EXTREME COMPLACENCY=2-24
A few years back, I read an incredible white paper regarding investor complacency in the final weeks leading up to the First World War. Archduke Ferdinand was assassinated, global powers were trading demands, with the threat of war and investors didn’t care. As the crisis heated up and the armies began to mobilize, investors still were in a fantasy world. Back then, bonds were the primary liquid investor product and a potential war would weaken a government’s ability to redeem the bonds in gold—hence bond prices would collapse if there was a war. Four days before the war started, with armies mobilizing, outside of a few basis-point move in Austria, no one feared a crisis. Why were investors so complacent? There are plenty of reasons; there hadn’t been a European war in their lifetimes, economic conditions were reasonably robust and everyone trusted the politicians to sort things out.