We’re All Hedge Funds Now

hedge_fundJohn Rubino, author of DollarCollapse.com, is my favorite financial blogger. He did some excellent reporting for Virginia Business magazine back in the day before he went on to become a successful author and financial pundit. In a recent post, he drove home a theme commonly expressed on this blog: that the near zero-interest rate policy pursued by the Federal Reserve Bank (and below-zero policy in some other central banks) is hidden with hidden costs and is creating systemic risk.

As global interest-rate yields are driven down, writes Rubino in his fourth post developing the theme, “We’re All Hedge Funds Now,” insurance companies are especially hard hit. They’re finding it increasingly difficult to meet their obligations to policy holders without assuming greater risk.

Such companies have no choice but to roll the dice on “growth” assets like junk bonds and equities, which fundamentally changes the nature of their business model. Instead of steady, predictable income that guarantees the ability to pay off on policies when retired, they’ll have flush years and lean years which might or might not coincide with the needs of their clients. They’ll become hedge funds, in other words, high-risk investment vehicles that do well in good times and frequently fold up shop in bad.

Globally, more and more capital is flowing into riskier and riskier investments. Sooner or later, the deck of cards will collapse. This time, when it does, the calamity will be global in nature. One thing you can bet on: The architects of the super-easy money policies will find someone to blame other than themselves. Meanwhile, here in Virginia, taxpayers will be left holding the bag for the state’s under-funded state pension fund — along with much else.

The Fed’s super-easy monetary policy is designed to keep interest rates low for the world’s largest debtor, the United States government. In effect, the Fed transfers yearly hundreds of billions of dollars of wealth from individual and institutional investors to the U.S. Treasury — no taxes necessary — by means of a process so opaque that few understand what is happening. I remain convinced that the hidden effects of loose monetary policy comprise a major reason why members of the white working/middle class are out their minds with political frustration.


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28 responses to “We’re All Hedge Funds Now

  1. It is an extremely difficult period to save money and make any interest on it.

  2. There is no conspiracy here. The Fed is independent of political influence.
    Back in the day when inflation was running in double digits,the fed under Paul Volcker gave me grey hair. At the time I was in charge of short term money management at the now infamous AIG. I remember buying short dated paper that yielded close to 20%. I am sure the administration at the time was not happy about this.over time this proved to be successful .
    Following the 2008/2009financial crisis the central banks threw everything they had at the markets to prevent another Great Depression. Following this Europe,to protect their ill conceived plan for currency integration was forced to lower rates to historically low levels. Were the Fed to raise rates now the dollar would soar making US goods uncompetitive in international markets.
    The real worry is the stock market. In a world of low to negative interest rate dividend paying stocks look attractive. This has been called the TINA effect. There Is No Alternative. The real worry is what happens when this trade gets unwound.
    Les Schreiber

  3. Some fundamental and transformative changes have occurred – namely globalization and how currencies work in globalization.

    People in Kenya now are paid via text on their cell phones and that’s how they buy things.

    blaming government for these things is like the ignorati marching with torches and pitchforks to blame government for the appearance of meteorites in the sky on the plague…

    money now moves at the speed of light around the world. Machines are doing what humans used to do.

    One might wonder if the traditional role of Central banks – no longer works the way it used to and we have yet to understand how they might have to work – per govt’s typically slowness in reacting to changing paradigms.

    Can a world economy work WITHOUT Central Banks?

    • Good idea, Larry, pretend central banks don’t exist, or if they do, that they have no influence on anything — global capital flows are entirely driven by market forces. Tell me what you’re investing in the days — so I can sell short!

      • Either I said it wrong or you did not understand. It was an honest question and Crazy took it that way.

        However, I don’t think non-govt backed currency “works” .

        and again – virtually every country on the face of the earth has a central bank except I think North Korea.

