Gyroscopic Investing

Forking this thread off the Corona virus thread...

pmward wrote: ↑Sat Mar 14, 2020 10:11 am

drumminj wrote: ↑Sat Mar 14, 2020 9:51 am

pmward wrote: ↑Sat Mar 14, 2020 9:32 am Another great article by Dalio published this week: https://www.linkedin.com/pulse/we-need- ... ded4b883a5

I'd be curious to debate this part of the article:

Some people will argue that providing such assistance is a bad idea. They say that our Darwinian economic system is designed to shake out those who don’t manage their finances well, or that fiscal assistance will grow the deficit.

Neither of those arguments makes any sense to me. This crisis is not a test of people and companies’ economic viability, and the cost of not providing assistance will be greater than the cost of providing it.

I'm not sure I 100% agree with the following statement, but do we want to bail-out those who haven't saved for an eventual downturn in business such that they can leave the lights on? Will this not create the same negative effects as bailing out the banks/banksters in 2008 did where the banks that were irresponsible actually gained market share (by being reckless, then got bailed out), and those that behaved responsibly were run out of business as a result (as their marketshare dwindled)?

It seems there's some serious moral hazard here, where being conservative, prepared, and self-sufficient is a liability, and no one does it anymore because everyone else who runs fast and loose is bailed out.

Thoughts?

Well he isn't just talking about business. He is talking about people effected as well, which was something that wasn't done in 2008. I also think we are already seeing this start to happen in the background. We have in the same week Trump announce small business relief loans, payroll tax reductions, and social spending for hourly workers that are forced out of work due to the virus in one way or another. We also had the Fed announce 1.5T of immediate liquidity, an increase of overnight lending to 175 billion per night, and signal it would be willing to provide another 5T if the situation warrants it. So this is already beginning to happen all on it's own.

In normal times I think that Darwinism is fine. But in a crisis like this, you cannot compound the issues. Things can spiral out of hand really quick in a crisis. I mean look at the grocery store runs going on right now. It doesn't take much to turn that into bank runs as well... and we all know from history how that plays out. Right now the demand for dollars has skyrocketed, as people and businesses are tightening their belts, saving more, and some businesses and people will require additional lending to keep the lights on. I do think that even if they do go all in on helping to prop the economy up, that we are still going to see some Darwinism take effect. I think there will be a shakeout of zombie businesses and that there is a chance that this virus crisis turns into a junk bond crisis, at which point a lot of low credit companies will go under. Some companies going under is fine. Like for instance, if a small weak airline goes under, the customers go to a rival, and with one less competitor prices can go up. But there are some businesses where the knock-on effects of a business going under, like a large bank a'la 2008, could completely destroy the system and the effects to the average person would be greater than if the bailout was provided. Either way, I think the emphasis this time around will be more on saving individuals and small-medium businesses. Letting the consumers and small businesses decide where to place these extra dollars. This also would be a good strategic political move for Trump. He can run as the man that saved the average Joe and the small businesses owners across America, which would give him quite an argument to combat the progressive liberals. It also would cater to the small blue collar worker that ultimately elected him in the first place. He helps his base and pours some water on the socialism fire, it's a perfect political move for him, especially since he has made some severe and very public mistakes in the early game of the virus response.

There are times to be tight and there are times to be accommodative. I think this is a time to be accommodative. Right now, the most important thing is to just weather the storm. Nobody could have predicted this. A virus like this is a natural disaster, no different than a large scale earth quake, hurricane, wildfire, etc. The government is responsible to step up and do anything in its power to limit the damage of and rebuild after a natural disaster. A company or person should not be left to die simply because their home/place of business got destroyed in an earthquake.

Can you objectively draw a line between what's okay to "bail out", vs things that should be allowed to fail? Is systemic risk inherently bad? Maybe the system is flawed, then, and we need a cleanse.

In all of these "crises", everyone evokes fear of pain in the immediate and says we can't afford that now. But if not now, when? It's never a good time. And perhaps the reason there's systemic risk is because we didn't take our pain earlier because we were afraid of it then.

Think of it like fire prevention. Frequent, smaller fires are seen as good because they clear out the underbrush, preventing larger, hotter-burning fires which take out the large trees and cause greater devastation. Then without the trees, erosion happens, etc.

The problem was to stop the small fires. The fix is to let them happen again.

