Editor’s Note: I am breaking my rule about not writing about politics. However, I think you will see that, while there will be some political content in this post, I’m not going to discuss my personal views or promote either side.
As always, I am sharing my observations. There is no agenda. If some of you will think I’m for or against your side, I’m not. I am looking to explain how people make decisions.
If it isn’t for you, I’ll be back next week with more of the usual topics. Also, comments are welcome as always, but if they go too far towards political advocacy in either direction, I reserve the right to remove them.
Bubble History
Last week was historic. No, I don’t mean because we had an election. We have those all the time.
What was historic was we saw the collapse of three giant bubbles within hours of each other. The crypto bubble had its biggest comeuppance yet with the collapse of Sam Bankman-Freed (“SBF”)’s FTX empire, Elon Musk lost his halo, and the election results appear to have taken the air out of Donald Trump‘s political career.
While these may seem like completely unrelated events, my thesis is they are actually one and the same. In each case, their ascendancy and subsequent fall resembled the behavior we typically see in investment bubbles.
Bubbles usually arise around charismatic leaders pitching new and exciting ideas. However, most bubbles are much more sizzle than substance.
Eventually, fatigue develops and people are no longer as stimulated by the story. They belatedly realize the facts don’t support the myth and they lose faith and the bubble quickly collapses.
While one can argue I am prematurely popping Elon and Trump’s bubbles, SBF is clearly done for, so let’s explore him first.
SBF & FTX
This story arc is the more common bubble path that people are used to. Something becomes an overnight sensation, people who know nothing about it start buying it because it’s going up. Then, they become evangelists and convince others to buy it and it goes up well beyond any rational valuation.
When professors create experimental bubbles in simulated markets, they act exactly like this! It’s literally textbook.
This continues until the asset runs out of rubes to buy from those who got in early. Eventually, some negative news comes out, people realize the game is over, and they run for the exits. This can be a long and painful process as we saw during the financial crisis.
On the climb down the mountain, there is inevitably some tragic figure who embodies the worst of the bubble. For crypto, it’s SBF. He became one of the leading faces of crypto and its utility only now to be sunk the same way most bubbles end…with too much leverage and the resultant bank run that collapses his empire.
Elon Musk
Elon was probably the first bubble of this bull market when he defied gravity to keep Tesla from going bankrupt. He seemed invincible and used the Hare strategy to raise tons of cheap capital until he was able to will himself to success. It seemed he was going to defy the bubble narrative.
But Elon learned an important marketing lesson. When you are the brand, one misstep can cause investors and customers to lose faith. When they lose faith in a bear market, it’s baaaad news!
It’s not just that he’s making a mess out of Twitter. It’s not just that he has sold some Tesla stock to pay for Twitter or that he’s distracted from managing Tesla.
No, the issue is most of his customers come from one side of the political aisle and he is now using Twitter to antagonize them. Do you think they will keep buying Teslas now? There are other EV brands. Their orders are going to take off now.
The Tesla story is over. It was as much about buying into Elon as it was the environmental or fashion statement. Tesla will be a niche EV producer going forward.
Remember, the stock price could drop 80% from here and it would still worth over $100B. Why is that not a reasonable expectation?
Political Bubbles
Speaking of mismanaging your personal brand and upsetting half the country…it certainly appears we have seen Peak Trump.
Why should bubbles only appear in financial markets? Is there something about investing that causes herd behavior and the willingness to suspend belief?
I don’t think so. Rather, humans are natively wired to act in ways that lead to bubbles. There is nothing about the human brain that suggests it should only react irrationally towards social pressure when the topic is investing.
There is a reason bubbles are sometimes called fads. Because there is little difference between a fad (Tesla) and a bubble (crypto) other than one typically has to do with a physical item and the other an intangible. In both cases, people are willing to suspend belief to own something that isn’t worth much.
Why should politics be any different? We are not the only country that has moved towards more populist political figures. So, no, this isn’t an exploration of just Trump. He is only the most well known example, so it is easiest to focus on him.
Am I suggesting populism is the equivalent of a bubble? Not always. Probably the better way to characterize it is “movements” tend to follow the same patterns as bubbles.
We have certainly seen a lot more political movements globally and from both the left and right sides of ideology. It’s not just one person.
Emotion vs. Rationalism
What is it about movements that inspire bubbles? The politician is usually less focused on policies and more on winning hearts than minds. The campaigns often appeal to fear of being left behind and being part of a club. Does that not sound like FOMO and momentum in investing?
Ideologies become more extreme during a bubble. There is no room for disagreement. Look at how crypto or meme investors came up with slogans to insult nonbelievers or those who took profits (“have fun being poor”). Does this not sound like RINOs or other purity tests now common in politics?
There is little room for disagreement or compromise which has resulted in both parties moving very far from the middle this century. People identify with parties like teams. Are you Team Red or Team Blue?
If you say you’re pink or purple, you’re looked down upon by the true believers as weak or a betrayer. This is why turnout keeps going up. People want to support their team! It’s emotional, not rational.
People are not voting for policies as much as movements. Many voters seem more interested in whether their team “won” than if they actually passed a policy that improves their lives.
It is interesting how, as voter interest goes up, the quality of candidates keeps going down. This may remind you of how the quality of IPOs goes down later in a bubble.
The unconditional devotion and unwillingness to contemplate that the other side might have a valid point too very much resembles bubble investors. Trump’s apocryphal quote about being able to shoot someone in Times Square told you he understood he was creating a bubble.
The goal was to get those early evangelists who would make him seem inevitable and then others would follow so they too could be on the winning team. As Trump knows very well, everyone loves a winner.
All Bubbles End
The problem with trying to be a politician based on a movement is your followers appear very loyal…until the moment they’re not. The early internet founders discovered this, the crypto bros are now discovering it, and the populist politicians are now beginning to learn it.
If your support is based on momentum, it goes away a lot quicker than if it’s based on “fundamentals”. After all, that’s why they call it momentum…it goes up because it went up before, rather than because something improved. Once the illusion of invincibility disappears, there is no “recurring cash flow” to stick around for.
This is what Trump found out last week. Once his endorsed candidates underperformed expectations (and DeSantis outperformed), he was no longer inevitable. For the first time, he was vulnerable and a lot of those late believers were first to abandon ship and throw him under the bus.
Maybe it’s too soon to write him off. After all, betting markets still have him close to 40% to win the nomination. But he was in the mid 40s. The momentum has broken and he is now in second place and, as Ricky Bobby famously said, if you’re not first, you’re last.
So just like Elon, I think this is just the early stage of the bubble deflating. Whether the bubble deflates slow or fast (like SBF), the end result is the same. Whether it’s DeSantis or someone else who wins, selling Trump at 40% looks like easy money.
Easy Money
Speaking of easy money, historically investment bubbles originate out of stimulative monetary policy. That’s certainly an explanation for crypto and even Tesla, to some extent. But can this also explain political bubbles?
Perhaps indirectly. If you look at prior populist movements in the US (Andrew Jackson, William Jennings Bryan), they were in response to large financial panics. Certainly, our current populist movement traces back to the financial crisis.
The Fed responded to the crisis with unprecedentedly easy money. This helped create the eventual market bubble, as well as exacerbate wealth inequality, which further increased the support for populism.
So the financial crisis, combined with the Fed’s response, brought us to this moment where we had simultaneous market and political bubbles. And, while they would have ended eventually, you can certainly argue a global virus is what it took to stop them.
Final thought: Just as it wasn’t too late to short Bitcoin at $30K, it’s not too late to short TSLA or Trump’s re-election futures. The easiest money is piling on to a deflating bubble.