Amin Rajan Talks Investing in a Debt-Fueled World with The FRA
Special Guest: Prof. Amin Rajan, Chief Executive of CREATE (Centre for Research and Technology in Europe)-Research - A network of prominent researchers undertaking high level advisory assignments for governments, global banks, fund managers, multinational companies and international bodies such as the EU, OECD and ILO. He is a visiting professor at the Centre for Leadership Studies at Exeter University, and an associate fellow at Oxford University's Said Business School. He is an expert on employment and workforce diversity and is one of the most sought after speakers on the future of work, organization and society and its leadership implications.
"Financial Repression is a device used by governments to liquidate their debt."
Financial Repression uses low interest rates (which reduces their financing costs) and inflation (which vaporizes its debt). The Negative Real Interest Rates which the two in combination create, has in the modern era been the way governments reduced their debt burdens.
"Financial Repression brings about an arbitrary redistribution of wealth."
Today it is the governments only politically realistic option.
The critical problem is holders of fixed income debt get hurt where there is a redistribution of wealth:
- From Savers to Borrowers.
- From Pension Plans to Governments
Historically we should expect Financial Repression to last anywhere from 15 to 50 Years. We are now into only the seventh year! In Prof Rajan's opinion "this show has a long shelf life and likely to run another 5 - 10 years"
Pension Plans - Entering "De-Accumulation Stage"
Aging demographics in the debt burdened developed economies is exaggerating the effects of Financial Repression because of the need for Investment Income products by retirees.
Pension Plans are now going into the "De-Accumulation Stage" where there is more money going out of the plan than is going in. Pension plans face problems of both under contribution levels and De-accumulation resulting in serious underfunding positions.
The Retirement Tsunami
The "Baby Boomer' Generation is in the process of retiring. There will be 78 Million in the US and 84 Million. Europe which accounts for 8% of the global population and 25% of global output accounts for a massive 48% of global welfare budgets.
The shift from Defined Benefits (DB) to Defined Contributions (DC) is about the "Personalization of Risk" so we are told, "so people can be 'empowered' and will be less dependent on their employers plans". Instead Prof Rajan argues we have "Personalization of risk has a big downside. It transfers risk from those who couldn't manage it to those who don't understand it!"
Product alpha is about beating the markets, solutions alpha is however about meeting investors' predefined needs.
"Solutions Alpha is not about trying to beat the market nor the crowd, because these markets are going to end in tears at some stage. So when thinking about retirement think about exactly what your needs are then think about asset classes that will help you meet these needs. 'Shoot-The-Lights-Out' returns are no longer an option without huge amounts of risk!"
Solutions alpha will remain the epicenter of innovation. Solutions Alpha requires looking for asset classes that deliver:
- Regular Income,
- Inflation Protection,
- Low Volatility.
Examples would be Rental Real Estate, Infrastructure, Timber, Farm Land and many traditional "hard assets".
Liquidity Crisis - Volcker Rule Has it 'Preordained'
When the next market correction occurs "liquidity is going to dry up in no time at all because of the Volcker Rule. The inventories of Bonds which the Investment Banks are caring are now one-eight of what they were pre-2008. Any mass exit and there will be no liquidity and prices will drop like a stone!"
Prof. Amin Rajan observes that two paradigm changes have occurred in capitalism:
- Capitalism has Lost Social Expression - It is no Longer Improving and Benefiting Society as a Whole
- Over Financialization - Financial Engineering and Trading for Profits had taken control of Capitalism versus Investing In Productive Assets for increasing productivity. Markets no longer channel capital from savers to investments in productive assets. There are neither savers nor productive assets involved in the process but rather financialization.