Friday, April 21, 2017

"World Out Of Whack: An Absurd Unintended Consequence Of Abnormally Low Rates"

From Capitalist Exploits, April 19:
Market dislocations occur when financial markets, operating under stressful conditions, experience large widespread asset mispricing.
Welcome to this week’s edition of “World Out Of Whack” where every Wednesday we take time out of our day to laugh, poke fun at and present to you absurdity in global financial markets in all its glorious insanity.
While we enjoy a good laugh, the truth is that the first step to protecting ourselves from losses is to protect ourselves from ignorance. Think of the “World Out Of Whack” as your double thick armour plated side impact protection system in a financial world littered with drunk drivers.
Selfishly we also know that the biggest (and often the fastest) returns come from asymmetric market moves. But, in order to identify these moves we must first identify where they live.
Occasionally we find opportunities where we can buy (or sell) assets for mere cents on the dollar – because, after all, we are capitalists.

Even the dullest amongst us have heard about compound interest.

The story goes like this: you can become wealthy – not rich, but wealthy – by foregoing those lattes, $100 haircuts, and saving a decent portion of your income. You earn interest on those savings and let it compound.

By the time your hips are giving in and your bladder has begun to leak it’s all turned into a decent little stash while the Jones’ next door who’ve spent their lives upgrading the Lexus every year and holidaying in Hawaii will be asking you for a loan to pay for the leaking roof.
This all works when you can actually earn interest on your money.

And so ever since our central bank overlords with their well intentioned but entirely destructive policies have driven rates through the floor the ability to achieve yield has been destroyed.
The distortions globally are truly breathtaking.
Take a look at this:
In the world of illiquid private assets such as venture capital and private equity asset prices are determined largely by:
  1. The valuation based on the last successful financing round
  2. Any liquidity event (trade sales, IPOs)
  3. Or… “belly-upedness”
Last month the WSJ ran an article about Investindustrial, a European private equity fund run by one Andrea Bonomi who, while running an existing fund, just raised gobs of new money ($800m to be exact) and launched a new fund to buy the assets of the old fund.

Wait! What??
The story, according to the WSJ, goes like this...MUCH MORE
“Low and expanding risk premiums are at the root of nearly every abrupt market loss.” 
Raghuram Rajan, the governor of the Reserve Bank of India, who is one of the few economists who foresaw the financial crisis