Clue: 12 Across. A false sense of security (5,6)

Clue: 12 Across. A false sense of security (5,6)

Global Investor Markets Themes
Charlie White-Thomson

CEO, Saxo Markets UK

Summary:  "Moral Hazard" is just one example of the complex terminology often used in the financial world. In the eyes of retail investors it often takes the guise of "bad news is good news", as it triggers quantitative easing or further rate cuts. But should we be concerned, as a whole generation of investors' attitude to risk has been skewed.


Like many other industries, the financial industry has a penchant for complex terminology. Contango and backwardation, to name two – are designed to describe a particular event or scenario in ‘finance’ speak. Moral Hazard is another one, but, this time, the use of two surprisingly normal words creates an opaqueness around the overall meaning. According to Wikipedia, ‘moral hazard occurs when an entity has an incentive to increase its exposure to risk because it does not bear the full costs of that risk’. In my interaction with retail investors, I see ‘moral hazard’ as a significant underlying driver to their investment process. This can be seen in their views – bad news is good news as it triggers another wave of quantitative easing or further rate cuts stimulating markets and risk assets. Put another way, fortune favours the brave – the financially conservative or the risk averse are made to look foolish.

For a long time now, interventionist policies favoured by Greenspan in the 1990s, has resulted in an investment environment akin to walking a tightrope with a safety net – namely, it does not matter if you fall as the net will catch you. In this scenario, the net takes the form of central banks backstopping the markets with their dry powder of printed money. In fact, not only does this financial net catch you, it takes you up higher than where you were before.

In the context of the recent speculative fever and stock market volatility, this safety net is a cause of concern, as it means that we have a generation of investors whose attitude and approach to risk has been skewed.

With US stock markets recently reaching another all-time high, discussions of moral hazard and notes of caution will be lost in the noise. Who cares about prudence when you can make one years’ return in a day? My advice to investors is to create their own safety net as confidence in the markets is exactly that, confidence, and this can be a fickle emotion – strong and powerful one day and callow and nervous the next.

The shock or shocks that can trigger a significant market retrenchment or fall are often very difficult to see or predict and that is what makes them so destructive. In many cases, they start with policy failure and a loss of confidence in the institutions who are there to guide and keep us on track, and this is usually compounded by significant speculation. A good example of this would be the financial crisis of 2007/8 which led to a deep global recession. It is worth noting that we are currently seeing many of the features which when put together can morph into a significant issue – huge stimulus, a highly accommodative interest rate policy, stretched valuations and to this we can add speculation on an epic scale – played out on not just the GameStop stage – but also borne out of the uncertainty caused by the global pandemic and what ripples or waves will come from that.

Safety nets take many forms – watch your leverage, diversify, actively manage the risk of your portfolio including cash levels and know how to buy downside protection, be slightly paranoid – think what can go wrong and how would you manage that. We should remind ourselves that the stimulus being pumped into the markets is not happening because everything is rosy, and that the sole role of central banks is not to support our portfolios. This is all about managing your risk.

In previous articles I have drawn on Pink Floyd to help deliver my message. This time I would like to finish with a verse from the aptly named Tightrope from The Greatest Showman (2017, Michael Gracey).

Hand in my hand,
And you promised to never let go,
We're walking a tightrope,
High in the sky,
We can see the whole world down below
We're walking a tightrope
Never sure, will you catch me if I should fall?
Well, it's all an adventure
That comes with a breath-taking view
Walking a tightrope

We would like to hear your opinion on the topic.
Is Moral Hazard a significant risk or just overcooked economic theory?
Submit your answer by email to replies@saxomarkets.com for a chance to win £10,000

Quarterly Outlook

01 /

  • Macro outlook: Trump 2.0: Can the US have its cake and eat it, too?

    Quarterly Outlook

    Macro outlook: Trump 2.0: Can the US have its cake and eat it, too?

