Hacker News Reader

Comment by danhak | Hacker News Reader

This trope gets repeated over and over but it just makes no sense. Volatility is risk. What rational investor says "interest rates are too low, I MUST deploy my capital into a market that is seeing wild 30% gyrations from month to month instead of parking it safely while this global crisis plays out."

View on HN

You're thinking about your personal investments, not someone managing a large investment firm or hedge fund. This simple fixes for your personal investments would be seen as absolutely insane in the professional investment world. You can't just tell your clients "oh I put $100 Billion into some nearly 0% interest investments because I think the market is crazy", especially if the DJIA is having record months. Even the people managing your 401k are expected have a steady read of return and react slowly and calmly.

Isn't some form of this what the Taleb-advised Universa fund is doing?

https://www.bloomberg.com/news/articles/2020-04-08/taleb-adv...

Holy shit. 41x! I'm in the wrong world. Even though I'm in the overpaid-programmer-industrial-complex, in an expensive west coast town with an expensive million dollar house and expensive taxes, I can't imagine what it would take to get into evil and profitable investment vehicles like these hedge funds. I just have no exposure to that world.

I'm curious - why do you call the hedge fund world evil? I hear this quite often but where does it come from?

I've worked in both a hedge fund and in tech, and I found the former to be less evil and pretentious. People in finance think and say "I want to make a ton of money" while people in tech say "I want to save the world" while thinking "I want to make a ton of money" - resulting in misaligned incentives and imposter syndrome everywhere.

today i learned that (for some people) 'impostor syndrome` is a heuristic for cognitive dissonance.

> I hear this quite often but where does it come from?

A part of it might be stereotypes and depictions in pop-culture. The drama Billions shows hedge funds getting their consistent edge from insider info. Not sure how true that is but for people outside the industry that doesn't come off as a good look.

> while people in tech say "I want to save the world" while thinking "I want to make a ton of money"

Citation needed. The number of people in "tech" who say that is remarkably low -- in my experience in Silicon Valley: zero.

Far more often, I hear employees who are driven by "the mission" of the company/product. I work on a newer generation cybersecurity product because the ones that exist in the space have terrible usability and probably aren't very accurate/comprehensive/ergonomic. I'm not "saving the world", but I am making marginal improvements in a high impact space.

Personally I haven't the foggiest idea of what a Hedge Fund actually is. I've seen The Big Short, Margin Call, Barbarians at the Gate and I don't find myself sympathetic with any of those characters (except the Ben Rickert[1] in The Big Short, but only because he saw how terrible the industry was and got out years before the story takes place).

[1] https://www.bustle.com/articles/128208-what-does-the-real-be...

Whereas a monetary system is an essential aspect of modern civilization many people see major players in our specific system obviously working against the interests of the rest of civilization instead of simply enabling it. It's obvious that not everyone is equally bad or equally culpable but its obvious that there is also an institutional lack of what most people think of as ethics.

Take for example the creation of a market to manipulate the price of commodities most notably wheat.

https://foreignpolicy.com/2011/04/27/how-goldman-sachs-creat...

Sachs is most likely mostly responsible for millions perhaps hundreds of millions of people going hungry and yet a response to outlawing this kind of manipulation provokes this response.

>I asked a handful of wheat brokers what would happen if the U.S. government simply outlawed long–only trading in food commodities for investment banks. Their reaction: laughter. One phone call to a bona-fide hedger like Cargill or Archer Daniels Midland and one secret swap of assets, and a bank’s stake in the futures market is indistinguishable from that of an international wheat buyer. What if the government outlawed all long-only derivative products, I asked? Once again, laughter. Problem solved with another phone call, this time to a trading office in London or Hong Kong; the new food derivative markets have reached supranational proportions, beyond the reach of sovereign law.

This is Bond villain proportions of villainy. We could of course continue in the same vein touching on Banks laundering money for cartels, the housing market collapse, and on and on and on.

Other people answered you well, but I could sum it up as financialization doesn't help society. It puts up barriers to free trade, monopolizes businesses, adds rentier like barriers to society. A great financial system also makes it easier to get a loan, invest in things, get credit. For wealthy or fortunate people like most programmers this is all great. For poorer people it adds to the tax or drudgery and difficulty of having a good life and affording it.

Then way are institutions buying negative rate bonds?

Which institutions? Some institutions are forced to keep a certain amount of money in bonds, not their fault the yields are negative.

"As long as the music is playing, you’ve got to get up and dance."

--Charles Prince, Citigroup CEO, 2007

A very large percentage of the market is required to achieve a certain return. Think insurance companies. Giant pension plans. Etc. They have all been forced further and further out the risk curve over the past decade due to low interest rates.

I wonder how long those pension plans may make their obligations if they start paying short term obligations with their long term principals. I could see something from them triggering a correction.

The current model of having a very large fund that needs to show to an actuary that it's "fully funded" is relatively new. Defined benefit pensions existed for quite a while before "fully funded" pension funds, using a pay-as-you-go system, and could probably survive indefinitely that way if designed right.

