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I’d like to make kind of a meta-point about what I see as two different ways that people are talking about the issue in this rather contentious thread. To over

I’d like to make kind of a meta-point about what I see as two different ways that people are talking about the issue in this rather contentious thread. To oversimplify a bit, there seems to be a crowd saying: “these pension fund managers gambled with my retirement to enrich themselves”. There seems to be another crowd saying: “if you examine the details of these transactions you’ll find that it’s neither that simple nor fundamentally even true”. I’d like to submit that the latter group, which I suspect is probably technically correct (the best kind) should possibly examine the possibility that while any isolated derivatives transaction probably makes sense and is governed by deep and sophisticated mathematics, it does seem to be the case that in sum total we see, decade after decade, a cumulatively destabilizing effect on both financial markets and the financial security of everyday folks: somehow the emergent system either is or really, really fucking appears to be privatizing profits while socializing losses while simultaneously driving up the swings of the business cycle. I love the financial mathematics stuff intellectually and this is certainty a forum that welcomes experts discussing details, but at some point we need to acknowledge that it’s high finance’s job to convince the public that they’re actually helping, not the public’s job to learn high finance. Elites that forget this for too long have historically come to very bad ends.

redanddead 4y ago
Would love to hear more of your thoughts on finance
csomar 4y ago
Any system that socializes losses to parties that are not embarking in the risk/profit is going to be exploited. Period. This is not just about finance. It's a leak. Anything that can leak for profit, will eventually leak. These attacks (and I don't mean you personally) to the free market (and derivative products) are dangerous. If the "free" market fails because it's not so free after all(socialized losses), you don't fix this by having more bureaucrats/politics involvement to run the markets. This will only make matters worse. The proliferation of politics in the markets, because of that, is also accelerating. The argument is now readily available (look at how these complex derivatives products are destabilizing the market!). This will lead to more chaos in the market, more dysfunction and more organized thefts of the market (if not from smart mathematicians than from politicians/bureaucrats) and eventually to a military rule. We've been there a few decades ago. It's sad what's happening now.
- deleted 4y ago
  [deleted]
- barrkel 4y ago
  > If the "free" market fails because it's not so free after all(socialized losses), you don't fix this by having more bureaucrats/politics involvement to run the markets. This will only make matters worse This is deeply naive. Governments that don't take action when pension funds evaporate en masse will fall and be replaced by those which do take action. If this didn't happen, it would be a failure of democracy, not of markets. Such a government would be illegitimate - and on-topic, that's pretty much where the UK government is at right now, it's pursuing a set of policies it has no electoral mandate for and is currently 33% behind the main opposition.
  - gmac 4y ago
    (Yes — and it feels like we have a systemic problem when the people have no way to get rid of a government this unpopular — except relying on them to do the decent thing and bow out, which this bunch, having been basically purged by Johnson of anyone with intelligence or principles, will clearly never do).
- asdfasgasdgasdg 4y ago
  But the public -- pensioners and future pensioners -- are embarking in the risk/profit side of things. We want to fund our pension with less money than we ultimately take out, and additionally have guaranteed outflows regardless of market conditions. To put it shortly, we want profit. The average pensioner may not understand that they were joining in a risky undertaking. Whose fault that is I could not even begin to suggest -- too many possible candidates depending on your world view. But a lack of understanding will avail you little when your counterparty is the fundamental financial reality that there is no free lunch. As annoying as it is that the bankers made a bunch of money, the alternative, where all pension monies go into a savings account, would leave people much less happy.
  - ls612 4y ago
    And fundamentally it must be risky. You are engaging in a deal to be paid a sum of money 30 years down the road, there’s 30 years of mandatory uncertainty and risk involved with that deal. With defined contribution plans at least the worker observes that risk directly (401k goes up or down) but you can’t, no matter what you do, make it not risky.
btilly 4y ago
