There are only two asset classes: ownership and debt | Hacker News Reader

There are only two asset classes: ownership and debt

ft.com

55 pointshhs39 comments

Note: the article seems like a subtle ad for the booming industry of private credit.

The author is the co-founder of Oaktree Capital, which has been raising capital for one of the largest private credit funds ever[0]

https://www.bloomberg.com/news/articles/2023-08-10/oaktree-t...

  "Moving on to the real world, I note that following a sea change in interest rates, non-investment grade public and private debt now offer prospective returns that are competitive to those historically seen on equities. I believe investors should consider shifting capital to this area if they are (a) attracted by returns of 7 to 10 per cent or so, (b) desirous of limiting uncertainty and volatility, and (c) willing to forgo upside potential beyond today’s yields to do so. For me, that should include a lot of investors, even if not everyone."

Howard Marks is one of the most respected investors in US with a stellar record. His newsletter (Buffet reads it) and books are widely read and respected. He doesn't need the marketing as some up and coming financial "influencer".

The financial sector needs retail bag holders.

I feel like I am the exact kind of person who should enjoy reading the ruminations of a private capital manager published on the FT, but like others I am really struggling to find any interesting or meaningful point in this. The points discussed in this article aren't even finance 101, they are somewhat more basic than that. I can only assume it is an advertisement for Oaktree, but even then, given their target audience of sophisticated investors I don't know who they expect to impress with this.

I’m curious what the reason is people are upvoting it. I guess there’s some who are new to this stuff, which is fine. Or perhaps there’s some other reason this landed on the front page?

The fundamental accounting equation is:

    Equity = Assets - Liabilities

Borrowing (i.e. liabilities) is a way of adding leverage to your investments. This makes higher returns possible, but correspondingly higher risk of losses.

In my experience, people often do not understand the latter point. They will say it is unfair that Bob made a lot of money, but discount the risk Bob took to enable those returns. Lots of investors go bankrupt.

Well sure, but this perspective ignores that past a certain point you no longer need to take sizable risk to convert your massive mound of money into an even more massive mound of money. It also ignores the criticism that most people don’t ever get to try their hand at risking a large amount of capital, thus keeping them from the large prizes.

Money isn't the only thing people can use to invest. They can also invest their time, such as spending time learning a valuable job skill.

Microsoft was founded with $5000. Allen and Gates saw opportunity that nobody else did. They took a large risk in abandoning their Harvard degree program to focus on Microsoft.

Steve Jobs famously sold his Volkswagen for $1500 to found Apple.

Jobs took an enormous risk in investing in the iPhone prototype. He bet the company on it. What would our society be like today if people were not willing to make enormous risks?

Boeing bet the company on the 707, and then again on the 747. There was no guarantee of success with either of those bets.

Edison bet everything on his electric power company, which became General Electric.

Where would we be if people were satisfied with making a modest living?

Basically where we are now, if not better off. The vast majority of people are satisfied with making a modest living, and none of these bets would have paid off if they weren't. The crux of the issue is how to create a stable arena in which sociopathic risk takers can innovate without destabilizing society. The brilliant implementer who finds he's satisfied with punching the clock is grist for Jobs' mill. No need to destroy him in the process.

I’m not sure what the supposed takeaway of this article is. I guess the author is pushing debt at the end of the article? Regardless, trying to look at investing through the lens of “it’s either ownership or debt” is a very narrow view of all the ways an investor can invest. I don’t find it terribly helpful

With interest rates that are higher than the last 10 years of near-zero levels now you can earn more from the credit markets (bonds), because money aren't free like they were recently. Most people have forgotten that and the author points that with bonds you can yield much more than what you could recently get.

I don't think debt should be transferrable (same with intellectual property). If it is you end up with a tumor on your economy dedicated to shuffling it around in ways that prevent change and which crank out analysis like:

> The only two things that matter are these ones which we made up.

This may or may not be good advice, within its sector, but I question whether its sector is worth keeping around.

An economy cannot function without use of credit and debt.

For example, if you have a business idea that will generate a check for $12,000 every year, but your expenses are $1,000 a month, how will you make that work?

You go into debt and then you pay it off. Or you default on your debt, and the creditor makes off with whatever asset you used as collateral.

I'm not trying to do away with the concepts entirely, just trying to place limits on them so that a larger portion of our economy is people having business ideas which relate to the real world and acting on them and a relatively small portion of it is people playing money games. What we're doing now is dangerously lopsided: why innovate or build anything or tackle hard problems when you can do better by playing money games or supporting those that do?

> why innovate or build anything when you can do better by playing money games or supporting those that do?

Innovations in money are the lubricant that drives the economy. People like to hate on banks, for example, but an economy without a banking system is a crippled economy.

A lot of those money games are actually means to spread out risk, which enables people to take larger risks in innovation and building.

A lot of companies have been founded and financed by credit cards. What would it cost the economy to do away with credit cards?

> Innovations in money are the lubricant that drives the economy

Drives the economy toward what? Economic agents don't necessarily share interests, often one succeeds at the expense of another. When the risk is spread too widely, it becomes difficult to determine whether you're helping somebody help you, or whether you're helping somebody harm you. It's not clear where to participate and where to interfere. This leads to an unfortunate situation where the the simplest conclusion for many is that the entire system is their enemy.

