Desperation Is the New Fear

 The big, risky bets increasingly placed by investors from the young to pension funds are a danger to everyone.

People are still greedy, because they’re human, but what’s really driving investment decisions is not so much greed as desperation. And despair can overcome fears.

If you’re a long way below water You’re drowning and you need to get to the surface to survive. If you come by some money and you’re desperate, you’ll deploy it to give yourself the best chance of a spectacular return, even if there’s also a real chance that it will go to zero. 

The younger generations face a difficult future as it is, lacking the generous pension guarantees of their parents, weighed down by student loans, and having little prospect of being able to buy a house. In this situation, it might make more sense to put a windfall to use in a risky way that just might hit the jackpot. A safer index fund approach isn’t going to move the needle on such a person’s life opportunities; a big win squeezing the shorts just might.

For another example, try pension funds. Low interest rates have left many with deep deficits, because they make it more expensive to finance promises to pensioners (or liabilities). 

John Authers Bloomberg 10 maj 2023

- There is no such thing as rational expectations.

There is wishful thinking, or panic.

Rolf Englund, many years ago (probably in 1997)

Five years before the financial meltdown of 2008, Robert Lucas famously declared that “the central problem of depression-prevention has been solved . . . and it has been for many decades”.

Lucas, whose Chicago School housed the high priesthood of mathiness, won a Nobel Prize for his rational expectations theory. 

It demonstrated that the market was always right.


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