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When things don't go as you expect, it's very easy to fall into the cave of cynicism.
As this is a thing (or place?) I've just invented, I can liken it to whatever I want.
It's a cave, so let's compare it to the most famous of them all... In case you're not familiar with the Allegory of the Cave, here's the short version 👇
In the allegory "The Cave", Plato describes a group of people who have lived chained to the wall of a cave all their lives, facing a blank wall. The people watch shadows projected on the wall from objects passing in front of a fire behind them and give names to these shadows. The shadows are the prisoners' reality, but are not accurate representations of the real world.
The shadows represent the fragment of reality that we can normally perceive through our senses, while the objects under the sun represent the true forms of objects that we can only perceive through reason. Three higher levels exist: the natural sciences; mathematics, geometry, and deductive logic; and the theory of forms.
Socrates explains how the philosopher is like a prisoner who is freed from the cave and comes to understand that the shadows on the wall are actually not the direct source of the images seen. A philosopher aims to understand and perceive the higher levels of reality. However, the other inmates of the cave do not even desire to leave their prison, for they know no better life.
Moving (quickly) away from the obvious interpretation that philosophers are somehow intellectually superior, there's a takeaway here on cynicism that seems very relevant right now.
'Everyone knows' that a recession is coming, that earnings are being downgraded, and that this rate cut pricing is going to be contested by the Fed this week. Yet the stock market won't go down.
"Even the Vix won't go up! It must be manipulated" /s
Which leads to two obvious conclusions. Either the market is 'wrong' or 'it's in the price'. But the obvious isn't always correct. Especially if the view taken is as binary and cynical as these examples.
For what it's worth, my read is that we've generally moved on from the depths of uncertainty, and now have a far narrower spectrum of probable outcomes.
- Mild recession + inflation comes down = Fed cuts, softish landing
- No recession + inflation comes down = soft landing until economy slows and Fed cuts
- Bad recession or credit event = Fed cuts and/or liquidity increases
- Sticky inflation, higher for longer, economy stagnant but resilient
It's a huge difference from the uncertainty of 12 months ago with war breaking out and inflation spiralling.
Are we leaning too heavily into the optimistic scenaros right now? Probably. But it's not as insane as some observers might perceive.
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Although cynicism is often praised as a mark of intelligence, I think it's dangerous, especially when interpreting markets.
Cynicism is one of the most striking of all the Hellenistic philosophies.
It claimed to offer people the possibility of happiness and freedom from suffering in an age of uncertainty.
Could there be anything less suited to financial markets? Uncertainty is constant, suffering is assured. That's the game. And your solution is to become a cynic?
The opposite isn't optimal either. There's no point being naive and innocent. That just turns you into prey for the metaphorical market lions.
This conversation between two of my favourite market people hints at that healthy balance.
“I was too skeptical in the past. Skepticism can lead to knee-jerk dismissiveness.”
When he said those words, my brain lit up a bit because I have suffered from the same bias of excess dismissiveness many times. Healthy skepticism is great. Reflexive cynicism and dismissiveness is bad. Marks’ comment hit home for me and the conversation may have influenced my less skeptical view of NFTs a few weeks later.
If I was wrong about the iPhone and I was wrong about bitcoin (and Twitter… Who’s ever going to use that???)… Maybe next time I should be more open minded? And perhaps less wrong?
The risk, of course, is you end up on the other end of the spectrum—that’s not good either!
In hindsight, it was absolutely the right thing to be sceptical about NFT's, but if you were cynical at that time, you missed the whole mania.
Maybe NFT's (or manias) just aren't your bag so you don't get involved. Fine.
But if you're excessively cynical, you short into the mania and get hosed (even though you were right to be cynical of the valuations).
Something I've been thinking about (again) is the concept of things being priced in and the market making sense.
More precisely, by the time it 'makes sense' isn't it already largely priced in?
The process of pricing in new information isn't always linear. Sometimes it overshoots and corrects, other times it's far smoother. Which looks something like this 👇
Anyway, to the point. There's a LOT of information incoming this week. Earnings reports from the big guns, central banks, economic data, US quarterly refunding.
Loads going on. Stay open-minded.
Healthy skepticism is great. Reflexive cynicism and dismissiveness is bad.