In praise of risk

Crystal BallI was watching Hostage, a typical Bruce Willis action movie, the other night with my wife.

At one point I got up to get a glass of water and she grabbed my hand. When I looked at her she was holding her breath, the suspense was so great.

You need to bear in mind that my wife and I have four daughters, so we don’t watch many macho action movies together. I usually watch them in my man cave, generally, with kids floating in and out as things blow up and people are thrown through glass windows.

After we finished watching the movie, she told me she had watched a Die Hard movie a couple nights before and enjoyed it as well.

This is kind of a shock coming from my wife.

So I got to thinking about all the generalized excitement that has greeted the new Donald Trump presidency. And I started to realize that something new and different is about to happen in U.S. politics — and no one knows what will come of it.

Some believe that it will be awesome. Others believe just as strongly that it will be a nightmare. But the ‘meh’ middle has dried up. Everyone is running with strong feelings one way or the other.

In my younger days I was a playwright on occasion and sometimes someone would ask me if anyone ever told me they hated a show. And I would tell them that I thought the show was successful if people loved it or hated it. As long as they weren’t indifferent about it, I did my job.

What I am seeing collectively, even beyond U.S. borders, is a sense of suspense and anticipation. No one knows what’s coming next.

It’s refreshing in a way. But we’re also seeing this play out in the markets.

We’ve had bank excesses for decades, starting with President Bill Clinton repealing the Glass-Steagall Act in the early 1990s and ending in the financial Armageddon in 2008.

But it hasn’t stopped there. The quantitative easing the Federal Reserve began has kept these ungainly, unhealthy organizations at the top of the food chain by artificial means — central bank policy.

In a “state of nature” these banks would have collapsed and we would have new financial institutions to take their place that were built by modern people, for modern times.

The markets have reflected this era with record low volatility. Basically, what I’m saying is, the markets have been living in a romantic comedy for a very long time.

It’s an artificial reality and it too may be coming to an end.

I expect Fed’s rate rise in December will be the beginning of sure and steady increase in volatility, or in more plain language, risk.

Risk is on the rise. And that’s a good thing. It’s a healthy thing. It’s a necessary thing for capitalism and democracies.

My prediction is that next year at this time, things will be very different in the markets and the economy. And I’m fine with that, for good or ill.

When risk rises back to healthy levels of creative destruction, you need to be well positioned in smart investments. For now, gold and silver are your best bets because they will thrive when market risk is high.

Other than precious metals (and bitcoin) there is nothing worth buying until after the inauguration.

— GS Early

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