By Bill Kelly, CAIA Association CEO
The dugong (the second “g” is soft) is a marine mammal and a close relative to the more notorious manatee. They are known for their consumption (eating up to 100 pounds of sea grass a day), their size (weighing up to 2,000 pounds), and their short-termism (destroying their own seabed via indiscriminate grazing).
Let’s park the dugong on a very sturdy virtual couch for a moment and take a quick “today in history” tour. The color black has scary connotations. Put that word in front of cat, hole, or Monday and it can cause extreme anxiety. In the "Monday" case, especially for the over-50 crowd, that anxiety is for good reason and it originated on this day in the year 1866, which actually happened to be a Friday but otherwise on-point. Back then, the London banking house Overend, Gurney and Co. was known as the bankers’ banker and, like most good bankers, they borrowed short and invested (very) long, leaving them with limited liquidity when the finicky depositors asked for their modern-day equivalent of $1B pounds, on-demand. Also following the banker-playbook, the Overend crowd quickly turned to their friendly central bank for help. If Twitter were alive back then #NFW may have started to trend for the very first time as it echoed out of the hallowed halls of the Bank of England. Absent the bail-out, Overend expired and brought down almost 90% of the London shipbuilding companies along with it. The following day the Times of London called it Black Friday and that moniker, fear and all, was born and has sustained.
Dateline May 11, 2020 and it is time for the dugong to come back out on the reinforced stage and meet Jerome Powell. Different meal plans for sure, but consumption, size (balance sheet in the case of Mr. Powell), and short-termism are some of their very common behavioral traits. How else can you explain what happened in the closing trading session just last week? Over 20 million jobs were lost in the month of April pushing the unemployment rate to almost 15%. As bad as that stat sounds, it is likely far worse, as many more have either stopped looking for work, or simply cannot look at all during this #WFH lockdown. The brand dominos continue to fall too with bankruptcy filings announced last week for the likes of Neiman Marcus and J. Crew, with JC Penney expected to follow next week… And, the market shrugged it ALL off as the S&P registered an almost 2% gain on the day, or plus 30% over the last six weeks. No need to look away as there is nothing ‘black’ to see here, or is there?
The Fed-adopted dugong characteristics of consumption (limitless quantitative easing), size (sovereign debt expected to soon be 120+% of global GDP), and short-termism (no game plan for when the massive bill needs to be settled) are all pointing to the blackest of black days. Yet we obliviously bounce along with the ebb and flow on the financial seabed, propelled by these tidal forces.
Orange was once the new black before the beefy dugong crowded it out, but like all fashion trends, this one will have a shelf life too. There will be nothing subtle, and maybe very little left, when this very hefty cousin of the sea cow rolls over and dies.
Seek diversification, education and know your risk tolerance. Investing is for the long term.
Bill Kelly is CEO of CAIA Association. Follow Bill on LinkedIn and Twitter.