Hazards

April 24, 2020

It's ok not to feel ok.

That was some of the best advice I've read in the past week, and I was so interested in the advice I forgot who said it. John Harris, the founder of Politico, went a step further yesterday, with sentiment that I suspect is more widespread than people want to admit. Some of the corporate advertising certainly hasn't helped:

"Bossed around by the authorities, claustrophobic in a shutdown of indeterminate length, I ruefully find myself with a gag impulse toward people greeting the plague with more idealism and good cheer than I can muster."

Socially and financially, you don't have to be cheery. Look for places where you can build your own confidence back to normality, and start one step at a time. This is going to be a unique process for everyone.

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Our job is to stay rational, and to look forward. While no one wants to discuss moral hazards, this is a perfect time to look at effects that might show up in three to five years. That's the job of a good investor. Here are three possibilities:

1. Wealth inequality, and big business, will surge. This one is likely, as the inequality statistics are highly dependent not just on the 1%, but on the 0.01%. And the 0.01% is winning big in this event: while small businesses across America are forced to shut down, the Walton family and Bezos family are allowed to operate. Shares in Wal-Mart and Amazon are hitting all-time highs. Permanent consumer behavioral changes are forming. It you thought large corporations were powerful before Covid, as Randy Bachman sang in the '70's, "you ain't seen nothing yet."

2. The fed buying junk bonds. Means more people will take more risks. If it's going to be capitalism on the way up and socialism on the way down, that is a different world from one we have inhabited (or a more extreme version of it). In other words, if as an investor you get the higher yield of a junk bond in good and normal times, and when those bonds fall you have the option to hand them off to the taxpayer, you probably are going to notice the asymmetry. And that guy sitting next to you on a trading desk is going to notice, as is the CEO with big ambitions.

On the other hand, if your high-yield debt gets bought by the Fed because you were forced to shut down your business, one could make the case this is not a moral hazard.

3. Federal debt. It's been a losing idea for four decades to say that the size of the federal debt matters. America has been a good bet. We've borrowed and re-invested in ourselves, effectively leveraging our own success. But a note of caution, in that something has changed. It's not the gross number today that is necessarily the problem - that might be manageable over time. It's that our culture has shifted. Politicians can drop a half trillion or trillion and it's widely accepted that there is no significant cost to this action. This is a gradual though major shift in Americans' thinking.

When a financial idea around debt acceptance becomes entrenched, it's a good time to explore the other side of the trade.

Dan Cunningham

1. A good Bloomberg article on the abstraction of money to a meaningless state.