From Failed Banks to Tulips: Same as it Ever Was
Silicon Valley Bank, Signature Bank, Silvergate Capital…their financial woes all have one thing in common: the madness of crowds.
Let’s spotlight New York-based Signature Bank, which made reckless forays into cryptocurrency. Signature, which held $110 billion in assets, was among the failed regional banks recently placed into receivership of the Federal Deposit Insurance Corporation (FDIC).
In years past, the executives of Signature and other banks had funneled thousands of dollars in campaign donations to congressional leaders in a successful effort to loosen Dodd-Frank capital requirements.
At the same time, as many banks steered clear of the risky crypto industry, Signature made an aggressive endeavor to attract crypto investors as clients. When crypto crashed, Signature got caught short by a run of deposit withdrawals.
In the words of the rock band Talking Heads: Same as it ever was.
Below, I explain why you should always remain leery of the herd mentality and the Fear of Missing Out (FOMO) syndrome.
The madness of crowds…
Charles Mackay, in his 19th century classic economic book, Memoirs of Extraordinary Popular Delusions and the Madness of Crowds, aptly describes the tendency of investors to behave like lemmings. Mackay’s book is the bible for contrarians. Consider his account of “Tulipmania:”
“In 1593, no Dutchman had ever seen a tulip. Their beauty and rarity caught the national fancy. In no time, they became ‘the rage’ as aristocrats flaunted the exotic flowers as symbols of power and prestige…Though supplies could be increased only as fast as nature allowed, demand for tulip bulbs accelerated at a fevered pitch.
“Soon all tiers of Dutch society were swept up in a tulip-trading craze that peaked in the 1630s, selling ‘futures’ on crops not yet grown or harvested. In the end, crops of bulbs still in the ground were bought and sold so many times that the sales were called the ‘Wind Trade’ (as the speculative prices were being made up out of thin air). After the market crashed in 1637, bankrupting many, the era came to be known as ‘Tulipmania’ or ‘Tulipomania.’ ”
In the above passage by Mackay, substitute “tulip” for “crypto” and you come to the sinking realization that nothing has changed over the last four centuries.
A key contrarian indicator is the financial press. Fundamentally weak companies often ride a wave of positive publicity. One of the most reliable contrarian indicators is CNBC celebrity Jim Cramer.
Back in March 2008, during the Great Financial Crisis, Cramer told his viewers that investment bank Bear Stearns was “fine,” right before Bear Stearns collapsed.
Last month, Cramer on his show “Mad Money” tried to assuage mounting concerns about SVB Financial Group, the holding company of Silicon Valley Bank (see screenshot).
In his usual hyperactive fashion, Cramer argued that SVB Financial Group’s stock was “compelling” and “cheap” and said its battered shares were poised for a rebound. Shortly after Cramer’s hearty on-air endorsement, the FDIC seized Silicon Valley Bank’s assets and California regulators shut it down.
Thankfully, federal regulators in recent days have been decisive in rescuing failed banks such as Silicon Valley Bank. As the financial sector stabilizes, we’ve witnessed a relief rally in equities.
The main U.S. stock market indices closed sharply higher Wednesday, as follows:
- DJIA: +1.00%
- S&P 500: +1.42%
- NASDAQ: +1.79%
- Russell 2000: +1.08%
Mega-cap tech names led the surge; the benchmark 10-year Treasury yield edged higher to 3.57%.
As stocks rise despite current economic dangers, they’re proving an old Wall Street adage: markets climb walls of worry.
This expression refers to the stock market’s tendency to climb when investor fears don’t come true. Fears of financial contagion have not materialized.
Bank failures, elevated inflation, Federal Reserve tightening, negative earnings growth, the Russia-Ukraine war…they’re all potential triggers for a market swoon. But don’t exit the stock market. Stay invested.
One analyst who always bucks the herd is my colleague Robert Rapier. I suggest you consider his premium trading service, Rapier’s Income Accelerator.
Robert has devised an investment method that generates steady income with reduced risk. He can show you how to squeeze up to 18 times more income out of dividend stocks, with just a few minutes of “work” each week. Click here for details.
John Persinos is the editorial director of Investing Daily.
This article originally appeared on Investing Daily.