Understanding Uncertainty

Last month the US banking industry got thrown into turmoil when Silicon Valley Bank became the second largest bank failure in US history. You probably had never heard of it (I hadn’t). It was the 16th largest bank in the US, prior to its collapse.

The story didn’t end there – two other US banks failed quickly afterwards, and cracks re-appeared in the European banks.

It all seems somewhat contained for now. The market was a bit spooked for a few weeks but has regained most of the losses since.

Much has been written about the failure and we shared a few good pieces in our last email newsletter.

There are a few angles I want to explore. First, since the whole banking thing kicked off I have heard more than one person tell me that “everything is more uncertain now”.

Let’s think about this.

Everything is more uncertain now.

That must mean things were less uncertain before. Or more certain.

Before the bank failures, things were more certain?

Uncertainty is a state of doubt about the future. So we are saying that there is more doubt about the future now than there was before.

Or put the other way, we knew more about the future before and we know less about the future today?

It doesn’t make sense, does it?

The future is always entirely unpredictable and we are always in a state of doubt about what might happen next.

In some way though we could argue that the future of banks, at least, is a little MORE certain today than it was two weeks ago. We at least know that the Fed will step up and protect depositors whenever there might be risk of systemic failure. We weren’t SURE about that before SVB. There are also three less banks in the US so that’s three less banks to fail going forward!

Morgan Housel has written about uncertainty. He says “the idea that uncertainty is higher now than it was, say one or two or five years ago is a strange one. The risks were always there. People were just blind to them. The future is always endlessly unpredictable. What changes isn’t the level of uncertainty, but the level of people’s complacency.”

And there it is. It’s our level of complacency that changes.

Before SVB people were pretty sure their money deposited in a bank was safe. They were complacent about that.

There is not so much complacency around now.

In a recent podcast Morgan Housel referred to Parkinson’s Law of Triviality. The law states that the amount of attention that any problem gets is the inverse of its importance.

A few weeks ago there wasn’t a lot of talk about making sure your cash at a bank was safe, but turns out it was an important topic.

And so it is with all risk.

Ben Carlson recently said “the things that you worry about the most are rarely the things that end up hurting you and it’s the things that you don’t think about at all that come and wallop you.”

He goes onto make the point that we can never know what is going to come along and wallop us – it’s always the left-field, black-swan events (things like the twin-towers or a global pandemic) – so really, what’s the point of worrying?

As Carl Richards says, you aren’t in charge of everything – do what you can, and then relax.

What can you do? You can’t control the banks but you can do some basic cash management (talk to us about this). You can’t control interest rates but you can keep your debt levels low and manageable. You can’t know what will happen to the stock market in the short-term (the long-term is inevitable though) but you can diversify and stay disciplined. You can’t predict a personal crisis but you can have liquid assets to see you through.

The world is always uncertain – that is as true today as it was yesterday. It’s how we manage that uncertainty that matters.

Georgie

georgie@libertywealth.ky