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November 24th, 2020

Mania, Panic, & Crash Cycles

What the MPC cycle is and how it impacts your financial health.

You've probably heard the statements below a few times in the last 2-3 years: 

“This time is different.”

“Technology is better nowadays.”

“Economic models are more refined.”

“We have more central banking tools.”

“We can target volatility and keep markets and participants calm.”

All of these are regularly parroted on financial networks and by financial pundits/analysts as to why markets are never going to crash again. But the problem with all those statements are that this time is not different. In fact, none of the previous times were different either. The problem isn't our lack of tools or technology or strategies to calm markets. The problem is us. We as human beings cannot help ourselves and are prone to repeat the same fractal cycles over again. We easily fall into the psychological traps of an MPC cycle because we're prone to it – no matter what the advancements are in technology or society – because we all want to "Get rich wuick!”.

We've regularly gone from manias to panics to crashes (the proverbial ‘MPC cycle’) throughout human history. For example, we've done this more than 20 times in the last 400 years. That's effectively one blow out mess after another approximately every 20 years…which means that 'no time is different'. Don’t believe me? Take a look for yourself at the last 400 years of manias:

 

Bubbles/Manias since 1600 AD

Dutch Tulip Mania – 1637 (Dutch)

East India Company– 1695 (England)

South Sea Company – 1720 (England)

Mississippi Company – 1720 (England)

US Bonds Issued for Bank of the US – 1792 (US)

Commodities – 1819 (England/US)

Latin American bonds, mines, and steel – 1825 (England)

Cotton (Textiles), Railroads (Steam Engine) – 1836 (England/US)  

Railroads – 1848 (England/US)

Credit Mobilier – 1864 (France)

Railroads, Homesteading – 1873 (US)

Stocks of banks, Lyons – 1882 (France)

Argentine Securities – 1890 (England)

Silver/Gold/Miners – 1893 (US)

Trust Companies – 1907 (US)

Industrial Lending – 1907 (France/Italy)

US Securities/Stocks – 1920s (US)

Florida Real Estate – 1929s (US)

Forex – 1950s/1960s (Worldwide)

Commodities – 1970s (US)

Asian markets – 1997/1998 (Asia)  

Tech Stocks – 1999/2000 (US)

Real Estate – 2006/2007 (US)

Everything Bubble 2011-2021 (Global)

 

What is exactly is an MPC cycle?

Mania = Irrational/Speculation Phase. This is a deviation in prices that cannot be explained in terms of financial fundamental analysis, only in human irrational exuberance. Greater fools bidding up prices on nothing other than price itself.

Panic = Displacement Phase. This is when an existential event that is not accounted occurs that kicks off a structural shift in the market dynamic bursting the mania and exposing the excess exuberance into gear the cascading effects of the manias mispriced assets

Crash = Volatility. This is the reconnection mechanism between the expected return of the irrational speculation and the actual value of said speculation. Think Expectation of reality vs. Actual reality. This is the chaotic disorderly mess that feels like the world is over.

An x-factor in the MPC cycle is the ‘gasoline effect’. This is the expansion of credit (via low interest rate environment which fuels the irrational risk tasking). This is spurred on by the Central Banks/National Banks of the geography in which the MPC cycle is taking place. The impact this has on the MPC cycle is rather important as it can truly take manias to unhinged levels.

 

What happens when MPC cycles end?

Some people make money. Lots of other people get very hurt. Then life goes on. The interesting thing is that they're not the drivers of prosperity in economies. The progress process is the driver of prosperity, which is primarily a derivative of technological advancements. Technology is the rising tied that lifts all ships, not speculative manias. MPC cycles are really tied to periods of excessive greed (and low interest rates) and then stoked by the excessive fear of the human conditions fight or flight response (when it all falls apart). We're well served to always take a step back and look at both WHAT we're investing in and WHEN we're investing in it. You cannot make sound investments without measuring both components of the WHAT and the WHEN because making a sound investment in real estate in 2007 (which by fundamental perspectives would've been logical but terrible if you assessed the MPC cycle as that was the height of the ‘mania’ phase of that MPC cycle) only to lose 50-70% of the value of that investment in the next 5 years when the ‘crash’ phase of that MPC cycle occurred.

 

What should I do about MPC cycles?

Avoid them if you can. Being on the lookout and actively avoiding an MPC cycle is very good for your financial health. Participating in MPC cycles is quite dangerous and rarely ends well. Currently (in 2020) we are at the tail end of the one the longest Mania phases ever recorded (2011-2020) and the broadest asset bubble speculation every (stoked by Central Bank’s around the globe keeping interest rates at or below the zero bound for so many years now). Arguably, the panic/displacement phase has hit with the COVID19 shockwave of March-June 2020. Will it result in a volatility induced crash soon that resets asset prices to mean reverted levels? It is highly probable. The past 400 years of history would suggest that – “this time isn't different.”

vig.io Manias
TagsBearsBullsMacroDebtSpeculation Interest RatesGeneral InvestingAIAlgorithmsMPCPanicsMoney Management MPT
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