Repression Obsession – Fund Firms Weigh In on Financial Repression

by on Mar 07, 2013

allianzA growing chorus of financial commentators is raising the alarm about financial repression. While definitions of this term differ based on political stance, financial repression can be loosely defined as measures taken by a government to channel investments to themselves that would naturally be invested elsewhere. For example, efforts in an emerging market nation to stem capital outflows by implementing high currency reserve requirements would be considered financial repression. Recently, some experts have become concerned that repression may be applied in the U.S. to combat high debt levels. To address this concern, Advisor Monitor firms are releasing new educational resources and commentaries aimed at discussing this phenomenon and finding ways that advisors can explain the issue to clients.

Firms Address Financial Repression Online
Allianz Global Investors launched a new Financial Repression Resource Center last month, aimed at educating both advisors and their clients about the risks and likelihood of financial repression. The firm asserts that financial repression is likely to be used to reduce sovereign debt in the U.S. Allianz argues that advisors should prepare their clients to cope with this new environment by focusing on growth assets and overcoming loss aversion behaviors. The new resource outlet efficiently organizes educational and commentary materials on this topic, and explains that repression may be likely due to continued slow growth and negative outcomes of other deleveraging alternatives such as restructuring or austerity.

 


Allianz Financial Repression Resource Center Introduction (Truncated)
Turning to another firm, the newest edition of the quarterly Lord Abbett Review newsletter contains a cover story, The Great Repression?, which provides a more skeptical discussion of the likelihood of financial repression. The article notes that perceived repression may actually be the impact of banking regulations aimed at stemming unsustainable risk. Lord Abbett cites the United States’ Regulation Q that was in effect from 1933 to 2011 as an example of regulation where the goal is safety rather than repression. The piece also explains that financial repression is more than a low-rate monetary policy, despite the confusion of these terms in the news media.

The firm views the current environment as one of deleveraging and efforts to maintain balance between deflation and inflation, rather than financial repression. Lord Abbett explains that “financial repression” more accurately describes past emerging market practices aimed at combatting a shortage of sovereign debt investment and currency outflows, neither of which are currently issues in the U.S. The firm does note that regardless of if the current environment is repressive or not, short-term low-yield investments are earning negative real yields, and the firm recommends moving out of safe-haven investments into the world of greater risk.

 

 


Latest Edition of the Lord Abbett Review
Closing Thoughts
Allianz and Lord Abbett provide very different outlooks on the likelihood of financial repression. On the one hand, Allianz views current measures and conditions as likely to create a repressive financial environment. Lord Abbett takes a contrary view, seeing current measures as means to insure bank safety and provide monetary stimulus rather than a repressive environment. Regardless of which outlook is correct, both agree that safe-haven investments are unlikely to meet investor needs, and recommend a shift to securities with greater growth potential.