🔴 Unfunded Pensions & Retirement Crisis (w/ Brian Reynolds) | Real Vision
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🔴 Unfunded Pensions & Retirement Crisis (w/ Brian Reynolds) | Real Vision

August 24, 2019

Before we invented the margin credit market,
the stock market ran on fundamentals, things like earnings, things like valuations. And then the credit market came along, and
starting in the 1990s, disrupted that whole process. 40 years ago in the ’70s, the average company
was highly rated, AA or AAA rated from a credit standpoint. Now we’ve added so much leverage in the last
40 years that the average credit quality has gone down to just above junk. Brian Reynolds, here to talk about unfunded
pension liabilities, the credit boom and corporate buybacks. And we’re here at this lovely New Hampshire
Institute of Politics, which is the perfect setting for our conversation. First, why don’t you just get everyone familiar
with your background and maybe go through that a little bit. Sure. So in a month it’ll be my 35th anniversary
in this business. I started in 1984. And I’ve been in the business so long, the
junk market didn’t exist when I started. That’s how long I’ve been in the business. The first 16 years I spent on the buy side
of David L. Babson and Company. It was a great place to work because it started
in 1940. I have mentors that go back to the 1920s,
’30s, and ’40s, they taught me to follow the money. They taught me this business the old fashioned
way. And I’ve brought that through every job I’ve
ever had since. And it was a great place to be because that
was the emergence of credit as an asset class. Not only was the junk market not invented
yet but the actual investment grade credit market was still in its infancy. So it’s a very different world now than it
was then, because credit is now so big it dominates financial markets, but back then
it was a backwater. So I ran our money market funds, which is
where shadow banking started. I was in charge of bank and finance bonds,
which is some of the original shadow bankers. And then in the late 1980s, as structured
finance began to become more significant, I was in charge of that product from the late
’80s until 2000. So I kind of grew up with the Martin credit
market. I saw it develop from almost nothing into
this large asset class, which is now the tail that wags the dog. Some of the things you talk about, the Daisy
chain of capital, now that’s like a primary theme throughout your work, can you explain
that for the viewers? Before we invented the Martin credit market,
the stock market ran on fundamentals, things like earnings, things like valuations. And then the credit market came along, and
starting in the 1990s, disrupted that whole process. So now we’re in the third modern credit boom. The first one lasted from 1991 through 2000,
then we had a financial disaster. The second one went from 2004 to 2007, then
we had another financial disaster. And then we launched another one in 2009. And all this Daisy chain is, is our public
pensions needing to make outsized returns. They have become the dominant global investor. Our pensions were only about 60% of GDP in
’84. Now they are 120% of GDP. That’s massive spectacular growth. There’s nothing on earth that’s grown that
fast from such a high base. So they’re the dominant global investor, but
they’re so underfunded they need to make 7.5%. So talk about how the big, big pension funds
work. Why 7.5%? And where’s that money going? The 7.5% they need to make, that’s the difference
between what their governors and their legislatures have under the mat versus the promises they’ve
made to our public sector workers, police officers, firefighters, teachers. Most state governments tend to work the same,
so they all tend to have that same gap. And that gap works out to be 7.5%, which is
crazy because most interest rates are much, much lower than that. So they really have to push the envelope in
terms of what they invest in to try and get that. And you would think they would be in stocks
because pensions should be long term oriented, but most pension boards are police officers,
teachers, firefighters, and politicians. They have a short term focus, and so they
invest in the credit market. They started doing it in the 1990s. The most famous credit fund they hired was
John Meriwether’s long-term capital management. But it wasn’t just him, it was thousands and
thousands of other credit funds that mimicked him. These pensions will hire these credit funds,
they’ll put money to work on an aggressive leveraged basis to try and get that 7.5% yield
they need. And when they buy these record amounts of
corporate bonds from companies, that puts cash into corporate balance sheets. Modern CEOs are incented to get their stock
price up, so they take this unlimited money that comes from our pensions via these credit
funds and use it to buy back their stock. That’s a Daisy chain of financial engineering. That’s what happened in the ’90s, it’s what
happened from ’03 to ’07, that’s what’s been going on since 2009. Now, can you put that in a relative context? How much of the buybacks have pushed the market
up? First, like say, ETF or mutual funds. How come people don’t quantify the buybacks
in relative terms to that? They concentrate so much energy on Wall Street
talking about ETF flows and mutual fund flows. And how does it get overlooked? What’s the number? Because the world has changed in the last
3 and 1/2 decades. As I said, the junk market didn’t exist when
I started in the business, but from the late 1980s on, the junk market began to become
a bigger force for this, and that’s when we started putting on leverage. So 40 years ago, in the ’70s, the average
company was highly rated, AA or AAA rated from a credit standpoint. Now we’ve added so much leverage in the last
40 years that the average credit quality has gone down to just above junk. That’s how much we’ve levered up corporate
America. And if you look at a chart of who’s been buying
stocks over the last few decades, there’s been money going to ETFs, but that’s come
at the expense of mutual funds, pensions, both state and private pensions have been
large sellers. So investors as a whole have really done nothing
these last three decades. The buybacks have taken an increasing share
to the point where they’re almost 100% of the buyers of the last decade. In other words, investors have done nothing
on a net basis for 10 years. Yeah, they put money into ETFs at the expense
of active product. And the result is this Daisy chain of money
coming in from taxes to pensions, going into credit, which is then used to artificially
push up stock prices. And a lot of times that money ends up in not
profitable zombie companies. And you talked about in 2015, 2016, I believe,
that money flowing into energy companies that oversupplied the market. Can you talk about how that kind of related
