The Financial Crisis – Wall Of Worry & Who Is Exposed by David Schawel, Economic Musings

The wall of worry since the great financial crisis always seemed high in the moment. Extraordinary experimental measures put into place led to sentiment that the Fed was/is creating a bubble, or inflation, or whatever. The ex post realities thus far have proven much less sensational than most thought. The banking system is stable, housing is recovering (although in a different way than we thought with multi-family leading), and inflation is lower than anyone thought it would be at this stage.

So going forward, given we like to find things to worry about, what should we worry about? Late last year in my 2015 outlook I predicted that we would see negative returns for both stocks and bonds. Maybe it happens, maybe not, still a third of the year left.

My point though is that I believe the risk/reward of financial asset prices are a lot more vulnerable than the actual underlying economy. Just like the benefits of easy monetary policy generally benefitted the owners of financials assets, I believe the eventual era getting out of this environment (be it from a BoP crisis, Fed hike, etc) will lead to financial asset owners being hit and the general economy not hit much.

This is more of an all else equal statement, if we see a global downturn, then sure, we could see the US economy with a downturn. I just believe that the asset owners & “rich” are more vulnerable to the excesses of this environment than previous times.

On a broad asset class level, the risk/reward of owning many financial assets is marginal at best right now. Thankfully with the underlying economy looking stable, it won’t be mom & pop that takes the brunt of the damage if markets tumble.

The Financial Crisis - Wall Of Worry & Who Is Exposed