The Risk Of Doing Nothing

[ParticleMan]

One of the basic tenants of capitalism is that capital itself flows to the most efficient use.

This idea isn't really too radical - any rice farmer knows that a surplus can either be given (or traded) away, or stored.

And that the latter, defending stored rice from the ravages of weevils, moisture, and all of nature's other theives is an expensive and ultimately zero sum game.

Far, far better then, to give your surplus away - of the available choices, only this results in additional production (of whatever kind).

Acturial planning - funds set on autopilot with an aging bulge in their capital base have increasingly moved to overweight risk-free positions (the circus of the last three years has merely accelerated this - the trends have been established long before, viz rising deficit levels in the constituent states).

The price of this rice (the price of risk free instruments - and inversely, the yield to maturity) tell us that the "investment" world is now seriously overweight in this one single dimension; that a great many rice-farmers have opted for a zero sum option, of trying to store their own meagre surplus, fearing above all else their own approaching enfeeblement, and the savings gap required to fund it.

Trying, in fact, to grip the tide as it washes past.

And here we get to the meat of this idle Sunday's thought.

The least efficient users of capital today are the large pooled funds now overweight in these zero- and near-zero coupons (gilts, treasuries, overnight cash, et al).

And exactly as designed, the underlying nature of capitalism will strip them each bare (the specific mechanism today being requiring near-logarithmic growth in the purchase of so-called risk-free assets as their market yields plunge, simply to maintain present levels of underfundedness).

To prevent this, pooled funds must invest in growth - particularly, in dividend growth; they must seize the nettle, they must radically rethink their "lifestyle investment" strategies, they must weigh in on the side of additional and more efficient production.

They must in fact trigger capital spending, cause new job creation - and likewise, raise productivity, raise efficiency, raise national output levels, reduce energy consumption, and in so doing reduce the cost of making good their promise to their members.

The most risky thing a fund can do today is invest in risk-free (really - growth-free) assets.

Funds who recognise this, who petition their members for the required regulatory and legislatory changes sooner rather than later will prosper.

The remainder, those who choose not to choose, and those who choose to remain unchanging, are attempting to plug the growing gap by hoping that by some miracle tomorrow's unborn rice farmers will grow like soldiers from as-yet unsown dragon's teeth.

The risk of doing nowt is very real.

[Alan B'Stard MP]

Let them eat cake with approaching expiry dates.

[Bloo Loo]

"maintain present levels of underfundedness"

quote of the day.

[Si1]

an article in the latest economist magazine cites the 'new paradox of thrift'

in this case - because IRs are so low, people approaching retirement with low expectations of anuity returns, and funds representing their interests, have higher psychological risk-aversion, and are hoarding cash in cash and near-cash forms

therefore, paradoxically, lower interest rates, in this near-retirement baby-boomer-dominated world, are encouraging saving and discouraging spending.

[Alan B'Stard MP]

an article in the latest economist magazine cites the 'new paradox of thrift'

in this case - because IRs are so low, people approaching retirement with low expectations of anuity returns, and funds representing their interests, have higher psychological risk-aversion, and are hoarding cash in cash and near-cash forms

therefore, paradoxically, lower interest rates, in this near-retirement baby-boomer-dominated world, are encouraging saving and discouraging spending.

We need to lower the retirement age to get these boomers spending.

[council dweller]

One of the basic 'tenants' of capitalism is that capital itself flows to the most efficient use.

You what?

Is this another one of your Yen ramping threads?

[porca misèria]

You what?

Is this another one of your Yen ramping threads?

I expect it was a typo for tenets.

Sometimes the context of a word makes its meaning clear even if the word itself is nonsense.

[ParticleMan]

Sometimes the context of a word makes its meaning clear even if the word itself is nonsense.

Or vice-versa.

(you suspect correctly)

On the other point, I've been accused of a great many things recently - Yen ramping however has not been one of them.

Nursing *that* position... for the better end of three years... hurt, some.

Back to the topic, I'd definitely go as far as to suggest that there's a causal link between passive fund members, passive fund management, yields, and likely growth outlooks.

Watching large pools of capital get vapourised due to (of all things) enforced allocation models is... hideous... sickening.

I'm absolutely not talking about increased consumption spending (which is the message at least some of the ad-men want you to hear).

But this present phase, the complete withdrawal of all risk capital - it's the root of a very nasty feedback loop which ultimately results in less and more expensive production; something which, if sentiment does not turn, and turn soon, will echo in economies the world over for a generation, perhaps more.

[Democorruptcy]

Low interest rates are a sign of no confidence in an economy.

Who is going to invest in that?

