Do you see what I see?
In April 2011 a UK film team along with several renowned
neuroscientists produced a documentary examining the science behind how humans
perceive color. Color is often mistaken as a property of light when it really
is a property of the brain. At first
blush the question as well as the answer of whether we all see the same colors
may seem trite and obvious but considering that experts estimate that humans
can distinguish (perhaps) as many as 10 million colors[1],
researchers are in the early stages of being able to adequately answer the
question. The documentary detailed an 8
week period where neuroscientist Dr.
Beau Lotto conducted different experiments on volunteers to determine what - if
any- effect that age, nationality, gender and time may have on our perception
of color. The results surprised UK
researchers because it appears that the human perception of colors does vary
from person to person[2] and is dependent on our
individually unique experiences.
This got us thinking about how investors view the current
global capital markets; at first blush the question as well as the answer
(again) seems obvious when considering the seemingly never ending European
sovereign debt saga and the Gordian knot of daily political gridlock in
Washington DC. However, much like the
findings of UK researchers, we believe
that how we perceive what is in front of us is critically dependent on how it
is contextualized; meaning how investors specifically put
opportunities/challenges into their individual context matters.
Let's consider how global investors perceive and
contextualize current sub 2% yields on US Treasury 10 year securities[3]. In a highly uncertain world investors will
tend to invest in areas of perceived relative safety. Much has been written about the generational
low rates on US Treasury securities and
the positive impact these rates should/will have on US housing and credit
markets specifically, and the overall US economy generally. For many that context gives the perception that
the current low interest rate environment - caused by the flight to safety
trade and Fed monetary actions, e.g. Quantitative Easing and TWIST - is an
unequivocal positive for the economy and capital market investors.
Hmmm, well what
happens when we change the context from the impact on individuals to the impact
on say, institutional investors.?
For example, if you are CALPERS, managing an investment
portfolio of approximately $229 billion (as of May 2012) with an estimated
“unfunded liability” of $38.5 billion (meaning the shortfall in projected
assets needed to pay for pensions over the next 30 years[4]),
how does the current low rate environment effect your investment strategy? Is
it an unequivocal positive?
As an institutional investor CALPERS is not necessarily happy. Why?
Earlier we mentioned CALPERS' estimated “unfunded liability”
of $38.5 billion of their state worker plans.
In order to meet their contractual
pension obligations CALPERS MUST achieve at least a 7.50%5 rate of return on their investment
portfolio every year for 30 years. With sub 2% yields on US 10 year Treasury
securities ANY allocation to Treasuries makes CALPERS ability to meet their
investment rate of return target difficult at best.
Furthermore, remember that all securities are priced off of
the Treasury curve, so whether an investor is building a portfolio which
includes US corporate bonds or equities or options, the current sub 2% US
Treasury rate environment and any corresponding (meaningful) movement from the
current generational low point in yields could have a dramatic impact on
investors, both large and small.
At the conclusion of the documentary neuroscientist Dr. Beau
Lotto commented that "in thinking about 'do you see what I see', the
answer depends on what it is we're looking at.
If it's something that's shaped by our own individual [circumstances],
then we can see the world very differently.6
Truer words have never been spoken.
[4]
http://calpensions.com/2012/05/17/calpers-ignores-brown-delays-pension-payment/
5 For further
calculations please contact Saddle Peak Asset Management, LLC
posted by Seraph146 @ 9:04 AM
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