        How did that happen? If economies work “better” without a central bank – then those countries that did not have them would outperform the ones that did – no?

        so all countries have central banks because all countries govt are corrupt and collude with other countries to make sure they all have central banks?

        hmmm… Zero Hedge seems to lean towards all governments “imposing” those nefarious central banks on unsuspecting citizens:


        yet another reason why I don’t put much stock in what zero hedge blathers about…

  4. Absolutely the economies could work. Historically, “money”, however defined, has found a way to surface and be usable long before there were central banks. Little dicier, perhaps, when you have large amounts of money moving in mere nanoseconds, but that only affects the clearing operations of the Fed, which can be done by anybody in whom the markets have confidence. But you do have to return to “real” money and abandon the idea of fiat currency; as long as a government can decide what the money is worth, you have a recipe for disaster.
    In the 19th century, we used gold, but on the developing frontier, gold was a bit cumbersome to carry around. So we developed the promissory note, payable in gold at Bank X. We then developed the negotiable instrument, again usually payable in gold or silver at Bank X. But often as not, that negotiable instrument never saw the inside of a bank. It was just passed around in payment, since it typically did not have an expiration date. Bottom line: there was no Central Bank to run the economy.

    Les, I have to take partial issue with the first of your statements. Dad ran the Open Market trading desk at the Fed for a number of years, and it is far from accurate to say the Fed is independent of political influence. There has never been any such independence, if for no other reason than Fed chairmen were always compromising their positions somewhat in order to avoid having idiots like St Germain and Wright Patman give away money. Some Fed chairmen were better than others. Volcker was difficult to bully. Similarly, McChesney Martin was able to resist much of what Congress tried to do at various times. Burns was a disaster.

    I’m also not sure why you think that the Reagan administration was necessarily unhappy with 20% interest rates from Volcker. Certainly in the long run, 20% would kill the public fisc, making the rates payable by a spending/borrowing government unsustainable. Only the Democrats at the tail end of Carter would be unhappy, since they relied, as they do now, on inflating away the massive debt that had accumulated, imposing what amounts to a massive tax on the populace for the government spending. It’s been reversed at this point; now the rates the government pays is so low that expansion of debt becomes desirable in the eyes of Democrats. But as someone observed, that’s only good for so long.

  5. Here are cold hard facts:


    Averaging in 2 “crashes”, over an 87 year period, the S&P has an annual return of 11.41%.

    The problem with “frustrated” investors’ returns isn’t the Fed, it’s the investors. The simplest investment of all, a low cost S&P index fund, has an 87 year set of data that demonstrates an average eleven percent return on your money regardless of “crashes”, “the Fed”, “debt”, etc.

    Who are you gonna believe, bloggers proclaiming all wealth will be wiped out or your lying eyes observing cold hard data?

  6. Like Cville Resident (at least I think this is CR’s point) I do not understand the slam on equity (read stocks). Dividend paying stocks have always been a pretty safe investment, with a solid rate of return (more or less depending upon what you paid for them.) Does anybody know why Mr. Rubino thinks of equity as a risky investment? (Yes, there is greater risk in equity than there is in investment grade bonds, but holding shares of a company that has paid out dividends for the last 40 years hardly seems like a risky investment.)

    • The irony of this blog pushing Rubino’s garbage while being sponsored by Dominion is not lost on me. Historical chart of Dominion dividend payouts for 22 years:


      3.5% dividend as well as capital appreciation sounds a lot better than a 1% annual return on a CD. But what do I know?

      I have a lot of respect for Dominion. As I do for Amazon. Both are well run companies. We could have ZIRP or we could have 10% interest rates, both companies are full of intelligent people who will find a way to add value for the shareholders.

      Or you can go into your local bank and get a 1% annual return on a CD and scream about low interest rates and the Fed.

      The choice is yours.

  7. yeah but when you belong to the school of “Govt has screwed up the World Economy and now we’re all going to die” – it’s hard to allow those nasty facts mess up that perfectly good anti-govt article of faith!

    • Of course it is difficult to accept the fact that regardless of political conditions, the S&P averages an 11% return on your money. The white male grievance industry depends upon fabulists to peddle apocalyptic garbage.

      Listen to talk radio or Fox News, we’ve heard the economic apocalypse is “just around the corner” for 7 and a half years now. Democratic administrations unite economic and religious conservatives like nothing else. Both strands of conservatives get to wallow in apocalyptic predictions like a Jehovah’s Witness meeting. “The end is near!”

