Despite
“Surprising” Connotation, Many Market Crashes Forewarn Us of Their Arrival
By Anthony
Rhodes
The
mean is that area which resides
equidistant between deficiency and excess. Occupancy within this region has
been lauded by the great Greek philosophers as the ideal way to live life, while
postulating that movement towards either end of this gauge creates an imbalance
which is non-sustainable, and therefore should not be pursued. One of the chief
duties of the Federal Open Market Committee is to enforce the mean through monetary
policy. When the economy is growing too fast, they step in and raise interest
rates, in an attempt to restore its balance, and when it’s moving too slowly,
the lowering of such rates commences, in pursuit of the same objective.
Maintaining
the mean becomes complicated when our perception of what constitutes excess, is
clouded by our natural tendency to rationalize our desire for more. We’d like
our companies to produce more growth, so that our portfolios can produce more
money, and this wanting incrementally distorts our calculation of the mean, which unknowingly moves us further towards
the excessive end of the gauge. This week, we’ll discuss how this distortion manifests
itself through stock market crashes. At our conclusion, we’ll collectively come
to the realization, that the often used wording of “surprising” or “shocking”
crashes (which tend to associate themselves with these occurrences), might not
be an apt description of these events, but that many, if not most, actually forewarn
us of their arrival, and in some cases, for weeks, if not months, in advance.
The Incredible Phenomenon of Lying Numbers
Logically
speaking, the best way to maintain the mean should be to simply rely on the
numbers. After all, numbers are universally known for their impartiality and accuracy,
and are credibly held as a dependable mechanism to offset our emotional
penchants from interfering with our investigations. However, while numbers are
known for their neutrality, human beings are not, and this incongruity can
cause our biases to creep into our interpretations
of numbers. Many scholars, who study the aftermath of market crashes, often
find themselves scratching their heads as to why they weren’t avoided. Their post-examination
of the numbers revealed, that the market was clearly on an unsustainable
course, and that a simple analysis of
said numbers, should have divulged this information for all to see.
"Irrational Exuberance"
When
times are good, we naturally expect those periods to continue. Our human
proclivity for positive outcomes, tends to override our ability to judge events
rationally, and this illusion unfortunately blinds us towards the possibility
of those moments coming to an abrupt end. During such periods, our
perception of the mean once again becomes distorted, as we march headlong towards the excessive end of the gauge. A continuing movement in this direction
will inevitably result in an imbalance, and unfortunately, market corrections
and or crashes, are predictably soon to follow.
Be
it Socrates, Plato or Aristotle, the wisdom and guidance of the great philosophers
continue to inform us of the monumental teachings which made the Hellenistic
era one of histories’ most influential periods. Of the myriad of topics covered
by these sages, perhaps the most poignant and longest standing, is the ideal way to
navigate life, with the quote “Nothing in excess” serving as the bedrock of this
particular pillar. Maintaining the mean authenticates this message, and informs us
yet again, that the lessons of the past are transferable to the present. Also, that market corrections and crashes are the inevitable conclusion of moving
beyond it, and appropriate justification for those who'd dare defy the
wisdom of the Greats.
(Anthony
Rhodes is a Registered Investment Advisor and owner of wealth management firm
The Planning Perspective www.theplanningperspective.com
)
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