Financial bubbles and social unrest have much in common.
As markets powered through the economic shutdown of 2020 to new all-time highs, many have begun to ask if we are in a financial bubble. Some, like Jeremy Grantham and Carl Icahn, believe we are. We’ve formulated our own opinion on the bubble question, but as I did my research on the topic, I was struck by how the core components of a financial bubble correspond to the components of a social unrest bubble.
There are three fundamental components to a financial bubble: leverage, a captive public imagination of rapid riches, and an acute price increase in some asset class. When leverage, often paired with financial innovation, emerges in force, it creates the possibility for the second two. It is when the average person sees everyone else getting rich and feels compelled to dive into the market that a bubble truly forms as demonstrated by the rapid rise in asset value.
It seems we have three similar components to our current state of social unrest: leverage of partisan tribalism created by social media, a captive imagination on both sides of the political spectrum of living under the regime of the other, and an acute increase in the recognized importance of speech to protest that undesirable regime.
As John Kenneth Galbraith, a historian of financial bubbles, reminds us, most financial innovation that fuels leverage is just the past recreated by those who have forgotten it. Hyper-partisan politics aren’t a new concept. Many countries throughout history have dissolved under the strain of incompatible public beliefs about the purpose of the state. America herself experienced civil war not much more than 150 years ago. What’s new this time is the leverage created by social media. The purpose of financial leverage when done well is to augment underlying investment performance, and the same is true for social media. It augments tribal behavior, a natural human act, dividing participants in the social unrest bubble by certain ideals they defend through speech, at least until recently. Now, as speech is restricted by big tech, its value rises even more, and the social unrest bubble inflates further.
Financial bubbles contain the seeds of their own destruction. Eventually the supply of greater fools willing to pay higher and higher asset prices exhausts itself. Euphoria gives way to panic when prices stop going up, and then we experience the crash. Here is where the comparison diverges. The value of speech is not ultimately determined by the financial performance of some underlying asset. In a country founded on the fundamental principle of freedom, speech is arguably priceless. This pricelessness pertains to both the ability to exercise free speech and control it. Both are demonstrations of power. As such, the greater fool may be the one who cedes the ability to speak at all, leaving us with no logical endpoint for a return to “normalcy.”
In financial bubbles, it is always the reasonable investors who lose their voice to those caught up in the euphoria of the market. Reasonable investors who question the financial realities of the day are looked at as unintelligent, incapable of comprehending the supposed new world, and even evil, standing in the way of the accrual of certain wealth for bubble believers. Those reasonable investors quietly position themselves to weather the bubble’s ultimate demise and come out of the panic stronger.
In a bubble where the value of voice is inflating, quiet positioning is likely to be a failed strategy for the reasonable person. For our social unrest bubble to deflate to a calm end rather than burst, the reasonable person must exercise his or her voice against the extremes that continue to ignite current passions. If there is, in fact, a silent majority that believes in what America stands for, respects her history, and is growing tired of radical elements controlling the future of the country, it should speak up now or risk being silenced forever.