What will stocks do when consensual hallucination ends?
“This is when prices begin to decline, or plunge, and these dropping prices pull more people out of their hallucinations with a sort of rude awakening, and they sell in order to hang on to what they still have left, and this pushes prices down further and yanks more people out of their consensual hallucinations. It works wonderfully on the way up, and it can last a lot longer and be a lot more powerful than folks who haven’t smoked the same stuff think possible. But at some point, it turns into a treacherous and gut-wrenching mass-awakening.”
USAGOLD note: Wolf Richter does a wonderful job in this editorial explaining what he calls ‘consensual hallucination’ or what others have called ‘the madness of crowds.’ In the aftermath of the 2008 meltdown, money men around the world offered some version of the excuse they ‘did not see it coming’ to explain why no public warnings came from money managers who might have known better. This time around major players all around are warning that the consensual hallucination will someday end. In fact, many – including billionaires Ray Dalio, Paul Tudor Jones, Thomas Kaplan, and Stanley Druckenmiller among others – have advised people that gold is a sound choice under the present circumstances of stock market over-valuation.
“What’s astonishing,” concludes Richter, “is just how long consensual hallucination lasts, and how shocked and appalled people are when it ends.” The most enduring lesson gained from these often forgotten (or is it ignored?) chapters in financial history is the utter and enduring destruction they leave behind. The Dow Jones top achieved in 1929, for example, was not revisited until 1955. The best course of action is to hedge one’s own animal spirits with some cool, common sense. Such exercises in discipline have done wonders for investors down through the centuries.