Markets Are Now A Beauty Contest On Steroids
Markets are always changing.
There are better products, services, research tools and technologies. Our past experience influences how you invest in the future.
In this sense, market cycles are always different.
But human nature does not change.
People have feelings. You experience stress, anxiety, greed, panic, fear, happiness and all other emotions caused by money.
In this sense, market cycles are never different.
Human nature is a constant in all market cycles but there are new ways we can leverage our emotions to influence the markets.
As early as 1936, John Maynard Keynes compared the stock market to a beauty pageant in his book. General Theory of Employment, Interest and Money:
Professional investment may be likened to those newspaper contests where the contestants have to choose the six best faces from a hundred pictures, the prize being awarded to the contestant whose choice is closest to the average of the contestants’ overall popularity; so that the competitor chooses, not that face which he himself finds the most beautiful, but that which he thinks may hold the pleasure of the other competitors, who all look at the problem in the same way. It is not a matter of choosing those that, according to one’s own view, are the most beautiful, even those that common opinion thinks are the most beautiful. We have reached the third level where we devote our intelligence to what the average opinion expects the average opinion to be.
This was true back in the 1930s and is still true today.
However, the information age has added an unprecedented dimension, changing the way markets work, especially in the short term.
For example, the parabolic phenomenon and the crash of silver prices in the last few months look amazing on the chart:
How do you explain a 55% return in a matter of weeks followed by a crash that wiped out a third of its value?
There are always many different reasons why markets have big moves up and down but let me explain the inverse movement of silver this year.
Gold began to move following the seizure of Russian financial assets after the war in Ukraine. This caused central banks around the world to hoard and buy more gold to have more physical assets that could not be snapped up at the push of a button.
Silver is seen as a high beta play for gold trading.
Then we moved into a world of global uncertainty because of the trade war. That prompted a rethinking of supply chain materials and precious metals. Silver has many industrial uses.
We’ve also had an AI capex boom that will require a lot of physical resources.
Then you have to worry about the devaluation from higher deficits and government debt.
It’s been a perfect storm1 for complex precious metals.
But when everyone starts to see this bull market it takes away the investment bots.
Profits went into the trade. The Reddit/Robinhood/memestock crowd jumped on the bandwagon. Hedge funds saw activity rising and decided to jump in the pool.
The information age has taken flexibility and adaptability to the next level.
Just look at the daily price changes compared to the history of silver:
The vol-spike in the early 1980s was when the Hunt brothers tried to corner the silver market to drive up the price. It worked until it happened.
Over the past few weeks, silver prices have now experienced their biggest one-day decline in history. The previous record was down 18.6% in March 1980. Since the last trading day of January this year there are now down days of -19.6% and -26.4%.
Social media has changed marketing forever. There are also many products that allow investors to use energy easily.
ProShares Ultra Silver ETF (2x leverage)2 from $1 billion in assets to nearly $6 billion at its peak in January:
Some of this was from raising prices but a ton of money has obviously been poured in here.
The speed of information accelerates market movements and causes manic movements in both directions.
I started writing about how technology is accelerating markets back in 2014. Here’s what he said at the time:
Technology now allows irrational exuberance, misinformation and fear to spread around the world at an alarming rate.
This is why the abundance of information is both a blessing and a curse. It is very easy to reach, which is at the level of the people’s platform all over the world. And social media allows for a quick response to almost everything. The problem is when people make quick decisions without waiting or thinking about the consequences. The world is now moving towards taking a shorter time. Many default to the idea of ​​act first, think later. If the consequences of our decisions are not accompanied by sufficient time and deep thought, unintended consequences will occur over and over again.
This still sounds fair but I have underestimated the meme stock nature of the market where groups of investors are obsessed with certain securities or assets. It’s almost like the Netflix algorithm that highlights hot investments for people who like to chase the hot dot.
The Keynesian beauty contest is alive and well. It’s happening faster than ever now.
And it’s hard to know where ideas will go next.
Further reading:
Would Keynes Be Fired as a Money Manager Today?
1I’m usually against the perfect storm as a financial phrase but it fits here.
2The fund was up 158% in the year to the last week of January. We are now down 63% from the high. Leverage works both ways.
