How Stability Is Destabilizing

Weds ◆ Feb 28 ◆ 2024

Michelle Burleson

Feb 28, 2024

“The world is not driven by greed. It’s driven by envy.” - Charlie Munger

The graphic above is a snapshot of this morning’s Fear and Greed index.

We’re in extreme greed as the markets — BTC, the S&P 500 and the NASDAQ - keep soaring in the overall macro.

🙏🏽 Wait! Stick with me if you’re not into finance or economics…

…because as dry and nap-inducing as markets may be for some people, they’re really about how people, tribes, countries delude themselves over logic.

Emotion and envy sway the markets.

And the markets impact every single living entity who has use for money — or the things we collectively agree as humans to have a store of value.

Don’t believe me?

Look at the Dutch Tulip Craze in the 17th century.

It’s not about greed. It’s about envy… and more importantly, FOMO (fear of missing out).

If everybody and their monkey is getting rich off of skyrocketing asset valuations and you’re sitting there with cash earning a few percent a year — you’re going to be tempted to get while the getting’s good.

And you’re going to be jealous of everyone who zigged and zagged while you did zip.

The Madness of Crowds

In 1841, Scottish journalist Charles Mackay published an account of Dutch Tulip-Mania in Extraordinary Popular Delusions and The Madness of Crowds which is as relevant today as it was two centuries ago.

I highly recommend this book as no one is immune to herd mentality or taking behavior cues from others…

It’s ultimately about human nature and not getting ditched by the pack.

Not even Mackay was immune to market and mob frenzy… he got wrecked in the Railway market of the 1840’s.

About the Tulip Mania, Mackay writes:
“Many individuals suddenly became rich.
A golden bait hung temptingly out before the people, and, one after the other, they rushed to the tulip marts, like flies around a honey-pot.
Every one imagined that the passion for tulips would last forever, and that the wealthy from every part of the world would send to Holland, and pay whatever prices were asked for them.
The riches of Europe would be concentrated on the shores of the Zuyder Zee, and poverty banished from the favoured clime of Holland. Nobles, citizens, farmers, mechanics, seamen, footmen, maidservants, even chimney sweeps and old clotheswomen, dabbled in tulips.”

People were selling off hectares of their land and using credit just to purchase tulip bulbs — assuming they would sell for a hefty profit, repay and repurchase what they sold/borrowed and be neck-deep in the money.

When the price became so inflated there were no longer buyers, people were left ruined — with only some beautiful, but worthless, flowers to show for it.

The Cycle of Human Greed and Fear

One of my favorite finance writers, Morgan Housel, has a fantastic take on this - whether for the markets or our own lives:

First you assume that good news is permanent.
Then you become oblivious to bad news.
Then you ignore bad news.
Then you deny bad news.
Then you panic at bad news.
Then you accept bad news.
Then you assume bad news is permanent.
Then you ignore good news.
Then you deny good news.
Then you accept good news.
Then you assume good news is permanent.

And so we come full circle. Wash, rinse, repeat.

This is why with all our innovation and cunning, we cannot rid the world of economic recessions.

American economist Hyman Minksy put forth in his Financial Instability Hypothesis that “boom and bust” will always be in the DNA of economies.

And that eradicating recessions is impossible.

He didn’t base his hypothesis on math, but psychology. And it goes like this:

When an economy is stable, people get optimistic.
When people get optimistic, they go into debt.
When people go into debt, the economy becomes unstable.

Housel sums up Minsky’s hypothesis well:

Stability is destabilizing.

A lack of recessions plants the seeds of the next recession. This is why Minsky believed we can never be free of them.

If the markets only skyrocketed and we were guaranteed their stability, we’d buy all the stocks, commodities and assets that we could.

We’d take out loans we’d feel confident in paying back and sell grandma’s good china to get our hands on these valuable assets. And this would make their prices continue to soar.

Their valuations would just keep getting more expensive.

So expensive, in fact, that their future returns would decline to… 💩.

There would be no room for error in the markets with prices being moonshot. Like rope-swinging over a moat of gators with dental floss.

And in the millisecond that everyone realizes their investments are waaaay overpriced and nobody’s buying…. the seeds of fear and panic are sown.

You’ll be left holding a bucket of beautiful, but worthless, tulips in the rain. And that’s when you see the Fear & Greed index whiplash in the opposite direction from today.

The Moral of the Story

Black Swan events can, do and will happen. Also, great flick.

Always leave room for uncertainty because black swan events happen.
Be suspicious of sure bets.
Don’t let the highs get you too high and the lows get you too low.
Check over-confidence in anything.
Try your best to have a plan for what might go wrong and where.
Know that over time, in human history, everything improves and gets better — with some shit shows to learn from along the way.

I write a note to myself about the markets almost every morning in Notes here: https://deepkimchi.substack.com/notes

It’s basically an ongoing text chat I have with a friend about trading and the markets before they open in the U.S.

Share Deep Kimchi by Michelle Burleson

📚❌ By the way…. book banning.

There’s an effort by a group who doesn’t even have kids in the schools to ban books like Toni Morrison’s Bluest Eye in the Washoe County School District of Nevada.

Nevada is a swing state that’s gone purple recently and a battleground in the culture wars.

If the spirit moves you, this is a petition to Stand Together Against Censorship in Washoe County to be presented to the Public Library and School Board trustees:

https://www.fightforthefirst.org/petitions/oppose-censorship-in-washoe-county