Are we living in a time of mania? Quite possibly yes.
To give you a spoiler for where we’re going, new evidence has come in suggesting an investment mania is at hand. It comes in the form of a $120,000 banana slapped on a wall with duct tape.
Before being slapped on the wall, the banana was worth whatever an ordinary banana is worth. After attaining its $120K status, which in part involved the wall and the duct tape, someone ate the banana. (More on this shortly.)
Here is the thing. If an investment mania is truly afoot, we haven’t seen the craziest part yet. Not anywhere close.
In fact, if a budding mania is what we’ve got, things could be just warming up.
This fits the collective tendency of humanity to lose its mind every so often — financially, politically, and even geopolitically (think multi-country wars or even World Wars).
Mania psychology on the whole is a fascinating topic. One of the best books ever written on it is Charles Mackay’s Extraordinary Popular Delusions and the Madness of Crowds, published in 1841.
This is probably the book’s most famous line (which is also quite accurate in our view):
“Men, it has been well said, think in herds; it will be seen that they go mad in herds, while they only recover their senses slowly, one by one.”
Mackay’s book also describes how mania fever feeds on itself:
“We find that whole communities suddenly fix their minds upon one object and go mad in its pursuit; that millions of people become simultaneously impressed with one delusion, and run after it, till their attention is caught by some new folly more captivating than the first.”
Another 19th-century luminary, the noted economist and journalist Walter Bagehot, described what happens when an investment mania goes bad:
“At particular times a great many stupid people have a great deal of stupid money… the money of these people — the blind capital (as we call it) of the country — is particularly large and craving: it seeks for someone to devour it, and there is “plethora”; it is devoured, and there is “panic.”
The age of Mr. Gibbon was one of these. The interest of money was very low, perhaps under three percent: the usual consequence followed — able men started wonderful undertakings; the ablest of all, a company for carrying an undertaking of great importance, but no one to know what it was…”
Walter Bagehot died in 1877, but he would instantly recognize the environment of today.
Historically low interest rates, waves of “blind capital,” and companies with no plan or business model are all features of the modern landscape. (Not too long ago, a prominent venture capital firm sought to raise money for ventures “to be determined later,” exactly the thing Bagehot described.)
Then, too, while Bagehot mentions “stupid people” and “stupid money,” the trouble is that smart people — even brilliant people — tend to get pulled into manias just as easily. No less a mind than Isaac Newton, one of the most brilliant human beings who ever lived, lost a fortune in the South Seas investment bubble.
“I can calculate the motions of the heavenly bodies,” Newton later said, “but not the madness of people.”
For the purpose of detecting manias, there is a useful tendency of historical cycles to show boom-bust patterns not just in the business cycle, but in outward displays of luxury and wealth.
At the peak of the luxury-and-wealth cycle, if you will, there tend to be extreme “gilded age”-type sentiments, as the rich flaunt their wealth and spend with wild abandon.
And then, at the trough of the cycle, you have extreme caution and discretion — the rich seeking to hide all traces of their wealth, rather than flaunt it — in the face of pitchfork-level anger, which, in extreme cases, can lead to bloody anti-wealth uprisings like the French Revolution of 1789.
One of the best barometers for the mood of money is the art market, which can further be narrowed down to the modern art market.
After all, “modern art” can be anything, and come with any price tag attached, which makes it a sort of blank canvas to express how wasteful the wealthy are feeling.
A shark preserved in formaldehyde, a solid gold toilet, a light switch flipping on and off: All of these are real examples of “modern art” pieces — some of which earned big bucks from avant garde collectors.
Now getting back to that banana…
Last week, the super-rich gathered at Art Basel Miami Beach, an extremely chi-chi (pronounced “shee-shee”) social affair with many modern artworks on display.
Through some unknown bit of inspiration, the artist Maurizio Cattelan decided to make a new piece of art on the spot for Art Basel Miami Beach. So, he purchased a banana from a Miami grocery store, duct taped it to a wall, and dubbed it “The Comedian.”
Was it a joke? Was it a real modern art piece? It was both — that’s modern art!
There was great celebration when a collector purchased the art installation — which, remember, was an actual banana, purchased at a Miami grocery store, duct-taped to a wall — for $120,000.
Then there was great dismay when another performance artist, in his own bolt of inspiration, decided to eat the banana. (There is no word yet on what the second fellow might owe in damages.)
If this all sounds completely ridiculous — well yes, that is actually the point.
The current “gilded age” has become so gilded, so unhinged by the perpetuation of rock-bottom interest rates, that super-rich collectors with money to burn are paying six figures for pieces of fruit.
That is a sign of mania, or pending mania, if ever one existed.
But as we said earlier, this doesn’t mean the mania is almost over. If a mania is what we’ve got, the crescendo — the peak craziness of it all — could yet be months or quarters away.
One of the most notable things about the year 2019, from an investment perspective, is how the market has seemingly shrugged off or muscled its way through every risk factor and pessimism point that was thrown at it: Trade war, Middle East tensions, political drama, hawkish Fed speak, Silicon Valley unicorn implosion, the whole nine yards.
When you combine that with hints of the art world mood, which feels like an oddball mix of deep worry and devil-may-care euphoria, it creates the sense that something very strange — and big — is coming.
Like the $120K banana, this all confirms our research that suggests the year 2020, and the decade that follows it, will be one of the wildest, weirdest, and most flat-out dangerous time periods investors have seen in nearly a century.
TradeSmith Research Team