The destabilizing threat is real and systemic. Derivatives allow us to hedge local risks at the cost of creating the possibility of the whole system collapsing. It greatly concentrates risk in those who wish to gamble, and if their gambles go south allows them through leverage to threaten the whole financial world. This is not just a contrarian view. Go to https://www.berkshirehathaway.com/2002ar/2002ar.pdf https://www.berkshirehathaway.com/2002ar/2002ar.pdf and start around page 13 where it says "Derivatives" for Warren Buffett's analysis. This is the one where he calls derivatives "weapons of financial mass destruction". (This was several years before the 2008 financial crisis. He makes a number of good points. One of which is that we value derivatives is based on complex models. Those models inevitably have errors. And the errors are generally in favor of the side that you purchased. So those engaging in the trades always believe that they are making money (and bonuses etc get paid on this basis), no matter how disastrous it may later turn out to be. In this case it is likely that the pension fund managers never realized what kinds of complex gambles they were making or what the real risks are. They were working according to models in which what they did was wise. And it may well be that they were right in the long run. But as Long-Term Capital famously showed, being right in the long run only matters if you survive to see it. It remains to be seen if these pension funds will survive.
- miohtama 4y ago
  But in this case, there was no error on derivatives. It was unforeseen and very violent market move in the response of Tory’s policy “more tax cuts” and the general loss in the faith that the UK economy will be productive and surplus any time soon. Those who modelled the risk did not think Tories would do anything that stupid and risk the UK economy.
  - wjnc 4y ago
    I would take even a somewhat kinder view of the pension funds involved. With no knowledge of the intimate aspects of the agreements UK pension funds make with employers, those involved knew that you could either pay for the risk margins involved up front, or via emergency capital. Margin calls are nothing special. Derivatives are used for balancing assets and liabilities, since you cannot match the cash flows on pensions directly given the very long duration (cash flows for pension funds run for nearly a century). Swaptions etc are nothing evil. They are pretty clear cut tools for the job of limiting interest rate exposure for parties with very long liabilities. This is not a pension fund problem (I agree up front: that's a reductio nearly ad absurdum), it's an employer and pensioner problem, created by a sudden loss in confidence in UK gov in an already very turbulent market. If sterling falls, purchasing power falls, interest rises, there is no way pensions can keep purchasing power or indexation. Margin calls are a tiny symbol that shouldn't worry a risk manager. It's the larger enviroment for the UK - that is very worrying. It's all hocus pocus but a well run insurer or pension fund should have a pretty solid grasps on interest rates and a pretty low exposure to swings in that rate. Same for FX exposure. End of '21 you should have opened up some upward potential in interest rates and have some room to survive that volatility. The best managed ones keep afloat or even profit, without taking too many excess risks. The worst managed ones are the first to fall. Go and look at the Q3 financial results for the largest _worldwide_ insurers. I predict the largest insurers will show stronger financial capital positions. (Stocks will fall since large insurers are partially valued on general stock market performance since they are in essence also investment companies.) Again, margin calls are a symptom caused by the underlying agreements, with not a direct relationship to which ones will fail or prosper.
paganel 4y ago
Agree with your point, but as far as I understood that “gambling” done by the pension funds mainly happened because there’s no other way for them to pay what they’re due, i.e. the pensions themselves. In other words the pensions system slowly reveals itself as the Ponzi scheme it was from the very beginning.
Aunche 4y ago
>it does seem to be the case that in sum total we see, decade after decade, a cumulatively destabilizing effect on both financial markets and the financial security of everyday folks I'm not an expert in finance by any means, but for the most part this doesn't seem true. Besides the mortgage bubble, the market has only seemed to get smarter over time. There's definitely a lot of weirdness, but that's to be expected when interest rates are less than inflation for over a decade. >it’s high finance’s job to convince the public that they’re actually helping, not the public’s job to learn high finance. People go into finance to make money, not to help people. It happens that making money in finance tends to make the market more efficient, which helps people. All the low-hanging fruit has been picked, so very little benefit is going to trickle down to the common folk these days, but as a whole, I don't think they're harming people. Meanwhile, I do think that it's the public's job to learn finance, or rather strive to be more informed in general. When the public's priority is to scream out that we should eat the rich, politicians will happily virtue signal along with them and outsource the boring work of legislating to a corporate lobbyist.