Don't misunderstand -- I don't want to see friends or local business suffer. I've been personally wrestling this week with how to help/support those I value as I don't want them to go away. But that's because I, a market participant, value them. Not because the government is picking winners and losers with taxpayer money. And it would be a mix of the business/owner's behavior coupled with mine and other patrons that keep them afloat.

Same with individuals.

IMO rewarding irresponsible, short-sighted behavior is a slippery slope. It now means banks take as much risk as possible, vs act prudently. Individuals don't save for retirement or for a postential job loss. Those of us who work hard and save and deny ourselves luxuries, trips, etc, become targets to fund and bail out the imprudent. That is a system that's guaranteed to fall apart, no?

Perhaps this "crisis" is different, and warrants some intervention by the gov't. I've not come to a conclusion on that yet, but if so, it should be consistent and equal -- every business gets an X% tax credit. All business taxes suspended. All citizens get $X, etc. Handing it only to the imprudent or fragile business models is just going to make the system even less stable for the next crisis, IMO.

MangoMan wrote: ↑Sat Mar 14, 2020 1:37 pm Exactly. It's just like student loans.Not fair to bail out just some and penalize those who paid theirs off or didn't take them in the first place. Bad precedent.

IMI, having Student loans really hard to discharge in bankruptcy is bad policy.

Taking a risk to sell a tangible good or service as a company? if you fail, we'll discharge your debts.

If you are big enough / have connections, we'll bail you out before it gets to that point.

Take a risk to invest in your ability to sell your service (get a decent job)? Tough luck.

Having those funds that go to student loan debt available for the economy? That would be a big boost.

[Edit: I am for making it easier to discharge in bankruptcy. On the fence about discharge in general of debt - 100% of everyone seems wrong, but I think something has to give.]

MangoMan wrote: ↑Sat Mar 14, 2020 1:37 pm Exactly. It's just like student loans.Not fair to bail out just some and penalize those who paid theirs off or didn't take them in the first place. Bad precedent.

IMO, making student loans not dischargeable in bankruptcy is one of the factors causing costs to skyrocket. The feedback system to the schools is completely broken, with schools getting paid up-front regardless of the quality of the product and the government having no mercy collecting the lifetime bill.

If you want to fix the root cause, I think we could do it in 3 simple steps:

1) Eliminate the federal student loan business and send it back to the private sector
2) Make student loans dischargeable in bankruptcy again
3) Put schools directly on the hook for half the loss, with the other half on the bank that gave the loan.

Do that, and watch how fast schools and banks stop handing out massive loans for useless degrees. Tuition would drop to more sustainable levels almost overnight.

But that's admittedly outside the stimulus topic and worthy of it's own rant. It's less about bailouts and more about eliminating the broken government-subsidized debt system that got us here.

Tyler wrote: ↑Sat Mar 14, 2020 2:43 pm
3) Put schools directly on the hook for half the loss, with the other half on the bank that gave the loan.

I've also thought 1/3 student, lender, institution, or some such.

Haven't really thought in depth, but sounds reasonable to me to have everyone with skin in the game.

And if fraud on the institution side, debt relief for the students.

I haven't really thought through what this would do to access to credit, but something has changed.

Tyler wrote: ↑Sat Mar 14, 2020 2:43 pm

MangoMan wrote: ↑Sat Mar 14, 2020 1:37 pm Exactly. It's just like student loans.Not fair to bail out just some and penalize those who paid theirs off or didn't take them in the first place. Bad precedent.

IMO, making student loans not dischargeable in bankruptcy is one of the factors causing costs to skyrocket. The feedback system to the schools is completely broken, with schools getting paid up-front regardless of the quality of the product and the government having no mercy collecting the lifetime bill.

If you want to fix the root cause, I think we could do it in 3 simple steps:

1) Eliminate the federal student loan business and send it back to the private sector
2) Make student loans dischargeable in bankruptcy again
3) Put schools directly on the hook for half the loss, with the other half on the bank that gave the loan.

Do that, and watch how fast schools and banks stop handing out massive loans for useless degrees. Tuition would drop to more sustainable levels almost overnight.

But that's admittedly outside the stimulus topic and worthy of it's own rant. It's less about bailouts and more about eliminating the broken government-subsidized debt system that got us here.

Maybe I am voting for YOU for president this year! You just make way too much sense!!!

Vinny

Dieter wrote: ↑Sat Mar 14, 2020 4:14 pm https://www.cnn.com/2020/03/14/politics ... index.html

If the loans are government-backed, would this be all that different than forgiveness? Taxpayers still take the loss, vs the educational institution or lender.

