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When you play in the devil’s den expect your feet to get burned

January 31, 2014

From Reuters today:

“Among the investors in alternative asset managers are pension funds that have funding issues of their own,” [Martin Pfinsgraff, senior deputy comptroller for large bank supervision at the OCC] said.

“Transferring future losses from banks to pension funds does not aid long-term financial stability for the U.S. economy,” he added.

Both privately and publicly I have registered serious concerns about adding risk to justify a discount rate that is significantly too high. But when the returns are rolling in it’s difficult to convince the captain that there is a massive iceberg directly ahead. As I have said, we will rediscover what taking on more risk ultimately means —and as always, it will be a very hard lesson.

I had planned on leaving Defying gravity forever… Is it possible? as my last post until gravity appeared to be setting back in. Is this the moment? I have no idea, but the gravity I expect to see is the ultimate realization that our monetary policy for the last six years has been an epic failure — instead of fixing our economy it has exasperated the problems. If there was one lesson to be learned from 2007–2009, it should have been unprecedented risk, leverage, complexity and manipulation is not healthy for financial markets or the economy as a whole. Somehow we have blindly followed our monetarists’ lead as though they are our pied-piper.

The financial media is pointing at those silly emerging markets as the problem. I want to ask: why? Because they followed our lead? We have exported terrible monetary policy and now we point a finger at them and suggest they should have known better. It is too bad they don’t have the world currency so they could cover the inevitable of what happens when you artificially juice the system through interest rates and liquidity.

Still, our greatest hope is that my concerns are 100 percent wrong. But if I’m even partially right, my greatest concern is for whomever the biggest victims will be — once again.

If you read the Reuters article quoted above, ask yourself why anyone would play in the high-risk, junk credit markets at such low premiums? Could it possibly, just maybe, be because the Fed’s artificial manipulation and suppression of interest rates while flooding the financial markets with liquidity drove leverage, risk and stupidity to ever increasing levels? Possibly? Excess liquidity in a massively suppressed interest-rate environment might just drive investors to eke out a few more basis points while our central bankers happily provide them blinders —”no danger here; nothing but winners in this casino!”

I found it interesting that one of these private equity firms that is being referenced as problematic, warned back in September that we are in an epic bubble. I guess seats on the 50-yard line give one a better view!

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