- zimpenfish 4y ago
  > Besides the mortgage bubble, the market has only seemed to get smarter over time. An incongruous comment on an article pointing out that the market has got dumber (ie turning the "should be perfectly safe in gilts" UK pensions market into "hours from 90% collapse because we gambled with shares")?
  - Aunche 4y ago
    The is the weirdness that I'm talking about. If interest rates are lower than inflation, it's impossible to make money without taking risk.
cm2187 4y ago
I think you are assuming the derivatives in question are wild, complex, speculative derivatives. This is almost certainly not the case. They are most likely long dated interest swaps. Pension funds have a duration problem, they are managing long term liabilities (what they owe to pensioners) and need to ensure they have enough assets to cover the present value of those liabilities. If interest rates move, then the present value of those liabilities may change a lot because of the new discounting. So they try to reduce that risk, either by buying assets that behave in a similar way with respect to interest rates, or by entering into long dated interest rate swaps. I think the leveraged repo positions they are refering to is doing the same thing as an interest rate swap by going long a long term gilt and short a short term gilt (or the other way round), but basically they try to create an interest rate mismatch to take some duration exposure. So this is pension funds reducing the risks, not speculating. The systemic risk here seems to be mostly a concentration problem and feedback loop. I.e. the more interest rates move up the more pension funds need to sell gilts to hedge their duration or post collateral, the more gilt prices collapse, the more interest rates move up.
- concinds 4y ago
  Agreed, the problem isn't at pension funds; the problem is the whole financial system's excessive systemic risk. That systemic risk can be effectively reduced, and policymakers haven't done much to address it at all due to regulatory capture. Many financial mathematicians and popular intellectuals (Nassim Taleb, James Rickards) have pointed out the need to descale the financial system to decrease systemic risk, and prevent the financial blowups that are inevitable at the current scale.
misja111 4y ago
The problem has two sides. On the one hand there's finance where some people are taking risks, creating instability that will mostly hit every day folks when things blow up. But on the other side are those every day folks. They want their pension money to gain a profit each year so they'll have a decent pension when they retire. At the very least it should match inflation but preferably a bit extra. Investing money (almost) without taking risk is possible but you'd have to stall all the money at the ECB or some other central bank, and until recently you'd have to pay a negative interest rate. This wouldn't make pension holders very happy. So pension fund managers take risks. They surely take as little risk as possible and they are excellent in picking opportunities that give a comparatively high yield for their risk: but they are taking a risk, otherwise they would never come close to beating inflation. And sometimes the risk blows up, and everybody is all upset. It's easy to blame those filthy rich fund managers but people should also look into the mirror sometimes.
- zimpenfish 4y ago
  [1] points out that you can have a perfectly boring, safe pension fund by investing all the money into gilts with positive interest rates which means you only need to put in £48 now to get £100 in 30 years. [1] https://newsletterhunt.com/emails/22524 https://newsletterhunt.com/emails/22524
  - dchftcs 4y ago
    Government bonds are not perfectly safe.
    - misja111 4y ago
      Exactly. A very recent example are UK government bonds: https://www.reuters.com/markets/europe/uk-bond-prices-collapse-after-sterling-hits-record-low-2022-09-26/ https://www.reuters.com/markets/europe/uk-bond-prices-collap... It's a fundamental law of investing that return is positively correlated with risk. Unfortunately you can't have your cake and eat it too.
betwixthewires 4y ago
I don't think fundamentally that the problem here is derivatives. I think fundamentally that it is pensions themselves. Think about what a pension is. A pension is a deliberate inefficiency in a labor market. It's a promise to pay someone for not working, and in some cases even, children of people who once long ago worked. It is also a central lever for people to look to profit on through managent, and a tool with which to overinflate demand for financial products. The commitment taken on by a pension fund is an increasingly impossible one to uphold as time goes on and markets get more efficient. They have a bag of capital they have to make grow to continue to honor an open ended commitment, so they have to continue to find interesting and clever (and risky) ways to do that. Compounding on this, they're big bags of capital, so they will invariably become load