In the nuanced trade-offs between financial markets and economic theories, a false fable that I’m calling “Goldilocks and the Big Bad Wolf” emerges as an apt analogy. While traditionally the Goldilocks fairytale features the Three Bears rather than the Big Bad Wolf, the mixed metaphor illustrates the delicate balance and potential threats within the prevailing economic landscape.
Just as Goldilocks seeks conditions that are “just right,” those institutions in public life—most notably the Federal Reserve System—that pull the economic macro levers in an increasingly managed economy find themselves navigating between extremes in search of the ever-elusive ideal balance. What, a student of history might ask, makes a 2% inflation rate sacrosanct rather than arbitrary, let alone achievable? Is this a sign of enlightenment or desperation? Those questions, I would note, are essentially rhetorical.
To be sure, the Fed argues that this delicate balance aims to foster sustainable economic growth without veering into the extremes of rampant inflation or cold recession. Lurking, however, in the seemingly serene environment is the Big Bad Wolf—representing the speculative bubbles and unwarranted market optimism that threaten to disrupt such a fragile and evanescent equilibrium.
This essay seeks to unpack the layers of said metaphor, focusing on how speculative ventures, particularly the resurgent interest in Bitcoin ETFs (exchange-traded funds) and the peculiar case of Truth Social, weave into the broader narrative, potentially setting the stage for a confrontation where the stability of the Goldilocks economy could come face to face with the rapacious Big Bad Wolf on the trail of reality.
Bitcoin ETFs: Below the Surface
The revival of interest in Bitcoin, catalyzed by the court-mandated introduction of Bitcoin ETFs in January 2024, epitomizes the speculative dynamics that pervade financial markets. These ETFs ostensibly provide investors with a more accessible avenue to invest in Bitcoin, amplifying its speculative allure and concomitant volatility. The fundamental appeal of Bitcoin ETFs lies in their ability to track the price movements of Bitcoin, offering investors exposure to the cryptocurrency’s performance sans the complexities associated with direct ownership.
Yet the rapid escalation in Bitcoin’s value following these ETFs’ debut prompts critical reflections on the sustainability of such price surges. The intrinsic supply constraint of Bitcoin—capped at a finite 21 million coins—combined with soaring demand, most notably from the ETFs, engenders a supply-demand disequilibrium, paving the way for eventual air-pocket price declines. This momentum-driven manifestation of the bigger-fool theory, while seemingly advantageous for speculators in the short run, underscores the speculative essence of the asset, magnified further by the introduction of ETFs.
Bitcoin, of course, exists in the digital world, where some of the most valuable assets are intangible. To wit: the “Magnificent Seven.” The largest shareholder of technology giant Apple and the most successful investor in modern history, Warren Buffett, says: “I wouldn’t pay $25 for all the Bitcoin in the world.” If you don’t know the difference between Bitcoin and Apple …
Truth Social: an Examination of Speculative Valuation
Conversely, the journey of Truth Social paints a vivid picture of the speculative enthusiasm capable of engulfing assets with significant political or cultural implications. Despite its humble origins and operational challenges, Truth Social’s valuation, propelled by its merger with Digital World Acquisition Corp (a SPAC: special purpose acquisition company), has skyrocketed to 100 or more times what its business fundamentals would suggest. This inflated valuation, buoyed by many of Donald Trump’s ardent supporters, epitomizes the potent combination of political zeal and speculative investment strategies inflating asset values.
The bubble enveloping Truth Social starkly illustrates the disconnect from traditional business-valuation principles. With scant revenue and considerable operational losses, the platform’s market valuation leans almost exclusively toward its political and cultural import rather than financial viability. This instance highlights a broader market trend wherein sentiment, speculation, and extrinsic factors heavily sway asset valuations, often resulting in a chasm between market prices and intrinsic worth.
The Convergence of Speculative Dynamics
The narratives of Bitcoin ETFs and Truth Social underline the under-the-radar pervasiveness of speculative bubbles in the occasionally ethereal world of finance that John Maynard Keynes pejoratively dubbed casino capitalism. These phenomena, marked by asset valuations bloated by speculation rather than fundamental value, pose significant threats to the stability of the Goldilocks economy. The allure of swift gains exacerbated by the herd mentality has likely led investors to gloss over the innate risks of these assets, priming the pump for probable economic upheavals.
This amalgamation of speculative forces—be it in the digital-currency domain or the realm of social-media ventures—acts as a poignant reminder of the hidden vulnerabilities within our ostensibly stable economic milieu. Similar historical patterns vividly demonstrate how swiftly such speculative enthusiasm can be displaced by acute risk-aversion, precipitating sharp devaluations and eroding consumer confidence, thereby catalyzing broader economic ramifications.
Most recently, the roots of the Great Financial Crisis in 2008 lay intertwined in a combination of forces and factors, including excessively loose lending standards, the proliferation of complex financial instruments like mortgage-backed securities and derivatives, and a general failure to recognize the systemic risk accumulating in the U.S. and international financial system. When the bubble burst, it revealed deep vulnerabilities in the global financial architecture, leading to a severe recession that affected economies worldwide. Few—including the Fed, pundits, and ordinary people—saw that train wreck-to-be as it barreled down the track.
Trekking Through the Speculative Woods
Revisiting the allegory of “Goldilocks and the Big Bad Wolf,” it becomes evident that the speculative bubbles typified by Bitcoin ETFs and Truth Social eventually manifest themselves as Big Bad Wolf incarnations. This pernicious predator lurks in the economic shadows, ready to upend the delicate balance the Fed and other lesser economic engineers endeavor to maintain. Aspirations notwithstanding, the patterns of history leave little doubt that we are veering, virtually irrevocably, toward the Big Bad Wolf’s grasp. Goldilocks stands a disconcertingly good chance of becoming the predator’s lunch.
As we conclude, the cautionary tales of Bitcoin ETFs and Truth Social not only illuminate the speculative tendencies that pervade our financial systems but also serve as harbingers of the likely challenges that lie ahead. In an economy where the economic managers strive for the Goldilocks ideal—neither too hot with inflation nor too cold with recession—acknowledging the presence and pervasiveness of speculative bubbles becomes paramount.
Our mantra: Preparedness invariably trumps prediction. During this extended episode of wanton speculation, occasionally looking stupid is the sole path to doing right. And that course is full of career-risk potholes. Only by imagining a predator masquerading in Grandma’s ETF and DJT (the ticker symbol for Trump Media & Technology Group) clothing, can we avert the looming threat of the Big Bad Wolf. If we preserve your capital and our capacity to embrace volatility when the pendulum swings so far that nearly everyone panics, the eventual bull market that follows will be the reward for enlightened patience.
In crafting this narrative, we journey through the speculative landscapes that define our times, drawing lessons and insights that transcend the immediacy of current market dynamics. This exploration not only enriches our understanding of the delicate interplay between speculation and stability but also beckons us to navigate the complexities of the financial markets with wisdom and foresight.
As we seek to envision what lies ahead in 2024 and beyond, the newly minted metaphor of Goldilocks and the Big Bad Wolf serves as a timeless reminder of our enduring quest to be on the right side of history.