This week, in my capacity as a part of the strategy team for Principal Global Investors, I have the opportunity of attending the Milken Institute Global Conference in Los Angeles. The conference is a program that includes 140 sessions involving a total of 620 speakers and panelists. This year’s record attendance of over 3,000 brings together participants from 40 countries. By any measure, it’s an incredible range of experiences and disciplines. For the next couple days, I’ll be sharing a few insights from some of the presenters and panels, starting with this post about some of Monday’s sessions.
First, a general observation. Experiencing this conference brings home the fact that, at its core, investing is about people and ideas. In a forum like Milken, you really see the power of bringing senior business leaders and investment professionals together with clients and guests for three days packed with thought-provoking discussions. Read more
Oh dear. Reinhart and Rogoff may wish to avoid ever holidaying in Greece, Portugal, or Spain. Their seminal (and now-disproved) paper – arguing that once a country’s public debt was over 90% of their GDP, there is a strong negative relationship with the country’s economic growth – probably took up a fair amount of the Troika’s discussion time when it was deciding on the measures the peripheral countries needed to take if aid were to come their way.
Of course, Reinhart and Rogoff were not the only ones to argue that high government debt is bad for growth. Over the years, several economists have pointed out that government borrowing can crowd out private investment, and that reducing government borrowing can allow growth to resume. Read more
Last week, the economics blogosphere was ablaze with commentary on an economics paper from 2010 called “Growth in the Time Debt.” The paper was by Carmen Reinhart and Kenneth Rogoff, both of Harvard, and has come to be known as just “Reinhart-Rogoff.” What’s so big about a three-year-old economics paper? Well, most of the current calls for austerity in the U.S. and around the world cite this paper as the major influence in cutting government spending…oh, and the conclusions of the paper turn out to be wrong. Read more
From the desk of risk:
The trader sums his gains. The investor compounds her returns.
When I was a kid, we used to have bike races through the neighborhood. One particular race on a summer evening featured a 1.5 mile route, a fit 12-year-old on a dirt bike, and a slightly pudgy 10-year-old on a ten-speed. Of course, the ten-speed was a much bigger bike so it was going to be an interesting race. Those not racing would follow along on their bikes or wait at various points along the route. A few bets were made (mostly trading cards) and the race was on.
The race began exactly as would be expected – the older boy on the smaller dirt bike jumped out to an enormous lead. At one point, the distance between the two riders was somewhere between two to three hundred yards. But . . . slightly past the halfway point, the younger boy on the ten-speed pulled ahead. In the end, it wasn’t even close.
Why did the younger boy win? Read more
Continuing my previous thoughts on last week’s Atlanta Federal Reserve Financial Markets Conference, I thought I’d cover another of the conference’s big themes: the efficiency of the regulatory system.
Two things matter to a well-functioning regulatory system: the complexity in the regulation and the political system that backs up that regulation. Political systems matter because of the potential influence on a majority party. Democracies where one party cannot easily take control (political economists call them “liberal democracies”) are least likely to have banking crises. This is because liberal democracies such as Canada and New Zealand are less likely to have one party in the majority, one party whose special interests form the regulation of the banking system.
Complexity also matters. Read more
Last week I had the opportunity to attend the Atlanta Federal Reserve‘s Financial Markets Conference, titled Maintaining Financial Stability: Holding a Tiger by the Tail. This year’s topic – as the pun in the title suggests – was the regulation of financial firms to manage tail-risk events. Tail-risk events are those that have a statistically low probability of happening, but a large potential cost if they do. They’re called tail-risk events because in a standard normal distribution curve that has a peak in the middle and sloping tails out to both sides, these are the events that take place out in those tails.
Tail-risk events associated with the financial system negatively affect a country’s financial system, and a stable, developed financial system is a key condition for economic growth. Banks and other financial intermediaries exist to move money from households and businesses that have extra (savers) to those who need more (borrowers). An efficient financial system reduces transaction costs and information costs (such as moral hazard and adverse selection), making it cheaper for firms and households to access credit. Read more
Last week, I introduced the idea of ten concrete concepts that our high yield research team uses to help summarize the many interacting factors and variables that make high yield a unique and challenging asset class. In my previous blog post, I covered the first five: cash flow, capital, cushion, cyclicality, and competition. To finish up this thought, here are the last five:
- Cost Structure – A company can’t provide products and services to customers without incurring some costs. Within a particular sector, many companies face similar cost pressures, but not always. For instance, there is a currently great disparity between the cost of natural gas in Europe (high prices) and in the United States (low). This has created a tremendous opportunity for companies in the chemical sector that use natural gas as an input to their production process.
- Read more