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As a psychoanalyst, I’ve been perplexed and amazed that the market has been on such a steady upswing, with the VIX, the well-known “fear index”, hitting record lows on July 26. And, CNBC reminded us, “Even before Wednesday’s move, the VIX had steadily fallen to lows not seen in more than two decades amid U.S. stocks’ steady climb higher”
A prolonged period of placid growth has coincided with the most tumultuous, bizarre and unpredictable time in a half century of American history.
Chuck Todd on MSNBC said tonight, “the Stock market went bonkers today” over reports that Gary Cohn might be leaving his position as President Trump’s Chief Economic Advisor. “Who will run the economy?” Todd asked rhetorically.
I’ve been expecting the stock market to go bonkers every day since 9:00 pm on November 8, 2016. I told my clients to count on nothing but instability and craziness. I was wrong, but I shouldn’t have been. The market should have been afraid, because absolutely nothing was predictable, ordinary or similar to anything we’ve ever encountered in politics in America.
How has anyone on Wall Street thought anything was stable or safe? That any person could be relied on to stay in the Trump administration? That Trump’s promised agenda regarding taxes and infrastructure was gong to sail through Congress? Apparently they wanted it to be true so they acted as if it was.
I can only account for this by offering up for your consideration a psychoanalytic concept called “disavowal”. I described this defense mechanism in a recent blog post “Why Professional Investors Need to Know About the Concept of Disavowal”. I was writing about the necessity of knowing about disavowal for all investors at all times, not particularly focussed on this one strange moment in time.
Here’s how I introduced disavowal:
Disavowal is a psychoanalytic term that describes a sneaky and pernicious defense mechanism that leads to very risky foolish behavior. It is the fundamental mental flaw behind most white-collar crimes. Disavowal is one of the reasons people break their own well-thought out investing rules. Disavowal is the prime mover in the dumbest stuff you’re likely to do.
With disavowal, facts are accepted as true, but bizarrely, they have no impact on your decisions. It’s as if your mind has been split in two with a glass wall in between. On one side is a bunch of reality based facts, logic and awareness of consequences. You see it all. You know it all. On the other side is “you”, who really wants to do something, or believe something. The reality and known dangers hanging on the far side of the wall are disconnected from emotion and your motivational system, and therefore fail to have an impact on the decisions you’re making. You go ahead and do the Really Dumb Thing.
In the last 10 months, the Really Dumb Thing has been not being afraid.
Famed investor Howard Marks, who understands the central role emotion plays in investing (especially as a source of mistakes!) borrowed the term “willing suspension of disbelief” from the world of theater to describe one of the key emotional gremlins that can lead the most experienced investor to do stupid things. In The Most Important Thing Illuminated, Marks writes, “Many times over the course of my career, I’ve been amazed by how easy it is for people to engage in willing suspension of disbelief…people’s tendency to dismiss logic, history and time-honored norms.”
At a point in history where there is no history to use as a comparison point, when there are no norms, one would think that market fear would be at an all time high. I suggest disavowal is responsible for the fact that it’s not. Wall Street has stubbornly not wanted to know what it had to know. It was more exciting to think about corporate tax rates dropping, of forthcoming private contracts for huge infrastructure projects, or about a businessman, finally, in the White House, or of favorable trade deals.
On the other side of that glass wall that people erect when they are employing disavowal were a lot of known but ignored facts–that Donald Trump was an unknown, that he was unpredictable, that the populist/authoritarian appeal that propelled him into office was an enormous threat to the basic American institutions that corporate America depends on. With disavowal, knowledge is split off from emotion and a subjective sense of reality. It just doesn’t feel real, relevant, important, or worth paying attention to despite the fact that a rational assessment would conclude that the consequences of ignoring reality could be dire.
In the world of psychology, the employment of extreme disavowal has predictable consequences. There comes a moment of catastrophic reckoning, when reality catches up with the decisions that were made while ignoring it.
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