I just read a very interesting article in Bloomberg. It turns out that major national wealth and pension funds have radically increased their holdings in private, non-marketable investments like hedge funds, infrastructure projects and real estate. The chart below, taken from the article, tells the story.
When, as now, traditional stock and bond markets drop, these non-marketable investments "shield" the valuations of such pension and wealth funds because private holdings are marked to market (valued) very infrequently, making them look like they are outperforming. Even then, valuations depend on "independent" experts who get paid by the investors themselves. Having a bit of experience on the subject, I can tell you that such valuations are highly subjective.
When large investors exit traditional markets, volatility increases - there are fewer large, long-term investors to act as dampeners/shock absorbers. To make a football analogy, a team's star players are exiting the game and are hiding in the locker room. This leaves the B players out in the field (eg retail investors with their ETFs) at the mercy of sharp short-term players, scalpers, and manipulators. The A players can claim that they are not being beaten, but the team will lose the game, anyway. Even worse, the whole of the NFL (or FIFA, pick your football) will soon get totally disorganized and eventually fail.
And the final insult? As the A team hides in the locker room, it will get out of touch with the game, grow fat and lazy. When it comes time for them to prove their A status by playing a game (get a real mark-to-market valuation for their illiquid assets) they will discover that they are now C players...
kind of talking to myself... was still thinking about Krugman and real interest rates... If there exist real rates, it would be impossible to raise nominal interest rates beyond the real interest rate, without simultaneously raising inflation that would correct the real rates back down.ReplyDelete
i.e. the higher the Fed interest rate, the higher the inflation...
or to put it in Hell's words... inflation can only be controlled by controlling money supply... not by controlling interest rates...Delete
not sure how much I believe myself though...
btw, Hell... really appreciate your posts, such as this one. Gives me a peek into another world... sometimes (ok a lot of the time) I just go off topic because I don't have anything to say on the current post... still, they are interesting reads. =)ReplyDelete
Feel free to express your thoughts, and thank you for the compliment. H.Delete