This is not a forecasting
Anybody calling himself a forecaster should be labeled a scammer for eternity until the final supernova.
Again, this is not a forecasting post, but a very unhealthy way of sharing my feelings about the weird current atmosphere.
Sometimes, I feel like this is it, the monstrous financial crash that we owe to the market, the consequence of extreme short-termism and greed. History does not repeat itself; human nature does, and the same flaws spread over a more complex world lead to the same effects, just more explosive and widespread. Societies are complex systems, and markets, involving multiple complex subcomponents, are even more complex: the behavior of individual agents can't just be summed and equated to the behavior of the whole. There are latent variables and hidden feedback loops that lead to cascading explosive blow-ups.
We have entered a period where nobody wants to face the ruthless reality, and everyone is trying to connect the dots backward. People are not looking for scientific explanations, but for convenient narratives where they will ultimately be safe and avoid ruin. I’m afraid it won’t be the case for many of them, and I’m also afraid that we are bound to make the same mistakes in the coming decades.
In those crucial moments, the entire universe expects key economic players to choose between two options: either limit their losses and accept that they were mistaken, or continue down the wrong path until the situation becomes systemic and potentially fraudulent.
It's evident what choice bankers, investors, real estate brokers, and politicians will make, and they do so for a very specific reason: in the end, they won't bear the brunt of the losses—you and I will. Does that sound populist? I don't particularly care if it does, because when greedy individuals finance other greedy individuals, they artificially inflate market values. They boast about their successes publicly, but when things take a turn for the worse, they vanish, only to reappear later seeking financial assistance and support. This phenomenon is commonly referred to as a bailout.
Easy capital fuels folly
When it comes to the end of free money, this is it. The past decades, particularly the post-COVID period, saw historically low interest rates. Debating whether high or low interest rates are better isn't the real issue. What I wonder, with the benefit of hindsight, is whether easily accessible capital for a few entities truly fueled economic growth, innovation, and prosperity. The answer is evident to both of us: Free money fueled greed, short-termism, and fraudulent behaviors.
Innovation, technological revolution, and economic prosperity are not born from hasty capital injections into faltering projects. Instead, they are the offspring of compounded knowledge, resourcefulness, and a keen understanding of market feedback combined with long-term vision. The last few decades gave birth to a few giant tech companies, which are implementing generational changes at scale.
However, they also gave birth to a myriad of unsustainable projects, burning money, and leading the market towards greedy short-term behavior in the race to sell equity or stocks to a greater fool. Back in the days, technological innovation, especially the ones financed by venture capitalists, was kind of a good abritrage : lose a bit of money in a lot of projects but make explosive returns in a minority of them, covering the small losses. This thesis is good, and is the basis of powerful as well as sustainable strategies over the long term. Those principles of investments have been no longer enforced in recent years, and the new ones fuels stupidity.
The new paradigm
I don't recall who mentioned it, but a market should be evaluated based on its buyers rather than its sellers. This heuristic rings truer today than ever before: Observe the buyer's side closely, and you'll find many looking for shortcuts. In the past, venture capitalists (VCs) wouldn't be infused with money from uninformed pension funds. This was mainly because higher interest rates made such high-risk investments unattractive. However, historically low interest rates have given birth to a new type of investor who operates based on the following strategy:z
Choose investments by observing the actions of larger, more influential VCs, without conducting any due diligence.
Maintain a herd mentality in your communications and double down on even the worst investment decisions.
Refinance and reinvest when you observe your companies growing, even if they're incurring more losses and generating no revenue.
If fortunate, offload equity to a greater fool, and eventually brag about it
In the same way that people in the venture capital world tend to look at what others are doing and follow suit, we see a similar pattern in other industries. Instead of doing their own research and making informed decisions, many simply go with the flow, basing their choices on what's popular or trending at the moment. They hope that by doing what everyone else is doing, they'll make money quickly. This kind of mindset, where folks are more eager to jump on a bandwagon than to think critically, is not just limited to these two areas; it's a common thread that runs through many sectors of business.
Real-estate scammers
And now we approach the most dubious of all markets, a magnet for those drawn to get-rich-quick schemes and short-term douchebags. I am fortunate to reside in a picturesque Caribbean country where tourism has surged in recent years, sparking hopes for an economic revival. Yet, this influx has also brought a wave of deception, particularly in the real estate sector. But why does this industry, of all places, attract the most unscrupulous agents? Why are scammers so drawn to real estate? Their reasons mirror their fascination with cryptocurrencies, NFTs, penny stocks, and foreign currency trading. These assets often lack clear, inherent financial indicators to establish their value. Unlike businesses, these don't have cash flows or income statements to evaluate. Their worth is primarily based on speculation, fueled by the hope of future popularity rather than tangible utility or predictable revenue streams.
And there we are, observing a wave of property buyers lured by the promise of passive income from emerging markets. How could that possibly fail? You save in dollars, secure a modest leverage in your home Western country, then jet off to Bali, Medellín, or Tulum. Buy a spacious apartment and rake in $3,000 a month on Airbnb, minus a few fees you'll hand over to those crafty intermediaries known as Airbnb hosts. How could this possibly go wrong? Seriously, how could this not be a brilliant idea? The answer lies in those pesky principles of supply and demand. There's a finite number of tourists, and similarly, there's a limit to the era of post-pandemic enthusiasm and suppressed interest rates.
As predicted, the market has reacted with a force akin to gravity, swiftly pushing the short-sighted scammers into a corner. Towns are now overrun with apartments that no one wants to buy, and as previously mentioned, rife with deceptive deals. The impending downfall of these short-term agents often triggers an uptick in fraudulent activities and dishonesty. I see it nearly every day: sincere but unsuspecting buyers are enticed by promises of passive income, even though the occupancy rate for Airbnb properties in town has dipped below 40% in recent months. Similarly, builders are marketing their apartments with incentives, offering prospective buyers monetary bonuses. Why not simply reduce the price? Because these real estate properties serve as the collateral they've leveraged, and any devaluation could jeopardize their financial standing. They're trying to avoid the inevitable: ruin.
La drôle de guerre
In 1940, Parisians experienced what was termed "La drôle de guerre" or "The Phoney War." While the storm clouds of conflict gathered, many in the City of Light clung to a sense of normalcy, telling themselves stories to ignore the imminent threats of war. This historical episode often comes to my mind as I am witnessing people unwilling to face the harsh reality that their whole business model is a short-term tinderbox bound to explode right in their hands. As they anticipate their imminent crash, they try to connect the dots backward to build narratives, and sometimes even invent lies. In the city I live in, most tourist spots have been totally empty for a few months, and every tourism business tells the same story: "September is always like that." Well, no, it's not, and last September was booming, as the numbers show.
This behavior is reminiscent of the "normalcy bias," a psychological phenomenon where individuals underestimate the potential effects of a disaster, believing that since it hasn't happened before, it won't happen now. It's classic tail risk underestimation. They assume that everything will continue to function as it always has, even in the face of clear evidence to the contrary. Just as Parisians once clung to the hope that their beloved city would remain untouched, many today cling to the illusion of an unchanging market, unwilling to tell themselves the truth, that they are going to have to look for a real job and come to the terrible conclusion that life tolerates no shortcuts.