Nothing is more mind-boggling than our ability to repeatedly fall prey to financial euphoria. Equally so, is our ability to recognize it only after the fact. Though a few recognize it sooner, nobody really knows until its over, after the crash.
What’s almost as mind-boggling is how each new generation of investors gets the opportunity to experience it first hand.
Innovation (financial or other) and/or debt, taken to an extreme, are behind all of the booms and busts. Investment trusts and excessive margin debt in the late ’20s. The explosion of mutual funds in the late ’60s. Junk bonds in the ’80s. Dotcoms in the late ’90s. Housing Bubble and mortgage blowup in ’08. Bitcoin most recently. What’s next? ETFs?
What really helps drive the frenzy is if someone comes up with a new way to value assets that everyone can latch onto. In my introduction to market euphoria, the valuation metrics replaced earnings with eyeballs and clicks. And investors ate it up.
Those are some of the lessons you’ll find reading A Short History of Financial Euphoria by John Kenneth Galbraith. Of course, all of this leads to the one question that gets repeatedly asked after every bubble. How do you avoid it?
The only remedy, in fact, is an enhanced skepticism that would resolutely associate too evident optimism with probable foolishness and that would not associate intelligence with the acquisition, the deployment, or, for that matter, the administration of large sums of money. Let the following be one of the unfailing rules by which the individual investor and, needless to say, the pension and other institutional-fund manager are guided: there is the possibility, even the liklihood, of self-approving and extravagantly error-prone behavior on the part of those closely associated with money. Let that also the continuing lesson of this essay.
A further rule is that when a mood of excitement pervades a market or surrounds an investment prospect, when there is a claim of unique opportunity based on special foresight, all sensible people should circle the wagons; it is the time for caution. Perhaps, indeed, there is opportunity… A rich history provides proof, however, that, as often or more often, there is only delusion and self-delusion.
No one concluding an essay such as this can expect to escape the questions: When will come the next great speculative episode, and in what venue will it recur — real estate, securities markets, art, antique automobiles? To these there are no answers; no one knows, and anyone who presumes to answer does not know he doesn’t know. But one thing is certain: there will be another of these episodes and yet more beyond. Fools, as it has long been said, are indeed separated, soon or eventually, from their money. So, alas, are those who, responding to a general mood of optimism, are captured by a sense of their own financial acumen. Thus it has been centuries; thus in the long future it will also be.
The repeated cycle of booms and busts would suggest we’re not skeptical enough. Perhaps, it’s because we’re too focused on the wrong information.
History might allow us to see things like how stocks perform over time but the lesson is in seeing how people act in the midst of that performance.
History is not without its lessons for tariffs either. Our “Stable Genius” in Chief blurts out random things (almost uncontrollably) without having any sign of a plan in place, which is how we learned about his grand tariff idea late last week. Like all the other politicians before him, you have to watch what he does, not what he says, as hard as that is sometimes.
Yesterday, we got a glimpse of the “plan”. Take a look here.
He seems to think trade wars are great and easy to win, which explains a lot. Somewhere in that strange head of his is a belief that the U.S. can go back to a time were hundreds of people stood on an assembly line making things. That antiquated worldview doesn’t jive with today’s reality because automation ended that ages ago.
His narrative (that too many people seem to buy into) is that there are fewer manufacturing jobs so we must be making less stuff. The truth is that the U.S. makes more stuff today using fewer workers than 30 years ago. Improved productivity will do that. Going backward in regards to tech is economically destructive and dumb.
So are tariffs, since the stupidity compounds as other countries retaliate. The U.S. has a costly history of terrible tariff ideas that were tried…and failed. One only can hope saner heads prevail.
- Economic History Shows Why Trump’s Tariff Policy is So Dangerous – The Conversation
- Trade Wars are Bad, and Nobody Wins (pdf) – GMO
- Your Handy Postcard-Sized Guide to Statistics – T. Harford
- Fooled by Optimism – B. Mullooly
- Ideas That Changed My Life – M. Housel
- The Bannister Method – S. Godin
- Interest Rates and Stock Prices: It’s Complicated! – Musings on Markets
- Be Wary of the Gap Between Stock and Bond Yields – B. Carlson
- When Value Goes Global – Research Affiliates
- The Role of Luck in Life Success Is Far Greater Than We Realized – Scientific American
- Master the Art of Influence: Persuasion as a Skill and Habit – First Round
- The Grim Conclusions of the Largest-Ever Study of Fake News – The Atlantic