A story came out last week from the WSJ that we think flew under the radar given its potential outsized implications. Calpers, the largest pension fund in the United States ($495 billion), voted, for the first time ever to begin using leverage in the portfolio to achieve its stated annual return goal of 6.8% (which was lowered from 7% set just a few months prior). Its board of governors also voted to increase its allocation to alternative investments - raising its Private Equity allocation to 13% from 8% and adding a new 5% allocation to private debt.
I can only imagine what the Bitcoin maxis are thinking right now…
The $25 billion they’ll lever up is only about 5% of the fund, so it’s not huge, but it’s a clear sign from one of the largest buyers in the market, that yield is very difficult to come by these days.
“Retirement funds around the U.S. have been pushing into alternative assets such as real estate and private debt to drive up investment returns to pay for promised future benefits. Funds have hundreds of billions of dollars less than what they expect to need to pay for those benefits, even after 2021 returns hit a 30-year-record.”
“Monday’s decision marks the first time the Calpers board has made leverage an integral part of its asset mix, building it into the fund’s plan for meeting its investment-return target.”
If you follow us on Twitter (how could you not?), you know we’ve been logging some of the instances we find of investors being forced further and further out on the yield curve to chase returns. Russel Napier has discussed in-depth, and we covered here, that this is an intentional regime of financial repression, intended to inflate our massive debts away (see the next chart below). The playbook is to keep yields low while inflation increases.
Diego mentioned in his last Markets Update that stagflation is only superseded by a deflationary spiral as the worst possible economic environment for society, and I’ll add, it’s also (probably) the most difficult environment to earn an appropriate risk-adjusted return.
If you’re an investor, you’re very aware that the 60/40 isn’t what it used to be, and Calpers just telegraphed a potential Rubicon moment to the world.
What could possibly go wrong?
This one’s simply a PSA that there’s a shit ton of debt out there ($50.1 trillion) and a reminder that debt = growth pulled forward… sorry Gen Z.
A few thoughts: