Comment by crazygringo | Hacker News Reader

Comment by crazygringo | Hacker News Reader

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> simply transferring wealth from the less sophisticated investors often teachers’ pension funds and factory workers’ retirement accounts, to the more sophisticated investors...

Exactly. Wall street and investment have wonderful effects -- funneling money towards companies that can use it in amazingly productive ways. It provides an incredibly valuable service.

But the flip side is exactly this, that pension funds, ordinary investors, etc. wind up getting screwed.

I, for one, don't realy see the problem with Wall St. in itself, but rather -- who on earth is allowing the managers of pension funds to "gamble" with their money like this? Why should retirement accounts get invested in anything but government bonds and index funds? Employees get duped because they "trust" their company to take care of their pension, or "trust" their financial advisor to give them good advice.

At heart, I think it boils down to a fundamental misguided notion, prevalent in America at least, that investment is good, that you can grow your money, that you can outwit the stock market -- when the reality is, that for 99% of people, investment is just playing the lottery, and over the long run, Goldman etc. is going to win, because they're smarter than you. Just like, in the long run, the lottery always wins.

>Why should retirement accounts get invested in anything but government bonds and index funds?

Step 1: Pension return rates get "set" during boom time highs.

Step 2: Boom times end, the pension fund is grossly under funded, and the manager needs to find ways to get excess return beyond what the typical fixed income and equity products can offer.

Step 3: Pension Managers reach for "alternative investments", hoping for higher returns that can offset lackluster market returns.

What are you babbling about? The dodgy investments were done during the boom, not after it.

What if I told you the economy engages in boom/bust cycles and there was one oh right around the late 1990's that caused everyone to ratchet up pension benefits then wiped out a ton of retirement account value, setting the stage for dodgy investments being made in the 2000's trying to recover?

Step 4: shut down (by force of law) all pensions that claim to offer returns in excess of the Treasury bill rate.

Employees shouldn't be forced to but their compensation in a lottery managed by someone else with fraudulent promises of returns.

I think index funds are reasonably safe enough. "I bet that the whole market will make money over 40 years" tends to work out decently.

>Why should retirement accounts get invested in anything but government bonds and index funds?

Here (somewhere near the end) Mr. Blank says that this is what got the silicon valley rolling. When pension funds were allowed to invest, control of the valley switched from the military to the VC funds http://www.youtube.com/watch?v=ZTC_RxWN_xo

Probably another reason is that bonds and index funds do not yield enough to keep the pension funds going; people now live a longer life on average, so they need to pay more on each pension; so its all screwed up.

Everything is screwed up; now that probably that has something to do with the fact that energy prices & commodities are high; there is less energy to go round, so other creative means are found to create 'wealth'; these tricks increasingly have something to do with extracting something from pocket A and transferring it to pocket B.

And the Zero Interest Rate Policy (ZIRP) has lowered yields on fixed income to next to nothing. No longer are there less-risky investments that yield anything near the rate of inflation.

They just can't pay anything on government bonds, given the deficit that has been accumulated so far.

That's what they say here http://finance.yahoo.com/news/why-federal-bank-near-zero-143...

Because people are different, if you're 20 year-old healthy female you'll have a completely different risk profile from a 64 year-old male with health problems.

If you work in the government you might want to avoid your pension being in your own government bonds because you don't want all your eggs in one basket.

If you're an immigrant who plans to retire back to your home country you might want to limit you exposure to currency risk.

It's not just about betting on being better than the market, it's about aligning your investments (pension or otherwise) with your personal situation and objectives.

People may be different, but within a given pension system, the various accounts are usually not.

That's not possible with a pension, since members don't direct the investments.

Maybe it's different where you are, but in the UK it's pretty common for people to pick the broad allocations of private pensions.

If you're investing over the long term and can afford to ride out the shocks then historically speaking stocks have always out performed bonds. That's not gambling.

It's not a zero sum game between you & Goldman. In a growing economy everyone can win by investing.

While cash securities markets (i.e. stocks and bonds) are not a zero sum game, derivatives markets (i.e. futures, options and all kinds of swaps) are zero or negative sum by definition. Also, derivatives markets are far larger in size [1]. There are always 2 parties to each transaction and one makes the money that the other one loses. The additional transaction fees that go to the banks and various other operations providers make it negative sum.

[1] http://www.isda.org/statistics/recent.html#2010mid

Also see:

http://www.nakedcapitalism.com/2013/03/worldwide-derivatives...

That's a reasonable point. Obviously it's hard to talk about a term as broad as "investment" without running into exceptions.

Can we stop quoting the underlying notional size when comparing size to equity markets? If you know how a derivative works, it's well understood that quoting the notional to represent size just doesn't make sense.

To put it simpler, a terminated CDS contract does not mean there is a loss of wealth equal to its notional, whereas a stock price going to zero in the equities market literally means you just lost the complete amount you invested.

Not to sound offensive, but I've heard this comparison way to many times and it just doesn't add up in terms of prices - most swaps, for instance, have their fixed leg in the single digits in relation to their notional.

That's certainly true for interest rate swaps, but credit default swaps are actually quite similar to stocks. For example when Lehman filed and the stock went to 0, the CDS settled at 91.375 [1] meaning that the protection seller had to send 91.375% of the notional value to the protection buyer. Yes, in most cases there is no credit event and even in many credit events the impairment to the debt is much less than 90%, but also most stocks don't go to 0. This case is a good example because the maximum market cap of Lehman stock was 60 bln [2], but the CDS market moved 270 bln in the credit event (see [1]).

[1] http://www.bloomberg.com/apps/news?pid=newsarchive&sid=a...

[2] http://www.investopedia.com/articles/economics/09/lehman-bro...

"There are always 2 parties to each transaction and one makes the money that the other one loses."

Completely false. Wealth is not fixed. There can be two winners, which often happens.

My understanding of the original idea for derivatives was apportioning risks into pieces that could be independently valued by different experts/markets. For example, say a company wanted to finance an X factory in Y country. The original lender would have to be an expert at evaluating risk in the X market and the Y currency market, which is a small pool of investors. If derivatives could split the risk into X market risk and Y currency risk and sell them separately to specialists in each risk, then the factory was much more likely to find funding, at lower rates, etc. The "world" ended up with a factory that would not have been built, with all the associated wealth, which is positive sum. Am I missing something that makes derivatives negative sum in this case?

This is nonsense. With a future, for example, both sides lock in future cash flows and can lead to a reduction in risk for each party. Reduction in risk for each party can be beneficial for each party.

You might as well say that buying milk is a zero sum game, because the milk is either over or under priced. That's just wrong. Financial securities have more to them than just their price.

Goldman sure acts like they think it's a zero sum game.

How so?

In the modern era of retail investing and hedge funds and liquidity providers, I don't know if stocks and "betting on American industry" are the long term value they were in the past.

Although, if you take the view that corporations are pillaging America and its taxpayers, then owning stock maybe just the hedge you need. If those corporations' managers aren't pillaging the corporations.

I think the flip side is that engineering companies don't get to hire the best of the best.

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