So Much . . .

October 2, 2020

One of the characteristics of an abrupt change is usually volatility. That truism shouldn’t be any more evident than it is right now. The world is experiencing massive volatility in politics, in business and in the social frameworks that hold society together, and the underlying causes of that volatility should be expected to precede significant change.

After years of political craziness, the US has just endured a debate between the sitting president and the incumbent that could best be described as a bully yelling at the popular kid on an elementary school playground. This wouldn’t happen if the issues of concern during the impending election were being meaningfully discussed. It is happening because, at least one of, the participants doesn’t want to engage in debate. The outcome of that volatile situation will be a dramatic change post election. That election is now just 32 days away, and with increasing rhetoric, threats to democracy and the rule of law, among other threats, there is little chance that there will be calm on the policy front in 2021.

The business world is still being rocked by the effects of COVID-19. While stock markets are generally stable now, the politicians have injected billions of dollars to stave off the downsides of an economy that is in trouble. The arguments regarding the necessity of these financial machinations will go on for at least a generation, perhaps ten generations, but the volatility in financial markets, in business models, indeed in company finances is nothing short of astounding. The outcome of that volatility will be a dramatic change in the nature of business, perhaps even the functioning of trade and markets.

That outcome is likely to play out over a longer duration. Government support (corporate socialism) has sidelined the harsh realities of a difficult business climate and allowed (mostly larger) organizations to adjust their business models while creating a massive number of ‘zombie’ companies that have not or will not cease operation due to that government support. That same government support has removed the incentive for investors to account for, or indeed accept, the outcome of the risks they have taken on. That risk is growing and it is being transferred to the general public through deficit spending and burgeoning central bank balance sheets.

Socially the volatility is also growing. The political climate as well as the COVID-19 effect on business are stoking fears, creating chaos and stress and the ensuing disaster can almost certainly not be avoided now. That disaster is hunger and homelessness. An unfortunate outcome of the COVID-19 pandemic is that those most in need of jobs, of consistent income, are those least visible in the modern world. A very large number of these invisible people around the world are in serious trouble of losing their homes, of losing their access to food. This typically doesn’t end well. In parts of the world there are already dramatic scenes of social unrest due to racism (in the US), territorial claims (South China Sea, Hong Kong, Taiwan, India/China, Armenia and more) and food insecurity (Africa, Asia). There are plenty of other issues plaguing the planet, including weather, health issues and more.

The world is always full of problems, and there is an argument that the current, very long list is only notable because of communication (media, internet). That belies the fact that people still feel the weight of these issues, that they need to respond to them personally, in some cases for the first time and that these issues may not go away anytime soon.

This amount of uncertainty is likely beyond the ability for most to even discern. Those issues that don’t directly impact individuals daily lives are quickly forgotten but as the number of people who can’t ignore them rises, the potential systemic impact grows.

With that said the overwhelming advice is to reduce financial exposure, prepare for a socially challenging period and try to enjoy your life. It is likely to get more difficult, not less in the coming months.

A couple of short updates:

  1. From my ‘what happens when the money runs out file’, Zimbabwe investors took it on the chin during the summer as their markets closed. They reopened on August 3rd. Since then sellers have been exiting the market in droves. The lesson here is that liquidity matters. Central banks flooding the market with money what is keeping first world markets up. It’s not value.
  2. As a secondary point to that, Markets remain over 200% higher than the long term median. That valuation continues to climb. It is not sustainable, but it also isn’t clear what the outcome/downside is. (i.e. do stock prices collapse, or currencies collapse? Do investors move money from ‘less desirable’ jurisdictions or diversify into other parts of the world?) It won’t be obvious until long after it happens, so have a plan and stick to it. The best bet is to diversify assets, geographies, currencies if you are able.

3. From the ‘horrible economy’ file, we see that insolvencies in Canada plunged to a 23 year low as the worst financial crisis in 50 years hit the country . . . how does that happen? Corporate socialism. Here is a chart of Bank of Canada Assets. This isn’t the deficit, these are securities that the BoC has purchased to ensure markets remain liquid. The fact that they are assets is only somewhat comforting. Someone sold them to the BoC because they needed cash, needed to reduce risk, or just took advantage of government largesse! The point is, the people of Canada have taken ALL of that financial risk from private enterprise.

Total Assets of the Bank of Canada

Here is a similar chart for the US Federal Reserve. The chart isn’t quite as dramatic looking but the scale is about the same (50 billion -> 550 billion between 2007 and 2020 in Canada; $1 trillion vs $7 trillion over the same period in the US).

Total Assets of the US Federal Reserve

4. The US discussions regarding stimulus continue, but every rush of hope is met with more failure. Of course for fiscal conservatives (a common thread here) this is good news. The government should stop passing the economic hardships of poorly run businesses and insolvent citizens onto society as a whole. Good social policy is a much better solution than stop gap measures that enrich the biggest fish and impoverish the masses. If there is further stimulus, asset prices will be sustained or even rise further. If not, volatility in asset prices should be expected. (Note that a change in government, US, Canada, Europe, will alter expectations here.)

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