The Emperor‘s Clothes

I recently read a brief essay by an apologist for our President. He argued that people were only losing “built up equity” in their investments and not “actual money” in the rapid downturn of the markets. It got me to thinking:

We have assets in which we have no expectation of growth. We accept that they “depreciate“. Cars, furniture, and all sorts of stuff. Occasionally, one of these assets becomes a collectible, and the value can actually rise. Art, a rare coin, or an antique automobile. If that asset is lost, destroyed, or stolen, the asset’s owner is deemed to have lost the increased value, and not just the original investment. Similarly, there are assets we acquire that we are hopeful will increase in value. A home is the most common example. Again, if the asset is destroyed, it is the increased value and not the original investment that is deemed the lost value. Insurance is typically purchased to cover the actual value of these assets and not just the original investment.

With regard to financial investments, FDIC insurance covers the original deposit AND accumulated interest in most bank and savings accounts, up to a certain limit. Rating agencies (like Standard and Poor) publicly evaluate bonds for risk to principal AND interest, from investment grade to “junk”. Publicly traded stocks and mutual funds are required to publish information to enable investors to evaluate the risk to principal AND gain.

It is a fiction to distinguish loss as somehow being less painful if it is interest, gain, or “equity”. If the loss was within the ambit of known or knowable risk then the investor is presumed to have accepted that risk. These can include natural disasters, general economic downturns, bankruptcy, and even war. The investor may also rely upon the factors that weigh in favor of the assumption of the risk. Such factors may include the stability of the company, the stability of the government, its leaders, and its institutions.

As the President said within the last 24 hours, he is being guided by his “gut feelings” and “instincts“. He is not being guided by experts or government institutions. That one man can by his whims influence markets in such a dramatic way is not a typical risk assumed by investors. The shock and distress that the President’s “instinct“ driven decisions are causing are not limited to the unsophisticated investor, but extend to the most sophisticated of investors.

People are rightly fearful that the institutions they have relied on in making their money decisions are failing them. Yes, we see that the Emperor has no clothes. We also see that the Emperor doesn’t care.

Peace Everyone. Pete