> Defined benefit pensions existed for quite a while before "fully funded" pension funds, using a pay-as-you-go system, and could probably survive indefinitely that way if designed right.

The PBGC was created because this isn't the case. The issues with Social Security are another example of how pay as you go isn't completely sustainable.

The PBGC is an insurance system. Of course, pension plans haven't always been able to pay out, but the fact that an insurance system exists for them doesn't make them any more of a failure than a savings account backed by FDIC.

And what issues with social security do you mean? The program has taken in more than it's paid out since '83.

Yes, and the PBGC exists because so many of the pay as you go pensions went under.

Also, social security has required many changes that decrease benefits over the years to remain solvent, such as increasing the expected retirement age.

Everything is being forced further out on the risk curve. Everything.

This also explains wacky basketcase unicorns like WeWork, perpetually unprofitable companies raising round after round, the continued existence of the cryptocurrency world in spite of it being like 90%+ scams, real estate going up in cities where >25% of people are behind on their mortgages, etc. There's no "alpha" anywhere. Money is chasing its tail.

All this QE is just going to give us is more asset bubbles. The financial economy is completely detaching from the real economy and becoming a pure fantasy LARP for the rich and of course governments.

My guess is when the financial economy goes bust and those dollars start chasing real economy assets all the inflation we were assured wouldn't happen due to all the money printing will happen all at once.

People act like the big short guys were geniuses to see this trend come out of nowhere. I was a teenager asking questions like "How can housing prices rise nationally at a multiple of wage increases for any sustained period of time?" and was short down by the "smart money" on forums not unlike this one.

Once you allow for the fall in interest rates over the past decades, the house price rise looks less surprising. However, there's a weird corollary: what happens when rates go negative?

US will not allow interest rates to go negative.

Will we have a choice? The Fed has tremendous influence over the economy in the short-medium term, but over long time horizons they are actually at the mercy of it.

Is that enshrined in law or something?

Relevant read: How Zero-Interest-Rate Policy explains the world

https://themargins.substack.com/p/zirp-explains-the-world

Pension funds aren't required to achieve a certain return. If returns over a long period are below the assumed rate, then the employer simply needs to increase contributions. This is less than ideal but not a requirement in any reasonable sense.

>If returns over a long period are below the assumed rate, then the employer simply needs to increase contributions.

It's seductive to type out the word "simply" to describe a proposed solution but that doesn't mean it's simple in reality. (My previous comment about supposedly "simple" fixes: https://news.ycombinator.com/item?id=16698821)

E.g. The employer (the state government) that pays into pension funds for teachers won't simply pay more. The taxpayers aren't sympathetic to raising taxes on themselves to pay for fully funded pensions (even if the pension is underfunded) when they perceive the teachers already getting better benefits than they do. A lot of citizen taxpayers who are not teachers also suffer from underfunded pensions themselves!

This doesn't at all address the core point I'm making: that pension funds are not required to achieve a given rate of return in any meaningful sense.

But sure, I agree that there are other ways to handle the situation if the fund doesn't achieve its assumed rate of return. There are other options than increasing employer contributions.

>This doesn't at all address the core point I'm making: that pension funds are not required to achieve a given rate of return in any meaningful sense.

You're being uncharitable in reading gp's (erentz) word "required". No, there isn't a statute or law that says the pension fund must get 8% returns or the pension administrators go to jail. Nobody is saying that.

Here's how to interpret the word "required" in a more reasonable manner...

Using Illinois Teachers Pension as an example: the pension fund manages ~$50 billion but they still have a ~$70 billion shortfall.[1] The CIO (Chief Investment Officer) is currently Stan Rupnik. His salary is ~$400k per year and he's responsible for investing the pension fund in a way that balances max returns with safety. If he just sits back and folds his arms in a defiant manner exclaiming, "hey, the pension fund is not _required_ to achieve a given rate of return so I'm just going to invest all $50 billion in T-Bills which returns a negligible 0.19% yada yada yada" ... he's not going to keep his job.

That's what a meaningful interpretation of "required" is for the context of this discussion.

[1] https://www.chicagobusiness.com/finance-banking/teachers-pen...

You’re right. As jascode suggests I think you took a stricter definition of “required” than I intended. We have pension plans buying private equity which should never happen. We have had them selling volatility because they’re desperate to find yield, which should never happen. Etc. When I say required I mean that for whatever management reasons they decide they must continue to target the same returns, and due to the artificially low interest rates they’ve been required to go into riskier assets to find them.

Pension managers, and probably all fund managers, make stupid decisions all the time. I suspect especially so in cases where they have to be seen to be actively managing things to justify their salaries.

I don't think it has anything to do with the fact that there's an assumed long-term 8% return. Fund managers in situations where no such assumed returns exist make the same bad decisions all the time too.

And the people making those decisions get paid on commission, so of course they want returns, not "safe parking".

