Thursday, September 20, 2012

Allianz on Repression: "Welcome to a RIGGED Future in a World of Financial Repression "

Sometimes I forget just how big Allianz is. Then I remember that PIMCO is one of their subsidiaries and PIMCO alone has $1.8 trillion AUM. The Global Investors division has a total of € 1.6 Trillion under management. Not BlackRock but still a behemoth.
Anbd that's just the investment management biz, I hear they're also into insurance.
From Allianz Global Investors:
Neil Dwane, CIO Europe of Allianz Global Investors, believes that financial repression is here to stay and will have a huge long-term impact. He presents its causes and effects—and tells investors how to fight back.

As a European investor—working and living in both the U.K. and Germany, and speaking to our clients around Europe regularly—I continue to be shocked and deeply saddened at both a professional and personal level by the impact of this destructive debt crisis that still rumbles on in Europe and will continue to do so.

Faced by this unprecedented crisis and the deepening rifts appearing between societies protesting against austerity, European leaders are under immense pressure to deliver a quick solution. It must be both constitutional and the most palatable (and preferably painless) way out of the ever-deepening recession—which is hitting the poorest hardest. While facing similar though different issues, the U.S., the U.K. and Japan are not far behind.

The solutions
There are two sides to these more painless "solutions" being sought, in my view. The first, quantitative easing (QE), has been firmly established since the 2008 financial crisis, and is more popular with markets as a method of pouring short-term "oil" on the debt crisis "fire" in an attempt to alleviate slowing growth and cruelly high levels of unemployment in too many Organisation for Economic Co-operation and Development (OECD) countries.

Welcome to the now familiar theme of short-term money action by central banks—which has sprung back to life recently—with further easing by China, Denmark, Brazil and Korea all lowering interest rates, the U.K. undertaking additional QE and the European Central Bank (ECB) lowering rates to a historic level. Sadly the positive effect of these actions lasted only a very short time, with the U.S. Federal Reserve’s recent minutes disappointing those hoping for yet more stimulus in the immediate future.

The second is a much less blatant, far more subtle long-term policy—already written about widely but nevertheless invisible to many in society, and hence so irresistibly attractive to Western governments under extreme pressure to come up with less painful solutions to ease the debt crisis.

Welcome to financial repression and artificially engineered negative interest rate policies (NIRP). Having long since been implemented, it's here to stay for many years (or even decades) to come—as it must if it is to solve the excessive debt burden and entitlements obligation. While far less obvious to the average citizen in the short term, it has a huge long-term impact and brings many challenges with it—which I will endeavour to explain for you below, point by point.

 Welcome to a RIGGED future

The facts

Restrictive and regulated behaviors will impact all participants in the savings industry, as banks are forced to hold more sovereign bonds, insurers are encouraged by Solvency II to remain risk-averse, and pension funds are persuaded to accept increasingly less-volatile returns.
Inflation of real assets and costs are likely to erode nominal cash returns, thereby making savers unable to protect the purchasing power of their money. A premium may emerge for illiquid, high-quality, infrastructure-type assets.
Government policies will tend to squeeze out private capital during this period, thereby dulling the real value-creating part of the economy and highlighting the value of growth companies globally.
Global investment opportunities are expected to remain attractive during a time when many policies seek to de-globalize markets and correct the remaining huge imbalances that remain in Europe and around the world—a process that may take years to undo.
Equities in the past have been able to offset much of the pain of financial repression, especially by (A) offering real inflation-adjusted dividends within high-quality large-cap stocks, but most effectively in small caps both regionally and globally; and (B) accessing the real market growth of the emerging markets.
Disciplined investment skills can optimize the full use of risk in a client's portfolio, implemented in as unconstrained a fashion as possible.
RIGGED it may be ... and the fight to protect the value of your savings has just begun.