[ParticleMan]

Low interest rates are a sign of no confidence in an economy.

Hence the topic.

In this instance blindly, passively doing exactly what classic risk management models (some of them dating as far back as the 30's) tell you to do is sending the herd thundering over a cliff.

Here's the thing.

You can't not invest a surplus.

You can go overweight in "riskless" assets (and underweight in growth assets).

(you can also of course fail to generate a surplus)

In this instance, anything else (particularly the "something elses" viewed as safe-havens) will slowly, lovingly, and gently impoverish those foolish enough to continue pyramidding their positions in them.

The price signals that the market is giving are loud and clear in respect to this.

A zero coupon - including gilts in a ZIRPy world, other "wealth stores" - are being stripped of their ability to fund consumption (pensioners the world over are slowly discovering what this truly means).

At the limit, zero coupons become illiquid (you literally run out of people able to buy at any price) - I sincerely hope this day does not arrive in the gilts market, that people rediscover their faith in people, begin funding new rice farmers long before.

Let's see if the message gets through.

[Injin]

Or vice-versa.

(you suspect correctly)

On the other point, I've been accused of a great many things recently - Yen ramping however has not been one of them.

Nursing *that* position... for the better end of three years... hurt, some.

Back to the topic, I'd definitely go as far as to suggest that there's a causal link between passive fund members, passive fund management, yields, and likely growth outlooks.

Watching large pools of capital get vapourised due to (of all things) enforced allocation models is... hideous... sickening.

I'm absolutely not talking about increased consumption spending (which is the message at least some of the ad-men want you to hear).

But this present phase, the complete withdrawal of all risk capital - it's the root of a very nasty feedback loop which ultimately results in less and more expensive production; something which, if sentiment does not turn, and turn soon, will echo in economies the world over for a generation, perhaps more.

No taxes on wealth.

Taxes on incomes.

Unforseen?

or is there an understanding of economics lurking in there somewhere....

[easy2012]

The most risky thing a fund can do today is invest in risk-free (really - growth-free) assets.

Of course, investing in risk free growth free is of course not the riskiest thing to do. Buying overpriced asset or lend money to a gambler

is certainly far more dangerous than that.

Having said that, I agree with your sentiment - staying in cash or low yielding bonds is the most certain way of ensuring that the purchasing

power of the pool fund be smaller in 10 years from now.

The question is of course what to invest, and where to invest. To create jobs etc, people need incentives. With a 50% tax rate, it would only

make sense to either:

(1) Be a speculator and seek from 0% capital gains

(2) Invest only in businesses that have non free market characteristic (e.g. BTL that cream off HB), government contracts that one can overcharge etc.

(3) Go elsewhere

Edited September 19, 2010 by easybetman

[ParticleMan]

Buying overpriced asset or lend money to a gambler is certainly far more dangerous than that.

I'd say that giving a fiver to the guy sleeping rough outside Ladbrokes is less risky than a two year reserve instrument of any description right now.

At least the first position is flat at the end of day.

(1) Be a speculator and seek from 0% capital gains

(2) Invest only in businesses that have non free market characteristic (e.g. BTL that cream off HB), government contracts that one can overcharge etc.

(3) Go elsewhere

I'm thinking - largecaps, who stand a chance of being able to buy the assets from the present junk bond bubble at default, and use them to boost dividends.

Either that or buy enough in the way of soft commodities to support folk who can't otherwise take enough time away from rice growing to construct new rice fields.

It's much of a muchness which, in the end.

[stormymonday_2011]

One of the basic tenants of capitalism is that capital itself flows to the most efficient use.

This idea isn't really too radical - any rice farmer knows that a surplus can either be given (or traded) away, or stored.

And that the latter, defending stored rice from the ravages of weevils, moisture, and all of nature's other theives is an expensive and ultimately zero sum game.

Far, far better then, to give your surplus away - of the available choices, only this results in additional production (of whatever kind).

Acturial planning - funds set on autopilot with an aging bulge in their capital base have increasingly moved to overweight risk-free positions (the circus of the last three years has merely accelerated this - the trends have been established long before, viz rising deficit levels in the constituent states).

The price of this rice (the price of risk free instruments - and inversely, the yield to maturity) tell us that the "investment" world is now seriously overweight in this one single dimension; that a great many rice-farmers have opted for a zero sum option, of trying to store their own meagre surplus, fearing above all else their own approaching enfeeblement, and the savings gap required to fund it.

Trying, in fact, to grip the tide as it washes past.

And here we get to the meat of this idle Sunday's thought.