> instead of parking it safely while this global crisis plays out.

parking isn't safe. Parking is guaranteed to lose 20-30% because of the newly printed money and the resulting asset prices rise across the board. Yes, some assets may experience the swings during that money tsunami, yet on average across the board the assets would still rise 20-30% - ie. the amount of the newly printed money.

Economy and market didn't part ways. The stock market is just like speedometer that got "upgraded" from mph to kmh - the number is higher while the car and the speed are still the same.

> instead of parking it safely while this global crisis plays out

Because interest rates will never go back up, or if they do, they will be counterbalanced by inflation. This is the view of Ray Dalio at Bridgewater and (presumably) many other very smart people. I'm not that smart, but I agree.

Thus, cash and cash obligations are no longer stores of wealth. Equities are, unfortunately. High volatility is just the price you pay. Equity prices are honestly not that high if this scenario plays out.

Forgive me if I say this sounds awfully like the "new paradigm" / "this time it's different!" phase of a bubble.

But it is different this time. Productivity growth is slowing [1], people are aging rapidly (in the US, baby boomers are retiring at a pace of 10,000 people per day, 5,000 of them die per day) [2], and secular stagnation is taking hold in most first world countries [3]. Sort of strange to expect today or the next 50 years to look like the last 50 years.

[1] https://scholar.princeton.edu/sites/default/files/ernestliu/...

[2] https://research.stlouisfed.org/publications/economic-synops...

[3] https://web.archive.org/web/20200629061702/https://larrysumm...

Yeesh, sounds like Japan in the 90's!

Japan is a time machine, showing us the future of all developed countries as their population ages. No country is immune once their total fertility rate drops below replacement rate for a sustained period of time.

Your comment is the equivalent of a defendant in a criminal trial saying, "I'm not guilty," and then prosecutor saying, "Forgive me, but this sounds awfully like what the last guy said, and he murdered his wife!"

In other words, we have to actually look at the evidence.

Dalio's point is specifically "this time looks just like all the others" but unfortunately his "this time" is referring to something much bigger and scarier than yours.

https://www.linkedin.com/pulse/big-cycles-over-last-500-year...

Month over month volatility is a poor reason to put money there. Long term average growth is a good reason. Over the 10-20 year periods in the last century, what widely available asset classes perform better?

If you invested into the German stock market in 1914, it would have taken over 100 years to get your money back.

The America of the past 100 years has been quite exceptional. Using its history to predict the future is not a good idea, IMO.

Let that be a lesson: do not spend all your money at once. Buy chunks of stocks (etfs) periodically.

Im sure the result would be much better then.

Are you sure about the German stock market? I've googled and found this https://commons.m.wikimedia.org/wiki/File:CDAX-Kursindex.png

You've always got to consider inflation over the long term, and in this case there is a well known hyperinflation period during the Weimar days. (I don't know about the GP statistic but this graph is clearly not meaningful)

If your currency is going to undergo hyperinflation, aren't equity or physical goods exactly where you want to keep your money?

I suspect the parent's statement might be accurate if you invested with another currency.

The problem (or uncertainty) is that both the US and Germany left the gold-backed systems during those years and the exchange rate between our currencies changed quite a bit during the 1914-1924 period (which is probably why your parent chose that year).

If you notice your image's description, it is denominated in 3 different currencies, depending on the years you are looking at.

The problem is that cash is also quite risky right now. The money supply expanded by about 80% in the past few months. Stocks are more sensitive to economic conditions but less sensitive to inflation.

Have you talked to the people who use Robinhood? This is exactly how many of them think but in less sophisticated terms.

/r/wallstreetbets for anyone looking

If the expected NPV of the riskier investment is much larger than the non-risky one, a "rational investor" would of course take it. That's literally what the words mean.

In a high volatility market, the NPV might range from -10% to +20%.

It's a well established economic term: financial repression.

Understate inflation so real rates are negative, then your savings either dwindle or you give in to the pressure to take more risk.

An investor who fears missing out on 30% gains.

Kendall found that prices followed a random walk model, i.e., past stock prices have no bearing on future prices.

I wonder if a BTFD strategy would still work

Then you concur that the market is being driven by FOMO and not low interest rates?

If you have a mandate to generate returns (institutional, pension funds), you have no choice but to participate. You can't sit in cash forever as returns race towards zero [1]. You may flail and fail looking for that Alpha (perhaps even making wild private equity bets), but that's what you're getting paid to suss out as an investment manager. “As long as the music is playing, you’ve got to get up and dance.”

For equities heavy strategies, there is even an acronym to describe this: TINA ("There Is No Alternative") [2]

[1] https://www.visualcapitalist.com/700-year-decline-of-interes...

[2] https://www.investopedia.com/terms/t/tina-there-no-alternati... ("On the other hand, if bonds offer low yields. and illiquid assets such as private equity or real estate are also unattractive, investors may hold stocks despite their concerns rather than revert to cash. If enough participants are of the same mind, the market can experience a "Tina Effect," rising gradually despite an apparent lack of drivers since there are no other options for capital increase.")

Reply on news.ycombinator.com