FROM: Lisa Sorani, Manager of HR Employee Services LS -

More documents

Recommendations

Info

POSSIBLE OUTCOMES: ALTERNATIVE SCENARIO 2 r • Most observers comment that t the probability bilit of such a scenario playing out in the US is exceedingly unlikely o o One of the main reason people point to this unlikelihood is that the US controls its monetary supply In essence, if such a scenario began to play out the Fed could simply print additional money and purchase Government debt on the open market similarly il l to what they are doing with Quantitative Easing • However, such a scenario could lead to “Fed Capture” o o o o Fed Capture results when fiscal policy and the corresponding impact on the interest rate environment work together to force the Fed to act in a specific manner In such a scenario, monetary policy and the Fed essentially loses its independence Once this happens, the Fed’s mandate for price stability is sacrificed for interest rate stability and Government debt stability Historically, Central Bank Capture often proceeds bouts of inflation and currency decline and/or collapse ♦ Central Bank Capture is a hallmark in studies of country default ♦ Most countries prefer to default through currency devaluation and inflation versus reneging on debt ♦ Reinhart and Rogoff point out in their book “This Time is Different” that inflation crises and exchange rate crises have traveled hand in hand in the overwhelming majority of [default] episodes across time and country Pension Consulting Alliance, Inc. ││ EBMUD Fixed Income Discussion │ 40
POSSIBLE OUTCOMES: ALTERNATIVE SCENARIO 2 r • While it is easy to see how such a situation ti can get out of hand in severe cases, Fixed Income investors are still exposed to negative outcomes in more moderate situations o o o Any form of Fed Capture would be highly detrimental to investors even if it does not lead to a spiral of hyperinflation Fixed Income investors rely on the price stability provided d by the Fed as part of its mandate Without price stability Fixed Income investors cannot make a sound judgment on the merits of a particular investment ♦ Does the Bond provide adequate value greater than the foregone consumption today? ♦ If the investor can’t quantify their prospective purchasing power in future periods then it is impossible to estimate the value of an investment in the current period ♦ Today’s low interest rate environment compounds the problem by reducing the margin of safety • In such a scenario, Fixed Income investors today can face multiple paths to sub-optimal outcomes o o Any swings in interest rates could cause material capital losses in today’s low rate environment Plan Sponsors, especially those with COLA agreements, are dangerously vulnerable to inflation increases ♦ The current 10-Year Treasury has a small negative real yield; if inflation increases, losses of real purchasing power would be substantial Pension Consulting Alliance, Inc. ││ EBMUD Fixed Income Discussion │ 41
Page 21 and 22:
M E M O R A N D U M Date: April 29,
Page 23 and 24:
Recent Investment Performance Barro
Page 25: Additional Considerations Barrow Ha
Page 29 and 30: For example, as of the most recent
Page 31 and 32: Q1 - 2013 Preliminary Recent Invest
Page 33 and 34: Q1 - 2013 Preliminary Periods endin
Page 35: Q1 - 2013 Preliminary Fixed Income
Page 38 and 39: AGENDA ITEMS Section Tab Current In
Page 40 and 41: THE CURRENT INTEREST RATE ENVIRONME
Page 50 and 51: SECTION 2 LOOKING FORWARD Source: W
Page 52 and 53: LOOKING FORWARD: INTRODUCTION r •
Page 54 and 55: LOOKING FORWARD: POSSIBLE OUTCOMES
Page 56 and 57: POSSIBLE OUTCOMES: ALTERNATIVE SCEN
Page 78 and 79: LOOKING FORWARD: CONCLUSIONS r •
Page 80 and 81: INVESTMENT OPTIONS r • In light o
Page 82 and 83: INVESTMENT OPTION 2 r • Option 2:
Page 84 and 85: INVESTMENT OPTION 4 r • Option 4:
Page 86 and 87: INVESTMENT OPTION 4-A r • Option
Page 88 and 89: INVESTMENT OPTION 4-B r • Option
Page 90 and 91: INVESTMENT OPTION 4-C r • Option
Page 92 and 93: CONCLUSIONS r • There are a few a
Page 95 and 96: Considering a Real Return Class Eas
Page 97 and 98: Defining Inflation • Inflation is
Page 99 and 100: Expert Views 5
Page 101 and 102: Expert Views: Inflation Doves • B
Page 103 and 104: Expert Views: Inflation Doves The E
Page 105 and 106: Expert Views: Inflation Hawks • B
Page 107 and 108: Expert Views: Inflation Hawks The E
Page 109 and 110: Expert Views: Summary • Experts a
Page 111 and 112: Institutional Investor Response •
Page 113 and 114: Modeling the Real Return Class •
Page 115 and 116: Modeling the Real Return Class •
Page 117 and 118: Implementing a Real Return Class
Page 119 and 120: Appendix 25 25
Page 121 and 122: Modeling a Real Return Class SUMMAR
Page 123 and 124: A Brief Description of Global Infla
Page 125 and 126: A Brief Description of Absolute Ret
Page 127 and 128:
A Brief Description of Absolute Ret
Page 129 and 130:
A Brief Description of Commodities
Page 131 and 132:
A Brief Description of Oil & Gas RE
Page 133 and 134:
A Brief Description of Oil & Gas RE
show all

FROM: Lisa Sorani, Manager of HR Employee Services LS -

Create successful ePaper yourself

Delete template?

Save as template?