bearing pieces of a nation's financial portfolio. Of course they're going to wind up intimately tied to the overall financial health of a nation. "We take some chunk of money we would otherwise just pay you, promise to invest it wisely to indefinitely pay you later for not working, and in return we get a chunk of capital to play with and a sink to help stabilize the financial system." That's the proposition of a pension, right? You might be tempted to say "pensions are just a part of agreed to compensation, a contractual obligation and nothing more. There's nothing special about a pension that gives it these negative properties your ascribe to it" and to that I'd ask, then why don't people just take the capital through their working years as monetary compensation? Surely they could hand that to a money manager and achieve the same result as a pension achieves? The answer is because people wouldn't be able to expect what they get out of a pension, they go with a pension because they think they're getting something more out of it, and that excess is the ultimately impossible commitment I am referring to.
- JonChesterfield 4y ago
  The premise that a pension should beat the market without taking on risk does seem suspect. Other traders have the same idea with higher risk tolerance. Maybe gambling over multiple decades is a significant advantage but that's also difficult to see.
- v-erne 4y ago
  >> A pension is a deliberate inefficiency in a labor market. It's a promise to pay someone for not working... That's and extreme simplification of pension and probably the worst definition You can think of. I guess if You were a marxist as opposed to some form of capitalist/liberal I would expect that You would base Your definition on class struggle. I much more prefer to think about pension as a form of insurance against the risk of getting old. And as such the free market "implementation" is only one of possibilities (for ex. here in Poland we have state pension with a bit of free markets sprinkled on top). I personally believe that "old age insurance" is one of flag inventions of our times and do not think that there is a place for free for all solutions in civilized society (we are in this together and should work out a way to protect the weakest). >> It is also a central lever for people to look to profit on through managent, and a tool with which to overinflate demand for financial products. That's an implementation detail in my view - if You look at it from insurance perspective, You just need to search for a way to redistribute effects of current work between workers and retires. And using financial products (stocks and derivatives) may just be a wrong tool for the job.
dcminter 4y ago
Apropos of which I enjoyed this paragraph from Matt Levine's column yesterday: (Edit: I missed that it was already mentioned elsewhere in the comments - https://news.ycombinator.com/item?id=33029162 https://news.ycombinator.com/item?id=33029162 ) "I know this is bad but I find something aesthetically beautiful about it. If you have a pot of money that is immune to bank runs, over time, modern finance will find a way to make it vulnerable to bank runs. That is an emergent property of modern finance. No one sits down and says “let’s make pension funds vulnerable to bank runs!” Finance, as an abstract entity, just sort of does that on its own." https://www.bloomberg.com/opinion/articles/2022-09-29/uk-pensions-got-margin-calls https://www.bloomberg.com/opinion/articles/2022-09-29/uk-pen...
insomniacity 4y ago
Reminds me of this point by Matt Levine: > If you have a pot of money that is immune to bank runs, over time, modern finance will find a way to make it vulnerable to bank runs. That is an emergent property of modern finance. No one sits down and says “let’s make pension funds vulnerable to bank runs!” Finance, as an abstract entity, just sort of does that on its own. https://www.bloomberg.com/opinion/articles/2022-09-29/uk-pensions-got-margin-calls https://www.bloomberg.com/opinion/articles/2022-09-29/uk-pen...
hackerlight 4y ago
> while any isolated derivatives transaction probably makes sense and is governed by deep and sophisticated mathematics, it does seem to be the case that in sum total we see, decade after decade, a cumulatively destabilizing effect It's not true that derivative transactions are good in isolation and add up to something bad. The bad derivatives transactions add up to something bad. The good derivative transactions do no harm, and are good for everyone involved. If you see a wheat grower hedging their variable yield, that's not going to add up to something bad. If you see derivatives on junk loans in a low interest rate environment, obviously that's different.
bionsystem 4y ago
I have leveraged positions on the stock market and never got a margin call, and probably never will. Being margin called is purely and simply unprofessional and irresponsible. There is no way around that. The maths will never justify a margin call. LTCM has tried taking on extra risk justified by their oh so clever math models and ended up blowing up. People will keep repeating these kinds of mistakes until the end of capitalism.

