Between chaos and order

Some people get excited about Christmas. Some people get excited about the big game. I don’t want to know what it says about me, but that’s the sort of feeling I felt when I saw that Morgan Housel was the guest on Odd Lots.

If you don’t know Morgan, fix that. His book The Psychology of Money should be required reading for high school students, and everyone else. (Disclosure: I get zero compensation for saying that or providing the link. It is just the truth.) I’ve referenced him by name here before, and it is hard to find something on here that at the very least didn’t have some Morgan Housel filter applied.

If you don’t know Odd Lots, fix that. It’s the best econ/finance/markets podcast out there, with smart hosts addressing complex topics with great guests in accessible ways. You can take your Super Bowl. Having Morgan Housel talking personal finance and market history on Odd Lots is the big game.

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I’m not going to summarize, because everyone should listen to the whole thing on their own and I wouldn’t be able to do it justice. But I did want to highlight one point Morgan made.

I’ve already said I’m in the camp who believes that rates will stay higher for longer than the market imagines. I think those who feel otherwise, and who are investing based on that feeling, are kidding themselves.

I’m at least in part talking my book, so to speak. I’m kinda old, and I believe an important piece of financial stability is to have a mountain of risk-free cash sitting in the corner ready to be deployed when it is needed most. I’ve kept that mountain intact even when it is returning 0.1%. The idea of it returning 5% is delightful. So yes, I want to believe.

Morgan makes the argument that it is also a necessary ingredient of a healthy, functioning market. One of the problems of the last decade is that there has been little choice beyond speculating on stocks. The safer alternatives that served previous generations were not available. If cash is yielding 0.1% and bonds are yielding 0.2% is there any reason not to YOLO into a high-risk growth stock or the latest crypto project?

Higher rates won’t kill speculation. There are still stocks and valuations today that show that. There are plenty of reasons to engage in YOLO and higher rates will not discourage everyone.

But there is real value in YOLO not being the only game in town. In a world of 5% rates, you don’t have to go all in. I believe that revised mindset will slowly seep in over time, and it will alter market dynamics for the better. At least for a while.

French high-wire artist Philippe Petit seemingly was the embodiment of YOLO decades before the term became popular. Petit’s unsanctioned walks between the twin towers in New York and across the Sydney Harbour Bridge in the 1970s were the embodiment of “risk on.”

Yet Petit’s personal reflection on his exploits is far from YOLO.

Yes, it is cute for him to use the word “balance” considering what he did for a living. But truth is we can all benefit from balancing chaos and order. We can all benefit from not charging headfirst because there is no alternative available.

The normalization of rates after a decade in the wilderness will have profound impacts on many aspects of the economy in the years to come. Some positive, some disastrous. Companies built in that world will crumble. Fortunes will be lost.

But for most of us, and for the economy as a whole, the rebirth of the savings account will provide better balance and alter the risk/reward calculus.

We’ll all be better for it.

Disclaimer: Fits and Starts DOES NOT provide financial advice. All content is for informational purposes only. Stocks mentioned are as reference only, and a mention should not be interpreted as a buy or sell recommendation. The author is not a registered advisor or a broker/dealer. DO YOUR OWN HOMEWORK. The information contained within is not and should not be construed as investment advice, and does not purport to be. The red zone has always been for loading and unloading of passengers. There’s never stopping in a white zone.

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