Leverage is Back! But This Time It’s Different.

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From the Wall Street Journal today:

Pension funds across the U.S. are desperate to overcome low interest rates and churn out returns big enough to pay future retirees. Now some hedge funds and money managers are pitching something they see as a Holy Grail: a strategy that often uses leverage to boost returns of bonds that usually occupy the low-risk, low-return portion of pension-fund investment portfolios.

What could possibly go wrong? Apparently nothing. Proponents of this strategy say that their brand of leverage is nothing at all like that nasty old-school kind of leverage that produced a global economic crisis five years ago:

Money managers such as Bridgewater Associates, the world’s largest hedge-fund firm, and a growing number of pension funds say this type of leverage is different. By using leverage through derivatives, such as bond futures, and by investing in commodities, some pension funds believe they can reduce their typically large exposure to the turbulent stock market and still earn solid returns. Other proponents of this strategy, known as “risk parity,” include AQR Capital Management and Clifton Group, a Minneapolis-based investment firm.

….Pension officials that employ risk parity say they are using a modest amount of leverage, and nowhere near what investment banks used leading up to the crisis. They also are trading in large, liquid markets, and say they have ample liquidity should they ever need to settle trading losses with cash….”Ironically, by increasing your risk in the bonds you are going to lower your risk in your overall portfolio,” he said in an interview.

Uh huh. It’s just a little bit of leverage. Trading is in large, liquid markets. Stocks and bonds always move in opposite directions. It’s just common sense!

It simply astonishes me that, as near as I can tell, the rulers of our financial world learned exactly nothing from the events of 2008. They literally seem to believe that their actions had nothing to do with anything. The financial crash was just one of those black swans that nobody could have prevented. Next time we’ll get it right.

No mattter how many fairy tales we tell ourselves, apparently we are all still just hairless apes and we are all idiots.

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And the truth is, going into the final 4 days of the year we still needed to raise $TK to hit our $350,000 goal and start 2021 on track. It's nerve-wracking, wondering if the big spike we normally see at the end of December is going to be another thing that doesn't go as planned in 2020, or worse, if, now that Donald Trump is set to leave the White House (for longer than a taxpayer-funded golf trip to a property he owns), folks might be pulling back from fighting for the truth and a democracy and think the hard work is done.

It's not, and if you can right now, please consider a year-end donation to support our team's fearless nonprofit journalism so we can close that big fundraising gap and finish the year strong, ready for all that's ahead in 2021. Whether you can give $5 or $500, it all matters in keeping us charging hard, and we'd be grateful.

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