The article discusses Harvard's investment shift away from American stocks and bonds, into real assets such as timber forests, real estate, and stockpiles of oil.
While these assets may have lost even more than US stocks this year, it's not hard to imagine that this strategy still makes sense in the long term. It really depends on whether you think this is simply a cyclical recession in the US or whether there is a risk the US will continue to decline relative to other nations. If the latter happens, commodities may regain value much faster than US stocks.
> US will continue to decline relative to other nations. If the latter happens, commodities may regain value much faster than US stocks.
Somewhat paradoxically, U.S. stocks are likely to do better if the U.S. declines relative to other nations. Very few U.S. stocks make the bulk of money in the U.S. Instead, they tend to make most of their revenues abroad (usually from 30-70% for most S&P 500 companies) and pay most of their expenses in the U.S. If the U.S. dollar declines, their expenses drop, their revenues increase, and so their earnings (and hence stock price) go way up. If the U.S. worker declines and can't bargain for the same standard of living they used to have, their wage costs go down, their revenues remain constant, and their stock price goes up.
The nightmare scenario for U.S. stocks would be if international trade goes kaput and war breaks out. Then they'd see the bulk of their market instantly disappear, with a resulting drop in earnings and stock price. But in this case, you should be worrying about how not to get killed, and not where to put your money.
Good points. The decline we should be worried about is not in the currency, but in the competitive advantage of the US relative to other countries. If it gets more affordable to do business elsewhere, you'll find fewer and fewer good companies on US financial markets. (Many claim SarbOx has already done significant damage here.) If emerging economies can continue to reduce costs -- by tackling security problems, corruption, red tape, improving education and infrastructure, etc. -- faster than we can, US equities may lose their world-leading position. That's not to say it's a zero-sum game; it's quite possible that all the world's equities markets could do well, and the US could lead without being dominant. But equity investments are more strongly tied to their country of origin than globally traded "real" commodities like timber or oil, so if you think the US might lose some competitive advantage -- like if it got significantly less appealing for valuable workers to immigrate here -- you might want to skip the stock certificates and instead buy the paper they're printed on.
In the long term we are all dead. Or, to quote Keynes again, markets can remain irrational longer than you can remain solvent. It's not just a question of whether these real assets will rebound in value within the next few months/years - it's also a matter of how much margin the HMC might need to put up for realized losses. Deleveraging forces you to sell at firesale prices into illiquid markets.
The Wall Street firms that bailed out LTCM in 1998 actually made a profit off of LTCM's assets within the next 1-2 years, once the markets returned to rationality. Unfortunately for them, LTCM didn't have the capital to weather that storm. Depending on what else HMC holds, they too might be forced to liquidate what seem like economically sound positions at a loss.
Yes. The article gives the California Public Employees' Retirement System as an example of extreme losses due to over-leveraging. I didn't see anything in the article to suggest that HMC itself was dangerously leveraged, though. Considering the long-term outlook and vast wealth of Harvard, one wouldn't expect it to gamble anywhere near as much as a hot-shot hedge fund, or even as much as a pension fund with an implicit government guarantee. That's just speculation, though; real data would be welcome.
Yeah, it's sort of unclear from the article if they have sold or not. But until you sell losses are just as imaginary as gains. The short term reduction in interest, dividend, and similar income sounds like it's gonna hurt them though.
It's a populist backlash. As far as Harvard is a proxy for our financial elites, the commenters are upset at what they see as the government bailing out Wall Street while ignoring Main Street.
It looks like it really is a HuffPo article/blog post as opposed to a teaser link to WSJ, NYTimes, etc. It'd be nice if there was a bit more citation of quotes, numbers, etc.
And of course it's not just Harvard that's hit with losing nearly a quarter of it's value: Yale had announced it lost 25% [http://seekingalpha.com/article/111196-yale-endowment-down-2...] and if you do a news search on "college endowment" you'll see similar losses.
It'll be interesting to see how colleges cope with budget shortfalls especially with the initiatives that they've made on the financial aid front.
While these assets may have lost even more than US stocks this year, it's not hard to imagine that this strategy still makes sense in the long term. It really depends on whether you think this is simply a cyclical recession in the US or whether there is a risk the US will continue to decline relative to other nations. If the latter happens, commodities may regain value much faster than US stocks.