    John J. Hardy

    Global Head of Macro Strategy

  • Equity Outlook: The ride just got rougher

    Quarterly Outlook

    Equity Outlook: The ride just got rougher

    Charu Chanana

    Chief Investment Strategist

  • China Outlook: The choice between retaliation or de-escalation

    Quarterly Outlook

    China Outlook: The choice between retaliation or de-escalation

    Charu Chanana

    Chief Investment Strategist

  • Commodity Outlook: A bumpy road ahead calls for diversification

    Quarterly Outlook

    Commodity Outlook: A bumpy road ahead calls for diversification

    Ole Hansen

    Head of Commodity Strategy

  • FX outlook: Tariffs drive USD strength, until...?

    Quarterly Outlook

    FX outlook: Tariffs drive USD strength, until...?

    John J. Hardy

    Global Head of Macro Strategy

  • Fixed Income Outlook: Bonds Hit Reset. A New Equilibrium Emerges

    Quarterly Outlook

    Fixed Income Outlook: Bonds Hit Reset. A New Equilibrium Emerges

    Althea Spinozzi

    Head of Fixed Income Strategy

  • Equity Outlook: Will lower rates lift all boats in equities?

    Quarterly Outlook

    Equity Outlook: Will lower rates lift all boats in equities?

    Peter Garnry

    Chief Investment Strategist

    After a period of historically high equity index concentration driven by the 'Magnificent Seven' sto...
  • Commodity Outlook: Gold and silver continue to shine bright

    Quarterly Outlook

    Commodity Outlook: Gold and silver continue to shine bright

    Ole Hansen

    Head of Commodity Strategy

  • Macro Outlook: The US rate cut cycle has begun

    Quarterly Outlook

    Macro Outlook: The US rate cut cycle has begun

    Peter Garnry

    Chief Investment Strategist

    The Fed started the US rate cut cycle in Q3 and in this macro outlook we will explore how the rate c...
  • FX Outlook: USD in limbo amid political and policy jitters

    Quarterly Outlook

    FX Outlook: USD in limbo amid political and policy jitters

    Charu Chanana

    Chief Investment Strategist

    As we enter the final quarter of 2024, currency markets are set for heightened turbulence due to US ...

Content disclaimer

None of the information provided on this website constitutes an offer, solicitation, or endorsement to buy or sell any financial instrument, nor is it financial, investment, or trading advice. Saxo Bank A/S and its entities within the Saxo Bank Group provide execution-only services, with all trades and investments based on self-directed decisions. Analysis, research, and educational content is for informational purposes only and should not be considered advice nor a recommendation.

Saxo’s content may reflect the personal views of the author, which are subject to change without notice. Mentions of specific financial products are for illustrative purposes only and may serve to clarify financial literacy topics. Content classified as investment research is marketing material and does not meet legal requirements for independent research.

Before making any investment decisions, you should assess your own financial situation, needs, and objectives, and consider seeking independent professional advice. Saxo does not guarantee the accuracy or completeness of any information provided and assumes no liability for any errors, omissions, losses, or damages resulting from the use of this information.

Please refer to our full disclaimer and notification on non-independent investment research for more details.
- Notification on Non-Independent Investment Research (https://www.home.saxo/legal/niird/notification)
- Full disclaimer (https://www.home.saxo/en-mena/legal/disclaimer/saxo-disclaimer)


Business Hills Park – Building 4,
4th Floor, office 401, Dubai Hills Estate, P.O. Box 33641, Dubai, UAE

Contact Saxo

Select region

UAE
UAE

All trading and investing comes with risk, including but not limited to the potential to lose your entire invested amount.

Information on our international website (as selected from the globe drop-down) can be accessed worldwide and relates to Saxo Bank A/S as the parent company of the Saxo Bank Group. Any mention of the Saxo Bank Group refers to the overall organisation, including subsidiaries and branches under Saxo Bank A/S. Client agreements are made with the relevant Saxo entity based on your country of residence and are governed by the applicable laws of that entity's jurisdiction.

Apple and the Apple logo are trademarks of Apple Inc., registered in the US and other countries. App Store is a service mark of Apple Inc. Google Play and the Google Play logo are trademarks of Google LLC.