to back in the WorldCom days? This credit money typically zeros in on a
particular industry. In addition to boosting the overall level
of credit, we overdo it in an industry. So in the 1990s, we focused on companies like
WorldCom and Enron. We inflated their balance sheets to the point
where their valuations didn’t jibe with reality. And then it came down like a souffle. Then we did the same thing with subprime housing
in the next cycle, and that collapsed. And then we did it with energy companies from,
say, energy and commodity companies from say 2009 to 2013, then those companies collapsed. And now we’re starting to do it with commercial
real estate, so it’s just like we go from one asset class to another within the context
of boosting overall leverage. So in terms of shocks and supply, I know the
big concentration these days is on the stock market when it’s falling and the VIX is going
crazy. What happens to the credit markets? Because I think very rarely you turn on the
news and you see, stocks are in turmoil, stocks are in turmoil, but no one’s talking about
how credit markets are functioning. I have three themes. My first theme is that we’re in this credit
boom, this Daisy chain of financial engineering. But my second theme was that it gets periodically
interrupted by these panics, because equity investors just don’t believe in this. The stock markets outpace the economic fundamentals
over the last decade. So if you are a fundamentally oriented equity
investor, you don’t want to buy stocks, you don’t want to own them, you want to sell them
in a drop of a hat every time there’s a worry. We’ve had 35 pullbacks in the stock market
that have been marked by irrational inversions of the VIX curve, where people get so panicked
about the downside that they pay up for short term protection when longer term protection
is cheaper. The most recent of those was in the fourth
quarter of 2018. And when these stock market panics happen
and the VIX gets inverted, the credit market shuts down. Because these credit funds that are hired
by our pensions to put money to work, they’re allowed to take a break during a panic to
see if the turbulence creates a better buying opportunity. So yields and spreads typically go up during
these panics. That happened again in the fourth quarter
of last year, as demand for credit temporarily stopped. But once the equity panic runs its course,
as it did at the start of January, then the credit market opens right back up. People make up for lost time and stocks go
ripping higher on a new round of buybacks and mergers. We’ve done that 35 times in the last 10 years. We’ll probably keep doing it a number of times
per year. These drops feel like the world is ending,
and as soon as the panic is over, we go right back up. That frustrates active managers tremendously. Of course. And I think– so my background is in trading,
so market structure wise I think what’s happening is outflows work differently. So back in 2008, you could be 30% of the trading
volume and not move the price of the stock. Nowadays you can be 5% of a trading volume
and move the price of the stock. So buybacks are constantly pushing us up. And then in the panics, when those corporate
pensions pull back and the credit markets seize up, it’s like a go trail going out. But what’s interesting, I think, what you’re
saying is pensions actually are always constantly there. I think you said in one of your notes, University
of California Endowment lowered their cash weighting. Can you talk about that and CalPERS and how
they’re getting even more aggressive on the engine front? Well, that example of lowering their cash
weighting, it’s not just that particular pension, it’s a slew of pensions that are doing that,
because they all typically need to make about 7.5%. If you’ve got cash that yields 2%, that’s
a drag on that. So what we’ve seen over the last 10 years,
especially the last 5, is more and more pensions reducing their low yielding cash in favor
of more aggressive credit investments, that helps increase the intensity of this credit
boom and it exacerbates these up and down panics, because it removes shares from the
stock market, which means that the money that remains can move shares with less effort,
as you mentioned. That makes the downside more rapid and it
makes the upside more rapid as well. And that’s what– that further drives people
nuts. And now, another thing is the Detroit bankruptcy. how much has that influenced the next exuberance
in investing in these needed based investments? So the Detroit bankruptcy has actually radically
changed the tenor of this credit boom. In the prior cycles, the 1990s with WorldCom
and Enron, the next cycle was subprime. We did it purely with leverage. But now we’re doing with increased taxes. Because until Detroit went bankrupt, nobody
really cared about pensions, because most state constitutions guarantee pensions. Once you give a pension to a police officer,
a firefighter, a teacher, you can’t cut it, you can’t eliminate it, you just have to keep
providing for that pension. But then Detroit went bankrupt and they filed
an US bankruptcy court. And the judge says, yes, I know the Michigan
constitution protects your pension, but you filed an US bankruptcy court and US law trumps
state law, so the pensioners ended up taking a hit on the unfunded liabilities. And since most pensions are only about 2/3
funded, that sent shockwaves through the public labor union movement. And since then they’ve gone to every major
state. And every major state since then has either
raised or is thinking of raising taxes to try and narrow this funding gap in our pension
system. And the result is overwhelming. Every month I tracked pension votes going
into credit from these new tax flows, the chart I do goes up and to the right. It’s now growing faster than the average annual
value of the federal tax cut that was passed in 2017. In other words, we did $1 trillion tax cut
over 10 years, that’s 100 billion a year. State and local taxes just for pensions are
now growing at more than 115 billion a year. So fiscal policy is actually negative now. That’s one more reason why the economy’s cooling. But this money goes into levered credit and
it comes back in the stock market with five times the buybacks, because that’s the leverage
they start to employ. And so if you’re a fundamentally based investor,
you’re looking at a historically slow economy relative to prior decades and prior economic
cycles. Yet, we’re putting more money to work than
ever in credit and doing it on a leverage basis, so you get one of the greatest stock
market bull markets in history. That everyone hates. That everyone hates because it way outpaced
the economic fundamentals, because of these new inflows of money at the state and local
