You clients who are new to our process should know that the number of adjustments we’ve made during the past 3 months equal what, during bull market conditions, normally occurs over the course of years.

Thing is, bear markets are messy. This one — given yesterday’s intervention by the Fed into the ETF space — especially! And they require an intensely-focused tactical, and of course defensive, approach to investment management.


Speaking of the Fed, while I want to say “with the best of intentions” they are intervening in record fashion, their willingness to prop up, say, a junk bond ETF (while they’ll couch it much differently) virtually has to be interpreted as an attempt to rescue big-monied investors — hedge funds, private equity players, etc. — at the ultimate expense of the taxpayer (who really needs the help right now!).


You see, the junk bond market is a place where companies whose financial conditions are suspect can access capital. Of course such companies will pay a notable premium (above what “better” companies pay) to attract said capital. It’s therefore also a place where yield-hungry investors who are willing to accept a high level of risk can garner premium returns.


Now, the argument will be, “it’s a global pandemic, it’s unique, no one saw it coming, therefore everyone (even billionaires exposed to risky corporate debt) should be rescued”.


Well, two things:


1. That’s utter hogwash!! We went short (betting they’d get creamed) junk bonds last year, long before COVID-19. So, clearly, investors who did their homework knew that the risk in the junk space had grown to the point where it had already made it uninvestable.


2. No! It’s not okay for the taxpayer (in one form or another) to ultimately pick up the tab for bailing out every risk-taker under the sun. In essence, what the Fed is creating (once again — yes, this is ultimately the 2008 story as well), is a situation where the gains from irresponsible risk-taking are privatized, while the losses are ultimately socialized.


Sorry folks, I suspect I’m ruffling a feather or two, but when the government steps in to rescue ” Company X”, the government has completely abandoned capitalism. Besides, we have bankruptcy provisions; “Company X” can file bankruptcy and restructure while operating — keeping folks working, etc. — the whole time, and after! The process keeps ultimately viable enterprises alive and exacts the pain right onto where a proper risk/reward capitalist system dictates. Of course the hedge fund and private equity operators want none of that!

Okay, so from the third paragraph above on I gave you the narrative that you’re about to be bombarded with by the unsympathetic-to-intervention punditry. Now we need to dig a little deeper into the weeds to gain a deeper understanding of what’s going on down there…

All of the above said, and all of the above venting aside, the result of years of bailouts, money-printing and low interest rates has us staring down a crisis that, were it allowed to play out in free market fashion, would wreak serious havoc onto much more than the lifestyles of the rich and (when they lobby Washington for help) shameless, but into the most sensitive corners of our economy as well; not the least of which being the pension system.


You see, pension funds need to capture some serious yield to be able to fund the promised income streams of their ever-aging retirees. In our artificially low-yield world they’ve “had to” look to the private equity space for help. Thus, armed with seemingly infinite billions to work with, private equity billionaires levered them up many times over, while ingeniously placing that leverage directly onto the balance sheets of the companies they (and their pension fund clients) acquired. Should those utterly bloated companies file bankruptcy and default on their debt when recession hits, which they absolutely should, make no mistake, the reverberations would be painfully felt at the pension fund level. 


Well, and of course, all indications are that the Fed is going to do whatever it takes to keep that from happening…


I suspect, in the aftermath of this mess, the Fed, and Congress, will have to answer (to what’s going to be a major public backlash) to why they didn’t simply backstop the pension recipients directly (not that that’s doable without injecting liquidity into pension funds, that could indeed be used to support credit markets [ah!]), as opposed to bailing out those who literally reaped billions themselves by gaming the Fed, and Congress, ever since the Greenspan days. Well, of course the latter is easier, and far friendlier — to their friends, that is.


Speaking of “ever since Greenspan” and “gaming the Fed, and Congress”, the following from Annie Duke’s excellent read Thinking in Bets captures the essence of how we find ourselves in this messiest of circumstances: Emphasis mine…

“We link results with decisions even though it is easy to point out indisputable examples where the relationship between decisions and results isn’t so perfectly correlated. No sober person thinks getting home safely after driving drunk reflects a good decision or good driving ability. Changing future decisions based on that lucky result is dangerous and unheard of (unless you are reasoning this out while drunk and obviously deluding yourself).”

Lastly, just so you know, I personally have no problem with billionaires. Believe me, I am your rabid capitalist personified! I love billionaires…. well, I love the ones whose brains, talent and work ethic made them that way! But I love markets more! And we kill virtually all market functioning (price discovery, etc.) when we (yes “we” taxpayers!) bail out the players.