Hi there folks. It’s been quite a while since I posted anything new here. Some of you have probably forgotten you even subscribed. Anyhow, I had a thought I wanted to share with you regarding much of the government-infused capital into our economy over this past year. But first, a prelude.
The primary reason many investors shun equity investing is the perceived risk associated with equities. For what it’s worth, it’s only a perceived risk because, as I define it, real risk is the risk of a permanent loss of capital which is something that has literally never happened. In fact, the exact opposite of that is what has occurred during the life of retirees today. For those who are counting, the market is up almost 100X during the life of today’s 65-year-old, not even including dividends. Wild statistic, no? This is what investors are so afraid of?
Maybe I’ll write more about the wild irrationality of the avoidance of such an asset class another day. What scares investors though is the major market collapse. Forgetting for a second that they have historically all been temporary in nature, the major market collapse is what I want to touch on now and how this infusion of government capital may work in the years to come.
Given the number of pundits (always) predicting a crash of 1929 magnitude, I thought it would be an interesting exercise to question whether a crash like that is even possible in the future. I’ll say that unequivocally, yes, anything is possible. But that doesn’t mean that it’s likely.
One thing we learned through the COVID pandemic is that when the world turned upside down and the economy shut down, the government flooded the economy with money. They drastically expanded unemployment benefits and placed funds directly in the bank accounts of qualified individuals to the point that household savings today is near an all-time high.
While there are folks who believe they went too far and certainly others who believe they missed the mark entirely, I’m not making an argument on either side.
My hypothesis is simply this: When (not if) a major market or economic downturn occurs again, it seems likely that the public response will practically demand government action to again flood businesses and the American public with funds.
Once the cat is out of the bag, it’s extremely difficult to put it back in.
Invariably there will be long-range negative impacts caused by this expectation. Impacts on deficits, the national debt, inflation (as we’re already seeing), and maybe even increased risk and leverage on the part of the economic system knowing that such a bailout may now be the expectation.
Who knows what will come of this; I’m not speculating. Certainly, I believe short-term downturns are inevitable. But I’m wondering whether the government’s response to the pandemic has completely changed the game. It’s got me thinking, that’s for sure.
Stay the course,
This post is not advice. Please see the additional disclaimers.