level. And there, can give me like a recap of California? I know you talk about Kentucky, I believe. Any of those specific. It’ll be easier to list the pensions that
are in good shape and are not raising taxes. I think Delaware is in good shape, but they’re
kind of small relative to the other states. Starting in California, whether it’s fashion
or finance, the trends start in California. So the California legislature passed a bill
giving CalPERS an extra 5 billion a year over and above what they’ve been doing. And then they passed another law giving CalSTRS
another 5 billion a year over and above what they’ve been doing. And you can go down the list of all the major
states, Texas, Colorado, Michigan, New York, Pennsylvania, New Jersey, Massachusetts, they’ve
all taken steps to raise taxes and bring more money into the pensions, which doesn’t do
anything for the economy. It’s actually a net negative for the economy,
but it helps boost our financial markets. And that’s why this is the most intense credit
boom in our nation’s history. And the short interest remains because all
the economic fundamentals look horrible on the surface. The short interest remains high, which causes
those extra short squeezes higher, correct? People hate stocks. Yeah, they hate them. Short selling, which is a bet that stocks
are going to go down is higher now than it was during the 2008 financial crisis. It’s near a record. So active hedge fund managers have been betting
against this bull market in near record amounts. That’s another reason for active management
underperformance. On the hedge fund side they’re betting stocks
are going to go down. And we’re in one of the greatest bull markets
in history. Why is it that hedge funds ignore that? They want to talk next quarter’s earnings. But when you’re talking giant liquidity, they
seem to ignore it. And why are you one of the lone wolf voices
on the street that analyzes pensions whereas everyone else is stuck in the weeds? I managed pension money for 16 years. So I was there at the beginning of this process. I helped do some of these practices that we’re
doing now. So I bought one of the first auto loan deals
in the 1980s. One of the first credit card deals, one of
the first manufactured housing deals in the 1980s, which of course, turned into subprime
in the next cycle, so sorry. At the time we were doing them we thought
they were great, they were good, but Wall Street always takes a good idea and runs with
it and pushes it until it becomes overdone and a negative for the financial system. So there’s not a lot of strategists on Wall
Street that have actually done structured finance the way I have. My mentors let me run in credit, but they
also gave me experience in equities. So I can speak both languages. It’s like I can be a general contractor and
explain to the plumbers what the electricians are doing, whereas most people who come into
this business on the equity side, they’re taught equities and they’re taught classical
equities, Graham and Dodd type stuff, fundamentals, valuations, margins of safety. Whereas our public pensions don’t worry about
any of that. All they focus on is the need to make 7.5%. So that’s kind of like the dumb money. And the smart money wants to short, because
fundamentally this doesn’t make any sense. But there’s that old saying that markets can
stay irrational longer than you can stay solvent. And it looks like this irrationality is not
only going to continue but it’s going to intensify. So how does it all end? What indicators are you looking at to give
you a heads up on when things change? Because these 35 that you talk about is–
how are you going to know next time that this is the one? My third theme is that this is just a credit
cycle. Credit cycles always end and they always end
badly. So this will be the same with this one. My first theme was that it’s a Daisy chain
of financial engineering. My second theme was we’re going to have periodic
panics. My third theme was it will end in a crisis. And that’s the difference. We’ve had 35 panics that had been brief and
seen stocks go back up. Eventually we’ll have a crisis like 2008,
like 2000, where you have a multi-year financial market disaster. And the difference between a panic and a crisis
is that in panics we see pensions keep voting to put more money to work in credit, even
though there’s a panic. So we saw that in the fourth quarter of last
year. October, November and December were horrible
for stocks. The credit markets shut down towards the end
of that, but yet pensions keep voting to take money in and allocate it to credit when the
credit market will open back up. A crisis is when there’s a run on the shadow
banking system and our pensions are forced to sell their credit investments. Because credit’s a one way market. Everybody’s either buying or everybody’s selling. We’re like electricians, we’re either on or
off. On the equity side, I view them as plumbers
with flow control, because equity traders, as you’ve been, are trained to sell overbought
rallies and buy oversold dips. We don’t have that concept in credit. When we get overbought, we get overbought
and stay there for years. And then somebody flips the switch and it’s
off. And what I mean by a run on the bank, it’s
like a run on the– a run on the shadow banking system it’s like a run on the bank in the
1920s. All of a sudden some people want their money
back and there’s nothing behind it, so that causes a rush for the exits. So what happened in 2007, November of that
year, Florida was running a cash fund, which is like a money market fund without any rules
or regulations, on behalf of their cities and towns. One of the cities in Florida wanted some money
back to buy some school buses, but they couldn’t give– the fund couldn’t give the money back
because they were in subprime. So instead of cash, the city got slices of
subprime. And it wasn’t until four years ago that the
cities were made whole. Wow. That was a 24 billion fund. It had a $15 billion outflow in a few weeks. The New York Times detailed it perfectly in
a story on November 30th of 2007. But it wasn’t just Florida, it was the other
cash funds that were also experiencing runs on the bank, because all the city and town
state treasurers, they all know each other, they all talk to each other, they’re like,
oh, this is actually in subprime, we need to get out. And when you’ve got subprime investments,
or illiquid structured finance investments, and a few people want to get out, it’s impossible
to make everybody whole. And that’s what causes a crisis. So commercial real estate you’re keeping an
eye on specifically. Commercial real estate, but also these lightly
regulated cash funds. Because a few years ago the SEC essentially
banned institutional prime money market funds, those were the money market funds that owned
Lehman commercial paper and had the run on the bank in 2008. Gotcha. And they thought that would make the system
