The Stock Market Is Sitting on a Financial Volcano
“Do you realize that this is an active volcano?” asked the geologist.
“Yes, of course,” said the farmer.
“Why did you choose to build your farm on the slope of a volcano?”
“Because this is where you can find the most fertile soil,” the man explained. “The volcanic ash is rich in minerals that help our crops grow.”
“But the volcano can erupt at any moment!” cried the geologist. “Your entire village may be destroyed.”
“I’ve heard these warnings many times before,” laughed the farmer. “Geologists like yourself have been warning about an eruption as long as I can recall, and it never came.”
“I can show you my seismic readings,” said the geologist. “This mountain is growing more and more unstable. I can’t say exactly when, but sooner or later it will erupt.”
“What would you have us do? Abandon our farms, which we’ve worked so hard to build, based on some seismic readings? We’re not going anywhere.”
The geologist frowned, packed his bag and left.
…
“Do you realize how risky your stock portfolio is?” asked the economist.
“I suppose I do,” said the investor.
“Why did you choose to invest all your money in a handful of tech stocks?”
“Because they have the best returns,” the investor explained. “Tech companies are developing the technologies of the future, and they have tremendous growth.”
“But the stock market can collapse at any moment!” cried the economist. “Your retirement savings may be destroyed.”
“I’ve heard these warnings many times before,” laughed the investor. “Economists like yourself have been warning about a recession as long as I can recall, and it never came.”
“I can show you my indicators,” said the economist. “This stock market is highly overvalued. I can’t say exactly when, but sooner or later it will collapse.”
“What would you have me do? Sell my entire portfolio based on some silly indicators? I’m not changing anything.”
The economist frowned, packed his bag and left.
…
Shareholders (residents on the volcano) have learned that “holding” in a decline is more profitable than selling. And history confirms it. But if a real explosion were to occur, we would see the situation of 1929…
The situation changes, but human beings remain the same. They never heed the warning, even when there are good reasons to be concerned. They assume that what has worked well in the past twenty years will continue to work forever. There is nothing you can say to change their minds. Believe me, I’ve tried.
Our financial system can be compared to an inverted pyramid of debt and derivatives. If you build your house on top of it, you may at first enjoy huge returns. But sooner or later, it is destined to collapse.
