Episode 41: Simon Lack
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Truths and Crisis: Understanding the Hedge Fund Mirage and Why Bonds Won’t Last Forever
Following the success of his first three books, best-selling author and licensed chartered financial analyst Simon Lack examined how the steady growth in debt and financial services will affect future returns. In Bonds Are Not Forever, he explores the reasons behind the steady decline in interest rates over the last few decades, how these fueled a dramatic rise in government and private borrowing, and the resulting risk of inflation.
We will also get an insider's view on the data behind Simon's other best-selling book, THE HEDGE FUND MIRAGE, which chronicles the massive rise of the hedge fund industry along with it's the disappointing returns.
Tune in for an in-depth look at how returns and risks are skewed in favor of hedge funds, and how investors and allocators can reconcile the imbalance.
Episode Quotes:
If fixed income is such a poor performer, what accounts for its popularity?
“I think the most important question in investing today is why are long-term interest rates so low around the world because that's driving everything. Stocks are expensive compared with bonds. And that's the whole idea of stock; it's the equity risk premium. I think that there's no complete answer for this, but I think part of it is there's an awful lot of money in bonds that have an inflexible mandate. There's an awful lot of investors who have to have some fixed income. And pension funds would be in that category, right? They are not return-sensitive. They have to have 40%, 30% in fixed income, regardless of the returns. They don't have the flexibility to be able to say,'bonds are just return-free risk in effect.”
Who is affected by negative real rates and financial repression? Who are the winners and losers in this scenario?
“Well, the losers are the savers. The investors, they're fine. So, pension fund beneficiaries, sovereign wealth funds, and foreign central banks— all that we don't care about —but domestically, everybody who's invested through a pension or anybody who owns a fixed income is a loser. It's a prolonged transfer of wealth from savers to borrowers. The beneficiaries are, well, the federal government. And to some degree, every taxpayer, but generally wealthier people— it's a populist approach, right? Because wealthier people are going to be net savers, they're going to be net investors. Their benefit from the government funding itself at a negative rate is going to be dwarfed by their loss through the negative real return they own on their assets. But if you are, if you have a negative net worth or very low net worth, then you're probably better off from that. So, it is a form of wealth transfer, actually a distribution of wealth down the income spectrum, which is why it's so popular.”
Thoughts on inflation and accounting for the quality improvements and adjustments
“In other words, what would it cost for you to buy what you bought 10 years ago? Now, what this misses is that living standards rise every year. So if you keep your income rising at the CPI over 10 years, you'll be able to buy the standard of living that you had 10 years ago, but your neighbors will have moved ahead. In fact, if you want to preserve your living standard the way most people think of it -they want to keep up with their neighbors, right? You've actually got to keep up with something like per capita, nominal GDP, or median, household income, a nominal number, which increases that inflation plus productivity.”
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