Last month, I had lunch with a former City trader who is a trustee of a big investment banks pension fund. Trader was gloomy. "Returns are abysmal," he wailed. "Pension funds cant function when the risk-free rate on 10-year UK gilts is 2.2%, equity markets have gone nowhere for a decade and inflation is running at 3.5%." Trader confessed that in his bleakest moments he could see a situation where funds were not able to honour their obligations to those who enjoy favourable defined-benefit schemes."And governments will have to find billions in the next decades to make good the holes in the western civil service pension schemes," he said glumly as he speared a lettuce leaf.
Its always difficult to step back from the noise of everyday life. But for a while now I have been deeply sceptical about quantitative easing, which instead of being used as a weapon in central banks emergency armoury has become a staple of their policy. Since September 2008, short-term interest rates in many western countries have shrivelled to 1% or less. "The authorities have effectively taken cash off the table as an investment option," a hedge fund manager told me. Those who want to save are being forced further down the risk curve; undoubtedly asset bubbles are being created: think modern art or prime central London property. This will not end well.
I was therefore concerned to see that John Mack, the former chairman of Morgan Stanley, had been appointed to the board of a peer-to-peer internet-based lender, the Lending Club. I hope that Mack has good directors insurance. If things get bad and the borrowers cannot repay the amateur lenders, who are those lenders going to sue? The Lending Clubs website states: "We approve fewer than 10% of the loan applications, based on stringent credit criteria."
But I still have a sinking feeling. A proprietary trader, whom I have known for many years and who tends to see where others are blind, is urging caution. "People will be carried out in the 2013 abyss," he warned me and a shiver ran down my spine. Just in case you think I am being a caterwauling Cassandra, remember I was the one who wrote a column in May 2006 saying I was worried about the composition of the Lehman board. We all know how that story turned out. I also wrote at the time of the Blackstone IPO (June 2007) that when Steve Schwarzman was a seller, you didnt want to be a buyer. The Blackstone IPO marked the beginning of the end of the boom. The Blackstone share price hasnt traded at its IPO level since.