"Markets can remain irrational longer than you can remain solvent" is a line of wisdom bestowed upon us by renowned ̶p̶e̶d̶o̶ economist John Maynard Keynes, who is responsible for the spread of the monetary policy brain rot that dominates the world today. In a world in which debt is inconsequential and governments and central banks feel perfectly comfortable printing money at will, this assertion makes sense. If you have the ability to print away the ramifications of capital allocation mismanagement, markets have the ability to move irrationally against the bets of well grounded men who are attempting to operate from a position of first principles. Just when they think the market is going to learn the harsh lesson that capital misallocation should teach, the central banks and governments smash the print button to delay the inevitable while calling sensible men idiots.
However, the most important aspect of Keynes' quote is that it is an overt recognition that "markets" operating under the assumption that a government and/or central bank will always step in to throw a band aid on a gaping wound will, ultimately, hit a wall. The word "longer" is very important here. Mostly because it isn't the word "forever".
Money printing and bailouts can delay the inevitable for a certain amount of time, but at the end of the day the inevitable is... inevitable. The chickens always come home to roost. And whether the mainstream financial cognoscenti wants to admit it or not, the chickens are coming home to roost. The irrationality of the markets is reaching the boiling point at which it has become impossible to put the genie back in the bottle.
Nothing makes this clearer than the dislocation in markets that have moved relatively predictably against each other over the last 15 years. This dislocation is highlighted in the tweet above. It seems that markets have entered a stage of unprecedented chaos that has no clear end state for those who have internalized the phrase "markets can remain illogical far longer than you can remain solvent". Up to this point, people have used that phrase to explain why markets move a certain way, typically in lockstep, despite evidence that they may be mispriced. The "illogical" nature of markets moving in lockstep is described as an outcome that is produced in spite of evidence to the contrary.
What we are witnessing now is a scenario so perplexing that it is completely borking the "irrational longer than you can stay solvent" trade. The expectation of passive "irrationality" has created a complacent environment in which people are befuddled by movements that are relatively irrational within the "irrational longer than you can stay solvent" framework.
I don't know if I am articulating this effectively right now, but the gist of what I'm trying to get at is that this current moment is very meta in the sense that people are finally experiencing irrational markets, caused by irrational policy that lulled people into a false sense of security with the "irrationality trade". And these irrational market movements will not last as long as Keynes would like you to believe.
This is because in a world of fiat money being able to paper over problems with money printing isn't irrational in the short-to-medium-term. If you have the ability to print money it is rational to think that you can sustain what would otherwise be considered irrational. Unfortunately (or fortunately depending on your view of the world), it isn't working anymore. Rationality is coming back to the markets in the form of irrational moves in the minds of those who have been taught that irrational is normal.
The result of this is chaos.
Hopefully, on the otherside of this chaos we will be able to get back to rational markets and we won't have to create meta layers of relative rationality that lead to this type of wordy newsletter.
Love you, Bucky.