safer. Most of the money went into treasury money
market funds and did make the system safer, but a significant amount of money, which may
be as large as 400 billion, went into these unregulated cash funds that take multiples
of the risk of money market funds. So to me, that’s where the next run on the
shadow banking system is likely going to occur. It typically happens in the stuff that’s perceived
to be safe, which means people get very comfortable with their expectations. And then when they realize they need their
money and they can’t get it all, that causes a run for the exits. So that’s the difference between panic, when
stocks go right back up, and a crisis, when you have a financial calamity and a multi-year
bear market in equities. When I see the next run on the shadow banking
system– I don’t expect it for a number of years, but when I see it, that’ll be the sign
that this cycle is over and that a disaster lies on the horizon. So since you think this bull market has legs
to run, and I think it’s three or so years you think we still are in this bull market,
do you think it gets turned into euphoria or has this system been financialized where
it’s not really following its way into the retail pockets, per say? Well, right now it’s the opposite of euphoria. People hate stocks to the extent that anyone
putting money to work in stocks, it’s in ETF, but at the expense of mutual funds. So that’s just kind of like– that’s a wash. And the big institutions, like pensions, are
selling their stocks to put money into credit. That’s not euphoria. That’s a dislike of stocks. When the yield curve inverts, and that I’m
talking the 2-year treasury versus the 10-year treasury, historically, that’s what launches
a 2-year cycle of LBOs, where companies get taken private at insane valuations. And those two years after that inversion are
typically some of the best years for stocks because companies are getting taken out at
above market prices, people feel compelled to get money to work, so they don’t fall behind. And if you’re short, or betting on stocks
going down, you’ve got to cover, because if you’re betting on a down trend and your company
gets taken out 25% higher, you’ve lost your money. So the euphoria doesn’t typically happen until
the last two years of a cycle. Given that this is the opposite of euphoria,
that’s one more reason why I think that this cycle has longer to go. And some of the deals– you’ve talked specifically
about where they raise money in the debt markets, they’re massively oversubscribed still, correct? Can you espouse on that a little bit? Any deals specifically where you remember–
We don’t talk about specific deals in public, but in the last month there have been some
financings that were three to five times oversubscribed. Which is amazing. And some of them were for lousy credit. There was a loan that came to market. At the time it was the worst loan ever, according
to some sources, in terms of investor protections, or covenants. The company redid some of the covenants, so
some sources said it was one of the worst instead of the worst. And they were still able to boost the size
of the deal by 25%. And it was still like three times oversubscribed. So there’s just a massive amount of appetite
for garbage, which is one of the hallmarks of a credit boom. When this junky stuff coming to market and
it’s oversubscribed, that tells you that people need to make above market returns. So if they need to make 7.5%, and junk’s at
6%, and investment grade’s at 3%, you’ve got to push the envelope on structure and on credit
to get your desired return, which means as the cycle goes on, you have to run harder
and faster. And that’s why you’re seeing, I guess, some
money going into private equity more– did you say CalSTRS increase their allocation? They’re hiring 15 more people, I believe. Most of the large pensions are looking at
creating their own private equity firm within a firm type of ventures. They’re wrestling with how to do that. A number of them have proposed adding more
internal staff, but some of the best deals are from external managers, so they’re debating
that. But what they’re not debating is their desire
to move away from public markets towards private markets. And not only in private equity, but in private
credit, private credit is one of the fastest growing areas of finance. And we’ve talked about shadow banking. This is the epitome of shadow banking, where
in a private credit market it doesn’t even trade, it’s not allowed to trade. So we put it more deeply into the shadows,
so regulators and investors have less of an idea of what’s going on, which fuels more
demand for equities because of the cash flows. But when there’s a run on the shadow banking
system it’s more of a surprise to investors and regulators and what leads to a bigger
disaster. I believe we had Jeff Gundlach on before and
he was saying it’s kind of ironic the point we are in time because this money is going
almost to unconstrained bond funds like you’re talking about on the active side, they’re
super active, they’re putting it any way they want. Whereas on the equity side, everything’s passive. And just 30 years ago it was almost the opposite,
where you had passive bond funds and active equity. So it seems to be an ongoing pendulum that
swings back and forth. Well, that’s because the people who allocate
money drive by looking through the rear view mirror. So it’s very hard to beat an equity index
like the S&P 500 if you’re an active manager. So the trend has been to passive ETFs to fully
participate in the stock market, because the smart money, the active money has been betting
against this bull market and causing underperformance. Whereas on the credit side, it’s very easy
to beat a credit index during a bull market. All you have to do is overweight yield. To overweight yield means you overweight the
worst credits. Then you buy Argentinean bonds at 8%, right? We’ve been issuing bonds in the last couple
of weeks for European banks, for Russian banks. Amazing. And for African nations. Yeah. All with overwhelming demand. Yeah. So if you overweight your portfolio with yield,
you’ll outperform. And that’s why money flows to active managers
on the credit side in a credit boom. But when you’re in the lousiest credits, when
it turns and goes against you, you can’t sell those. And that’s why you get a bigger disaster,
because everyone wants to go for the exit at the same time, and in a one way market,
there is no exit. And I believe Dodd-Frank has kind of nullified
the brokers in all this, their supply has absolutely shrunk, so you must have this situation–
a highway going in, goat trail going out, where you have these giant institutions on
the credit side owning things. And if they do sell next time, I guess, who’s
