The COVID-19 crisis could open a new financial era if the world begins to avoid risks: Don Pittis


According to market tradition, risk tolerance and fear are contradictory emotional states that govern our economic decision-making. As we re-examine our lives in light of the COVID-19 epidemic, there are signs that the risk may lose some of its appeal.

When things are going well and we feel safe, it is reasonable for many of us to be careful with the wind and live a little closer to the edge.

But Canadian investors buy back $ 14 billion in mutual funds in March at our sudden urge to fill our homes with food and toilet paper, the risk-taking mood seems to have changed. As concerns arise the real estate sector and markets go up and down repeatedly, the effect could be long lasting.

“Consumer storage in the face of the coronavirus epidemic can be viewed as an unconventional inventory accumulation activity, primarily aimed at minimizing a threat of perceived loss,” said supply chain specialist Xiaodan Pan at the Molson School of Business at Concordia University in Montreal. me in an email conversation.

In fact, says Pan, behavioral economics tells us that the squirrel outside of supplies is a natural human response to risk and uncertainty, where we are more afraid of losing what we have and less eager to strive to make money.

Don’t feel so safe

So while the Alberta government investment fund loses billions of dollars on what was supposed to be a foolproof derivatives play, and people nearing retirement see their eggs shrinking, the world no longer seems as safe.

And it is by no means a Canadian phenomenon. On Friday, it was reported that US banks were becoming more cautious about lending to European companies. Some governments find sources of loans exploited.

According to an editorial in an influential business publication, the pandemic has taught businesses that they must adopt a risk reduction strategy by moving from “Just in time” to “just in case”. But avoid the risks can be expensive.

A Frankfurt trader reacts to the markets. Last week, it was reported that US banks had cut their lending to European businesses. (Ralph Orlowski / Reuters)

David Rosenberg, the market analyst who now runs his own research company and has repeatedly warned that the boom would end in one way or another, can now say “I told you so,” while baby boomers saving for retirement experience a “huge negative wealth shock” which he says will encourage them to save more and spend less.

At the same time, the risk-reward link that has been a business rationale for the low taxes on investment earnings is turned on its head as taxpayer money rushes for help business and economics.

But there are winners. The risk aversion that listened to Rosenberg’s somber advice in recent years, those who kept cash savings reserves, bought houses they could afford and paid them off and avoided debt now to the most intelligent.

But if others follow their example, a growing tendency to save and reduce risk rather than borrow and spend does not bode well for short-term economic growth. And it’s not just consumers and investors who are wary.

Just last year, it seemed like every visit to the bank resulted in slightly more consumer credit.

Now, despite the latest drop in interest rates, money is not so easy to come by, and mortgage brokers report that banks are making more cautious choices about the security risk of those to whom they lend.

More economical, less risky

The new mood against risk can be the impetus many have called for to make all Canadians, not just aging baby boomers, more frugal.

As a CBC reported last week, for those who have kept their jobs, lower spending as a result of the foreclosure allows some to save more, a trend that experts say may continue after the start of the economy.

But Martin Boyer, professor of finance at the Hautes Études Commerciales of the University of Montreal, says that even if Canadians are now learning the wisdom to save for future disasters, for those who are unemployed, those who own struggling businesses, those who hold overwhelming mortgages or who are burdened with credit card debt, playing safely will not be so easy in a weak, post-COVID economy.

Some may be looking for ways to reduce the risks. (Aly Song / Reuters)

Meanwhile, he said, the economies of consumers and businesses who kept a cushion to push them back from what they saw as a possible slowdown if unpredictable, form a crucial core of economic stability. Boyer said the savings are part of what allows the government to borrow and bail out the risk takers who assumed nothing bad would happen.

A sin the fable of the denying ant and the forgiving grasshopper, said Boyer, the ants end up paying for the grasshoppers.

Boyer believes the bailouts are reasonable for those who have lost their jobs without fault and those who had moderate borrowing levels. But if the economic contraction continues, governments should not bail out those who took big risks in the expectation of big returns.

Should some speculators fail?

“Speculators should suffer,” said Boyer. Otherwise, “no one will save, and everyone will expect someone else to save them. “

While a trend towards higher savings levels may be good for the country in the long run, Jennifer Robson, poverty and inequality specialist at Carleton University in Ottawa, fears that a large number of people in the bottom half of the income scale have no assets to build on.

“I think one of the lessons from the 08-09 financial crisis was that households found themselves in a situation where they took a big credit risk,” said Robson.

But with borrowing now near record levels and around a third of households without enough savings to last a month, it can be difficult to repeat this time if the lenders themselves become less risk tolerant.

Follow Don on Twitter @don_pittis

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