Special Guest: Prof. Amin Rajan, Chief Executive of CREATE (Centre for
Research and Technology in Europe)-Research - A network of prominent
researchers undertaking high level advisory assignments for governments,
global banks, fund managers, multinational companies and international
bodies such as the EU, OECD and ILO. He is a visiting professor at the
Centre for Leadership Studies at Exeter University, and an associate fellow
at Oxford University's Said Business School. He is an expert on employment
and workforce diversity and is one of the most sought after speakers on
the future of work, organization and society and its leadership implications.
Ginancial Repression
"Financial Repression is a device used by governments to liquidate their
debt."
Financial Repression uses low interest rates (which reduces their financing
costs) and inflation (which vaporizes its debt). The Negative Real Interest
Rates which the two in combination create, has in the modern era been the way
governments reduced their debt burdens.
"Financial Repression brings about an arbitrary redistribution of wealth."
Today it is the governments only politically realistic option.
The critical problem is holders of fixed income debt get hurt where there
is a redistribution of wealth:
- From Savers to Borrowers.
- From Pension Plans to Governments
Expected Duration
Historically we should expect Financial Repression to last anywhere from 15
to 50 Years. We are now into only the seventh year! In Prof Rajan's opinion "this
show has a long shelf life and likely to run another 5 - 10 years"
Pension Plans - Entering "De-Accumulation Stage"
Aging demographics in the debt burdened developed economies is exaggerating
the effects of Financial Repression because of the need for Investment Income
products by retirees.
Pension Plans are now going into the "De-Accumulation Stage" where there is
more money going out of the plan than is going in. Pension plans face problems
of both under contribution levels and De-accumulation resulting in serious
underfunding positions.
The Retirement Tsunami
The "Baby Boomer' Generation is in the process of retiring. There will be
78 Million in the US and 84 Million. Europe which accounts for 8% of the
global population and 25% of global output accounts for a massive 48% of
global welfare budgets.
The shift from Defined Benefits (DB) to Defined Contributions (DC) is about
the "Personalization of Risk" so we are told, "so people can be 'empowered'
and will be less dependent on their employers plans". Instead Prof Rajan
argues we have "Personalization of risk has a big downside. It transfers
risk from those who couldn't manage it to those who don't understand it!"
Solutions Alpha
Product alpha is about beating the markets, solutions alpha is however about
meeting investors' predefined needs.
"Solutions Alpha is not about trying to beat the market nor the crowd,
because these markets are going to end in tears at some stage. So when thinking
about retirement think about exactly what your needs are then think about
asset classes that will help you meet these needs. 'Shoot-The-Lights-Out'
returns are no longer an option without huge amounts of risk!"
Solutions alpha will remain the epicenter of innovation. Solutions Alpha requires
looking for asset classes that deliver:
- Regular Income,
- Inflation Protection,
- Low Volatility.
Examples would be Rental Real Estate, Infrastructure, Timber, Farm Land
and many traditional "hard assets".
Liquidity Crisis - Volcker Rule Has it 'Preordained'
When the next market correction occurs "liquidity is going to dry up in no
time at all because of the Volcker Rule. The inventories of Bonds which the
Investment Banks are caring are now one-eight of what they were pre-2008. Any
mass exit and there will be no liquidity and prices will drop like a stone!"
Observation
Prof. Amin Rajan observes that two paradigm changes have occurred in capitalism:
- Capitalism has Lost Social Expression - It is no Longer Improving and Benefiting
Society as a Whole
- Over Financialization - Financial Engineering and Trading for Profits had
taken control of Capitalism versus Investing In Productive Assets for increasing
productivity. Markets no longer channel capital from savers to investments
in productive assets. There are neither savers nor productive assets involved
in the process but rather financialization.