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Five Things: Secular Risk Aversion


Waning risk appetites don't just impact attitudes toward finance.

1) Secular Risk Aversion

Remember these days. These dark economic times will one day be accused of imprinting enduring behavioral changes on those who lived through them. Of course, it is really social mood that is responsible for this shift, but in the desire to offer a narrative, a linear explanation to what we are living through, historians will prefer to mark this economic crisis as a turning point in financial behavior.

"Two years after credit markets seized up and caused the worst financial crisis since the Great Depression, companies are hoarding the most cash in at least a decade," Bloomberg reported this morning. The article was specifically about the behavior of corporate treasurers, but it could have just as easily been written about the household checkbook.

"There's going to be a generational psychology shift as to how you and I and the rest of the world think about finance," Jonathan Fine, a managing director on the investment-grade syndicate desk at Goldman Sachs told Bloomberg. "People will keep cash on hand so long as what happened in the last two years remains so visible in the rearview mirror."

If much of the past 20 years was about accumulating and displaying "wealth," the next decade will continue the mean reversion toward something altogether more austere, if not more sensible. Debt reduction and the rejection of (and guilt projection toward) materialism will continue as meditations on not just doing more with less, but doing less... period.
And here's where an economic disconnect arises. I'm not suggesting that people will never again splurge on ridiculous things; they certainly will. But between bouts of obscene materialism, a new normalcy will begin to emerge.

Last week, while combing through the digital archives of The New Yorker magazine looking for references to "The Depression" during the 1930s, I stumbled upon the following excerpt written from the vantage point of bemused incredulity in a longer piece titled "The Sporting Life."

The writer wanted to know how in the world these people could be paying high prices for tickets to sporting events when it was well known that no one could afford to pay high prices for tickets to sporting events. The outrage!

Indeed. And for our purposes it's worth keeping in mind that the mere fact sporting events continued to draw crowds of downtrodden spectators throughout the Great Depression doesn't lessen the economic reality of that grim period. When we inevitably emerge from our own economic crisis, we will bear generational scars created by the transition from bizarre hyper-consumption to a more normalized consumer behavior.

2) Gambling Revenue

Speaking of risk aversion, it is deeply ironic that while peaking risk appetites produced a wave of interest in all forms of gambling - from day-trading to condo flipping to, seriously, watching people play poker on television - today's wave of waning risk appetites is occurring even as states across the country rush, belatedly, to expand gaming offerings to help boost sagging revenues.

This morning USA Today observed the rush to bring in gambling revenues, noting that gambling will expand in nearly a dozen states this year, a record-breaking expansion. Of course, the only problem is these states are now faced with elbowing their way into a dining spot at an increasingly crowded feeding trough.

The Wall Street Journal this morning noted that according to the American Gaming Association, state revenue derived from commercial casinos was down 2.2% in 2008.

3) Risk Version Means "Tone it Down"

Waning risk appetites don't just impact attitudes toward savings and gambling, consider the following related examples from the television and entertainment industry. USA Today inadvertently summed up the shift in consumer attitudes in the lead to a story on racy fast food advertisements.
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