The reckless obsession with maximizing capital risk and indebtedness under the guise of “investing” is sure to end in financial carnage. Historical precedents are unambiguous. When this carbuncle blows, we will be trying to patch financial holes for years to come. Cautionary evidence is everywhere. The recent Calpers decision is just one more egregious example, see: Leverage on leverage is big risk for investors and their lenders:
There’s already too much money chasing too few assets and yet even the most sober investors seem ready to add to the problem.
Calpers, the $495 billion California public-employee pension fund, is planning to put more money into chasing returns by taking on debt worth up to 5% of its fund value — or roughly $25 billion — to plow into financial assets. It is doing this because it can’t see another way of hitting its long-term return target of 6.8% to meet its promised payouts.
This seems remarkable to me: A very big pension plan, which invests in lots of different funds,including many that use leverage to boost returns, is now going to start using its own leverage on top to try to boost its returns. It highlights how investors of all kinds are having to take more risk to make any money.
One caveat…investors are not “having to take more risk”; they are choosing to do so. A wiser plan is not to take the bait and wait for investment-grade opportunities to come from future liquidation sales. They will come, but very few are positioned to take advantage.
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