      • C’Ville,

        I think you are trying to prove too much. It’s true that an economy as vibrant as ours has been able to sustain the stock market for many years, albeit with ups and downs. Part of that is due to our size. We are so big that we are not yet in the position of Greece, where government spending is at 140% of GDP. That’s not sustainable as a matter of simple math, not Fox News bloviating. But we are so big and vibrant, that the Ricardian wedge of federal government spending actually shrank when the sequester took place. The sequester was not an active decrease in spending, just not any more spending in certain areas. But because the overall huge U.S. economy was growing ever so slightly, the percentage (the wedge) of government spending relative to GDP shrank. It is why most economists will tell you we can grow our way out of the debt, even at 20 trillion, or whatever it now is. But YOU DO HAVE TO HAVE ECONOMIC POLICIES THAT WORK, which we haven’t for the last eight years. At a certain point, the wedge becomes so big that it overwhelms the private economy and you have a bankrupt country, a la Greece. Democrats use the above principle to justify continued spending, but they ignore the sound-economic-policy side of things.

  8. Once again, you are fixated on blaming the Fed for low interest rates. This is very strange, like blaming the Agriculture Department for too much rain. This is a supply/demand issue, basic Econ 101. Right now, for reasons that don’t have to do with the Fed, the supply of long term capital globally is high–relative to demand. That is why long term interest rates (the ones that count) are low. Hard to understand why pro-market literati would be blind to the workings of the market? The Fed does not have unlimited power, and setting long term interest rates is certainly NOT one of the things it can do: that is done by the market. The market right now is not rewarding things that in the past it was. If the supply of corn goes up, the price or reward goes down. It is not a grand conspiracy, and it is not something the Fed can control. The ceaseless whining by bond holders is the same as the whining by corn producers that their product price went down. Deal with it. The market speaks!

    • So, negative interest rates in Germany are the result of pure market forces at work?

      If the Fed has no influence on interest rates, then why the obsession with Fed policy?

      So, negative internet

      • You could knock me over with a feather. I agree with Jonathan and LarryG. Congratulations, Larry, you have stumbled inexorably into the truth. Market forces control interest rates, although the Fed has some influence by the amount of government bonds it buys or sells in Open Market, but that again is a matter of the resulting supply provided. Remember that the Fed was ever only intended to be able to fine tune the money supply and provide liquidity through the use of its Open Market mechanisms. The negative interest rates in Germany are the result of the demand for a “safe place” to put your money. Since the number and amount of DDA’s far exceeds the amount of actual currency available to be physically held, there is a big demand for someplace to put the money on the books of financial institutions. Thus, depositors, or holders of money generally, have to pay for the privilege of getting someplace safe to hold their money, given that these same depositors do not think the stock or bond markets or any other investment are places they would not lose their principal. When there is enough of that thinking, you get negative interest rates, which only means that instead of the bank paying you, you have to pay the bank to give you a “safe” place for your money. All supply and demand, guys, supply and demand.
        But Larry, don’t pat yourself on the back too hard. It’s the first time I’ve ever seen any indication that you understand supply and demand, so I suspect this time it’s only because it enables you to hoist Jim up on your petard.
        BTW Larry, Did I miss it, or did you comment further on that loathsome individual, Dragas, with all her personal agenda and motivation? I do see where you got your talking point: Mr. Goodwin himself in today’s paper.

        • Crazy – I’ve made the supply/demand point before with Jim as well as the “safe” place for money – to no avail.

          You’re preaching to the choir here – you need to tend to Bacon as he is convinced that govt is causing this instead of reacting to it!!

          • You’re conflating the government with the Fed. The government IS causing this through it’s fiscal policy (since they don’t really control the money supply, it could only be their fiscal policy) The Fed is only partially causing this through the printing of money to be spent through fiscal policy, thus expanding the Ricardian wedge when it needs to go in the other direction.

      • The obsession with Fed policy is because of the Fed’s distinct departure from its original and historic role as explained above: the fine tuning of the money supply and providing liquidity to the markets. It’s the more recent printing of money by the Fed that has everyone “obsessed” with Fed policy, and rightly so. For a neat little explication, see: https://www.youtube.com/watch?v=PTUY16CkS-k
        This is where political influence on the Fed is most manifest. If I can install the fellow travelers like Alan Blinder, Yellen and her predecessor whose name I can’t now remember, then I can clearly influence the approach taken by the Fed, setting aside the pressure that the likes of Wright Pattman can bring to bear on behalf of Congress.

