Sweet Fictitious Ignorant Bliss
They say history doesn’t repeat, but it rhymes.
If there’s one thing I’ve learned over the last decade being involved with capital markets, it’s that psychologically, market participants don’t change their tune or their optimistic outlook easily.
More than once, I’ve seen situations where it appeared blindingly obvious to me that both markets and the economy were heading for a crash landing, but the market did not budge in the slightest, nor did its investors.
The most recent example of this was Covid. While I sat by and watched the case count grow, and government officials and analysts pretend as though nothing was happening and nothing would change, all the stock market did was go straight up—even as late as February 2020.
I’ve learned that the market’s default setting is somewhere between blindingly optimistic and extremely irrational hubris and euphoric exuberance. We can thank years of 0% interest rates for this. The new reality is that it takes a tidal wave of bad news to break the psychological backs of market participants. And even then, the market appears to be resilient in its default setting of ignoring valuations and reality in general, so that computers can continue to bid up stocks and retail can continue to goose the markets higher, weaponizing call option gamma as fuel.
We are another living, breathing case study of this as we speak.