Stability is Destabilizing
In mid-2010, California was hit with an epic drought. Drought remained for 6 years. Then 2017 came dropping a preposterous amount of moisture. Parts of Lake Tahoe received more than sixty-five feet of snow in a few months. The 6-year drought was declared over.
Local residents rejoiced. But it backfired in an unexpected way.
Record rain in 2017 led to record vegetation growth that summer. It was called a superbloom, and it caused even desert towns to be covered in green.
A dry 2018 meant all that vegetation dried and became dry brushwood. That led to some of the biggest wildfires California had ever seen. So record rain directly led to record fires.
What people cheered as drought over brought a scary wildfire.
The 50 years period prior to 1960 was a period of scientific optimism. The world has gone from horse and buggy to rockets, and from bloodletting to robotic surgeries to organ transplants.
This advancement caused a push among economists to try to eradicate the curse of recessions. If we could launch intercontinental ballistic missiles and walk on the moon, surely we could prevent two quarters of negative GDP growth.
However, this gives birth to Destabilization.
- When an economy is stable, people get optimistic.
- When people get optimistic, they go into debt.
- When they go into debt, the economy becomes unstable.
Investors often argue and postpone their investment citing unstable market. They often seek stability whether market is volatile or political disruptions happen. Assuming stability from equity market is like childish demand which is fundamentally not possible. In order to be correct in this judgement, investors often start predicting market and gets fooled by randomness.
At Shalibhadra, we clearly know that we cannot seek or bring stability to market. Inherent behavior of market is to remain volatile and we only have to ride through this volatility.
Nishit Siddharth Shah