Bonds Are Not Forever: The Crisis Facing Fixed Income Investors

Praise for BONDS ARE NOT FOREVER "Simon Lack, a former J.P. Morgan trader and money manager, advises investors to steer clear of U.S. Treasury bonds on the grounds that the government's indulgence in the age-old practice of inflating away debt makes a negative return likely. His book also offers an insider's account of the dramatic changes in international finance at a time when a global explosion in public and private debt was expanding the size, scope, and complexity of banking. Personal anecdotes, especially about the fast-paced trading of exotic 'derivatives,' make this book not only informative, but entertaining. It won't, however, relieve anxieties about the current fragile state of the global economy." —George Melloan, former editor and columnist, Wall Street Journal, and author of The Great Money Binge "This fascinating and prescient narrative of the bond market's past, present, and future will captivate both professional and personal investors. Peppered with anecdotes from Mr. Lack's four decades of experience in the financial markets, this book prepares financial stakeholders for an investing landscape that may look very different from what they have come to take for granted." —Gabriel Hammond, founder and Portfolio Manager, Oppenheimer SteelPath Funds, and founder, Alerian "In The Hedge Fund Mirage , Simon Lack exposed the appalling mediocrity of a hedge fund industry grown fat on investors' fees. In his latest book, he takes on the great thirty-year bond bull market, turning an insider's eye on how we got here and the risks that lurk in portfolios of supposedly safe debt." —Dan McCrum, U.S. Investment Correspondent, Financial Times

Preface xi Acknowledgments xiii CHAPTER 1 From High School to Wall Street—The Bull Market Begins 1 Inflation Memories As Bad as It Gets 4 Trading in Gilts 5 The Old Class Structure 8 A Nineteenth–Century Market 11 Finance Starts to Grow 12 Is Finance Good? 16 Investing after the Bubble 20 CHAPTER 2 A Brief History of Debt 23 Interest Rates in Ancient Times 23 Medieval Credit 26 The Beginnings of Modern–Day Finance 28 Borrowing Reaches the Mass Market 31 Student Debt 39 Big Borrowers in History 43 What We Owe Now 45 CHAPTER 3 Derivatives Growth 51 Welcome to New York 52 Early Derivatives Growth 56 Swaps Take Off 61 Size Isn’t Everything 65 Derivatives Reach Omaha 67 Norwegian Wood 69 CHAPTER 4 Bond Market Inefficiencies for Retail 73 A Simple Market Model Stocks Are Fairer than Bonds 76 Why Change Is Slow 79 Structured Notes 81 The Internet Threatens the Swaps Oligopoly 84 Municipal Bonds 87 CHAPTER 5 Trading Derivatives 93 Before Banks Were Exciting Computers and Swaps 96 Should Banks Innovate? 97 Growth in Innovation 99 Volcker’s Problem 102 Bring Me Clients with a Problem 103 Derivatives Missteps 105 Trading by the Book 107 An Options Book Blows Up 110 CHAPTER 6 Politics 115 Government–Controlled Investing Why Should We Worry? 116 Who Says There Is a Problem? 120 Look to the Future 128 Looking Ahead 129 Monetization—A Thought Experiment 133 Imperial Overstretch 136 More Debt Means More Banking 141 CHAPTER 7 Managing Risk 1990–1998 143 Risk–Oriented Market Making Traders and Risk 145 Why Traders Are Bad at Budgeting 147 The Growth of Global Trading 149 Managing Obscure Basic Risks 152 What’s the Social Purpose? 155 Wall Street Fuels the Debt Growth 156 CHAPTER 8 Inflation 165 Germany’s Defining Economic Experience 167 Inflation Today 170 The Fed’s Huge Mistake 174 You Can’t Spend Quality Improvements 177 What Critics Say 181 Measuring What They Can, Not What Counts 183 CHAPTER 9 Bonds Are Not Forever 189 Putting It All Together Wall Street Built It 192 Make Your Own Bond 195 High Dividend, Low Beta 198 Hedged Dividend Capture 201 Master Limited Partnerships (MLPs) 202 Deep Value Equities 205 Debt Is Bad 205 Bonds Are Not Forever 207 References 209 Glossary 215 About the Author 219 Index 221

Simon A. Lack has worked as a trader and hedge fund investor for more than thirty years. Following twenty-three years with J.P. Morgan, he founded SL Advisors, LLC, a Registered Investment Advisor, in 2009. Much of Simon's career at J.P. Morgan was spent in North American Fixed Income Derivatives and Forward FX trading, a business that he ran successfully through several bank mergers and culminated in his overseeing fifty professionals and $300 million in annual revenues. In addition, Simon Lack sat on J.P. Morgan's investment committee, allocating over $1 billion to hedge fund managers and founded the J.P. Morgan Incubator Funds, two private equity vehicles that took an economic stake in emerging hedge fund managers. Currently, Simon chairs the Investment Committee of Wardlaw-Hartridge School in Edison, New Jersey, and also chairs the Memorial Endowment Trust Investment Committee of St. Paul's Episcopal Church in Westfield, New Jersey. He is the author of The Hedge Fund Mirage: The Illusion of Big Money and Why It's Too Good to Be True , which received high praise from the mainstream financial press, including the Economist , the Financial Times, and the Wall Street Journal . Simon makes regular appearances on cable business shows as an expert on hedge funds and investing. He is a CFA charter holder.