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Musings Report 2017:29 7-22-17 "We Can't Take That Chance": Our Pervasive Avoidance of Risk
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"We Can't Take That Chance": Our Pervasive Avoidance of Risk
Ben Hunt of the Epsilon Theory newsletter has been highlighting the connection between super-easy-money financial policy and the avoidance of risk that's so apparent in Corporate America: rather than take a chance that an investment in new technology, worker productivity etc. will increase sales and profit margins, corporations are borrowing super-cheap money and using this "nearly free money" to buy back their own shares in the stock market.
This reduction of outstanding shares boosts sales and profits per share, creating higher earnings per share without actually boosting sales or profits. Gradually and Then Suddenly.
Hunt's point is that easy-money policies actually reduce the incentives to take risks to improve productivity/ profitability, and this ends up crippling our economy, as growth and productivity require taking on some risk. No risk-taking = no productivity gains and thus no gains in wealth, prosperity, social mobility, etc.
I agree with Hunt's description of the perverse incentives created by easy-money policies, but I don't think that's the only driver of risk aversion, or even the primary driver.
We see this pervasive avoidance of risk in other areas as well--for example, in what college students are choosing as majors. Engineering, business and healthcare majors are increasingly popular, while famously low-yield/risky liberal arts majors are being shunned.
Policy makers at the highest levels of our centralized hierarchies (the Federal Reserve, for example) are saying, in word and deed, "We Can't Take That Chance."
In the case of the Fed, the Fed is saying "We Can't Take the Chance" that a recession would be positive, i.e. that a normal business-credit-cycle recession would do its intended job: clear out the deadwood of defaulted loans and eliminate marginal borrowers, lenders and enterprises.
This clearing of deadwood then sets the stage for healthy expansion of credit and business.
The Fed is clearly fearful that even a mild recession will cascade into something much worse--and something beyond their control.
This gives us some insight into the dynamics of risk avoidance: when we're confident that we can handle whatever comes our way, then we're free to take a risk on something that could yield long-lasting, important gains.
In other words, if we're confident we can handle the loss or downside of a risk not paying off, then we're able to accept some risks as the necessary means of reaping major gains.
But if we're afraid that any loss might collapse our world, then "We Can't Take the Chance."
Put another way--if our faith in the future and our resilience to losses and obstacles is near-zero, then we can't take any chances. We are restricted to taking only the safest path, even if it means foregoing all the really big gains that are reserved for those willing to accept some risk.
This is an enormously important dynamic, for it hollows out the entire society and economy, one "we can't take any chances" at a time.
In Musings Report 27, I described how relying solely on quantification to pinpoint problems and fixes could lead to catastrophic errors. One of my examples was drawn from this essay on Survivorship Bias: the aircraft that were shot down, the ones missing from the survey, were precisely the aircraft that revealed the weaknesses in the aircraft that could be ameliorated with additional armor plating.
One of the essay's later points is that "luck" is not just a matter of belief or some sort of magic: those who feel lucky are confident enough to absorb a wide range of contexts and opportunities. They don't cross off most of a list, they scan it with an open mind. The lucky are lucky because they don't arbitrarily narrow the opportunities they happen upon out of fear, i.e. we can't take any chances.
It's the confidence of the lucky that's lacking in risk avoidance, and the terrible irony is avoidance of risk is also avoidance of opportunity and indeed, of luck.
Summary of the Blog This Past Week
When We Can No Longer Tell the Truth... 7/21/17
The Death Spiral of Financialization 7/20/17
The Over-Quantification of Life 7/19/17
Why 2017 Is Like 1969 7/18/17
Earth's Economy Glorifies Waste, Exploitation, Debt, Expediency and Magical Thinking 7/17/17
Best Thing That Happened To Me This Week
Harvested the last of this year's surprisingly bounteous lychee crop.
Market Musings: High-Yield (Junk) Bonds
JNK is one of the more self-explanatory ETFs out there-- JNK = junk bonds = high-yield bonds, bonds that are high-risk and thus have to pay a higher yield to attract buyers/owners.
JNK is often regarded as a canary in the coal mine of the equity/bond markets: JNK does well in risk-on periods in which investors's appetite for risk knows few bounds, and it doesn't remarkably poorly in risk-off periods when investors are risk-averse and nervous.
Looking at the weekly chart ofJNK, investors and speculators were obviously feeling fearful and risk-averse in late 2015,as JNK was sold down from 34 to 29. The election of November 2016 triggered a minor wobble in JNK but this was soon viewed as a "buy the dip" opportunity, and JNK has drifted to new highs in the present era's risk-on euphoria.
There is no visible sign of weakness in this chart, and the canary appears to be singing without a care in the world.
If JNK drifts below the 50-week moving average around 35.75, the canary will be wheezing, and we should start paying closer attention to JNK's price action. If JNK quickly rebounds above the 50-week MA, there's little reason to expect a general market decline is pending.
But if JNK sags below the 50-week MA and continues losing ground, the canary will be definitely warning us the oxygen in the general market has plummeted to dangerous levels.
From Left Field
America Can Bring Back Factories, But Few Jobs, Says McKinsey
Survivorship Bias: When failure becomes invisible, the difference between failure and success may also become invisible...
What was it like to be at Xerox PARC when Steve Jobs visited? -- this visit is one of tech's most iconic... Alan Kay was present at Creation...
The neuroscience of inequality: does poverty show up in children's brains?-- how could it not show up?
MSM, Still Living in Propaganda-ville (via LaserLefty)
The Mighty U.S. Shale Oil Industry To Lose Another $20 Billion In 2017 -- woah--this isn't what we're hearing in the MSM...
From the Neoliberal Revolution to the Supremacy of Financialized Austerity: A Brief History
Globalisation: the rise and fall of an idea that swept the world -- we should remember Bronze Age empires did a brisk trade 3000 years ago...
Nearly a third of Japanese people are entering their 30s without any sexual experience-- no sex, no marriage, no kids, no families...
Happiness From Being Generous Has a Neural Basis Within the Brain -- it also generates a selective benefit...
The most effective individual steps to tackle climate change aren't being discussed -- Heaven forbid we're personally responsible....
Why Chinese youth are increasingly dropping out of society -- social mobility ladder in China is broken...
"Education is an admirable thing, but it is well to remember from time to time that nothing that is worth knowing can be taught." Oscar Wilde
Thanks for reading--
charles |
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