(un)Controlled Burn

I love road tripping.  Every chance I get to hit the road and explore, I try to take it.  I owe this passion for the rhythm of the road to my late father, who frequently took myself and the rest of the family on various excursions, ranging from short weekend jaunts to extended vacations through the Midwest and Old West.  My first drive out west occurred when I was 10 months old and the family trips continued until my father was no longer fully able to travel with my brother and I.  The road trip that left the greatest impression on me was in the summer of 1990.  We explored a high number of our country’s greatest national parks that summer, including Pike’s Peak, Bryce Canyon, the Grand Canyon, Glacier National Park, and Mount Rushmore.  Most were some degree of spectacular.  Yellowstone National Park, with its diverse range of beauty and natural oddities, was one of the high points.

Yellowstone’s splendor, however, was tinged by scars from a massive fire outbreak from two years earlier. From the summer through late autumn, many small, controlled wildfires combined to raze 793,880 acres, or 36% of the park’s surface area. On the single worst day of the fires, August 20^th, more acres burned than in all other fires combined since the establishment of the park.  Contributing factors to this massive fire included the prior winter being drier than normal, followed by a major drought that began in July.  These conditions were exacerbated by the effects of a pine beetle species killing a large number of trees from the late 1960s through the mid-1980s, which left a mixed stand structure of trees that allowed the fires to spread quickly.  Another major factor in the burn rate was a U.S. Forest Service policy.

From the late 1800s to mid-1900s, U.S. Forest Service fire policies were focused on suppression. This meant that small wildfires were extinguished as soon as possible, before they could grow large enough to have a sizable impact. The policy shifted to allow controlled burns in Yellowstone by 1972, although the fires were not large. This led to a timber stand with many older trees mixed with younger growth, which made the forests more vulnerable.  This policy also contributed to a proliferation of undergrowth and dead vegetation, which meant that fuel for the fires was plentiful. Over 250 small fires combined into a handful of larger fires that were nearly impossible to fight. It took contributions from over 25,000 people, with more than 9,000 in the park at one time at the peak of the blaze, to get the situation under control.

I’m not a professional trader or seasoned participant in the financial markets, but the parallels to the stock and bond markets are pretty clear.  Central bank policies enacted during the Great Recession of supplying tremendous amounts of money at very low interest rates has functioned as a suppression policy.  This supply of money has helped support asset prices of everything from single family homes to new tech startups to the entire financial markets.  Similar to the undergrowth that had built up over many years, the U.S. economy has enjoyed a record stretch of time without a recession, which has allowed for the possibility of stock market valuations to have become stretched.  The accumulation of factors has enhanced the potential for a terrific setback for the markets. No one knows whether coronavirus is the catalyst for the current correction to turn into a larger drawdown, but someday one will come.  How much heat can you take? It can always get worse, and cash can be a great safe haven.

I am not a financial services professional.  All information on this site should be regarded as informational or for entertainment only, and not as actual investment advice.

Disclaimer: I own put options on SOXX, which are expected to go up in value if a market correction occurs, and expect to sell or add to the position at any point in time.