Long-time investment bank CEO Rich Handler, who runs Jefferies (JEF), says it’s time to say “good-bye” to the “relaxing merry-go-round” on Wall Street and “hello” to “the more volatile roller coaster of financial life.”
“Many of us may have been lulled into a false sense of continual super low-interest rates and virtually non-existent volatility,” Handler writes in his monthly memo to employees and clients. “It was only a matter of time before reality returned and the fact that it took as long as it did reflects the depth of the decade-ago crisis and the magnitude of the medicine that was administered to get the patient off of life support.”
Handler adds that when a transition takes that long, it’s “easy to lose perspective” and many folks “begin to believe that calmly going round and round in a relaxing manner while enjoying cotton candy is the real world, and the sharp climbs and sudden plunges are the anomaly.”
Having been at the helm of Jefferies since 2001, Handler has seen his share of ups and downs, so he offers his observations of the return to “normalized volatility” to the younger generation, many of whom have never experienced higher rates.
“If you started work in the financial sector (hedge fund, private equity, investment banking, research, sales and trading) in the past 10 years, you have no experience with what happens in a rising interest rate environment,” he writes.
Volatility can be a good thing
He notes that a decade is a “long time” and many of these folks now hold important roles at their firms.
“This is a large group of smart people who have never experienced a Fed that isn’t our short-term friend. Unsurprisingly, some may have limited appreciation for a Fed that is concerned with moderating future inflation (what’s inflation?), managing a deficit (why should we care—just keep printing baby!) or having enough ammunition to cut rates the next time we have a recession (haven’t technological gains made future recessions obsolete?),” he writes. “The last decade is NOT the norm with rates or volatility, and every one of us needs to open our history books either for first-time learning or a refresher course, depending on your years of experience.”
Handler says that volatility can be a good thing for those who survive the transition period. In other words, it’s an opportunity for talented investors to stand out.
“Super low interest rates with non-existent volatility make it almost impossible for good investors (or sell side professionals) to differentiate themselves. Correlation is high in every asset class, and stock pickers, credit professionals, underwriters, researchers and traders have a hard time distinguishing themselves or competing against benchmarks,” Handler explains. “These days may be over for quite a while. This is really good news for those who can truly add value, but may mark the end of the line for any marginal players who were helped by merely surfing a nice wave.”
There will be always winners and losers, Handler notes.
“There are concepts called distressed cycles, covenants, violations of covenants, recovery value of secured versus junior debt securities, illiquidity, waivers, and restructurings. Rates do go up, the economy sometimes cools, liquidity isn’t a God-given right and operating margins sometimes shrink,” Handler writes. “So yes, sometimes life does get less fun and more complicated.”
Of course, it won’t unfold overnight, and it’s certainly not “game over,” he said.
“In fact, this could be quite a distance away. We are saying that all of these ‘historical concepts’ are real and not a figment of hypothetical imagination. Fortunes are made by those who navigate these waters properly, and they are lost by those who rely on yesterday’s calm sailing.”
Julia La Roche is a finance reporter at Yahoo Finance. Follow her on Twitter. Send tips to firstname.lastname@example.org.
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