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Risk Aversion

The economic news out of most of the world points to a continued, if not new, slowdown. Japan is going nowhere, Europe may be shrinking, China is bleeding capital, and the rest of the world is hanging on. The only place there is good news is here in the US where … there was a net slowdown in the number of jobs gained in May. None of this looks good.

For everyone outside the US, it doesn’t. But most of that money from China is coming to the US – or, more accurately, coming back. Why aren’t things looking up?

Global instability doesn’t help anyone, which is why the Fed stopped raising rates. We can’t go it alone anymore, not in this inter-connected world. It spooks everyone to see this much risk. Yet there is still reason to believe that the US, alone, will see a period of higher growth by the end of the year. It’s all about that money coming back – and when it gets put to use.

There is work to be done.

There is work to be done.

The slowdown in job growth over the last two months is probably going to be a feature for a short time to come. As we have noted before, job growth has come almost exclusively from smaller companies. It appears that venture capital is indeed drying up, down 30% or more by the few surveys which attempt to quantify how much is out there. It’s now at the lowest level since 2011, and job growth is dropping.

This doesn’t mean that money isn’t coming in to the US, however. Capital is still fleeing China at a rate in excess of $500B per year – and most of that will come here. The yield on the 10yr T-Bill has dropped to 1.6%, give or take, as investors snap them up in a search for a “safe harbor” to store this money.

It’s not getting out into the hands of those who can do good things with it, like create jobs, however. Risk aversion still reigns.

Not everyone can do this.

Not everyone can do this.

Investing in large companies can always be hedged. Stock purchased can be offset with options to sell, aka “puts”, so that damage is limited. The drop in the stock market early in 2016 has rallied back to about where it was at the start of the year largely because new money has rotated in. Big companies, represented by the S&P500, are something like a safe harbor – or at at least a minimal amount of risk.  It’s going just as we predicted it would through June.

But that’s not what we need. We need investors who are willing to take good old fashioned risk and invest in a new start-up. We need to create jobs and opportunities. We need to push the envelope and break out of the box with new paradigms which …

Whew! Almost bought my own BS there for a moment!

You like your tea green or fermented?

You like your tea green or fermented?

Seriously, there is money coming into the US at a furious clip. It’s just not doing us any good because there is so much money flowing around the world in frightening and unpredictable ways that it scares the bejaysus out of everyone. There are no good measures of the US Dollar “carry trade”, or borrowing in US Dollars for overseas investment. There are only spotty measures of venture capital. These things aren’t supposed to be this important – and no one has kept a close eye on them before.

Which brings us to the new economy. Money is coming to the US in search of safety, but we are having trouble using it. The process by itself scares people because there is risk everywhere. We can’t really say how much is coming in with great confidence, nor can we say how much is going into small business development. All we know is that long term Treasuries are a hot prospect right now.

How will this all settle out? Sooner or later, some of that money will take a risk. Some of that money will be rewarded for its risk and new companies with new technologies will come from it. That will be the day that we learn how to measure what’s going on and there will be confidence in the form of a line that is moving ever upward towards a brighter future.

Until that time, welcome to the new economy. It’s something we don’t even know how to measure yet, but what we do know looks very scary. That fear doesn’t lend itself to anything but carefully hedged investment in things that aren’t really all that useful.

No one said re-inventing a new economy would be easy.

10 thoughts on “Risk Aversion

  1. We need a whole economic revolution and to some degree that is what we are getting. Unfortunately, it is only benefiting the top %.

    • Yes, the whole economy is re-making itself. It is largely a question of who benefits – how the economy is made. But we don’t need a “revolution” – it’s already started.

      • We know who benefits, but until the many benefit as opposed to the few, there will be social unrest and risk of unnecessary wars to dig us out of this mess.

      • The thing is that in order to make it work, we we have to understand it. How, indeed, do we get money into the hands of people who are going to fuel the new economy in the way everyone talks about – technology and innovation driven stuff? And what safety net is appropriate? How do we protect a “flexible” workforce that works from one contract to the next? How do we guarantee such workers an income that will keep them going?
        There are a LOT of questions, but if you start from the perspective of “we have a new economy forming” they are all very hard to answer.

      • There are some very basic human rights that all countries should respect. No one should go hungry or thirsty and no one should have to live on the streets. (this may sound socialistic, but, so be it) We have multinationals that think they can produce products using, what amounts to slave labour. These same companies contribute nothing in the form of taxes except for political contributions to election campaigns. For these contributions they expect favourable concessions. (this, I consider corruption) Until these multinationals realize they are contributing to the decline of societies all over the world we will be in a fix for providing basic necessities. Once more, these business will have a very small consumer base.
        If they don’t see the writing on the wall they will not last long themselves. Leslie

    • I completely agree, but the rest of the world does not. We have to go with sentiment and figure out what it will take to change it. I see risk aversion as a major problem right now – and a big contributor to the “skills gap” among other issues.

  2. Here’s a thought. Are there ways that we can level the playing field where it comes to risk? The one article you linked to suggested but it wasn’t clear that venture capital funds are doing OK they just aren’t investing as much as they used to. It seems that spreading the risk out with these funds is going to be the way to go. How are they doing?

    • Several points here. First of all, I don’t understand how VC funds operate, to be honest, and there are none that I can see which are truly “public” and trackable. So there is a limit to how much money can possibly go into any given fund.
      Second, most target very small businesses. I cannot find good information all around, but this article has some that suggests that larger funds are coming into play, which will spread risk around.
      I didn’t use this article for this piece because it really doesn’t have much to say about the total amount of money coming into VC as a trend, but it does show that it favors smaller operations.

  3. Pingback: Forcing Investment | Barataria - The work of Erik Hare

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