the only game in town? Is the Fed. I don’t know, do you have any perspective
on that? Well, Dodd-Frank is interesting in terms of
both the intensity of this credit boom and for what lies ahead. I think back to the last cycle and the cycle
before, the broker dealers were some of the biggest customers for this credit. Remember the Bear Stearns funds were 50 times
margined, but so was Bear Stearns. And Merrill Lynch, Morgan– they were all
50 times margined. Now they own none of this stuff. They’re clean as a whistle, but yet it’s the
most intense credit boom in history. The credit market’s grow by over 85%. Since this credit cycle started, nominal GDP
is only up about 38%. So we’ve massively levered up this economy,
but without the broker dealers participating. That tells you the other participants, the
pensions, the insurance companies are pressing the accelerator even harder this cycle than
they were the last time around, which is why this credit boom is so intense. And the brokers never helped anybody out in
a crisis. All right. If you wanted to bid, there were no bids,
because they already owned the credit. The one thing that might make let the next
disaster less worse at the bottom is if Congress relents and lets broker/dealers take on that
risk. I doubt it. I think they’ll be a bailout faster than they
can change that law. But that might be one relief valve, but it
won’t come into play early in a crisis. It would only come into play towards the end
of a crisis. It might signal the bottom as opposed to signaling
a crisis. Interesting. Now, do you see any social ramifications of
this all? What happens to the millennials? What happens to the baby boomers in a pension
crisis? Will there be a social divide? Is it going to be a political answer? I find it ironic–
We’re here at the New Hampshire Institute of Politics. And this is where all the presidential candidates
come through when they visit New Hampshire for the first primary in the nation. And it’s led to a tremendous divide. Because if you look at who’s been the winners
since we started financial engineering in the 1990s, it hasn’t been the average working
class person. In real terms, real personal income has done
nothing for 30 years. It’s been gravitating towards the 1%. And that’s because of this financial engineering,
which creates a boom and a bust cycle for WorldCom and Enron, a boom and a bust cycle
for subprime, then a boom and a bust cycle for commodities, and now a boom and a bust
cycle for commercial real estate, which leaves the average person no better off than when
they started. So no wonder why everybody’s angry. And so from a political standpoint, you’re
going to get more of a division, I think. From a financial market standpoint, the politics
don’t matter, because what really matters is the large investors, our pensions needing
to make 7.5%, and that Trump’s political ideology. Until they have to cut potential. Well, it doesn’t matter. We started doing this under George Bush I,
then we did it under Bill Clinton, then we did it under Bush II, then we did it under
Obama, and now we’re doing under Trump. That’s a pretty wide spectrum of presidents,
which means it doesn’t matter. Yeah, yeah. The engine just keeps going. As long as the yield curve is positively slow
and our pensions need to make 7.5%, this is going to go on no matter who’s in office. And has for 30 years. Yeah. So that last part where the yield curve does
invert, I guess that’s a race for, if you’re someone who wants capital, right? You probably want to just run to the capital
markets and raise money. You’re just taking it in. Because right now we’re seeing a little inversion
on the 3-month, the 10-year. Is that the next big kick we’ll supply, just
go in overdrive at that point? Because–
Supply is always there. Companies always want to borrow because they
don’t know when it’s going to end. So throughout this bull market, throughout
this credit boom, throughout the last one and the one before, companies have always
rushed to market. They’re always in a hurry to borrow. Either the Fed’s raising rates and they want
to borrow money before the cost of capital goes up, or the Fed’s cutting rates and they
want to get capital before the economy cools off. The variable is demand. And in a credit boom, the demand is always
there, except during these brief panics when it shuts down. Until there’s a crisis, a run on the financial–
a run on the shadow banking system, and then there’s no capital that’s available. Right now we’re seeing demand increase. That’s leading to a more intense credit boom. When the yield curve inverts, that leads to
a more intense financial engineering environment because that leads to a two year LBO wave. When did private equity– when did leveraged
buyout kind of morph into private equity? It seems like we conflated those two things
over the past. Well, technically LBOs are private equity
because there’s no publicly traded stock. It’s like they rebranded themselves. So to me it’s a polite name for LBOs, just
like high yield bonds is a polite name for junk bonds. It’s the same thing with just a nicer phrase
to use it. That’s why private credit sounds much nicer
than junk bonds, or highly leveraged loans. You say private credit, it’s like, oh, OK,
it’s like a little club. And in reality, it’s just leveraged junk loans
and junk bonds. There’s more of a demand for it because our
pensions have this demand for it. When the pensions have a run on their system
and their cities and towns want some of their money back, that’s when it’s a crisis. Which demographically it looks like baby boomers
are retiring over the next 10 years. So I guess we’ll find out at that point. It’s a real generational issue, but that might
actually help solve the crisis. Because if you’ve got enough people with enough
demand– in other words, if you have the big California pensions and the Illinois pensions
and the New York, New Jersey, Pennsylvania pensions going to Congress in a disaster representing
millions of blue collar voters, I think Congress will give them a bailout faster than they
gave one to the banks. And if we do that and make our pensions go
to defined contribution instead of defined benefit, then we can stop this crazy boom
bust investing. And in the next cycle start to invest for
real sustainable economic growth for the first time in 40 years. And you won’t have unprofitable companies
for– Not only unprofitable, but leveraged. Because it’s the leverage that really causes
the boom and bust. And if we can arrange to eliminate that leverage,
eliminate these credit funds that need to reach for yield, then the millennials will
be in good shape, because they’ll be functioning in a non-leveraged growing economy. Yeah. And there you have it. Brian Reynolds, thank you so much for coming
on. Thank you for having me. It’s been awesome. And hopefully you’ll come back soon. I’d love to.

