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Strategies & Market Trends : John Pitera's Market Laboratory

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To: richardred who wrote (18365)	8/8/2016 11:19:44 AM
From: John Pitera	2 Recommendations Read Replies (1) of 33421

Hi Richard, You know interest rates are low enough already that there is in many ways not a pratical affordable way to hedge their portfolios in a sustained rising rate environment. just look how it has become impossible for Japanese and European Insurance and asset managers to attempt to pick up yield by being long US treasuries...... Hedging for currency and rate risks cost more than the additional yield that is picked up being long the US instruments. Message 30694250 AND MORE SIGNIFICANTLY, many professional bond managers, asset managers and Macro managers have been expecting Interest rates to bottom and start to rise for 3, 5 , 7 years at this point and they have at numerous times hedged their perceived interest rate risk and it has HURT their returns significantly. Hedging costs money and that eats away at ones returns and many jobs have been lost and new and different approaches tried to catch the sustained upturn in rates that has failed to materialize. one additional though to ponder is that as interest rates rise the P/E multiples of stocks contract since the relative return one can make in fixed income reduces the yield that stocks offer. But be sure of one thing we are in uncharted waters...of pretty serious magnitude. When Warren Buffet, Charlie Munger and Bill Gates were interviewed on CNBC back at the time of this years Berkshire annual meeting.... The 3 of them were commented that they would ponder what this development of 12 Trillion dollars of Negative Yield Sovereign Debt and the concomitant low yields on other debt instrumets meant to the financial system.. They said they were not Macro economists and did not know. They did comment that they wondered if we had gotten into a box that we would never be able to get out of... I found it remarkable that you have Munger a 91 year old and Buffett at 86 actually falling even a bit susceptible to the idea that things would remain as they are indefinitely...... They have too much life experience to believe that. Insurance is a fantastic business as you are taking in money now for payouts that are being made in the future..... quite often very far out in the future. And ReInsurance is an even better business as you can take risks and slice and dice them as well as use the actuarial time value of money to the businesses advantage. Big ReInsurance companies and Big insurance companies just about never go out of business... and they make money. Alleghany Y is but one example of a company that has created excellent long term results from the alchemy of Insurance Premium income. When you do get an Insurance company that blows up it's a company such as AIG that became super agressive in writting CLO's and Credit Default Swaps................ that business degenerated into, in essence, writing Naked Puts on companies pocketing the premiums written and then having a business model that said that no large businesses were ever going to fail. John

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