Market crashes: what happens when investors believe the impossible

Money Week/Merryn Somerset Webb/2-1-2022

“The first thing to note is that, while we love to talk about bubbles, periods of extreme valuation in the stock market don’t really happen very often. Of the 29 business cycles in the US since 1881 only a few have ended in one, according to Professor Russell Napier. But, while each has had its own peculiarities, the basic driver has been much the same: the ability of investors to believe absolutely in something that always turns out to be impossible. Namely that, thanks to some ‘marvels’ of technology, corporate profits will stay high (and probably rise) indefinitely and that interest rates will also stay low indefinitely.”

USAGOLD note: Inevitably, believing the impossible goes hand in hand with believing that this time is different, but as Rogoff and Reinhart so presciently pointed out in “Eight Centuries of Financial Folly”, it is always the same. The excesses always meet their day of reckoning. We will add that when financial history comes calling, the wise investor will be the hedged investor. Too, says Webb, “as long as the Fed holds this line, [stock investors] should surely not buy the dips, but sell the rallies.”