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  1. Brian Reynolds looks like a real bond guy. When I started in 1980, that's what all the bond guys looked like. Red meat and brown whiskey. If you went to Volk's in nyc at midday there were a bunch of these guys. The tall lean guys were equities option and futures.

  2. Oh look…..the "smart financial people" are finally catching up to what I was saying about 10 years ago. I keep saying it, this homelessness epidemic is the tip of the tip of the tip of the iceberg. I predict at LEAST a 50% homelessness rate in the USA. Thats low, In say….30 years max.

  3. Wait until Democrat wins 2020 election and double the size of government. Unfunded pensions are in the trillion and growing rapidly.

  4. Glad I found this guy. He has a calm and direct way of explaining things. Could listen to him talk about this for hours.

  5. How you can discuss this great expansion of credit, money all over the place looking for any kind of return in a ZIRP environment and NOT discuss the $4T that the Federal Reserve has printed up since 2009….. is beyond me.

  6. Thanks for all that info. Its rather technical with so many funds going everywhere. Maitreya has said the whole system will crash. And we must replace it with a sharing of resources system. Who is Maitreya? http://www.share-international.org/maitreya/Ma_main.htm

  7. This man is so down-to-earth and matter-of-factly it is remarkable.
    Great discussion full of positive and forward-looking perspectives. 🙂

  8. the libor rate went up like 0.75 points in europe and usa more or less last year during april, july, by october there was panic selling in equities junk bonds, growth is so low, debt so high, ppl need the fed to constantly say:we got your back no matter what, and its with junk bonds, gov bonds with negative yields, equities etc

  9. In Australia we have this supposed great 2.8 trillion superannuation nest egg. its a sham. it will be stuffed over by the next big market blip.

    There was 112 billion in contributions, yet only 87 billion paid out. Or 3.1, but people are being bullshitted to how much their superannuation has grown.

    The govt still pays out 40 billion in old age pensions

    We have a stupid tax system for your family home ( no capital gains tax) which I think will screw Australia in the next 5 years, absolute stupidity that's caused a real estate bubble

  10. Go and look at the Bank of North Dakota. Have simple sate bank and stuff wall street and their thieves. stuff the FED

  11. My only problem is bailouts bailouts it's never ending. Debt on debt on an increasing quasar like spiral.

  12. Sorry, these are OVER PROMISED pensions, not under funded. Two married government employees get $5,000,000 in house hold wealth for just living from 55 to 95 as parasites on the tax payers? We need to qualify and limit pensions grossly over promised.

  13. Pension, 1980, 18%, $3,000 per month cost $250,000. In 2010 at 1% requires $3,600,000 for same pension. Who pays the difference?