redanddead 4y ago

Would love to hear more of your thoughts on finance

csomar 4y ago

Any system that socializes losses to parties that are not embarking in the risk/profit is going to be exploited. Period. This is not just about finance. It's a leak. Anything that can leak for profit, will eventually leak. These attacks (and I don't mean you personally) to the free market (and derivative products) are dangerous. If the "free" market fails because it's not so free after all(socialized losses), you don't fix this by having more bureaucrats/politics involvement to run the markets. This will only make matters worse. The proliferation of politics in the markets, because of that, is also accelerating. The argument is now readily available (look at how these complex derivatives products are destabilizing the market!). This will lead to more chaos in the market, more dysfunction and more organized thefts of the market (if not from smart mathematicians than from politicians/bureaucrats) and eventually to a military rule. We've been there a few decades ago. It's sad what's happening now.

deleted 4y ago
[deleted]
barrkel 4y ago
> If the "free" market fails because it's not so free after all(socialized losses), you don't fix this by having more bureaucrats/politics involvement to run the markets. This will only make matters worse This is deeply naive. Governments that don't take action when pension funds evaporate en masse will fall and be replaced by those which do take action. If this didn't happen, it would be a failure of democracy, not of markets. Such a government would be illegitimate - and on-topic, that's pretty much where the UK government is at right now, it's pursuing a set of policies it has no electoral mandate for and is currently 33% behind the main opposition.
- gmac 4y ago
  (Yes — and it feels like we have a systemic problem when the people have no way to get rid of a government this unpopular — except relying on them to do the decent thing and bow out, which this bunch, having been basically purged by Johnson of anyone with intelligence or principles, will clearly never do).
asdfasgasdgasdg 4y ago
But the public -- pensioners and future pensioners -- are embarking in the risk/profit side of things. We want to fund our pension with less money than we ultimately take out, and additionally have guaranteed outflows regardless of market conditions. To put it shortly, we want profit. The average pensioner may not understand that they were joining in a risky undertaking. Whose fault that is I could not even begin to suggest -- too many possible candidates depending on your world view. But a lack of understanding will avail you little when your counterparty is the fundamental financial reality that there is no free lunch. As annoying as it is that the bankers made a bunch of money, the alternative, where all pension monies go into a savings account, would leave people much less happy.
- ls612 4y ago
  And fundamentally it must be risky. You are engaging in a deal to be paid a sum of money 30 years down the road, there’s 30 years of mandatory uncertainty and risk involved with that deal. With defined contribution plans at least the worker observes that risk directly (401k goes up or down) but you can’t, no matter what you do, make it not risky.

btilly 4y ago

The destabilizing threat is real and systemic. Derivatives allow us to hedge local risks at the cost of creating the possibility of the whole system collapsing. It greatly concentrates risk in those who wish to gamble, and if their gambles go south allows them through leverage to threaten the whole financial world. This is not just a contrarian view. Go to https://www.berkshirehathaway.com/2002ar/2002ar.pdf https://www.berkshirehathaway.com/2002ar/2002ar.pdf and start around page 13 where it says "Derivatives" for Warren Buffett's analysis. This is the one where he calls derivatives "weapons of financial mass destruction". (This was several years before the 2008 financial crisis. He makes a number of good points. One of which is that we value derivatives is based on complex models. Those models inevitably have errors. And the errors are generally in favor of the side that you purchased. So those engaging in the trades always believe that they are making money (and bonuses etc get paid on this basis), no matter how disastrous it may later turn out to be. In this case it is likely that the pension fund managers never realized what kinds of complex gambles they were making or what the real risks are. They were working according to models in which what they did was wise. And it may well be that they were right in the long run. But as Long-Term Capital famously showed, being right in the long run only matters if you survive to see it. It remains to be seen if these pension funds will survive.

