Danielle was a guest with Jim Goddard on This Week in Money talking about recent developments in the world economy and markets. You can listen to an audio clip of the segment here, starting at 13:28 on the playbar.
International stocks and commodities are tied at the hip in liquidation selling today, as usual, reminding yet again that different coloured jellybeans in different product wrappers do not offer meaningful risk diversification.
Cryptos, too: no hold of value here, folks.
As expected, risk sellers are heading to government bonds and out of commodity-centric currencies like the loonie and into the US dollar.
For those who forget, there are no gurus, only cycles. And this extreme cycle has seen participants plough more than $1 trillion (much of it borrowed) into equities alone over the last 12 months–as much as the previous 19 years combined (chart below from Bank of America). Try to digest the scope and scale of recent euphoria. Mindless, to say the least.
It remains to be seen whether we are entering the inevitable next leg of the bear market that was interrupted in March 2020. Meanwhile, tanking markets will go a long way in reversing inflation expectations and central bank tightening plans. It’s never too late to review one’s financial risk and loss exposure.
In the discussion below, Jeremy Grantham offers some valuable historical context for the present cycle.
FEG’s Greg Dowling sits down with renowned investor, philanthropist, activist, and bubble forecaster Jeremy Grantham, co-founder of GMO and Batterymarch Financial Management and founder of the Grantham Foundation for the Protection of the Environment. Jeremy shares his insights on the current market environment, details of his storied history in finance, recommendations for investing in a bubble environment, and his predictions for innovative green technologies that may have the ability to change the world. Here is a direct audio link.
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.