  14. Won't bother me, I don't have a pension. And I'm definitely not paying someone else's pension. Why should taxpayers have to foot the bill? The people who promised money to people are responsible, not me! People are stupid and believed their lies. I say screw the pensioners. Learn your lesson for next time and don't believe in fairy tales.

  15. There is an easy solution for the demographics problem open to the US, increase the quota of 18 to 28 year olds admitted to seek US citizenship.

  16. If they bail out the pensions we will be 40 trillion in debt and rates would have to go negative or the debt would snowball out of control ! That will never work not unless they made the 1% pay for it sense that's who's been stealing it all these years.

  17. It's impossible to make everyone whole he says? That's called a criminal pyramid scheme. He says financial engineering I call that scamming and scheming.

  18. So QE has nothing to do with the bull market, and we are $100 trillion debt for nothing? I don't buy it.

  19. very fine commentary by tyler neville. i have been following the financial mess for a decade and haven't heard these fundamentals so well explained. thank you for this.

  20. 12:30 … oh, really. u.s. law (federal law) trumps state law? the states created the federal gov't and they can revoke it any time the voters see fit so, I don't think so. of course brian reynolds does not get specific as to what law he is talking about. if he is alluding to the federal reserve's laws then that is something entirely different and I think that is what he is talking about without being explicit. when so-called "financial experts" speak about currency issues it is the federal reserve that they are talking about as the federal reserve note is the property of the federal reserve "bank" and what they say about those debt notes goes.

  21. raising taxes to keep the pension scheme going, oi vey. and this, my friends, is the problem with growing government. gov't grows, more gov't workers are hired and it's simply one more pension "mouth to feed." as simple as, smaller gov't means less pension liabilities which means less taxes. just shrink the gov'ts down to nothing and then the pension problem becomes minuscule.

  22. I have a pensionable hobbit I’m not naive to believe that it’s the end all. Someone else is still managing your money. I have my own investments that will exceed the pension

  23. Very clear & informative!

    I’d like to know, where can I find info on pensions funds. To be precise, how can I find if these pension funds are buying or selling? Per the “on/off” analogy Brian was referring to.

  24. Gene Evangelist, why isn't a built-in short attached to any over advancing market? And why isn't the payout time geared to absorb the time it takes for one of those markets to add value back on a pick-up? You could financially engineer the entire thing in a completely sustainable way. You are just engineering slices of the ecosystem now, as you know. Where would the money have to come from to engineer the other slices of the ecosystem?


  26. What was this man’s name and what is the name of his book? I could not understand his name or the title of his book.

  27. 4:30 So is he saying that state pensions are buying heavily into corporate bond market, and the corporations are using that public money to buy stocks? Wow, that sounds SUPER shady!

  28. all the money is going to the banks to pay interest on Washington D.C.s' debts (about $450 billion/yr ) and $ one trillion for military costs, and billions more for credit cards with inflated loan shark interest rates..

  29. I know it's only a opinion and no one has the magic ball. But a few more years to go on this bull cycle. Disappointing to hear that. End already.

  30. Great interview, Brian Reynolds clearly knows what he’s talking about…from a technical point of view. However, not considered and, in my opinion of greater impact is that we are moving toward a one-world financial system that will ultimately defy technical analysis. I’m no pro on financial markets but it is clear that those who control the fed and the one-world system that is coming will NOT give up their control. Technical analysis will be bypassed when things go south this time…IMHO

  31. Social Security retirement payments, beginning at a minimum of $2,000 for all, are affordable. No longer does any private going concern need store away money (or sit waiting for unscrupulous legal-loop-crawling-minds can attempt to steal) for later retirements. Also see YouTube – Austrian economist with an inaccurate model of how money works and who HATES TAKERS. ESPECIALLY ROBIN THE HOOD TAKERS! https://tinyurl.com/yx8uc25x With the inaccurate, neoclassical-model of HOW MONEY WORKS, the only two ways a Sovereign government (which issues currency) may pay for public goods & pay for public services are:

    1. For that Sovereign govt. to use eminent domain & purchase the private-sector-owned production-means which that Sovereign govt. needs to produce those public goods & produce those public services. Thereby, moving production-means from private sector ownership to government employee ownership.

    2. For the Sovereign government to leave ownership of the production-means with a private owner & then to tax money from that private owner. (see ROBIN THE HOOD).

    This is an inaccurate understanding of HOW MONEY WORKS when there is a fiat currency issued by a Sovereign government.

    This inaccurate understanding of HOW MONEY WORKS does easily explains the confusion which gives rise to resentment from someone who is a HAVE & who does not wish to become a HAVE-NOT or become a TAXED-TO-DEATH-HAVE-LESS.

    And see https://www.youtube.com/watch?v=lLaKxeR3XtA Economics of the Green New Deal | Robert P. Murphy

  32. The us inc. has no gold! It all belongs to the Fed and Treasury, two privately (foreign) owned corporations independent of the us inc. Don't let these criminal financial idiots fool you! They know the us inc. has been Bankrupt since 1933….. the reason for the ever climbing "national debt." In 1984 the Grace Commission reported to congress that ALL of the federal income tax collected in the us inc. by the IRS inc., another Independent of the us inc. privately owned corporation, goes ENTIRELY into servicing the 'principle' (paying the interest) on the ever climbing national debt. Also, the commission reported that hasn't been enough to 'service the principle' due to lost revenue; less taxes-more loopholes for the wealthy, military and private (gov't) overspending, lost industry, unemployment, etc.. The new puppet in the "half-wit house" has seriously increased the deficit (revenue in compared to revenue out) every year he's been in office.

