How to Invest for the Retirement Crisis (w/ Konstantin Boehmer)


ED HARRISON: Where the rubber hits the road
is where you talked about the South Koreas, the Netherlands and the Icelands of the world
and then do you play that from a macro perspective, because number one, obviously, when you look
at how you would invest, say, on government bonds or any other asset class, it’s not just
about what’s happening with the pension but also there is the relative factors like in
terms of are they relatively the relative value of the assets that you’re looking at. What’s the process that you use in terms of
putting this into an investment management component? KONSTANTIN BOEHMER: One goal for us, of course,
as investment managers has to be, so what? It’s great that you do all of this work, and
that you maybe write a paper and have this fancy model, but what do we do with that? I think for me, one of the important pieces
is that I want to educate so I want to also show people look, this is what’s going on. At the same time, I am a paid employee so
I need to also make sure that whatever I do will have a positive impact on the tasks that
I’ve been given. For sure, we want to make investment decisions
based on the information that we’re getting. I would say one is that it is an informational
piece. It is something where I’m not really saying
you should have been invested like this yesterday. This is something that has a timeline or horizon,
which is still some time out. What is important for me as a macro investor
is to also look out into the future. Everyone is focusing on the zero, two or three
months and we’re also, of course, taking a look at it and making our decisions on a very
short term tactical basis. It is number one, it is highly competitive,
and therefore there’s a little bit less alpha in this space. There’s more alpha if we look out further
into the future, and that is a one-year, two-year, three-year time horizon and we need to be
game ready. We need to have our game plan of how we want
to be invested if something happened, which we think there’s a high, or there’s a reasonably
high chance that this will become center stage. We can talk about what will be the triggers
to bring this center stage, but I think number one is we need to see, are there any glaringly
obvious decisions that we need to make based on the model that we’ve seen and the qualitative
analysis on the background? I think the glaringly obvious decisions are
that we look at Europe, because it’s always easier to make those decisions within the
same currency. If we look at Europe, there we have one central
bank, but we have multiple different countries, which are actors in that environment. Then you have some, like Netherlands which
is extremely well prepared. Then you have others like Austria, which is
extremely badly prepared. Then I look at those two bonds and as a barrier
minimum, I would say let’s not buy Austrian bonds, because they trade at the same level. I think it’s maybe eight basis points difference,
but it’s not worth those extra eight basis points for going from one country which looks,
let’s say, stable and solid and well prepared to something which on the surface looks decent
but if you look under the surface, there are a lot of challenges. I will put a massive disclaimer here that
this is not investment advice that you should put on that spread trade right now, this is
more going into the direction those trades we would look at and we also need to factor
in of course, what other pieces of information are there? Sure. We need to factor in that Austria just got
a new leadership and that is actually extremely progressive and might be the blueprint of
how European politics will look in three, four or five years and maybe with that young
dynamic tilted towards environmentally but still sustainable growth, maybe that is a
framework which works extremely well for Austria. We need to take all of those things into account,
but if we were to just look at pensions, that is a pretty clear case, to be long Netherlands
and short Austria. ED HARRISON: Can you play this in derivatives
like CDS and things of that nature? Because I would imagine that when you look
at the price of those derivatives, when you’re looking for trigger events later on, when
the trigger event happens, that protection will crystallize towards the values that you’re
already predicting. KONSTANTIN BOEHMER: I think that’s great. I think that’s possible. You could do those things. I think what is maybe the more cost effective
way would be to wait a little bit more until it hits the most critically exposed ones. I think having a good roadmap or a good game
plan ready, it is okay to miss the worst case, if you then play the second tier because it
will always trickle down, it will always be there will be one country which will become
center stage, let’s say in Greece or in Italy or Spain or France where you have a really
big move based on what is going on in that country on the negative side. Then the second tier countries will not move
for very long time. There will still the opportunity to put on
those trades, let’s say let it ride for a little bit longer, but at least it is right
in front of you, the playbook, you can just pull it out and say look, I’m getting ready. That’s one thing. The financial part is one thing, another one
is politics. There, it has already huge impact where we
see how maybe the political divide in countries is not based on ideology anymore. It is maybe a little bit more based on the
intergenerational split between the older generations, the, let’s say the okay, boomers
and the millennials and under where you see, well, who’s actually going to pay for it? Is it the young through the contribution,
or is it the old or older through lower entitlements? I think that’s what we see increasingly in
a lot of places in Europe, but also globally, and definitely in other places, too. You have that financial aspect, you have that
political aspect. Then you have, let’s say, the really big structural
impact of saying like, okay, how big is that problem in general and how does that affect
inflation rates going forward and GDP growth going forward? There, I just see a major drag from that particular
aspect. That doesn’t necessarily mean that I will
be a permanent bear on growth or on equity markets, but it is one contributing factor
which is extremely important for me.

3 Replies to “How to Invest for the Retirement Crisis (w/ Konstantin Boehmer)

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