miohtama 4y ago
But in this case, there was no error on derivatives. It was unforeseen and very violent market move in the response of Tory’s policy “more tax cuts” and the general loss in the faith that the UK economy will be productive and surplus any time soon. Those who modelled the risk did not think Tories would do anything that stupid and risk the UK economy.
- wjnc 4y ago
  I would take even a somewhat kinder view of the pension funds involved. With no knowledge of the intimate aspects of the agreements UK pension funds make with employers, those involved knew that you could either pay for the risk margins involved up front, or via emergency capital. Margin calls are nothing special. Derivatives are used for balancing assets and liabilities, since you cannot match the cash flows on pensions directly given the very long duration (cash flows for pension funds run for nearly a century). Swaptions etc are nothing evil. They are pretty clear cut tools for the job of limiting interest rate exposure for parties with very long liabilities. This is not a pension fund problem (I agree up front: that's a reductio nearly ad absurdum), it's an employer and pensioner problem, created by a sudden loss in confidence in UK gov in an already very turbulent market. If sterling falls, purchasing power falls, interest rises, there is no way pensions can keep purchasing power or indexation. Margin calls are a tiny symbol that shouldn't worry a risk manager. It's the larger enviroment for the UK - that is very worrying. It's all hocus pocus but a well run insurer or pension fund should have a pretty solid grasps on interest rates and a pretty low exposure to swings in that rate. Same for FX exposure. End of '21 you should have opened up some upward potential in interest rates and have some room to survive that volatility. The best managed ones keep afloat or even profit, without taking too many excess risks. The worst managed ones are the first to fall. Go and look at the Q3 financial results for the largest _worldwide_ insurers. I predict the largest insurers will show stronger financial capital positions. (Stocks will fall since large insurers are partially valued on general stock market performance since they are in essence also investment companies.) Again, margin calls are a symptom caused by the underlying agreements, with not a direct relationship to which ones will fail or prosper.

paganel 4y ago

Agree with your point, but as far as I understood that “gambling” done by the pension funds mainly happened because there’s no other way for them to pay what they’re due, i.e. the pensions themselves. In other words the pensions system slowly reveals itself as the Ponzi scheme it was from the very beginning.

Aunche 4y ago

>it does seem to be the case that in sum total we see, decade after decade, a cumulatively destabilizing effect on both financial markets and the financial security of everyday folks I'm not an expert in finance by any means, but for the most part this doesn't seem true. Besides the mortgage bubble, the market has only seemed to get smarter over time. There's definitely a lot of weirdness, but that's to be expected when interest rates are less than inflation for over a decade. >it’s high finance’s job to convince the public that they’re actually helping, not the public’s job to learn high finance. People go into finance to make money, not to help people. It happens that making money in finance tends to make the market more efficient, which helps people. All the low-hanging fruit has been picked, so very little benefit is going to trickle down to the common folk these days, but as a whole, I don't think they're harming people. Meanwhile, I do think that it's the public's job to learn finance, or rather strive to be more informed in general. When the public's priority is to scream out that we should eat the rich, politicians will happily virtue signal along with them and outsource the boring work of legislating to a corporate lobbyist.

zimpenfish 4y ago
> Besides the mortgage bubble, the market has only seemed to get smarter over time. An incongruous comment on an article pointing out that the market has got dumber (ie turning the "should be perfectly safe in gilts" UK pensions market into "hours from 90% collapse because we gambled with shares")?
- Aunche 4y ago
  The is the weirdness that I'm talking about. If interest rates are lower than inflation, it's impossible to make money without taking risk.

