This is an opinion piece by Mickey Koss, a West Point graduate with a degree in economics. He spent four years in the infantry before moving to the Finance Corps.
I will use the California Public Employees Retirement System (CalPERS) as an indicator of your general retirement system. According investopedia, the CalPERS invested about a third of their money in bonds with a target annual return for the fund of 7%. Bonds qualify as fixed income securities because of their predictable coupon payments. They are used for income, not capital gains.
Recycling a chart from one of my previous articles – let’s assume the weighted average coupon rate on government bonds is 2% to simplify some calculations (because that’s according to the Treasury). At a 2% rate of return on a third of your money, that means pension funds have to make 9.5% annual returns on the rest of their money, every year, without fail, or they run the risk. not being able to finance their pension payments. . There is no room for error.
So what happens when you start to feel the pressure but have to keep buying bonds by mandate, despite the lack of income? You start increasing your positions, a technique that nearly blew up the UK retreat space just a few weeks ago.
The Washington Post has a pretty good summary of the situation, but essentially repos have been forced to leverage their positions to increase yields and cash flow due to the prevalence of quantitative easing and low interest rates.
Channeling my spirit animal, Greg Foss, by operating a 3x position, you can increase your return by 2% to 6%, but the leverage is a two-way street. A 50% loss turns into 150% and starts eating away at your other positions and investments. This is exactly what happened in the UK, necessitating a bailout to prevent the liquidation of pension funds and the systemic impact on the banking and credit system.
Enter bitcoin, courtyard side. Instead of leveraging positions to increase yield, I think pension funds will be forced to embrace alternative investments like bitcoin to help grow their fiat-denominated asset base and serve their payouts to retirees.
I recently wrote an article on the debt spiral concept. While central banks are raising rates right now, they can’t keep going forever, which inevitably pushes pension funds back into the low-yield environment that caused the systemic problems before.
Bitcoin has no liquidation risk. Bitcoin does not require leverage. Instead of making risky bets, perpetuating the culture of moral hazard and socialized losses, pension funds can use bitcoin as an asymmetric opportunity to bolster their returns.
I consider this inevitable as more and more asset managers realize that it is their duty to give back to retirees what has been promised. Once priority is established, the dominoes will fall. Don’t be the last.
This is a guest post by Mickey Koss. The opinions expressed are entirely their own and do not necessarily reflect those of BTC Inc. or Bitcoin Magazine.