        • the video is amusing condescending propaganda from the same folks Bacon is listening to on the interest rates – loh!

          you guys can’t help yourselves!

          so Crazy – does quantitative easing affect the demand for capital?

          easy now….. 😉

          bonus question – so Bacon is right about the “evil’ govt after all?


          • It is certainly amusing, but I don’t post it necessarily for its accuracy, only for why Fed policy has become an “obsession”

            As for QE affecting demand for capital. Apparently not.

            But Bacon is right about the evil government when it comes to their impact on the economy, just for reasons he doesn’t cite.

          • Larry

            You still haven’t weighed in on that essence of evil, Helen Dragas.

  9. Jonathan nailed it then Bacon asks “why the obsession”?

    WHO is obessed?

    certainly not the folks like Jonathan who understand supply and demand while those who claim to be “market” folks are apparently blind to it and have to find a way to blame govt … for obvious supply/demand issues with capital.

    the real question that is worthy of further discussion is WHY there is an excess of capital and fewer folks who want it?

    and it has a good side – for new home buyers, small businesses and the construction of public works projects like schools and roads and bridges that are coming in at phenomenally lower bids – both for the work and for the bonds – and that saves taxpayers money!

  10. Jonathan,

    Your take on the Fed’s blameworthiness conflates two sides of Fed policy. One is interest rates, about which you are mostly correct. The other is what I must call non-Fed-Policy, by which I mean the policy that the Fed was never intended to undertake, namely, printing money. See my post nearby on this.

    • re: ” You’re conflating the government with the Fed.”

      Crazy – are not the Central Banks the creation of the Govt to carry out policies of the Govt?

      “The government IS causing this through it’s fiscal policy (since they don’t really control the money supply, it could only be their fiscal policy) ”

      it could not be the way the economy is working?

      “The Fed is only partially causing this through the printing of money to be spent through fiscal policy, thus expanding the Ricardian wedge when it needs to go in the other direction.”

      I guess you’ve read this:

      ” What is ‘Quantitative Easing’
      Quantitative easing is an unconventional monetary policy in which a central bank purchases government securities or other securities from the market in order to lower interest rates and increase the money supply. Quantitative easing increases the money supply by flooding financial institutions with capital in an effort to promote increased lending and liquidity. Quantitative easing is considered when short-term interest rates are at or approaching zero, and does not involve the printing of new banknotes.”


  11. re: Dragas – I’m actively commenting in the latest thread guy.

  12. re: ” Ricardian wedge ”

    I think you’re deep into theory here guy….

    Can you provide an objective – non ideological reference that explains it in terms that economists generally agree with?

  13. I’m fully aware that interest rates are influenced by many things other than Fed policy. These include the domestic demand for credit (weak right now due to low business investment), inflationary expectations, interest rates in other countries, demand for safe harbor investments, savings rates and much more. The Fed must work within the constraints of global supply and demand. But the idea, implied in many of these comments, that interest rates rise and fall with no influence by the Fed is so ludicrous that my brain is about to explode. Please tell me why the Fed even exists if not to influence interest rates?

  14. No one said that the Fed has no influence but the Fed is primarily REACTING to the supply/demand for capital in the market rather than driving it as you seem to think.

    and some of that thinking is betrayed by this comment you made:

    “These include the domestic demand for credit (weak right now due to low business investment)”

    that’s not the actual reason – the question that reveals what is driving the issue is this – why is business investment weak?

    do you think the Fed is causing the weak business investment or the market is? Do you really think the Fed can change business demand? and perhaps another phrase for business demand might be aggregate demand – for goods and services – i.e. when that demand goes up – businesses expand to meet it. what do businesses need to do that? capital. the cost of that capital affects when and where they expand – and the Fed tries to make access to it “better” but if the demand for goods and services itself is weak – no matter how cheap capital is – they don’t need it. That’s why the Feds are at zero interest now. the demand for capital is far less than the availability of cheap capital.

    you’re confusing cause and effect ………. again…. 😉 and I think you get some of this sometimes by focusing your reading on blogs that appeal mostly to your own biases zero hedge, dollar collapse, etc.


    don’t go looking for sites that back up what you tend to believe.

    we all do it – but in the end – you have to backtrack to get to the real issues.

    too many are too eager to blame rather than truly understand the issues.

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