The Death of Risk

As we all try to figure out where this goes, we have to grapple with the reality that this is a 180 degree flip in investor attitudes about risk that prevailed in the post-GFC era. All of the capital (over)committed in the TINA era needed that era to persist, if not become more careless. A big part of the long, gray slog is the prodigious amount of capital that is frozen and searching for an exit that pushes the haircut on someone else.

“TINA” stands for “There Is No Alternative.”

Thinking about the suburban housing market. I’m not an investor, but I see people on all sides of this having troubles. It’s not the homes are over-valued per se, but there’s a big spread between what sellers “need to get” and what seems reasonable. The sellers tend to be people who don’t need a house (estate sale, flippers, etc), buyers are people who really need a house and have a lot of cash. So there’s a market, but it’s very small compared to the norm. And within that smaller market, there’s a bit of an air of desperation… I’m merely zillow stalking out of curiosity, so that is a rather artistic and non-professional take on one semi-frozen market that is accessible to mere mortals…

After reading the “Not-so-golden rule” post, I had some visitors who are successful investors from SEA (having US MBA background however). We discussed the trade wars, probs with USD system / debt, and China. I attempted to summarize your take, passing it off as my own, and was met with blank stares. “But what is the alternative to the USD? Other countries still even less responsible stewards of currency than US.
Gold? There’s not enough of it…” I too am a fire appreciator, but it does feel a bit like waiting for a big pile of wet brush to combust spontaneously. Of course even without a fire, it will rot in place… to extend the corny metaphor.

I agree residential housing isn’t immune. It has continued to appreciate while its affordability plummets. It is under-supplied, but the levers to make more shelter so it is more affordable aren’t being pulled. Most Boomers rely on this as the cornerstone of their retirement, either via a rent free place to live, or to provide the capital to live on after downsizing. For that sale to occur at these or higher prices; some young family starting out has to come along and qualify for the exorbitant mortgage, property taxes, insurance, and a six-figure down payment. Outside the top 10% of incomes, or substantial parental help that is a thin set of buyers.

I have observed my boomer peers building their “forever homes”, both to enjoy and with the not so subtle bet it is also a no lose investment. In the best markets and neighborhoods they will be, but probably not at the median. There is a much deeper market for $500k homes than there is for $5 million!

And TINA for the US Government…it has no alternative than to provide backstops and liquidity in any case of real or forecasted pain.

I just learned in Mauldin’s SIC that the FHA was backstopping mortgages - i can’t seem to find a total but directionally up to 1T or over…began under Obama and Biden floored it (number go up). Apparently these are checks to the individual and not the bank.

I joked with some of my friends over the years about the fed/treasury keeping an eye on sub prime auto delinquencies and exerting “regulatory oversight” to manage delinquencies before they are reported.

I have no idea where this speeding train goes or how long it stays on the track but I’m sure there are plenty of 'geniuses" laying new track to keep the train from hitting the mountain or going over the sea clifff.

Great post Ben. I’ve been trying to wrap my head around this ever since your “Snip” untethered post a while back.

It will be interesting, if not fascinating, to see what monetary and fiscal policies get thrown at the upcoming cold, gray, slog. I’ll be most interested to see the reaction from the younger generations (Millennial and Gen Z especially) because they’re already starting from a point in which they don’t believe Social Security or Medicare will be there for them. I think we already see their reaction today as they buy every dip – the markets are where they’re putting nearly all their eggs!

I do think the Death of Risk got reignited in the '07/'08 Crisis with QE, GM Bankruptcy. QE continued and in Covid the Fed basically backed excessive leverage and are now exploring ‘methods’ to cover hedge fund losses in UST.

One could argue that Risk has been dying a slow death for 18 years.

Where does this US patient go now? Hospice for another 18 years? Put to bed (major reset). Dunno, i just know that those in power don’t want it on their watch which leads me to believe we will have perpetual hospice until someone/thing puts the patient out of its misery.

It has become increasingly difficult to maintain the quaint fiction that modern financial markets operate as arenas of fair competition and rational price discovery. Rather, they resemble rigged casinos where the house not only always wins—it rewrites the rules mid hand. The largest banks, brokerage firms, and insurers, those self-styled stewards of fiduciary responsibility, have evolved into institutions whose true genius lies in the artful circumvention of risk, accountability, and the interests of their clients.

Insurance companies, in particular, seem less concerned with underwriting protection than with perfecting the science of claim denial. Brokerage houses, once imagined as dignified custodians of capital, now function chiefly as fee extraction machines, shearing the unknowing with a rapacity that would make a medieval tax collector blush. As for public equities, the notion that they float freely on market forces is charmingly anachronistic. They are, in truth, jerked about like marionettes by the trillion dollar strings of institutional titans whose trading desks wield more influence than any boardroom.

And looming in the shadows of this already lopsided contest are the legal loan sharks, private lenders masquerading as legitimate financiers, who encircle small businesses like vultures over carrion. Their rates are usurious, their practices opaque, their recourse swift and brutal.

The architecture of American financial services is overdue for a reckoning. Reform should not aim merely to restore transparency, but to break the oligarchic grip that has rendered free markets a farce for all but the most fortified. In a system increasingly indifferent to virtue and hostile to prudence, one begins to suspect that the invisible hand now wears brass knuckles.