Known Unknowns and Unknown Unknowns

Plenty of folks are worried about the economy these days—not only in the US, but globally, too. As it always is, the list of things to fret is rather lengthy:

The US’s debt level has many concerned we’re quickly headed for Greek-like status.

• Geopolitical tension in the Middle East.
• The eurozone’s continued economic woes.
• A potential China slow-down.
• US political elections—feared equally by folks on both sides of the aisle.

And so on. We won’t recount the reasons we think those items rather less likely to have an outsized, near-term market impact here (other than to note their very prevalence in headlines)—for some of our previous writings on these topics, please see here: US debt; Middle East; eurozone; China; US elections.

But fact is there are always risks, and as we at MarketMinder frequently discuss, the key for investors is assessing probabilities versus possibilities. The former allowing investors to make informed, rational decisions about what they believe the likeliest course ahead—the latter potentially paralyzing them and leading to fear-based decisions aimed at side-stepping some event just not terribly likely in reality.

So given the things we have the opportunity to fret this year, it’s a good thing the Consumer Financial Protection Bureau (CFPB) and Dodd-Frank are collectively working on some of them. Oh wait ... no, sorry—they’re not. They’re doing the opposite: They’re mostly creating solutions in search of problems.

The CFPB seems to be concerned we’re in need of credit score reporting standardization—ostensibly because consumers aren’t getting an accurate picture of their creditworthiness since there are many companies out there who provide the service. Further complicating the situation, lenders may use a different company than consumers use.

First, we’re not quite sure what the issue is—that potential borrowers are “wasting their time” applying for loans they might not get? Well, we’re quite confident that’s all that stands between us and gangbusters economic growth! If only consumers spent less time filling out pointless loan applications, productivity would skyrocket!

Ok, maybe we’re overstating it a little.

But we’d suggest competitive credit score-reporting is rather a good thing—helping keep overall costs down (most consumers can currently obtain a credit report annually for free!) and allowing potential lenders to use various sources when assessing creditworthiness. In other words, the existence of multiple credit reporting agencies allows for competitive differences among them—maybe one emphasizes a certain aspect of “creditworthiness” differently than another, and a particular lender finds that aspect especially informative.

So the idea the CFPB may insert itself and potentially begin choosing a single “winner”—if indeed that’s how it decides to best handle this dilemma—gives us the willies to an extent. And in our view, it likely proves almost entirely backwards in terms of fulfilling the CFPB’s stated objective of “protecting consumers,” who are likely far better off in a more competitive environment, not less.

Then there’s Dodd-Frank’s Title II, which “gives the Treasury secretary and the Federal Deposit Insurance Corp. unprecedented authority to ‘liquidate’ financial companies.” More willies. For one thing, we already have bankruptcy laws in the US, which provide for the orderly settling of companies’ accounts, determine who’s paid in what order and overall ensure some certainty and reliability for creditors, shareholders, owners, financial authorities, etc. But introducing government authority to liquidate those companies according to their latest whim seemingly introduces enormous uncertainty.

Not to mention potentially undermining property rights, to an extent. And if there’s a key to capitalist, free market-oriented economies’ existence, it’s property rights—they provide the foundation upon which capitalism is built.

Now, neither of these provisions is likely to be our undoing any time in the near future—or probably in the longer term, either. Remember: It’s the unknown which typically has the most power to move markets, not the well-known and long rehashed, much like all of the items included in our initial list of global concerns. Moreover, the overlooked possibilities we’ve discussed here are also more likely to happen, given Dodd-Frank is law already and the CFPB is, well, the CFPB. But they’re both great examples of “potential negatives” most folks don’t really consider. Now, they’re likely at different points on the actual “risk” spectrum, but that’s true of anything.

None of this is to say those other threats couldn’t rear their heads in unanticipated ways and rattle markets short term, either. But far more likely is, as they’re gradually alleviated in one way or another, markets are glad to put them behind and continue their overall (though certainly not uniformly) upward trajectory. Investors who recognize this long-term market tendency likely benefit in the long run, no matter how uncomfortable they may be in the interim.