There are articles in financial press stating that Australian pension funds (industry super funds) are ramping up bets on risky private credit, with some intending to triple their allocation to the asset class over 18 months!
Now I am just sceptical enough to wonder what is to stop an owner of an asset turning around and buying into the capital structure of the financing facility for that asset, either directly or through an intermediary, to aid the extending and pretending that is typical and critical to preventing mark to market losses in less liquid asset categories, such as commercial realestate which has been stressed from changed conditions in interest rate markets and worker behaviours (WFH) since the pandemic.
Besides being unethical, if it is indeed against the law or at least against fund covenants, I have no doubt that backroom quid pro quo deals are struck amongst some in times of stress to achieve the same ends to their mutual benefit.
The opacity inherent in private markets, including private credit, is also concerning given the public nature of pension fund participants.
Before starting a SMSF I utilised a well-known industry super fund for a period including through the depths of the GFC. I found the stability of the Fund’s property fund… odd. It felt unnerving and eerie – a bit too similar to Bernie Madoff’s fund in the way its unit value consistently climbed irrespective of economic and market conditions. It was obviously avoiding mark to market losses at times (imagine Mark Burry in “The Big Short” complaining on the phone to his price-setting counterparties that their offered price for his CDO swaps went down when they should have increased with rising mortgage defaults). In fact this apparent stability is often advertised as a positive of the fund.
The truth is that this sort of gaming of asset markets is not a net positive for small-time investors because it is not an authentic free market where genuine price discovery occurs so that prices paid are a true and fair reflection of the intrinsic value of the asset based on its utility to society.
It introduces asymmetry – heads I win, tails you lose – into markets so that assets are nearly always overvalued which maximises fee flow to the managers and bonuses to Elites and Elite ‘wannabes’ extending to bankers, deal-makers and hangers-on.
This asymmetry is inefficient and anti-capitalistic, and it is a major feature of the vacuum apparatus that constantly sucks their modest wealth resources away from the everyday person, while the many human beings making up the pieces of the vacuum apparatus kid themselves that they are really doing it for the everyday person relying on constant returns into their pension and retirement funds.
No, gamed systems only ever favour ‘the house’ and the real wealth generated flows to the privileged, so that they are never in the interest of the everyday person.
With WFH, the utility of offices is changing, so must the price.
Now for an analogy which inspired the above graphic…
Just imagine a cart being pushed up a hill that never rolls backwards... sounds reasonable... looking closer the cart periodically stalls but to stop it rolling back chocks appear behind the wheels... still seems reasonable, right... but look closer at the chocks and realise that they are actually thousands of small people leaning into the wheels, the same small people who collectively are pushing the cart up the never-ending hill... moreover, look around and notice that there was another path that could have been taken, less steep and with regular flat resting spots... a path kinder and more compassionate to the small people... But the privileged big people riding on the cart insisted on following the tortuous path because along it there are more grains of gold to vacuum up from the ground as they pass and from the small people who can not properly secure it while they work unceasingly to support the upward trajectory of that privileged cart on the tortuous path...
The analogy can be applied to another property asset category, Australian residential property which has been in a two decade plus price bubble... Executive bankers and property developers, etc can be seen riding the cart and most other Australians are the small people pushing it... When it has slowed periodically, the big people on the cart could be heard to yell loudly "negative gearing" or "capital gains tax concessions" or "first home owners grants" or "leveraged SMSF buyers" or "first home owners boost" or "NRAS to soak up extra supply" or "looser lending standards and regulations", and the pavlovian-trained small people leaned into the wheels and chocked them, some deluded that they might somehow climb onto the cart with their gold intact, others just following everyone else living in constant fear that they might be crushed by the cart wheels in any direction...
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© Copyright Brett Edgerton 2024
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