Market Update | May 6, 2020

As I was reading a book to my kids last night at their bedtime, this passage jumped off the page at me:

“Besides I think you’re making a great mistake. If you and Serena stay here, you’ll be safe. You’ll have no enemies. You’ll have no worries about your children. No fox, no otter, no coyote will ever attack you with intent to kill. You’ll never go hungry. You’ll never get shot. You’ll never die of lead poisoning from eating the shotgun pellets that are on the bottom of all natural lakes and ponds. Your cygnets will be hatched each spring and will live a long life in perfect ease and comfort. What more can a young cob ask?”
“Freedom,” replied Louis on his slate. “Safety is all well and good: I prefer freedom.”

– Louis the Trumpeter Swan, The Trumpet of the Swan by E.B. White

In many ways I believe we are living this exact dialogue right now. Our governments (and many governments all around the world) are telling us to stay home and stay safe. They are promising to take care of us if only we will temporarily give up our freedoms and trust them. They tell us, “If you stay home you will be safe. You won’t get any viruses. Your children will be safe. You’ll never go hungry because we will provide you with food. You’ll never be without money because we will send you a check each week. Don’t worry about paying for your mortgage or those debts you incurred. Don’t worry about your 401(k), your investments, the financial markets… we will pick up the tab. Just stay home, stay safe. What more can you ask for?”

Freedom. Safety is all well and good—I prefer freedom.

I am well aware that life is inherently risky and that I cannot mitigate every risk for myself, my family, or my business. The reality is that we can’t escape risk. It is a fundamental and essential aspect of living. Just as winning and losing are essential to playing a game—risk is essential to living. Without the risk of failure, success wouldn’t be possible and life would not be the same.

I would suggest that our decision-making abilities would be terribly impaired if risk didn’t exist. A person’s ability to make sound decisions requires that they understand the risks (consequences) of their choices.

“Moral hazard” is the term used in economics and finance to describe a situation where risk is removed from the equation. The result is that you create a situation where one party is incentivized to engage in risky behavior or to not act in good faith because they know that they don’t bear the consequences (risk) for their behavior and decisions.

Welcome to 2020. Where the Federal Reserve is directly loaning money to municipalities to fund their deficits, loaning money to foreign central banks, buying high yield (junk) debt from financial firms and investments banks that gave us the last subprime mortgage crisis, loaning money to bail out corporations that have engaged in risky financial behavior with little or no concern for the future financial soundness of their company (e.g. stock buybacks funded with massive amounts of corporate debt), and enshrining the existence of the Fed Put that will mitigate any risks in the financial full market update here