Of Two Minds – Once Risk-On Switches to Risk-Off, the Bottom Is Far Lower Than Anyone Believes Possible

All bubbles share common characteristics: during the euphoric expansion, participants are richly rewarded for buying every dip and for confidently embracing the belief that this time it’s different.

The common characteristic when bubbles pop is the eventual bottom is far lower than anyone believes possible. This confidence in the bubble’s permanence permeates the entire financial system and encourages a faith that buying every dip will continue to be the road to easy wealth.

When euphoric risk-on switches polarity to risk-off, buying every dip becomes the road to ruin as the eventual bottom is incomprehensibly lower than the first stairstep down.

The final redoubt of risk-on markets is the confidence that I will get out at the top. The problem with this notion is there is no top in greed and hubris, and greed and hubris are the engines of risk-on markets. So please fall carefully into the chasm.

Of Two Minds – Once Risk-On Switches to Risk-Off, the Bottom Is Far Lower Than Anyone Believes Possible