Last night I probably watched my last movie for awhile. The NHL regular season begins tonight and will occupy my evening viewing for the months through mid-June next year.
What flick did I see . . . again? The James Bond movie "Die Another Day" starring Pierce Brosnan. An early reel features a scene with several hovercraft engaged in a bumpercar-like skirmish. The heavily militarized craft involved were designed to float above a sea of land mines, thereby escaping a potential disastrous blow-up. Good fun to watch. But unlike the carnival rides we've all enjoyed, dangerous to be a participant. Not for our hero though. It's all in a day's work. He manages to survive, fulfilling the film's title and promising another profitable sequel.
With a personal background of several decades in the financial business, the current gravity-defying elevation of securities markets reminds me a lot of the hovercraft scenario. As long as there is fuel in the tanks and air in the flotation pillows, the operators (are they very brave or very stupid?) can avoid allowing the vehicles to make contact with the deadly explosives lurking below. How far below? In the movie the answer is not relevant. Height can be dizzying even if measured in inches because in this screenwriter's world of make believe it isn't the fall that will kill you. But you are the trigger. In the real world of investing or speculating in financial instruments the distance from where you are to the bottom can vary from bruising, to broken bones, to fatal. We really do want to know the answer to "how far down is it"?
Land mines are planted as a deterrent to discourage unwanted invaders from traversing a disputed territory. Some are designed to destroy vehicles as big as tanks. Donning my three-piece financial togs I'm thinking ETFs, mutual funds and other $multi-million managed accounts. And some are designated as anti-personnel devices. Here I'm thinking of individual market players . . . maybe like you dear reader.
There are many types of mines lying in wait in dozens of countries around the globe. They have an indefinite lifespan and thousands of people, sadly most often curious unsuspecting children, are killed every year by devices planted decades ago. And so it is with financial markets. The seeds of blow-ups are rarely newly put in place. They are secreted over time and await a triggering event to take down both unwary and erudite people. Such events are typically called "black swans", as in rarely seen. When you're not looking for them they show up.
Some market players are amateurs using personal funds playing alongside professionals commanding fees for managing other people's money. All have the same intent . . . to increase wealth. While the game is going favorably, meaning accounts are increasing in financial worth, encouragement is provided by too clever by half expressions like "don't fight the tape" and "the trend is your friend". When you're getting richer on paper it can be easy to ignore the possibility it could all blow up in your face and the result would resemble the contents of your office shredder.
Securities markets
And I could write a script that would be akin to screaming "fire" in a crowded theater. It would send attendees fleeing for the exits as fast as they could skip over slower-moving bodies bleeding in the aisles. Again, all have the same intent. In this case it is to preserve life.
And so it is with securities markets. The quickest to act when the alert is given will have the best chance to survive with wealth largely intact. Normal good health can be regained after a contusion heals or a broken limb is repaired. But fatal is forever. Losing beer money is unpleasant; being wiped out is disaster.
Like widely strewn land mines the trigger alerts for securities market participants are many, and everywhere. There is a reason why investors are reaching wildly to obtain a return on invested funds, no matter how meager. Interest rates are abnormally low in virtually every geographic jurisdiction around the world. In today's bizarre investment scene once deemed unthinkable, you could be charged a fee by your bank to maintain your cash. But now 1/2 billion people living in 1/4 of the world's countries are trying to cope with rates below zero. Saving is heavily penalized. So don't save! Find something to invest in! Like the holdup guy in a western movie commands, "Reach for the sky"!
Here's what the sky looks like. In this crazy environment, woeful investors ordered out of the stagecoach purchased $2 3/4 billion of 100-year junk bonds issued by Argentina shortly after the country defaulted on previously issued debt instruments. Why would anyone lend money to a country for 100 years that has already defaulted several times in the last century? Are they nuts? The answer is to get a rate of return of 7.9%. We used to think that was a fair return for an investment grade U.S. corporate bond of average term to maturity. Early in my career I did my first sale of debt securities . . . a 20 year A-rated obligation. I fought hard with the underwriters to avoid an 8% coupon, settling for 7 7/8% at a discount from par to yield buyers 7.95%. My boss thought I did OK. And I did . . . back in the day! I also earned a nickname from a man known as "the King of Wall Street". . . "basis point Bob".
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Accumulated underfunding of pension plans
An even more alarmingly dangerous trigger is the accumulated underfunding of pension plans amounting to tens of $trillions! Clearly, these obligations accumulated over decades cannot be honored. No reasonably imaginable rate of economic growth will make the plans viable. The math just doesn't work. Depending on which plan you're part of the resulting defaults will apply. You can be bruised, broken, or completely busted. If you still have a rewarding career ahead, you may recover somewhat. If you are already dependent on the plan's viability you will not be made whole.
A saying connected with the securities business is appropriate here. "You can make more money selling advice than taking it". Please be assured I'm not selling anything here, and whether you take any advice from this epistle is up to you. But I'm reminded of a line from another of my favorite movies: "Witness" . . . starring Harrison Ford. In the last reel the older Amish farmer gives a parting warning to the big city detective returning to his former life of danger chasing bad guys. "Be careful out there among them English."
If you get scuffed up I hope you are a hero and have another profitable sequel.
Bob was born in Toronto and began his financial career as a trader on the Toronto Stock Exchange. He relocated to California and became SVP and CFO of a $multi-billion diversified financial entity. He served on the board of many companies in Canada and US. An avid yachtsman, he owns a twin diesel ocean going vessel once featured in Architectural Digest magazine. He maintains a hockey web site. “slapshotreport.com” and currently resides in Sausalito, California.
