What is the nature of risk? It’s a question I’ve asked before.
There has been lots of talk recently about US election risk. The debate, the potential for violence, and now Donald Trump has Covid-19.
Volatility markets are pricing in far higher volatility in the markets in November than normal, even for an election month.
What if (gasp) Trump wins? Will a Joe Biden presidency send oil stocks to zero?
I’ll tell you what if.
When I see things like “election risk” it reminds me to go back to the fundamentals of investing, and risk.
There are two types of risk, according to my favourite definition – losing money, and not making it.
At the moment there seems to be quite a clear trade-off. You need to be able to tolerate not making a little bit of money, in order to minimise your risk of losing lots and lots of it.
I personally believe that the winter of 2018 was the end of the bull market, and that everything since has been the financial equivalent of this:
Source (very appropriately): The Verge
Jerome Powell, chairman of the Federal Reserve, is leader of the More Fuel Faction.
In the hot air ballooning world (I presume), they are regarded as a radical faction. You could go as far as calling them outcasts.
That’s because they don’t believe in gravity. Well, not so much that they don’t believe in it, but that they don’t believe that injecting fuel into the burner to push the balloon upward contributes to increased risk of being killed by gravity.
It reminds me of this lovely interaction from Friends, with Phoebe (as always, stealing the show):
Ross: You don’t believe in gravity?
Phoebe: Well, it’s not so much that, you know, like, I don’t believe in it, you know, it’s just … I don’t know, lately I get the feeling that I’m not so much being pulled down as I am being pushed!
(Knocking on the door)
Chandler: Uh oh. It’s Isaac Newton, and he’s pissed. Quick Pheebs, jump on the ceiling!
Currently, the risk is not who is president of the Hot Air Ballooning society, the risk is that we are higher than any balloon has ever gone before, and that the guy in charge of the burner has just injected more fuel than any hot air balloon pilot in history.
Election risk threatens underperformance for a month, or maybe, a quarter, by a few per cent probably.
But the balloon is heading for the cold emptiness of space whoever wins. But various things could happen before then. The balloon could pop from the pressure, melt from the heat, or if it gets high enough, external temperatures would negate the impact of the fuel.
The point is this: the rise contains within it the growing factors which will cause its own demise, just like fuelling the balloon to go higher and higher.
The fuel pushes it higher, but increases the stakes.
And the higher you go, the further the fall…
On the election, people thought markets would crash before Trump got elected, and they’ve been on a record run. It was the same with Brexit.
Both outcomes were unexpected, and the stockmarket went against the main body of views on the subject in both cases.
That’s not me saying I know better, actually it’s the opposite.
I’m saying I don’t know which way the election will go (Biden is my guess), and that in either case I don’t know how the stockmarket will react.
All I know is, it’s not close to the biggest (or most asymmetric) risk at the moment.
A quivering market, beset by exuberance and greed at risk of a psychological reversal – that’s number one for me.
Who knows what will trigger it this time, but since 2018 we have been in a series of ever widening plunges and recoveries, fuelled by the Fed.
Source: Sven Henrich on Twitter
Do those lines mean anything? The only answer is “maybe”, but it’s good to keep an eye on these things, because others find them significant, and that gives them significance. The crowd watching the crowd, and all that.
But what the chart illustrates is the ever-widening crash/recovery relationship since 2018, when I feel the authenticity of the bull market ended.
Then, interest rates rising caused panic as corporate America is so burdened with debt (that it’s not growing fast enough to repay), that higher rates threatened to destroy it.
The Fed had to step in with rate cuts and QE4, and that’s when things started getting crazy.
For me the risk is that when the real “market ending crash” comes to rip the bull market down, it will happen in a post-stimulus environment.
What do I mean by that?
I mean that the Fed has put everything into this corona recovery, which has driven an extraordinary rally/bubble in the FAANG stocks and other US tech, while leaving everything else to flounder.
Source: The latest issue of Dynamic Investment Trends Alert
The Fed is fuelling the hot air balloon that is the Nasdaq.
If the balloon crashes despite the fuel injections, investors might realise that there are other factors, and that monetary stimulus cannot create good companies, only inflate paper prices.
If markets crash after all this, then there won’t be anywhere for the Fed to go. Money printing won’t have the same effect, because markets have crashed despite record easing. And rates are as low as they can go (unless they go negative, which brings its own problems).
So for me there is one risk above all, that for psychological reasons, the markets start collapsing and central banks don’t carry as much weight as before. Investors no longer believe in them, and so a true reset occurs.
The fact that investors believe that the Fed’s current actions will help stocks is the key to everything. If that link breaks, the game is up in a really significant way.
That’s how you can ruin the next decade of your life – lose over half of your savings. That’s the real risk of losing money.
Right now, the most important thing is figuring out what not to own.
The election does not carry that risk, unless you can present a compelling case that one result or the other will trigger such a collapse.
Until then, don’t worry about it too much. Something like green energy might get a better ride under Biden, or guns under Trump, but such adjustments should be small.
When it comes to risk and your money, think big, and think basic.
Before I go, I’d like to ask you a question. I’m trying to find out what holds people back from investing, especially those who are younger or don’t have so much to invest.
If you don’t invest, why not? Why do you think people only start investing when they get older, when it’s so clearly beneficial to start as early as possible?
The two key themes I’m imagining are education, and insufficient funds. Either they don’t know how worthwhile it can be, or they think they don’t have enough to make it worthwhile.
I’m interesting in thinking of solutions to overcome this issue, to help younger people to learn more about its benefits, and to help them start doing it, and also to offer ways (other than a free investment newsletter!) to those whom the fund management industry won’t target, because they don’t have £100 million to contribute to their annualised fee structure.
All replies, thoughts and insights to [email protected] please!
I’m away all of next week, so I’ll report back once I’m back. (Don’t worry, you’ll be hearing some great stuff from my colleagues Boaz Shoshan and Will Dahl instead – don’t miss it.)
I really enjoyed reading everyone’s personal anecdotes about the business recovery (or otherwise). There was a special focus on property, which seemed to show incredible regional divergence, with some reporting incredibly strong demand, and others – nothing.
The main theme behind a lack of a recovery was a lockdown, people saying business activity was dead, not by our own hand, but by the government’s dictat. Which feels like a shame.
Apparently, sales in pubs and restaurants fell 8% week-on-week as soon as the 10pm curfew came in. But what else should they do? It’s better than closing them all together.
While it’s so easy to criticise the government, I do try and ask myself why measures I would impose in their place, and it’s hard. It would be hard to escape the feeling that people are dying because you believe in libertarianism, which made me wonder how many people in government are voting for these measures against their natural instincts.
I would focus on informative advertising, and not looking hopelessly ill-informed and insincere.
Also God, Priti Patel… she really is an inspiration to people everywhere that no matter what level of capabilities you have, no matter what views you hold, you really can achieve anything in the corridors of power. Aim for the stars, evil children…
See you in a couple of weeks.
All the best,
Editor, UK Uncensored