cm2187 4y ago

I think you are assuming the derivatives in question are wild, complex, speculative derivatives. This is almost certainly not the case. They are most likely long dated interest swaps. Pension funds have a duration problem, they are managing long term liabilities (what they owe to pensioners) and need to ensure they have enough assets to cover the present value of those liabilities. If interest rates move, then the present value of those liabilities may change a lot because of the new discounting. So they try to reduce that risk, either by buying assets that behave in a similar way with respect to interest rates, or by entering into long dated interest rate swaps. I think the leveraged repo positions they are refering to is doing the same thing as an interest rate swap by going long a long term gilt and short a short term gilt (or the other way round), but basically they try to create an interest rate mismatch to take some duration exposure. So this is pension funds reducing the risks, not speculating. The systemic risk here seems to be mostly a concentration problem and feedback loop. I.e. the more interest rates move up the more pension funds need to sell gilts to hedge their duration or post collateral, the more gilt prices collapse, the more interest rates move up.

concinds 4y ago
Agreed, the problem isn't at pension funds; the problem is the whole financial system's excessive systemic risk. That systemic risk can be effectively reduced, and policymakers haven't done much to address it at all due to regulatory capture. Many financial mathematicians and popular intellectuals (Nassim Taleb, James Rickards) have pointed out the need to descale the financial system to decrease systemic risk, and prevent the financial blowups that are inevitable at the current scale.

misja111 4y ago

The problem has two sides. On the one hand there's finance where some people are taking risks, creating instability that will mostly hit every day folks when things blow up. But on the other side are those every day folks. They want their pension money to gain a profit each year so they'll have a decent pension when they retire. At the very least it should match inflation but preferably a bit extra. Investing money (almost) without taking risk is possible but you'd have to stall all the money at the ECB or some other central bank, and until recently you'd have to pay a negative interest rate. This wouldn't make pension holders very happy. So pension fund managers take risks. They surely take as little risk as possible and they are excellent in picking opportunities that give a comparatively high yield for their risk: but they are taking a risk, otherwise they would never come close to beating inflation. And sometimes the risk blows up, and everybody is all upset. It's easy to blame those filthy rich fund managers but people should also look into the mirror sometimes.

zimpenfish 4y ago
[1] points out that you can have a perfectly boring, safe pension fund by investing all the money into gilts with positive interest rates which means you only need to put in £48 now to get £100 in 30 years. [1] https://newsletterhunt.com/emails/22524 https://newsletterhunt.com/emails/22524
- dchftcs 4y ago
  Government bonds are not perfectly safe.
  - misja111 4y ago
    Exactly. A very recent example are UK government bonds: https://www.reuters.com/markets/europe/uk-bond-prices-collapse-after-sterling-hits-record-low-2022-09-26/ https://www.reuters.com/markets/europe/uk-bond-prices-collap... It's a fundamental law of investing that return is positively correlated with risk. Unfortunately you can't have your cake and eat it too.

betwixthewires 4y ago

I don't think fundamentally that the problem here is derivatives. I think fundamentally that it is pensions themselves. Think about what a pension is. A pension is a deliberate inefficiency in a labor market. It's a promise to pay someone for not working, and in some cases even, children of people who once long ago worked. It is also a central lever for people to look to profit on through managent, and a tool with which to overinflate demand for financial products. The commitment taken on by a pension fund is an increasingly impossible one to uphold as time goes on and markets get more efficient. They have a bag of capital they have to make grow to continue to honor an open ended commitment, so they have to continue to find interesting and clever (and risky) ways to do that. Compounding on this, they're big bags of capital, so they will invariably become load bearing pieces of a nation's financial portfolio. Of course they're going to wind up intimately tied to the overall financial health of a nation. "We take some chunk of money we would otherwise just pay you, promise to invest it wisely to indefinitely pay you later for not working, and in return we get a chunk of capital to play with and a sink to help stabilize the financial system." That's the proposition of a pension, right? You might be tempted to say "pensions are just a part of agreed to compensation, a contractual obligation and nothing more. There's nothing special about a pension that gives it these negative properties your ascribe to it" and to that I'd ask, then why don't people just take the capital through their working years as monetary compensation? Surely they could hand that to a money manager and achieve the same result as a pension achieves? The answer is because people wouldn't be able to expect what they get out of a pension, they go with a pension because they think they're getting something more out of it, and that excess is the ultimately impossible commitment I am referring to.

