As readers know, I was in Europe a few weeks ago, making a LOT of presentations. My London-based partners seem to feel that an hour or two of down time is wasted and only for sissies. I learn as much as I impart, and come away with lots of interesting information. Every now and then I learn something that gets into the category of what in the wide, wide world of (multiple expletives deleted) economics is going on? Subprime was like that when I first read about it. Could you really design CDOs that were so patently absurd and then sell them to the Europeans and Asians? Turns out you could.
Last week, Niels Jensen (head of Absolute Return Partners) and I were talking with a variety of pension funds. They started telling us about this thing called Solvency II. Outside the arcane world of European pension funds and insurance companies, it is not on the radar screen of most people. But it may be one of the more explosive problems in our future. Cutting to the chase, the new rules require insurance companies and pension funds to buy more bonds to match their liabilities. But as yields go down they are required to buy yet MORE bonds and then yields go down some more. And so on. The possibility of serious defaults by these same pension funds in the wake of these new rules (setting aside whether it makes sense to actually require pension funds to set aside enough assets to pay their obligations) is all too real. And more pervasive than we now think.
Niels, in his latest Absolute Return Letter, wrote up what we learned, and it is Today’s Outside the Box. Wonder why yields in Europe are falling? Read on.
“I am not sure if policy makers understand how potentially dangerous this situation is. We are on the road to insolvency. And, even if pension providers manage to stay solvent, future generations of retirees are likely to run into serious financial difficulties as their retirement savings earn next to nothing, because our political leaders forced new rules on the industry, the implications of which they did not grasp.”
I know, I am just a bundle of fun. But this really is stuff we should be aware of. And tomorrow I am off to discuss this and more (with some serious play time thrown in) at the Barefoot Ranch Symposium. Enjoy your week!
Your ready for some R&R analyst,
John Mauldin, Editor
Outside the Box
The Absolute Return Letter
“There are those who don’t know and those who don’t know they don’t know.”
John Kenneth Galbraith
On 1st January 2013, a new directive regulating insurance companies which conduct business within the EU will come into effect. It is called Solvency II and unless you work in the insurance or the pension industry the chances are that you will never have heard of…