents will have to increase to justify keeping cap rates down.

Some caveats to the caveats. Financial conditions are actually easing as sabre rattling, DC stagnation and Mother Nature collude to suppress interest rates. And while sales volumes are well off their peaks, they did recover somewhat in the second quarter and are down just five percent over 2016 levels.

It should be added that Chinese investors would rather have their cash escape to our fair shores; they just can’t get past the state-imposed controls put in place to staunch capital flight. The Saudis and other crude-export-dependent countries would also prefer to have the resources to keep investing were it not for that sticking point of the lowly price of that sticky fluid they pump out of the ground. In all, Middle Eastern investment is down 73 percent over last year; Saudi investment in particular has crashed by 96 percent.

And so, you have sellers thinking their still- nosebleed prices could be validated and buyers thinking recent trends will deteriorate further and thus refusing to budge. That brings us to where we are today – a virtual standoff.

To bring the extreme back into the picture to prove a point, CRE volumes in Manhattan are expected to end the year at $19.8 billion, matching levels last seen in the dark year of 2008. Not surprisingly, expectations for commercial leasing and the future rental market in New York both hit four year-lows in the second quarter.

The good news is the froth coming out of the market should reintroduce rationale among owners. Let’s just say that’s not exactly how the outcome appears to be evolving, which brings us to that article referenced at the outset, the one that disturbed and inspired at the same time.

The Bloomberg article is easy enough to Google, which you should: “NYC Landlords That Can’t Find Buyers Turn to Borrowing Instead.”

The gist of it speaks to the intersection of easy financial conditions not being reflective of the Fed being in a tightening mode, which actually speaks to the disconnect plaguing many asset classes. As it pertains specifically to CRE, think in terms of how cash-out refinancings increased investor losses in securities backed by subprime mortgages way back when.

Recall it wasn’t until John Thain attached a price tag of 22-cents-on-the-dollar to Mother Merrill’s subprime book that anyone truly knew the Street value of the toxic waste. Though things are certainly not nearly so bad, it is the spirit of owners’ behavior that resonates.

This from Bloomberg, per CBRE: “In a building where building sales are few and far between, it can be challenging to find a comparable transaction to get a reading on prices for an appraisal. There are other ways to calculate a property’s value, but it’s impossible to account for changes on a real-time basis.” (Let their painfully diplomatic wording plant its own seed next time you’re contemplating going long or short CRE on a macro level.)

Pardon the digression. Back to the matter at hand of what exactly entrapped owners should do? Why not seek out buyers for your property and simultaneously take out a mortgage on the property. That way you’re effectively refinancing at an inflated value, what my old friend who’d just as well stay in the private domain for, like, ever, terms the “perfect crime in CRE,” assuming you’ve cordoned said property into its own little LLC.

“If things go well, the property value goes up, no harm, no foul,” he observed. “If the market tanks, you hand the keys to the lender, but you still have the cash from the recapitalization.”

Let’s be clear, we’re not talking traditional lenders here. Indeed, second quarter originations fell two percent for life insurers and a steep 21 percent for commercial banks. The flip side is they rose by 26 percent for government sponsored enterprises and an eye-watering 126 percent for commercial mortgage backed securities.

For the record, retail was the only sector to see a decline in quarterly originations, so that’s something. As for multifamily, Morgan Stanley warns that, “investors are more willing to purchase and lenders more willing to finance, resulting in less deleveraging.” Cue the understatement considering the Bloomberg story referred specifically to apartment landlords though the cash-out contagion is sure to spread to other overvalued sectors by yesterday.

Notably, the Morgan Stanley data did not elaborate on the behavior of the most go-go cowboys in the land of lending, that is, private equity (PE). Disregard for a moment, as difficult as it is, the near trillion-dollar pile of dry powder PE sits atop. Ruminate rather on the quarter of that pile earmarked for real estate, some $255 billion, a record if there ever was one.

The beat looks set to go on and on. According to Canaccord Genuity’s Brian Reynolds, in the five-week period through mid-August, pensions directed an incremental $9 billion into some form of private equity fund. A few tasty offerings illustrate a particular penchant for that hard asset which, by the way, has become one of retirees’ most crowded trades, as you, but not they, can see:

  •   Boca Raton Police and Fire Pension allocated $10 million into distressed real estate fund
  •   Vermont state pension $30 million into value-added real estate fund
  •   Illinois Municipal Pension put $75 million into a value-added real estate fund
  •   Wisconsin state pension sank $395 million into real estate funds
  •   Kansas Public Employees’ Pension allocated $50 million to a real estate fund

And that’s just pensions. All manner of investors continue to herd into the divine diversification on offer with PE funds. As for the founders of PE funds, they’re taking buyouts and getting the heck out, at least according to the Wall Street Journal. Lovely.

“A majority of aggressive CRE recap deals are with real estate funds chasing yield,” my friend further added. “Banks can’t touch their rate and terms, so big boy rules apply.” Lovelier.

In the event you think some egregious omission has taken place, safe assured, the $300 billion in hurricane damages will indeed make a different kind of impact. But no one is sure how prominent that role will be just yet.

What can be said of Houston in particular is nearly a fifth of office space in the city stood vacant as of June while 11 million square feet were free for sublease pre-Harvey, the most since at least 1998. Oh, and the vintage of loans with the greatest exposure? That would be 2015.  For any of you vultures out there, can you please get back to me with a stronger word than ‘emptor’ to put after ‘Caveat ______” before you go off half-cocked?

In the meantime, this chart from Hoya Capital Real Estate highlights office real estate investment trusts (REITs) that have largely been given a pass vis-à-vis their brethren in the battered retail (mall) and massed multifamily spaces. You’ll note one REIT found its niche in low quality properties in Houston.



Don Henley’s song reminds us that we can never look back. Perhaps it’s best to then look forward, knowing that time as we know it often compresses and that any summer can come to an abrupt end. With any luck, unforeseen events make us stronger in the end. As investors, the best we can do is be positioned for the likely and unlikely outcomes, those that arrive after even the big boys of summer have gone.


DiMartino Booth

“Okay, Houston, we’ve had an opportunity here.”

Who doesn’t know that past perfect verbs are passé? Especially where drama is concerned.

Hence the thrice-taken artistic license in recanting the fateful conversation that took place April 13, 1970. An onboard explosion had just rocked those manning the Apollo 13 mission to the moon. In the pitch-blacked-out module, some 200,000 miles from home, the astronauts radioed mission control. You know what happened next – ‘Houston, we have a problem.’ Except it didn’t.

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Bonfire of the Vulgarities, Danielle DiMartino Booth, Money Strong, Fed Up

The Bonfire of the Vulgarities

Among other historic Wall Street milestones, this October marks the 30th anniversary of the release of Tom Wolfe’s Bonfire of the Vanities.

If you’d prefer, it also marks the 520th anniversary of the original Bonfire that took place in Florence, Italy. Back in the late 1400s, the powerful city was under the rule of the Dominican priest Girolamo Savonarola, who like Wolfe, was taken, though not in the best way, with the outward ostentatiousness of the local glitterati. The good father thus ordered the burning of sinful vices such as books and arts deemed devilish and even cosmetics and mirrors that vaunted the vulgars, at least in his eyes.

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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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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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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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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.