Dieter wrote: ↑Sat Mar 14, 2020 4:23 pm

Tyler wrote: ↑Sat Mar 14, 2020 2:43 pm
3) Put schools directly on the hook for half the loss, with the other half on the bank that gave the loan.

I've also thought 1/3 student, lender, institution, or some such.

Haven't really thought in depth, but sounds reasonable to me to have everyone with skin in the game.

That would also work. Anyone filing for bankruptcy does have at least some skin in the game with how that affects their credit, but I'd have no problem with a 2/3rds debt reduction limit vs. full forgiveness. Anything to make all parties think really hard about what they’re signing up for is a good thing.

Haha, the derail conversation got forked and then derailed again, haha.

A couple things. First, I do agree that there are times that the overgrowth should be allowed to burn. But there are times when that burning can do more damage than it is worth. People don't realize for instance the knock on effects that would have happened if they let the banking system collapse in 2008. Most people that say that we should have let the banks burn do not understand the consequences they themselves would have paid for that. The government has a responsibility to ensure that we have a stable financial and monetary system. They have a responsibility to ensure the safety and wellbeing of the citizens. This is what we pay all that tax money for after all. If they cannot use the tax money in a crisis to help people and businesses at risk, then what's the point of paying it and having a government in the first place? We need the government to be able to step in when the shit really hits the fan and do what's best for the wellbeing of it's people, regardless of cost, not stand back and watch it burn just to enact some false utopian ideal. There is indeed a fine line to walk though between balancing responsibility and compassion. You need a bit of both, if you get too unbalanced in either direction it can exacerbate the issue.

Now, there are obviously good and bad ways to stimulate. I agree that the way they stimulated in the past wasn't fair. And that is part of what Dalio is getting at. Just supplying banks and investors with cash doesn't help the average households and small businesses as much as it helps big businesses and the uber rich. The Fed created the wealth gap, there is no doubt about that. And while I do not consider myself a liberal, I do understand that my views on this are a hair left of the norm here (it's funny because in the work Slack channels I'm more right of the norm, so here I tend to present more left leaning arguments, and there more right leaning arguments, simply by presenting a different angle to the norm for discussion). But regardless of left, right, or middle, no one can deny the wealth gap is a real problem. The wealth gap was created by the government and Fed's handling of the financial crisis, and the whole socialist backlash that has happened in recent years is because of this. The "progressives" may not be right in their views, but they have a justifiable reason to be pissed. Just rescuing big business is not fair. Just evenly giving everyone a lump sum also is not fair. I honestly think, as bad as Trump as responded to this crisis, that his proposed stimulus makes sense. It is specifically targeted most at hourly service workers and small businesses. I haven't seen the exact details of this yet (Trump is known to exaggerate so it might not be as good as it sounds), but from a first glance it sounds both warranted and like it will likely be effective. I also wouldn't be surprised to see some other forms of fiscal come down the pike. It is crisis times like this when the government should be spending and doing whatever else it takes. It's the good times the government should be pulling back (unfortunately they did forget this part over the last 11 years).

I do expect some likely travel company bailouts. I think the circumstances the travel companies have been hit with are a natural disaster type moment that could not be planned for, so I don't find this unreasonable as long as it's done in a responsible way. I think Trump will think about bailing out the shale companies, but that might be a little too bad of PR for him in an election year, as oil companies are public enemy #1 right now. I wouldn't be surprised to see him let the shale industry go through a much needed shake out. The shale industry has been a disaster waiting to happen for ages, so that is long overdo, imo. My biggest worry though is if we have a major BBB grade markdown and a junk bond bust. This could create another 2008 like mass default deflationary scenario in the corporate world. This is the worst case scenario economically. The sheer size of the corporate bond market right now could make this much worse than 2008... I mean we are talking 2008 basically being the opening act. The Fed is well aware of this as well, and that is part of why they are stimulating early, hoping to get ahead of the curve. Corporate America will have to deleverage at some point... but it would be really messy right now to go through that on top of this humanitarian crisis.

Great discussion, and great last point there, pmward. We all need to remember that this particular crisis is primarily a humanitarian one, and only secondarily a financial/monetary one.

I agree that the relief plan on the table looks pretty good. It does have some holes: I'm thinking primarily of self-employed / contractors. Just as examples, our housekeeper. She doesn't have an employer to give her sick leave, but she may not be able to work if people don't want her coming around. I understand that classical musicians are really in big trouble, as events they've practiced for for months are canceled. Those are just two examples.