There's a balance to be struck re: how widely you spread risk, and we've overshot it. The net risk of being insensitive to the agents' needs is higher overall, even if it's spread evenly. We've removed the steering wheel in favor of an additional engine, and the road won't remain a straightaway forever. If we keep this up, sooner or later we're going to be unable to avoid a fatal obstacle.

> often one succeeds at the expense of another

Transactions in a free market are mutually beneficial, otherwise people wouldn't agree to them.

That's only true if all parties have the option to back out: If Bob doesn't like the terms of Alice's loan, he doesn't have to take it.

But if Alice grants Bob a loan and then later sells the debt to Charlie, Bob didn't get the opportunity to consent to the transfer. Depending on Charlie's behavior, it may suddenly be in Bob's best interest to default on that loan. So it's not necessarily mutually beneficial, in fact it's frequently exploitative.

But suppose Alice sells the debt to 1000 people in tiny slices, 200 of which are depended on by Bob in some way, 600 of which are independent parties that neither help nor harm Bob besides profiting on his debt, and 200 of which are working with Charlie in a mining endeavor which is poisoning Bob's water or whatever. It creates an information asymmetry where Bob may not be capable of determining who he is harming or helping if he defaults on the loan (Charlie and his 200 cronies, however, they have accountants on staff and know exactly what they're doing).

That's the second problem: Bob can't make an informed choice regarding the real-world consequences of his behavior, so the system becomes blind to those consequences. Bob and the rest of us who live nearby--whose retirement portfolios may have been unwittingly contributing to the problem--still have to deal with the consequences. Had the consequence of holding Bob's debt been known to us, perhaps we'd prefer to take the hit to our portfolios than to deal with the fallout of Charlie's actions.

Selling a loan does not change the terms of the loan.

It doesn't. But plenty of loans go unpaid despite what the terms say--that's why they're risky, and why they're profitable. The system allegedly works because we have a choice about whether the creditor profits.

And we'd be better off if that choice were more effective at keeping creditors accountable for the outcomes of the loans they grant, not merely their profitability, but for that to work the whose-loan-is-this question needs to have a simple answer.

that article is suspiciously quiet on commodities (and their derivatives, in case you don't want to sign up for storage/delivery/etc etc).

commodity derivatives are kind of a debt of a physical operator though

How are commodities not ownership? Derivatives etc notwithstanding, if you buy gold you become the owner of said amount of gold, doesn't matter if you physically hold it yourself or someone else stores it for you.

Perishable gold lol

Commodities don't need to be perishable, I don't see how this comment makes sense?

the proper term is "screen gold"

Try taking delivery of any gold bought on Comex and you'll get to know the difference.

Most "gold" people trade are derivatives.

The article is really talking about equity, rather than ownership. The point is, do you have some preferential claim to be paid a stated amount, or do you have residual rights to the value of an asset. In that sense, buying an "interest" in gold, whatever form that may entail, is closer to "ownership" than debt. Just like if you have a 5% equity stake in a company you can't actually take delivery of 5% of its assets. (Fun fact, you likely don't even "own" the shares themselves.)

I would be a lot more interested in the article if argued that debt at 1-6% and 7-10% is the same asset with the same risk spread but making that the assumption is more than lazy, it’s offensive.

> non-investment grade public and private debt now offer prospective returns that are competitive to those historically seen on equities

Be sure to hedge this against inflation.

In the modern world there is no 100% ownership (unseizable bearer assets), as there is no 100% debt (enslavement in case of default).

This statement is predicated on redefining the words ownership and debt to fit your arbitrary definition, instead of having them follow their conventional meaning accepted by society - as defined by dictionaries for example.

What is the point?

> redefining the words

you missed the "100%" modifier in front of the words

> What is the point?

1. Clarity

2. Understanding stuff from the first principles

3. Oaktree Capital claims that there are only two asset classes, I argue that there is an infinite continuum of asset classes: from 100% owning something to 100% being owned

Cryptocurrency enthusiasts will respectfully disagree.

This is the one and only thing crypto is actually good at, if you don't make a mistake and let yourself get hacked, no amount of force will let anybody seize your crypto without your consent.

I respectfully disagree. Once you open up the possibility of physical force the guarantees of cryptocurrency look pretty thin.

Obligatory xkcd: https://xkcd.com/538/

crypto is not a bearer asset[1], it's not unseizable[2], and it's not guaranteed to be a store-of-value in the long term (it has only been around for 17 years vs gold which was used for this purpose for 5000 years)

also there is no ownership in crypto, only partial control of the entries on the ledger via private key

1. 99% of cryptocurrencies are based on blockchains or DLTs (Dsitributed/Decentralized Ledger Technology) - ledgers or Systems of Record - so they are registered assets, not bearer assets. You change the ledger (e.g. by forking it) and now the ownership record has changed

2. Fiat is backed by violence -> https://xkcd.com/538/

There have been several divorce cases where spouses have tried to evade funds using crypto, and the court could still confiscate them, by threatening with jail time

The comments on that article are ripping it and the author apart, and not without good reason.

Reading this made me learn absolutely nothing new.

Ok … so what?

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