  33. Pensions and 401k's are just the way that Wall St forces citizens to buy into their corrupt ways and make a team together. Everybody should get out of the stock market and just work an honest job for an honest wage, put the rest in a vehicle with a modest, realistic return like CDs. Anything more is abject greed and you're asking for trouble. Profit doesn't come for free.

  34. This is why they are offering "FREE" flu shots to the boomers. We need a massive die off of the above 60 crowd.

  35. this is genius i was thinking about this before i could not figure out why things were so out of wack and i did not see any euphoria yet just brilliant brian reynolds straight talking

  36. Boy sounds great something I'd really like to be in I don't think so gambling with my pension not only that as time goes on and our dollars being devalued because China is printing their currency back by nothing R currency it's going to hyperflight What a Sad State of Affairs fellas

  37. Even if you change to defined contribution it still gives the money to Wall St and that is a recipe for disaster again. It’s a legalized casino 🎰

  38. So they discovered investment diamonds in Epsteins vault. Now who deals in those? Jews do. Anglo patriots = G&S physical bullion. Think he might be a very valuable mossad asset huh?

  39. Helen Clark a leftist prime Minister of New Zealand used the pension fund on the stock market and paid off our National debt. People were crazy mad at her Govt for doing it and voted the lefties out, we then got John Key who made his first millions out of the devaluation of the NZ dollar. He is a reprehensible scoundrel of the top banker class and shoved our country back into overwhelming debt,

  40. I am amazed, there are actually some people telling you the truth….
    not like the fake propaganda machine or the outrageous government….

  41. Why is it that there is no realisation that there is absolutely nothing except the administration's moral corruption to stop the US government from financing all social and environmental needs of the pensioners, the environment and the needs of the consumer who are increasingly unemployed due to the change that algorithmic robotisation is bringing to waged labour, or the lack of industry and corporates to have a need for same?

    The US government can absolutely never run out of money because all governments are the creators of the money supply, principally as debt. All money is created out of nothing as debt by the banking and financial sector, with governments providing absolute 100% solid investment vehicles as treasury bonds which never can be tied entirely to the amount of tax that is being paid by the populace!. It is bloody obvious that we need to write down debt in that the governments need to be able to pay off such debt in the same manner as it pays off treasury bonds.

  42. Pensions need 7.5% return so they hire fund managers who buy junk bonds and the companies take that money from bond issuance and buy back their own stock, driving stock market higher. Do I have that correct?

  43. I think it's so perfect that this guy sounds like the red pill/blue pill guy from The Matrix (Morpheus?). Guess I'm choosing to see how far the rabbit hole goes.

  44. My only disagreement is on his idea of a federal bailout for state pensions. Several such attempts have been rebuked. The states that did not mismanage their pensions, states with right to work laws , and states with only a few well run conservative pensions will not allow their state taxpayers to bail out the millions of over promised union pensioners. It is the unions who voted for the idiots that caused this crisis.

  45. After raping the common man, and then the middle class, big business and Wall Street want the rest. Where is the greatest amount of money that has been in abeyance? Well of course, it is the pension funds. They will use these funds to prop up banks and the rest of the market, and the way to do that is to convince fund managers to buy Bonds, that everyone knows will trade at a negative interest rate. The promise will be that "you will only lose 3%" and not 25% on the stock market. Over the next decade those bonds will be tied in, with penalties for withdrawal. Therein is the last blood sucking product coming from money managers, who will always get paid, no matter what happens.

  46. So the entire world is going to go bankrupt to fund the pensions of a relative few while the ones getting overtaxed have no pension.

  47. Learning all about banking and finance the stock markets the world monetary systems in the last six years

    fascinating and terrifying

  48. I can’t tell if he’s actually educating us, or bragging to us. But what I think is he just got put on someone’s list.

  49. Sure but what happens when the tax base dries up as baby boomers are no longer buying goods as death takes them out

    The trade is a massive loss of growth as baby boomers are no longer replaced by youth and gdp

    What’s hilarious is that republicans make the claim that socialism is bad yet their strategy is to make states shadow banks a socialism mechanism is holding their wealthy greed

    GOP capital is a total farce

    Taking a commodify that comes from taxes and millennials under socialism don’t replace the tax funding an the private sectors no longer pay the massive taxes required

    The worse kind of republican is the fascists that claim to be capitalist but are truly totalitarians fascists robbing Medicare Social Security pensions all financed with true capitalist labor it’s so bad they have created the farce of equity investments proof 1 and a great example is those republicans who rob Medicare and are rewarded by making the fix guard the hen

    If it weren’t for socialism these fascists wouldn’t have dung just as Putin

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