The last couple of weeks have provided ample confirmation that fear is a major factor in how economies perform. The Great Financial Crisis (GFC) provided many prior examples of that.
Unfortunately, and to state the obvious, fear has consequences which are non-linear and self-referencing- fear feeds on itself. Roosevelt’s famous phrase (“So, first of all, let me assert my firm belief that the only thing we have to fear is…fear itself — nameless, unreasoning, unjustified terror which paralyzes needed efforts to convert retreat into advance”) from his speech at his First Inauguration, may be a trope, but no less true for that.
The level of volatility and the ever-reactive and disjointed nature of many governments’ actions recently have demonstrated that the “standard” models and their underlying assumptions do not work (as they patently did not in the GFC) because they consistently underestimate the risk in the right-hand tail of the distribution, and that individuals have difficulty processing the impact of their decisions beyond first order effects.
It is the Amygdala overwhelming the Pre-frontal Cortex.
Of course, given actions which are unprecedented outside times of war or insurrection, and the still high levels of uncertainty over the true scale and consequences of Covid-19, which is indifferent to borders, rank or wealth, knowing when, why and how societies (and the economies which their behaviours impact) will resume some semblance of normality is at present unknowable. At some point the consequences of government actions will run the risk of causing permanent harm to those societies which (in theory at least) they are meant to lead and protect which outweigh the loss of life caused directly by the pandemic.
Meanwhile, the dislocations in the credit markets, while creating what amounts to “fear and loathing” and leading to often indiscriminate actions is something that has to be worked through. At such times, a dispassionate and careful re-examination of whether the original thesis for the purchase of an asset or taking of an exposure still holds is essential. Liquidity and access to sustainable contractual cashflows, as well as quality of management will make the difference between those who survive, even if they need to adapt and re-structure to do so, and those whose business models are found wanting and so irredeemably fail.
As Warren Buffett has said: “Only when the tide goes out do you discover who’s been swimming naked”. Involuntary nudity runs the risk of becoming rather too prevalent in some quarters (as it did in the wake of the GFC). The question will be whether the survivors internalize the lessons now being learned in real-time.
At Awbury, we continue to operate the full range of our business (while adopting all the necessary protocols to ensure that we continue to do so). We may be habitually paranoid, but that does not mean that we are paralyzed. Far from it. While prudently managing our existing portfolio, we are actively engaging in considering new opportunities, as well as in maintaining open communications with all our partners and Insureds. Maintaining pro-active dialogue and communication will ultimately repay the time spent many times over.
So, give us a call.
The Awbury Team