Stories of Risk, Economic Development Boundaries, & Sentiment of Local News
Small Cities Weekly | 10.03.2025
After a hiatus, Small Cities Weekly is back. I’m trying to get back on a weekly cadence and hopefully share some essays I’ve been thinking a lot about. I also have a new project in the works - more on that soon!
Stories of Risk
An apt metaphor came from Pension & Investments (August 20, 2007): “Jill Fredston is a nationally recognized avalanche expert. . . . She knows about a kind of moral hazard risk, where better safety gear can entice climbers to take more risk—making them in fact less safe.”
Like opportunities to make money, the degree of risk present in a market derives from the behavior of the participants, not from securities, strategies and institutions. Regardless of what’s designed into market structures, risk will be low only if investors behave prudently.
The bottom line is that tales like this one about risk control rarely turn out to be true. Risk cannot be eliminated; it just gets transferred and spread. And developments that make the world look less risky usually are illusory, and thus in presenting a rosy picture they tend to make the world more risky. These are among the important lessons of 2007.
Howard Marks, The Most Important Thing
Most investment reports tell a clean story: “You earned 7.6% last year, by allocating 60% to public equities, 30% to alternatives, 5% to fixed income, and 5% to cash equivalents.”
The reports don’t tell stories. They don’t tell you what actually happened in the real world to produce more money that what you started with — which companies were bought and grown, what buildings were financed, what projects got built. And that’s on the upside. They also don’t tell you what companies almost ran out of cash, what multi-family unit is only at 45% occupancy, or what council meeting got heated over the latest school bond issuance.
Returns are understood with numbers. But risk is understood with stories. I don’t know about you, but it’s pretty clear to me what it means to 2x my money. It’s not so clear what it means that the Sharpe ratio on a portfolio was 0.47.
This is where the infrastructure of the investing industry can feel like the climbing gear. Managers, firms, funds, funds of funds, rollups, reports - they all put layers between us and stories that communicate risk. The risks are still there. They’re just obscured. But it makes investing through this infrastructure feel safer.
The first person to tell you not to start a restaurant is a restaurateur. The first ones to tell you not to take over the family business are your parents. The closer you are to something, the riskier it can feel. But the risk isn’t actually different; it’s just visible.
This goes for investing locally too. It feels different to buy a local manufacturing company than to invest in a private equity firm doing “aerospace supply chain roll-ups across the industrial midwest”. A local apartment building in downtown feels different than a real estate fund looking for “strategic multi-family opportunities in growing secondary and tertiary markets.”
Visibility makes risks hard to ignore. Which is why local often feels riskier. But it’s not; it’s just that stories are more powerful than statistics.
I pulled some data on SBA 7(a) small business loans in our five county region over the last 15 years. We beat the national averages on both defaults and charge off rates. In the large residential housing price swings of the last two decades, our MSA had shallower dips and quicker recoveries. Our local municipalities carry investment grade credit ratings. But no one knows or cares about those statistics. We know the story of the company that went out of business, or the house that has sat on the market too long, or the debate over the local city budget. We know the stories.
Here’s the paradox we have to contend with: because outsiders don’t know the stories, they aren’t bothered. They’re buying local companies, financing local developments, and holding local municipal bonds. They don’t see the details we live with every day; they just see cash flows or attractive prices.
And for other communities, we are those outsiders. We don’t know the stories of the other places our money is going to work either, so we are apt to feel better about those risks.
Local doesn’t bring more risk, it’s brings more visibility. And the combination of things of value and a deeper understanding of risk is a recipe for better outcomes. The transparency is a reason to invest, not to avoid.
Ironically, it’s not the risk of the investments that we have to overcome. It’s the risk of continuing to export ownership, because we let stories of risk drown out the story that we have things of value.
Links
You can find links from this and all previous editions here.
The Case for READI Regions as Official Economic Planning Regions, Phil Powell, Ph.D., Tim Slaper, Ph.D., IBRC
Unlike READI regions, the ability of local jurisdictions to communicate, cooperate, and coordinate does not drive demarcation of EGR or MSA geographical boundaries. A state is best understood as a set of regional economies. Because of size and physical
geography, few states function as one integrated economy. In practice, the economic development strategy for any state must defer to market activity, industry transformation, and infrastructure planning at a regional level. With a few exceptions like Portland, Seattle, and Minneapolis, governance institutions do not geographically scale beyond the county level. This mismatch between geographic scale in economy and localized governance leaves state governments scrambling to define their own regions for purposes of economic policy implementation, such as for acquisition of federal regional workforce development funds through the Workforce Innovation and Opportunity Act. Definition of a region may meet arbitrary guidelines set in statute, but without a match in geographic scale between governance and economy, the transaction costs required to achieve optimal policy outcomes can be prohibitively high. Lack of formal regional governance means more resources and attention can be spent on achieving regional coordination between counties, cities, and towns – establishment of informal regional governance – than on implementing policy and delivering public goods to end users.
Don’t start reading this report right before bed, but it is an interesting structural thing that has just happened in Indiana. They are now defining regions for state funding and planning purposes as an optimization between “commuting tightness” (basically how many people both live and work in a region) and the infrastructure and relationships that naturally formed for local governments and other bodies to coordinate on economic development initiatives.
Two Big Stories that Help Explain Today’s World, The Morgan Housel Podcast
Digital news and social media has by and large killed local news.
Between 2004 and 2017, 1800 US print media outlets disappeared, were wiped out, and the decline of local news has all kinds of implications.
But one that I think doesn’t get enough attention is that the wider your new source becomes, the more likely it is to be pessimistic. 2 things make it that way.
One is that bad news gets more attention than good news because pessimism is more seductive than optimism, and it feels more urgent.
So if you look at today’s news headlines and sort them, the bad stuff is always going to rise to the top and get people’s attention.
The second thing really important here is that the odds of a bad news story like a fraud or corruption or some natural disaster, the odds of that happening in your local town today are pretty low.
But when you expand your attention nationally, the odds are pretty good that it’s happening somewhere.
And when you expand your attention globally, the odds that something terrible is happening right now are 100%.
And when your news focus is global, you are going to hear about it.
The hollowing out of local news phenomenon isn’t new, but I like this take. That the wider you go, the more negative news you’re likely to see, and that can drive real attitudes in sentiment. It’s still hard to understand how to structure local news differently to make it work in the era of the internet and social media, but it is interesting to think about what happens if you were able to.
The Grab, A Film By Gabriela Cowperthwaite
Narrator: But they are watching what was theirs become someone else’s and have very little recourse.
‘This is the Arizona state pension fund.’
Narrator: Holly’s own pension fund, without her even knowing it - the money that’s supposed to fund her retirement - is draining the water from her land. And she has no idea - no idea.
‘So basically, your pension fund funded that takeover that is now Al Dahra, that’s shipping it over seas.’
This is a documentary about the global race to buy up land and water resources in order for country’s to lock down food security for their populations. I started watched it purely for entertainment value, but then toward the end, a local county supervisor who is dealing with water issues from a foreign-owned farm in Arizona, found out that her own pension fund was invested in the project. Ownership matters!
You can reach me at dustin@invanti.co if you want to chat more about the small city segment!
Good stuff glad you are back writing