Identifying gaps in the market is a vital strategy for entrepreneurial success. Those who can meet unmet consumer needs often unlock significant profits.
However, without a unique advantage, competition can quickly lead to market commoditization. Profit margins may dwindle to mere survival levels, leaving little room for growth.
“You should either be first or be better than your competition.”
This common business wisdom is often cited but lacks actionable clarity. Many successful entrepreneurs will attest to the difficulty of finding and filling market gaps while outperforming rivals. Failing is often part of the entrepreneurial journey, as even previous successes don’t guarantee future wins.
Anyone who has launched a new product from concept to market understands how challenging profitability is to achieve. For every viable idea, there are countless failures.
The only reliable way to differentiate a profitable idea from a money-losing endeavor is through experimentation—testing theories in the marketplace and learning from outcomes.
Both success and failure yield valuable insights. They inform entrepreneurs and investors about what works and what doesn’t, guiding necessary adjustments to ensure profitability.
This essential feedback can be disrupted, leading to adverse consequences…
Emergence of Swindles
What occurs when this feedback loop is interrupted, and a supposed market gap turns out to be a mirage? What if fraud misleads savvy investors into committing capital to losing propositions?
In his timeless work, “Manias, Panics and Crashes,” author Charles Kindleberger discusses the emergence of swindles in the financial world. He argues that speculative bubbles, often due to loose monetary policies, can generate a breeding ground for white-collar crime and economic turmoil. Here, we draw on Kindleberger’s insights:
“Commercial and financial crises are intimately bound up with transactions that overstep the confines of law and morality, shadowy as those confines may be. The propensities to swindle and be swindled run parallel to the propensity to speculate during a boom. Crash and panic, with their motto of sauve qui peut, induce still more to cheat in order to save themselves. Often, the revelation of some swindle, theft, embezzlement, or fraud acts as the trigger for panic.”
Indeed, tricks and deceptions can bring a whimsical element to life, much like playful pranks. However, scams also sharpen our instincts, preparing us for interactions with those who may not be entirely forthcoming.
Over the decades, the availability of cheap credit, courtesy of central banks, has created fertile ground for sophisticated swindles that often masquerade as legitimate enterprises.
LDI Swindle Products and Schemes
The recent turmoil in the United Kingdom’s gilt market, where long-term bonds required the Bank of England to intervene with substantial purchases, brought attention to liability-driven investing (LDI).
BlackRock, a key player in the LDI scheme, was effectively rescued by the Bank of England. They have endeavored to clarify LDI’s purpose, claiming to “set the record straight”:
“The amount [public pension] retirement plans are expected to pay out to their members in the future are also known as liabilities, and so-called ‘liability-driven investing’, or LDI strategies, aim to match the value and time horizon of their current assets to those future liabilities.
“One way for retirement plans to minimize potential shortfalls is by using some of a fund’s assets to borrow capital, allowing further investment to grow the value of their current assets for future retirees.”
“Given that some pension funds have assets that don’t cover their liabilities, there is a need for them to borrow to gain both liability-sensitive and growth assets to fill those gaps.”
“Pension trustees and advisors set their own objectives and decide on asset allocation, which determines their exposure to LDI strategies. Asset managers help structure and implement these strategies, adapting them to changing market conditions.”
Sounds appealing, doesn’t it?
Who Else Bought BlackRock’s LDI Swindle Products?
What BlackRock conveniently omitted in their narrative is that pension funds employed LDI to significantly leverage their gilt portfolios—sometimes by up to seven times—using interest rate swaps and repurchase agreements to align with their actuarial obligations.
Leveraging can be advantageous when interest rates are stable, and even more so when rates drop. However, when rates rise rapidly, leverage can be devastating.
For instance, in the UK, with over £1 trillion on the line and excessively leveraged through BlackRock’s LDI, rising rates led to a catastrophic cycle of selling as funds struggled to meet margin calls. This forced $billions in pension funds to divest assets urgently to raise cash.
Such chaotic sell-offs depreciated the value of various assets, akin to a fire sale. The demand for collateral was sufficient to collapse the entire bond market within 24 hours had the Bank of England not acted as the emergency purchaser.
Truthfully, we had never encountered the term LDI before this debacle. Had you?
One could easily misinterpret the acronym LDI—much like QE—as a remedy for digestive issues. In reality, LDI is a convoluted scheme rooted in several decades of artificially maintained low interest rates by central planners. Moreover, the foundation of LDI stems from another overarching deception: public pensions.
The sad reality is that public pension funds in the U.S., much like those in the UK and other developed nations, are severely underfunded. Consequently, many funds resort to borrowing to engage in market strategies aimed at boosting returns to bridge funding gaps.
The California Public Employees’ Retirement System (CalPERS)—the largest public pension fund in the U.S., with approximately $469 billion in assets—requires a workforce of almost 2,843 full-time equivalents just to manage it.
As of the latest reports, there are over 2 million members in the CalPERS system. Recently, CalPERS commenced leveraging for the first time in its 90-year history.
Are they using their leverage to invest in BlackRock’s LDI products? Who else might be involved in this scheme?
What do you think the odds are that the Federal Reserve will eventually come to CalPERS’ rescue within the next decade?
[Editor’s note: In today’s financial environment, unconventional investment strategies are becoming increasingly crucial. Explore ways to safeguard your wealth and ensure financial confidentiality through the Financial First Aid Kit.]
Sincerely,
MN Gordon
for Economic Prism
Return from Who Else Bought BlackRock’s LDI Swindle Products? to Economic Prism
