Weekend Reads – 6/2/23

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Quote for the Week

Every bubble has two components: an underlying trend that prevails in reality and a misconception relating to that trend. A boom–bust process is set in motion when a trend and a misconception positively reinforce each other. The process is liable to be tested by negative feedback along the way, giving rise to climaxes which may or may not turn out to be genuine. If a trend is strong enough to survive the test, both the trend and the misconception will be further reinforced. Eventually, market expectations become so far removed from reality that people are forced to recognize that a misconception is involved. A twilight period ensues during which doubts grow and more people lose faith, but the prevailing trend is sustained by inertia. As Chuck Prince, former head of Citigroup said during the twilight of the super bubble: ‘As long as the music is playing, you’ve got to get up and dance. We’re still dancing.’ Eventually, a point is reached when the trend is reversed, it then becomes self-reinforcing in the opposite direction. Boom–bust processes tend to be asymmetrical: booms are slow to develop and take a long time to become unsustainable, busts tend to be more abrupt, due to forced liquidation of unsustainable positions and the asymmetries introduced by leverage. — George Soros (source)

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