JonChesterfield 4y ago
The premise that a pension should beat the market without taking on risk does seem suspect. Other traders have the same idea with higher risk tolerance. Maybe gambling over multiple decades is a significant advantage but that's also difficult to see.
v-erne 4y ago
>> A pension is a deliberate inefficiency in a labor market. It's a promise to pay someone for not working... That's and extreme simplification of pension and probably the worst definition You can think of. I guess if You were a marxist as opposed to some form of capitalist/liberal I would expect that You would base Your definition on class struggle. I much more prefer to think about pension as a form of insurance against the risk of getting old. And as such the free market "implementation" is only one of possibilities (for ex. here in Poland we have state pension with a bit of free markets sprinkled on top). I personally believe that "old age insurance" is one of flag inventions of our times and do not think that there is a place for free for all solutions in civilized society (we are in this together and should work out a way to protect the weakest). >> It is also a central lever for people to look to profit on through managent, and a tool with which to overinflate demand for financial products. That's an implementation detail in my view - if You look at it from insurance perspective, You just need to search for a way to redistribute effects of current work between workers and retires. And using financial products (stocks and derivatives) may just be a wrong tool for the job.

dcminter 4y ago

Apropos of which I enjoyed this paragraph from Matt Levine's column yesterday: (Edit: I missed that it was already mentioned elsewhere in the comments - https://news.ycombinator.com/item?id=33029162 https://news.ycombinator.com/item?id=33029162 ) "I know this is bad but I find something aesthetically beautiful about it. If you have a pot of money that is immune to bank runs, over time, modern finance will find a way to make it vulnerable to bank runs. That is an emergent property of modern finance. No one sits down and says “let’s make pension funds vulnerable to bank runs!” Finance, as an abstract entity, just sort of does that on its own." https://www.bloomberg.com/opinion/articles/2022-09-29/uk-pensions-got-margin-calls https://www.bloomberg.com/opinion/articles/2022-09-29/uk-pen...

insomniacity 4y ago

Reminds me of this point by Matt Levine: > If you have a pot of money that is immune to bank runs, over time, modern finance will find a way to make it vulnerable to bank runs. That is an emergent property of modern finance. No one sits down and says “let’s make pension funds vulnerable to bank runs!” Finance, as an abstract entity, just sort of does that on its own. https://www.bloomberg.com/opinion/articles/2022-09-29/uk-pensions-got-margin-calls https://www.bloomberg.com/opinion/articles/2022-09-29/uk-pen...

hackerlight 4y ago

> while any isolated derivatives transaction probably makes sense and is governed by deep and sophisticated mathematics, it does seem to be the case that in sum total we see, decade after decade, a cumulatively destabilizing effect It's not true that derivative transactions are good in isolation and add up to something bad. The bad derivatives transactions add up to something bad. The good derivative transactions do no harm, and are good for everyone involved. If you see a wheat grower hedging their variable yield, that's not going to add up to something bad. If you see derivatives on junk loans in a low interest rate environment, obviously that's different.

bionsystem 4y ago

I have leveraged positions on the stock market and never got a margin call, and probably never will. Being margin called is purely and simply unprofessional and irresponsible. There is no way around that. The maths will never justify a margin call. LTCM has tried taking on extra risk justified by their oh so clever math models and ended up blowing up. People will keep repeating these kinds of mistakes until the end of capitalism.