The least efficient users of capital today are the large pooled funds now overweight in these zero- and near-zero coupons (gilts, treasuries, overnight cash, et al).

And exactly as designed, the underlying nature of capitalism will strip them each bare (the specific mechanism today being requiring near-logarithmic growth in the purchase of so-called risk-free assets as their market yields plunge, simply to maintain present levels of underfundedness).

To prevent this, pooled funds must invest in growth - particularly, in dividend growth; they must seize the nettle, they must radically rethink their "lifestyle investment" strategies, they must weigh in on the side of additional and more efficient production.

They must in fact trigger capital spending, cause new job creation - and likewise, raise productivity, raise efficiency, raise national output levels, reduce energy consumption, and in so doing reduce the cost of making good their promise to their members.

The most risky thing a fund can do today is invest in risk-free (really - growth-free) assets.

Funds who recognise this, who petition their members for the required regulatory and legislatory changes sooner rather than later will prosper.

The remainder, those who choose not to choose, and those who choose to remain unchanging, are attempting to plug the growing gap by hoping that by some miracle tomorrow's unborn rice farmers will grow like soldiers from as-yet unsown dragon's teeth.

The risk of doing nowt is very real.

Hmm

Like to quote us some of the returns currently being produced by 'growth funds' for pensions over recent years compared to boring old gilts and Treasuries.

Nor is it inevitable that capitalism will invest such money in capital spending, cause new job creation - and likewise, raise productivity, raise efficiency, raise national output levels, reduce energy consumption, and in so doing reduce the cost of making good their promise to their members.

It is just as likely to piss the money away on assets booms and malinvestment in pointless factories producing teddy bears in China

Frankly if a pensioner calculates that they are going to need 20 pairs of shoes for the rest of their life then it would make as much sense to buy and hoard them now rather than invest in teddy bear factories and hope that the dividend from teddy bear production will shod them through their dotage.

This all sounds like special pleading by a financial sector that one day is going to have burned its way through the government dole it has received in recent years and needs new sources of cash to keep it going.

[easy2012]

I'd say that giving a fiver to the guy sleeping rough outside Ladbrokes is less risky than a two year reserve instrument of any description right now.

At least the first position is flat at the end of day.

I'm thinking - largecaps, who stand a chance of being able to buy the assets from the present junk bond bubble at default, and use them to boost dividends.

Either that or buy enough in the way of soft commodities to support folk who can't otherwise take enough time away from rice growing to construct new rice fields.

It's much of a muchness which, in the end.

1. Ladbroke guy - I suppose I agree !

2. How do you know Ben and King will allow the junk bonders to default ?

3. Are you advocating investing in soft commodities? I still believe soft commodities (rices etc) is for people to eat and not for speculators to buy them though...

I am OK with people buying rice field and grow rice, however.

Edited September 19, 2010 by easybetman

[Meat Puppet]

I'd love to buy equity cashflow streams - but I'm also buying most of the companies' madcap liabilities and leverage - just as we enter the gates of hell.

I wish there was a diversified global fund of unleveraged big name equities.

Problem is a lot of equity returns come from companies with madcap liabilities being priced too low. The macroeconomic environment has been benign enough since WW2 that many of those companies did not end up going to the wall. Can't say that will continue as we enter the gates of hell as you say.

I'm not sure but I guess that you would have to pay a substantial premium for that imaginary fund and that will mean lower returns.

[HPCatlast.]

We need to lower the retirement age to get these boomers spending.

No prob, we'll be spending when what we need is sensibly priced, simples.

When it's overpriced (due to cheap credit) we don't spend.

Simple in it!!

That's the way we were brought up (long before credit cards were available).

[winkie]

..put all windfall surplus apples in a box at the end of the drive for people to help themselves.

[ParticleMan]

3. Are you advocating investing in soft commodities? I still believe soft commodities (rices etc) is for people to eat and not for speculators to buy them though...

I am OK with people buying rice field and grow rice, however.

..put all windfall surplus apples in a box at the end of the drive for people to help themselves.

That's pretty much it right there.

The way I see it is that even taking a capital loss (on a productive yield) has got to be preferable to huddling in a corner waiting for the end to come.

Free apples (and above all, rice!) for those who would use them, I say.

[campervanman]

an article in the latest economist magazine cites the 'new paradox of thrift'

in this case - because IRs are so low, people approaching retirement with low expectations of anuity returns, and funds representing their interests, have higher psychological risk-aversion, and are hoarding cash in cash and near-cash forms

therefore, paradoxically, lower interest rates, in this near-retirement baby-boomer-dominated world, are encouraging saving and discouraging spending.

