Losses cause panic. 
Panic leads to action and
Action means progress.

“The market always comes back” is a cliché for a reason.

No one can honestly say it always will. We don’t know the future, and nothing lasts forever. But, up until this moment, losses in the American markets have always been followed by growth in American markets. This is a statistical fact with all of the data we have going back to the 19th century.

One would have thought that a Civil War, two World Wars, a litany of pandemics, 48 recessions, the Great Depression, and splitting the atom would have diverted the narrative at some point. But, until there is evidence to the contrary, you are betting against 100% of industrial American history to say “this time is different.”

My favorite new idea (from Morgan Housel) is that the reason why progress forges ahead faster than calamities is because people are always trying to run in the opposite direction of the closest apocalypse.

As I write this, there is an international crisis brewing amongst small regional banks in America and (by some reports) terribly managed banks in Europe. Banks are intended to be bastions of safety. They are the warm wool socks and chicken soup of finance. When banks are in trouble, it awakens deeply engrained trauma from the Great Depression that has passed through generations like a scar on a tree.

When banks and markets are knocked off balance, historical mathematics and statistics says “don’t’ sweat it.”

But for many people, that sounds like advice coming from someone magically floating high above the ocean. From far enough away, the sea appears vast and tranquil.

The problem is, we live in the waves.

There are seasoned pros out there who deal with threatening situations enough to develop a tolerance for them. But for most people, confronting a major loss will send them scrambling for anything and everything that resemble a solution. Immediate survival is a higher priority than long term health.

Living things panic in an emergency situation. Panic is going to happen. To deny panic is to deny part of what makes us alive.

It may be helpful when thinking about the current banking situation, to look at the 2008 Financial Crisis.

In order to stave off the collapse of Western Civilization as we know it, a freaked-out US Treasury bailed out huge banks, investment firms, private corporations, and even government agencies. At the same time that billions of dollars was infused into the financial system, the Fed dropped interest rates down to next to nothing.

From January 2007 (5.25%) to January 2009 (0.15%) the Federal Funds effective rate was cut by 97.14%.

And it worked. Apocalypse later.

From June 2009 until March 2020 the stock market went on the longest bull run in history.

Starting in January 2016, well after the S&P 500 reached its pre-crash price (in 2013), the Fed began a series of slow, incremental rate hikes. Rates got as high as 2.4% in March 2019 before the Fed cut them again over concerns the economy was slowing down.

Rate cuts and government stimulus was the result of panic. This led to an unprecedented long period of relatively steady growth. We can Monday Morning Quarterback this all we want, but those moves worked out exceedingly well for a decent stretch of time.

It took a global pandemic to finally stop the Growth Train that left the station in June 2009. Once again, everyone was justifiably panicked, including regulators. Once again, we got government stimulus and interest rate cuts. By April 2020, the Federal Funds rate was 0.05%.

What followed was roughly 20 months of the kind of stratospheric growth one would expect when secured loans were next to free and stimulus checks magically showed up in the mail every month.

The problem was the pandemic also disrupted the availability of goods. The corporations the government bailed out in 2008 were able to keep their employees and keep producing goods and services. The pandemic prevented that from happening.

Too much money was available to buy not enough stuff, and the inflation dragon roared to life.

And once again, regulators have panicked. Runaway inflation, or hyperinflation, can collapse countries. Looking outside of American markets, which is critically important when looking for real world data about the historical impacts of conditions that may be unusual in your home country, there are examples of inflation being a threat to national stability.

Is this what the United States is facing now? Doubtful. The regulatory framework of United States markets is sufficiently different from 2007 Zimbabwe, 1945 Hungary, and 1992 Yugoslavia that I am hedging on the side that says those results won’t be repeated at this time.

The American financial system is such that it allows panicked regulators to implement measures that fix crises in a hurry. 2023 technology allows extremely rapid iteration and implementation of entirely new financial channels. In this case, it’s the Federal Reserve’s new Bank Term Funding Program.

This program allows American banks to receive loans from the Fed secured against long term debt securities. This prevents banks from selling assets at a loss in order to have funds available for large withdrawals from depositors.

Silicon Valley Bank faced collapse on March 11th. The BTFP program was in place on March 12th. Impressive. Of course, this will mean regional banks will be in debt to the Federal Reserve. What could go wrong? That will be a crisis for a later date.

The panicked infusion of liquidity in 2020 helped create a dangerously high rate of inflation. That rate of inflation caused its own panic that led the Fed to raise rates fast enough to break small regional banks dealing in risky investments. Through the hastily created Federal Reserve lending program and the Treasury’s promise to back 100% of depositor’s dollars in Silicon Valley Bank, another infusion of liquidity appears to have averted disaster.

But more waves are coming. And there will be more panic. And more solutions. And the glacier of progress grinds onward.

In the meantime, this is an excellent time to address a financial plan. How safe is the money that you need in the near future? How much loss are you mathematically and emotionally able to tolerate in your long term investments? Do you have regulatory guarantees against loss in accounts designed to preserve principal? How far out in the economic ocean do you want to swim?

These are valuable questions to ask in the best of times, and essential to ask when navigating uncertain waters.

If you need help answering these questions, that’s what we’re here for.