The author is the founder and co-CEO of Elliott Management
Despite recent concerns about Omicron variants, global stock market prices have remained at or near their levels Highest valuation In history.Bond prices reflect the lowest interest rate history. Any surprises inflation Has broken the boundaries of the past 20 years, given that set objectives Of policymakers create more?Span Market structure, The risks are accumulating, and many of them are hidden.
However, unexpectedly, more and more of the world’s largest investors-including socially important institutions such as pension funds, university endowments, charitable foundations, etc.-are currently lining up to accept Greater risk, This could have a catastrophic impact on the stability of these investors, their customers’ capital, and the wider public market. What drives this behavior?
It was mainly driven by the radical expansionary monetary and fiscal policies adopted by developed countries’ governments since the end of the global financial crisis, and these policies accelerated after the Covid-19 pandemic disrupted markets and sluggish economic activity last year. Part of the reason is benchmarking—the practice of institutional investors measuring their performance against benchmarks such as the Standard & Poor’s 500 Index.
As monetary and fiscal policies push the valuation of securities to new heights, institutional investors have been trying to increase their portfolio holdings to stocks, even if prices hit record highs, so as not to miss extraordinary gains. The buying pressure created by these strategies will only push up prices and gather capital into risky assets.
At present, the risk is at or close to the highest level in market history. For example, the market value of all public and private stocks in the United States now accounts for 280% of GDP, which is much higher than the peak of 190% before the dot-com bubble burst. Household asset allocation is at the highest level in history of 50%.
Ultimately, rising inflation, rising interest rates, or some unforeseen events may cause the stock and bond markets to fall sharply, and they may appear in an unpredictable order. So, what will the agency manager do when the enthusiasm for withdrawal begins?
One answer may be that the authorities will never allow the continued decline in asset prices to happen again. This points to one of the key problems of the current series of monetary and fiscal policies in developed countries: they conceal and minimize risks, while preventing stock and bond prices from playing their indispensable signaling role.
At present, the policies of developed countries are aimed at encouraging people to believe that risks are limited, and asset prices, not just the overall operation of the economy, will always be protected by the government.
Because of this extraordinary support for asset prices, almost all investment “strategies” in recent years have made money, are making money, and are expected to continue to make money. Of course, the most successful “strategy” is to buy almost all risky assets, keep up with the latest trends, use the greatest leverage to increase purchasing power, and buy more during the “bargain” period.
Therefore, it is no wonder that under these manufacturing conditions, investors will “walk out of the risk curve”-in the words of investors, take more risks that have nothing to do with expected returns. Most investors who say they are willing to take more risks actually don’t mean this. What they really mean is that they are afraid of missing the higher returns that other investors receive—in other words, they are afraid of missing their benchmarks.
However, the government’s ability to protect asset prices from another downturn has never been more restricted than it is now. The central bank’s purchase of US$30 trillion worth of stocks and bonds worldwide has caused tremendous pressure. As inflation rises, policymakers’ ability to support asset prices in future downturns is approaching its limit without further exacerbating inflationary pressures.
With all this in mind, it is puzzling that more and more otherwise sober fund managers are increasing their allocation of risky assets instead of trying to figure out a way to obtain a certain rate of return without giving back for many years. Capital appreciation in the next crash or crisis. When the government’s orchestrated music finally ceases, investors who have increased their risk levels and rely on policymakers to protect the prices of their holdings may suffer significant and possibly long-term damage.