We are living through a period of wide-spread crazy. Sure there have always been reckless factions in the world. But today the affliction is mainstream. A good many people see what is happening and know that it is likely to end in more financial pain and human suffering, but most say that they are opting to play along anyway. The most common justification given, is that current monetary policies are nuts but so long as the music is playing one has to keep dancing. Famous last words of Chuck Prince who was head of Citigroup as the firm imploded in 2008: “When the music stops, in terms of liquidity, things will be complicated. But as long as the music is playing, you’ve got to get up and dance. We’re still dancing,” he said on the eve of his firm’s collapse.
There is a similar lemming-like sentiment at the moment in investment managers and strategists. Many are ignorant or self-deluded. But even the ones who know better have decided that it is a fool’s game to fight the Fed–better to throw client capital like craps at the casino and cross your fingers. The risk of destroying capital is trumped by the risk of looking like they are missing out on short-term gains–regardless of how fleeting.
I can think of a thousand analogies for this mentality. Driving fast on spring ice, hoping you can gun it over open water. Huddling in a burning building ’cause it’s warm. Just because people chose to do it, doesn’t mean it’s prudent, wise or not likely to be deadly. It’s a matter of when–not if.
The fact is that valuable risk managers are hard to find. Hard to find because it is hard to do. Sticking to rational controls and insisting on favorable odds requires discipline, on-going care and attention. Periodically it requires self-sacrifice. To be useful and worthy of trust, one must do what is best for those whom they are charged to protect, rather than what is easiest, self-enriching, consensus or short-term popular. This goes for parents. And it goes for politicians, trustees, business owners and asset managers.
Over the past 15 years, reckless policies in the western world have facilitated the extinction of prudence. We are all paying for that now. Given the thinking still dominating, it seems most will continue to pay for a while longer still.