Soft Landings, Hard Landings: Semantics Aside, Both Produce the Same, Awful, Outcomes.

Stock market indexes are typically forward looking. The coordinated and widely based declines in global major market indexes are broadcasting an ominous portent; 2019 looks to be somewhat worse than the 2018 in terms of economic outlook.

Even a single year of broadly based investment losses sours investors somewhat. Should any forecast envision back to back years of losses, a growing number of retail investors could react, APPROPRIATELY, by jumping ship for the haven of cash. Selling out portfolios IS the action that would logically be taken, at the institutional levels, to learning of such a forecast. The problem for institutions is that the very act of selling tens of trillions of securities can produce a stock market crash; buyers are needed to prop up a market and provide liquidity for an orderly decline. To institutional investors, retail investors are equivalent to remoras or pilot fish (tiny cleaner fish that live in/near the mouths of predatory ocean species); retail investors tag along with the institutions during bull markets and feed off of bull market scraps. Individual investors are privately loathed, but publicly tolerated, by the big firms, during bull markets; a certain tolerance is necessary because individual investors do serve one very useful purpose after market tops. Just after a market top, and on the way down, institutions use retail investors (provided that individual investors are not scared off), as a supplier of liquidity (bids) for securities when they choose to sell.

The quandary for financial institutions in general, and for investment banks specifically, is how to persuade retail clients to hold/buy securities that institutional clients are interested in selling, when the economy has peaked and might be softening? One solution is to simply ignore bad news or refuse to report the same. This is why individual stock or entire market “sells” are virtually impossible to find. A public sell report represents a major conflict for banks to issue as it will scare off the retail liquidity. Should individual investors attempt to exit equities at the same time as institutions, all manner of difficulties break loose. But, to mollify an unsettled public after a year or so of declining equity prices, at some point, certain large investment firms, pressed to unveil a narrative that won’t result in panic selling from the individual investors, may re-introduce the term “soft-landing” back into the investment lexicon.

A soft landing, in my view, is nothing more than a marketing term to describe a prolonged market sell-off that produces the same overall pain as a market crash. Describing a potentially dramatic decline, using an innocuous term, does the public incredible harm and understates risk greatly. Typical bear markets that result from economic recessions generally take broadly based equity markets down by roughly 30%; riskier and cyclical investments often perform far worse from peak to trough. Some companies actually fail and go through equity wipeouts, in the form of chapter 11 bankruptcies, if they are not self-financing.

The hard landing is often resultant from a stock market crash. Attendant government panicky reactions (immediate pumping of liquidity into the system, propping up of systemically important institutions and forced mergers of failed businesses) are typical outcomes of a hard landing. Any hard landing is sufficiently risky that coordinated triage by various supranational and national bodies takes place to prevent a global collapse; the speed of the decline results in equally speedy reactions.

Renaming of an economic slowdown as a “soft landing”, in comparison, evokes less urgency. Smaller, daily, repetitious, equity declines over six months (that still produce the cumulative decline of 30% seen in bear markets), an occasional pumping of liquidity into the system, some strategically placed prop-ups of systematically important institutions as well as forced mergers of failing businesses; all these tend to occur during soft landings. If the end result of a soft landing appears frighteningly similar to the experiences of hard landings, that is the point. Regulators, governments and supranational bodies use the same playbook during a soft landing as they do in a hard landing; they just do it somewhat more deliberately and spread out reactions over a longer window.

Within a timing window of, lets say one year, the painful results of a hard landing and a soft landing are, for all intents and purposes, the same; the only difference is in the immediacy of the losses. Why then do investment media and investment banks use two terms to describe what is essentially the same outcome? In a hard landing, financial pain is immediate (critical) whereas in a soft landing financial pain is meted out over a longer period of time (chronic).

I would argue that a soft landing actually hurts retail investors worse than the hard landing. In a hard landing, retail investors feel the same critical shock as do institutions and take the same actions; a qualitative purge of the riskiest investment occurs. In the soft landing, retail investors start averaging down on their portfolio, nibbling away on the first 10% decline and continuing to average down as the decline takes hold. Only at the bottom of a soft landing do despondent retail investors sell out, declaring that they will never again own equities.

Do not be lulled into a sense of complacency should the investment media, in 2019, trot out the term soft-landing. The only beneficiaries of a public that believes in the term soft landing are governments, regulators and financial institutions; retail investors feel the same pain during both the hard landing and the soft landing. During bear markets, retail investors need to remind themselves that institutional investors and investment banks are NOT the ally of the retail investor; we are little more than pilot fish and great care needs to be taken so that we are not swallowed whole.