Sometimes, you just want your Momma.
The safety of that soft touch, the secure hug, the serene voice, and the sentimental smell (even if it is that of meatloaf and Pine Sol). It’s Momma. And it’s safe.
That’s what financial markets wanted these last few weeks. Momma. And for financial markets, Momma is spelled C-A-S-H.
You expect this kind of behavior form equities (stocks). Stocks give their owners the opportunity to participate in the upside of the economy, hitching a ride as the world’s best-managed companies find new ways to create value for their customers and seeing the value of their shares bid up ever higher.
But bonds? Bonds are supposed to be the predictable ballast to jumpy, jittery stocks. Their underlying principle is guaranteed by the issuing entity, whether a government, a municipality or even a corporation. They pay promised interest payments at stated intervals. No guesswork. There may be some wiggle waggle in their pricing while one holds them. But everyone knows where they will eventually wind up, right?
Well, actually, no.
When a microscopic virus convinces nearly every national government of any developed economy to send their people home and keep them away from work to prevent the spread of the virus, the big money players in the system see something they’ve never seen before and cry one thing.
“Momma!”
At the same time, a tsunami of financial players decide it is time to convert a whole lot of what they own to cash. Sell me out. At any price.
It is the financial equivalent of someone yelling, “Fire!” in a dark and crowded theater. Everyone thinks they know where the door is and they start running towards it, knocking one another over, injuring themselves, and other theatergoers in the process.
Fortunately, we learned a thing or two when something like this happened during the Financial Crisis of 2008. This time, with little hesitation, the Federal Reserve announced they would buy bonds. Trillions of dollars’ worth if necessary. In making this announcement earlier this week, they essentially turned on a few lights in the theater and told everyone there were a lot more doors to exit than anyone realized.
It doesn’t solve the present problem, but it slows the stampede.
Generally speaking (and over long periods of time), markets tend to act in predictable and logical ways….but there are periodic, massive exceptions to that generality. Like when they suddenly experience a manic desire for cash and will sell at any level of loss to get there.
I’m a long-term free market optimist with a short-term cautionary bent. That means that whatever investments I may own (whether securities, real estate, a closely held business, or baseball trading cards) sit atop a pile of cash. A foundation of cash.
Right now, we’re under a statewide “stay at home” order. Many of us have more time than ever to think about everything that’s worrisome in the world.
A few brave souls will begin thinking creatively about the future. What lessons have we learned from this and what should we do differently next time?
Let’s meet back here next week to discuss just that.
Until then, be safe.
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