Errr hang on a mo:

http://www.housepricecrash.co.uk/forum/index.php?showtopic=151326

'encouraging saving and discouraging spending'

Even in the world of hpc 'lets make the boomers the scapegoats' you might see a contradiction here.

[easy2012]

That's pretty much it right there.

The way I see it is that even taking a capital loss (on a productive yield) has got to be preferable to huddling in a corner waiting for the end to come.

Free apples (and above all, rice!) for those who would use them, I say.

From the entire society point of view, that certainly would be nice. However, what if you invest your capital in rice field, give other people rice (or apple),

but other people refuse to give you beer unless you give them money? Society tend to be nicer after going through hard time, the abundance that

we have simply drive people to be super selfish (as they don't think they will ever need anyone else help).

I have been giving surplus apple in my garden to people around, few years past and I don't even get a cookie in return (not that I hope for it),

but you see my point. I can certainly take money and get a cookie from Tesco.

[Alan B'Stard MP]

One of the basic tenants of capitalism is that capital itself flows to the most efficient use.

This idea isn't really too radical - any rice farmer knows that a surplus can either be given (or traded) away, or stored.

And that the latter, defending stored rice from the ravages of weevils, moisture, and all of nature's other theives is an expensive and ultimately zero sum game.

Far, far better then, to give your surplus away - of the available choices, only this results in additional production (of whatever kind).

Acturial planning - funds set on autopilot with an aging bulge in their capital base have increasingly moved to overweight risk-free positions (the circus of the last three years has merely accelerated this - the trends have been established long before, viz rising deficit levels in the constituent states).

The price of this rice (the price of risk free instruments - and inversely, the yield to maturity) tell us that the "investment" world is now seriously overweight in this one single dimension; that a great many rice-farmers have opted for a zero sum option, of trying to store their own meagre surplus, fearing above all else their own approaching enfeeblement, and the savings gap required to fund it.

Trying, in fact, to grip the tide as it washes past.

And here we get to the meat of this idle Sunday's thought.

The least efficient users of capital today are the large pooled funds now overweight in these zero- and near-zero coupons (gilts, treasuries, overnight cash, et al).

And exactly as designed, the underlying nature of capitalism will strip them each bare (the specific mechanism today being requiring near-logarithmic growth in the purchase of so-called risk-free assets as their market yields plunge, simply to maintain present levels of underfundedness).

To prevent this, pooled funds must invest in growth - particularly, in dividend growth; they must seize the nettle, they must radically rethink their "lifestyle investment" strategies, they must weigh in on the side of additional and more efficient production.

They must in fact trigger capital spending, cause new job creation - and likewise, raise productivity, raise efficiency, raise national output levels, reduce energy consumption, and in so doing reduce the cost of making good their promise to their members.

The most risky thing a fund can do today is invest in risk-free (really - growth-free) assets.

Funds who recognise this, who petition their members for the required regulatory and legislatory changes sooner rather than later will prosper.

The remainder, those who choose not to choose, and those who choose to remain unchanging, are attempting to plug the growing gap by hoping that by some miracle tomorrow's unborn rice farmers will grow like soldiers from as-yet unsown dragon's teeth.

The risk of doing nowt is very real.

Financial capital is birthed on a balance sheet. The interest rate of the debt instrument that gave birth to it provides the glass ceiling on what that capital can expect to receive. The capital may float on a bed of liquidity to other "entities" : the implication for the heart broken balance sheet is that is must attract similar capital back on similar yields and maturity to make good on its solvency and further operations. So from a economic perspective - capital does not flow to where it is most needed - it flows to where it is most cajoled (by margins) to satisfy the lie of "surplus promised".

When the sum of the yields offered meets the sum of the debt interest - the capital must stop moving.

The market is telling you something, when capital stops moving, and it cannot be trumped. Listen to it carefully.

Production for productions sake is no answer - especially when the regions where productive capacity is needed and debt needs to be retired are also the unlikely recipients for capital.

Financial capital needs to disappear in a puff of accounting - by default - charity - or consumption.

Like I said - let them eat cake - there's plenty of it. The yield on capital can never beat the cash flows provided by debt. To pay debt you need income - which isn't happening if someone has a surplus of financial capital.

Edited September 20, 2010 by Alan B'Stard MP

[R K]

"Give it to the rice-eaters, for they shall inherit the earth (or take it from you with extreme prejudice)"

[Injin]

Financial capital is birthed on a balance sheet.

YOu know what i'm going to say to that, don't you?

[Alan B'Stard MP]

YOu know what i'm going to say to that, don't you?

That's why I stuck "financial" in front.

We know "capital" is a different fish.