The world shines brighter when your investments are flourishing like mushrooms in a damp forest. New possibilities unfold, perspectives widen, and the mysteries of life seem more attainable.
Achieving financial success can infuse life with fresh significance. The decade-long bull market in U.S. stocks has offered clarity, purpose, and achievement that many find reassuring, especially as reflected in their investment statements.
For instance, a modest investment in a low-cost S&P 500 Index fund has resulted in returns that have quadrupled over the past ten years. The late John Bogle would undoubtedly be pleased, having advocated for this strategy. In contrast, your Edward Jones broker, who advised you to invest in high-fee actively managed mutual funds, was mistaken.
Could the S&P 500 potentially quadruple again in the next decade? After all, history is full of surprises. For example, did you know that Alan Shepard once wetted his spacesuit in the Mercury capsule before launch with no repercussions? Who could have predicted that?
The more pressing question remains: would another fourfold increase in the stock market be a blessing or a curse?
Consider Venezuela’s Caracas Stock Exchange, which saw its Stock Market Index surge over 80,000 percent in just one year. Despite this astonishing rise, the nation’s economy is in utter disarray, having contracted -16.5 percent annually in both 2017 and 2018.
What does this reveal?
A continually rising stock market raises suspicion, akin to a car with worn-out tires or a politician sporting a toothy grin—trust is elusive. Such a market often indicates government-led currency devaluation that can skew financial realities.
Human Stampedes
The massive bull market in U.S. stocks since 2009 has coincided with the weakest post-WW2 economic recovery. In other words, while the stock market surged, the economy diverged sharply. When the stock market rises, everything appears delightful; when it falls, however, fund managers scramble for safety.
Recent weeks in the U.S. have demonstrated that stock markets experience both gains and losses. Moreover, when investors flee from the market, the rush is typically much more rapid and chaotic than when they are entering, often with no prior indication.
Consider how a cattle stampede can be triggered by something as harmless as a gust of wind. A sudden shock or perceived threat can lead to a frenzy, with the herd barreling forward and leaving destruction in its wake.
A rancher’s only recourse might be to fire a pistol, hoping the sound redirects the stampede back on itself. If successful, the herd may spiral into confusion or even plunge off a cliff.
Modern humans, straddling the realms of homo sapiens and homo neanderthalensis, are also prone to herd mentality. Similar to bos taurus, people can become so frantic in their pursuits that they trample over each other.
Religious gatherings, sports events, music festivals, New Year’s celebrations, and political rallies can all lead to tragic stampedes. Notably, over 2,400 people lost their lives in the Hajj Stampede in Saudi Arabia a few years back. In crowded situations with limited escape routes, chaos can easily ensue.
One Heck of a Reality Television Fight
In today’s fast-paced world, individuals constantly face the temptation to rush from one extreme to another. Financial markets, fueled by emotions such as fear and greed, create fertile ground for irrational behavior. Opportunities for market manias, panics, and crashes abound.
When the realm of geopolitics intersects with the economy and financial markets, the chances for erratic behavior multiply. Economic nationalism and tensions with China are shaping up to be one sensational spectacle—one that seems to attract attention from individuals on all sides.
This week has witnessed extensive attempts to depict, analyze, and understand the stalemate in U.S.-China trade negotiations. Strangely, even China’s state-run media has interjected its viewpoint using unusual phrases:
“As President Xi Jinping indicated, the Chinese economy is a sea, not a small pond. A rainstorm may ravage a small pond, but it won’t harm the vastness of the sea. After many storms, the sea persists.”
It’s possible that a trade agreement could still be reached. Likewise, stock prices might continue to inflate indefinitely. However, the millions of manufacturing jobs outsourced to China over the last thirty years are unlikely to return.
Blame-shifting, posturing, and belligerence will continue unabated, likely escalating into regrettable consequences.
Sincerely,
MN Gordon
for Economic Prism
Return from One Heck of a Reality Television Fight to Economic Prism
