Why the Biggest Market Risk Comes When Investors Feel Safe

During their recent episode, Jake Taylor and Tobias Carlisle discussed Why the Biggest Market Risk Comes When Investors Feel Safe. Here’s an excerpt from the episode:

[Tobias] That’s all you get. The psychic benefits of it. That’s it.

So the only sensible solution I think after having… I talk about a Hyman Minsky, the Minsky moment, which is that- Stability breeds instability. So people start feeling good, so they start levering up.

[Jake] Yeah. They feel safe.

[Tobias] They feel safe. So it’s always riskiest when it feels safest. And the corollary to that is it’s always safest when it feels riskiest.

[Jake] Ooh. Put that on a t-shirt.

[Tobias] That’s the headline of my next book. So after doing all of that, I think that the solution is something like you have to have some sort of acid allocation mix, which is like, it’s such a pedestrian response, but I think that it’s the only… I’ve basically eliminated everything else.

[Jake] So you went in a giant academic research circle to arrive at like, oh, this should look pretty boring and sensible, basically. Just try to avoid the first and bottom quartile and you end up okay?

[Tobias] I did discuss a little bit of the psychology of it in there, because I think that that’s important.

[Jake] I think that’s really important.

[Tobias] I’ve been through enough blowups to know how, particularly to… I started working in 2000 at the peak, and so I saw a blowup, but I was kind of insulated from it a little bit, because I just had salaried and didn’t have much or any savings at that point. And then 2008, 9, I felt a very…

It was like a chunk of years of working and saving that was in the market that got blown up, and that was a pretty sweaty. And there were people suggesting that that might be the end of the financial system at that point in time.

[Jake] Maybe the world, the global order on a larger base.

[Tobias] It felt pretty real. I don’t know if that was the sort of stuff you’d see. Did you go get money out of the ATM?

It felt that way in 2020. Do you think that felt that way in 2020? Like, oh, it could be a pandemic, could be the end of the world.

[Jake] Well, I’m sure we could go back and review the tapes of what we were talking about.

[Tobias] I was sweaty in some of them.

[Jake] Yeah. I mean, I had genuine biological concerns about… I thought like, God, what if my kids see bodies piled up in the streets, because we can’t keep up with the…

[Tobias] Well, I said that was what was happening in China. That was a real possibility.

[Jake] I know. And I was like, oh, gosh, that sounds horrific. But obviously, we didn’t, thankfully, get to that.

[Tobias] Right. And if you have a 1918 flu pandemic, then it’s still possible that that happens. And it’s happened lots of times.

It’s killed off large chunks of humanity. So that was an existential risk. So there was end of the financial system, end of humanity.

The next one, I don’t know. It’s probably…

[Jake] Oh, now we got AI, right?

[Tobias] AI. Yeah. End of humanity again.

It’s going to feel pretty real in the moment. I think you have to proceed as if it’s not the end of the world. And then if it ends up being the end of the world, then you have to adapt at that point.

But assume that it’s not the end of the world. What if it’s not the end of the world?

[Jake] You don’t know this, but this is a perfect lead in for veggies.

[Tobias] Awesome.

[Jake] Yeah.

[Tobias] Well, it’s just about time. Do you want to do it?