01.14.08
Market Sobriety
I read an analysis of the risk taking environment of the first part of the 21st century by the Dallas Federal Reserve Bank. One of the observations about the 2007 credit crunch is that investors underestimated key aspects of risk: default risk, interest rate risk, and risk appetite (that sometimes higher premiums are demanded for taking on risk and at other times, lower premiums are accepted, for which we’ve been in the latter). One lesson: that the ‘slicing and dicing’ of risk through structured products and derivatives was more attractive in theory than in practice. This transition phase, however, of the return to more sustainable risk taking (which implies risk-reward tradeoffs), ‘poses challenges to macroeconomic growth and price stability over the short and medium terms.’
This analysis ties in perfectly with the new report just launched, “Breathing New Life into Retirement Portfolios: The Battleground of the Life Annuity.” While the Fed’s brief rightly points out the causes and resultant macro environment, the new report takes these fundamental ideas about risk taking to the individual level, and why the life annuity balances out other risks beyond market risk that a retiree faces — longevity risk or simply ordinary, sustainable, income planning.
If the market just took to newfound sobriety, there could be some occassional slips off-the-wagon while players re-adjust to the meaning of their new life, in terms of risk-return tradeoffs.
