Paul B. Farrell: Looking back 800 years, we now know bull-bear cycles are inevitable. Right now, the cycles are again peaking, will crash, making the right exits, then the next entrance.
Warning: Forget the cuts, your brain is sequestered. That’s the real problem: Your brain. That’s why the economy and markets will crash, a new Dow high notwithstanding. Why it’s inevitable. Bigger crash than 2008. Longer afterwards. No bank bailouts. Austerity worse than the Great Depression. Hunker down.
Listen closely: America’s big problem is our “sequestered” brains. Meaning: “to remove, isolate, set apart, retire, withdraw into solitude.” Think post-trauma stress, paralysis, amnesia, lobotomized, entranced, just plain irrational. You’re out of it, incapable of acting rational.
And not just you: Economists, politicians and media pundits all have sequestered brains. They blab on endlessly about this or that of their special interests hiding among the trillion-dollar war-and-peace sequester cuts. Blab on and on. Myopic.
Why? Their brains are sequestered too. Millions of noisy brains. But you can’t hear them, no matter what. Your brain is on a different frequency. Only hears your set channels. That happens to your sequestered brain.
In fact, our collective brain, America’s conscience, our psyche, mind-set, even our soul is sequestered. America lapsed into a trance, confused. Our entire nation’s rational brain has been sequestered, collectively “removed, set apart, isolated, retiring, withdrawn.”
Brain sequestration: read all about your biggest problem
This is also why 152 nations worldwide as well as America can’t see the light at the end of the tunnel. Why we’re blindly driving headlong into a massive economic and market collapse. Why we refuse to see it. Why? Our collective brain periodically goes through these cycles, in the economy, markets, drama, in our personal lives. But our sequestered brains can’t hear, never learn.
Still our noisy self-centered economists, politicians and media pundits blab on, telling us: this time really is different. Why? They too, says Shakespeare, have their prescribed “entrances and exits.” The script never changes. Always the same drama, bull-bears, boom-busts, recession-recoveries, prosperity and austerity. Like Lear, same play, new actors, same result, always too late, main character blinded.
Flash forward. BusinessWeek just asked: “Why won’t anyone listen to Alan Simpson and Erskin Bowles?” Two brilliant brains, they see the oncoming train: A former GOP senator. Former Clinton chief of staff. Been “touring the country almost nonstop, warning of America’s impending fiscal doom,” for two years.
Yes, they see doomsday dead ahead. But few listen.
History repeats. History teaches. But, we never learn. Our brains are sequestered, trapped, repeating an 800-year old drama that you, me, all Americans and all world leaders can’t seem to escape.
Even Harvard historian Niall Ferguson, author of “The Ascent of Money: A Financial History of the World,” admits economists Carmen Reinhart and Kenneth Rogoff’s brilliant “This Time Is Different: Eight Centuries of Financial Folly” is “the best empirical investigation of financial crises ever published.”
But “This Time is Different” is much more than an 800-year history of endless human “follies” through bull/bear, boom/bust cycles. It is also the single best book on behavioral economics ever. It exposes the shadowy side of the investor’s brain and the faux promise of behavioral economics: “Just follow our advice, and your irrational brain will become less irrational.”
Princeton psychologist Daniel Kahneman’s 2002 Nobel Prize in Economics killed that theory. Investor’s decisions are always irrational, because our brains are sequestered.
800 years of historical proof: This time is never, never different
The fact is, the market’s roller-coaster ride of bull-bear cycles will never end. It’s trapped in our brains and genes. Nobody can stop America’s endless economic, market, financial and business cycles. The big reason, Wall Street doesn’t want behavioral economists educating Main Street to beat them.
If the promises really worked, investors would wise up and Wall Street’s con game wouldn’t work. So they’ll keep replaying the script in investors brains for the next 800 years. Here’s how Reinhart and Rogoff explain the never-ending drama:
Brain sequester … fading memories, lessons forgotten, renewed arrogance
“This Time Is Different” is a “quantitative history of financial crises in their various guises. Our message is simple: We have been here before. No matter how different the latest financial frenzy or crisis always appears, there are usually remarkable similarities from past experience from other countries and from history.”
No country is immune: “Fading memories of borrowers and lenders, policy makers and academics, and the public at large do not seem to improve over time, so the policy lessons on how to ‘avoid’ the next blow-up are at best limited.”
Delusions … we’re smarter, learned our lessons, old rules don’t apply
“The essence of the ‘this-time-is-different’ syndrome is simple. It is rooted in the firmly held belief that financial crises are things that happen to other people in other countries at other times; crises do not happen to us, here and now.”
Each new generation convinces itself, like Silicon Valley did in 1999, that “we are doing things better, we are smarter, we have learned from past mistakes. The old rules of valuation no longer apply.” And that each new boom, “unlike the many booms that preceded catastrophic collapses in the past (even in our country), is built of sound fundamentals, structural reforms, technological innovation, and good policy. Or so the story goes.”
Similar self-delusional “stories” guarantee the cycle will repeat ad infinitum.
New technologies … new leaders, new regulations, but same old greed
“The lesson of history, then, is that even as institutions and policy makers improve, there will always be a temptation to stretch the limits. Just as an individual can go bankrupt no matter how rich she starts out, a financial system can collapse under the pressure of greed, politics and profits no matter how well-regulated it seems to be. … Technology has changed … but the ability of governments and investors to delude themselves, giving rise to periodic bouts of euphoria that usually ends in tears, seems to have remained a constant.”
Excessive debt … one common problem repeating in all crises
“If there is one common theme to the vast range of crises … it is that, excessive debt accumulation, whether it be by the government, banks, corporations, or consumers, often poses greater systemic risks than it seems during a boom.”
Our brains are sequestered, too irrational in good times as well as bad. “Highly indebted governments, banks, or corporations can seem to be merrily rolling along for an extended period, when bang — confidence collapses, lenders disappear and a crisis hits. …”
Blinded … credit fuels success, arrogance, warning signs missed
Reminds us of 1999.“Highly leveraged economies … seldom survive forever … history does point to warnings signs that policy makers can look to access risk, if only they do not become too drunk with their credit-bubble-fueled success and say, as their predecessors have for centuries, this time is different” as leaders and followers all stay “too drunk,” till too late.
“This Time Is Different” should be in every investor’s library — it’s the best description of our financial history, the impact of behavioral economics and why your sequestered brain is the real culprit in Washington’s sequestration drama.
Looking back 800 years, we now know bull-bear cycles are inevitable. The reason? Because our brains are sequestered, forever vulnerable to this endless roller-coaster ride. And why, right now, the cycles are again peaking, will crash, making the right exits, then the next entrance.
No, this time really is not different. And, unfortunately, Reinhart and Rogoff also tell us that in the process our sequestered brains are also sabotaging capitalism, damaging America’s role in the world and, sorry to say, killing your retirement.
Worse, the cycle will go on for another eight centuries. Prepare to hibernate.
Paul B. Farrell is a MarketWatch columnist based in San Louis Obispo, Calif. Follow him on Twitter @MKTWFarrell.