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This is a continuation of a series of commentaries on the perils of rational thinking. See Beliefs, Historical Narrative and Political Reality.
This is a continuation of a series of commentaries on the perils of rational thinking. See Beliefs, Historical Narrative and Political Reality.
Markets are irrational most of the time. Very often market prices do not give way to a rational analysis. Rational thinkers will generally try to ascertain a fundamental value to a financial instrument. We may figure out that a stock should be worth $100, after which we find ourselves trying to understand why that stock is exchanging hands at either $50 or $300 in the market place.
In the Great O’Neill’s view, many overvaluations can be attributed to the human tendency to herd into shared belief systems. The world of art investing and government bonds (sovereign debt) are two examples of the many belief systems that exist in markets today.
Modern Art Market.
Lucio Fontana’s art work called THE WHITE SLASH is little more than a blank canvass with several Stanley knife slashes through it. Fontana is regarded as the founder of Spatialism. The artwork below is in the Tagli style as opposed to his Bucchi style in which he punctures holes in the canvass instead of slashes.
This art was completed in 1965 and has been bought and sold many times. It was sold most recently at Sotheby’s in 2021 for what must have been a competitive auction for exactly $12,788,100. This is a lot of money. To give some context, $12.8m can buy an Upper East Side townhouse in New York, (4 bedroom, elevator, wine cellar),and a Cessna Citation Jet.
A fundamental analysis of this work would pitch it at about $100 for materials and labour. So how can we rationalize the extra $12,788,000 of value? We could read Lucio Fontana: On the Threshold by Iria Candela et al. I’m sure this tome will easily explain to true believers why this piece of art is worth $12.8m. But most sensible people would agree, that if you can replicate the art work yourself in 5 minutes, why pay somebody else millions of Dollars for it?
True art requires skill, labour and creativity. Its value never dies and many times can be regarded as priceless. The Book of Kells (Leabhar Cheannannais, c. 800 AD) is one such example, an extraordinary combination of creativity, materials, and up to 10 years of monumentally intricate labour by numerous scribes and artists.
Defenders of high priced modern (bluffers) art will say that it can be a clever investment. For them the salient point is that some other eejit will pay more for Fontana’s work in the future. Their chances of success are probably good in the short term, but the long term is a different matter altogether. This leads us on perfectly to sovereign bond investors.
Sovereign Bond Markets.
The long term history of sovereign bonds can be summed up in one word. Failure. History shows that nation states generally end up bankrupt and unable to pay debts. This failure to pay off their debts is often manifested via a currency collapse. But even in good times sovereign bond investing is a bad idea.
Buyers of the bond pictured above received $600 in coupon payments over 40 years. However, when the bond was redeemed in 1995 at face value, $500 did not stack up to much. They would have needed almost $3,000 just to keep up with official inflation rates (CPI). In reality, many people would need a good deal more than $3,000 in 1995 to compensate them for five hundred 1955 dollars.
Consider the US ten year note that the government redeemed last month (Oct 31, 2025). If you invested $100 in the note 10 years ago (Oct 2015) you would have received $100 back last month. You would need to receive $135 just to keep up with the official government inflation rate (CPI). Total coupons received amounted to $42.50 over ten years, ($4.25 *10). Thus the total cash return is $142.50. Is that enough? Does it keep up with unofficial or real world inflation?
To be fair, our calculations are not complete. Coupons could be reinvested and allowed to compound going forward. So clearly it can be argued that some money can be made investing in government bond markets. If investors in US Govt Bonds can claim a successful outcome from their investment, they would have to concede that it is at best an anemic return.
The fact is that even in the best of times the borrowing entity, the government, promises to pay you back in Dollars / Euros / Pesos or Pounds that will have less purchasing power. They actually have targeted rates of purchasing power loss. Their official inflation rate targets guarantee that their bond holders will suffer losses.
Worldwide government bond history is a catalogue of continuous and repetitive failure. Governments by their very nature consume capital, they devour it and the longer a nation state survives the faster they squander capital on their bloated bureaucracies and stupid projects.
The traders in the photo below are not buying bonds with the long term in mind. They hope to make money by trading in and out of bonds. But their market place cannot exist without a collective or shared believe within the professional investment community that government bonds have real or enduring value.
The same can be said about the bidders below. Once again they may claim that their purpose is to turn a buck out of modern art. But like the traders in the pits above the modern art market is underpinned by a shared belief that there is real value in junk.
Professional investors are no different to the general public. They are attracted to crowds and they want to believe in something, or be a part of something. I am certain that if you spoke to any of the characters in the above pictures they would concede that in the long term all governments renege on their debts and in the long term all modern (bluffers) art will be dumped as worthless.
Charles Mackay used the term “popular delusions”. I think it is apt. I think the popularity is driven by the desire to belong to a herd. It is not so much the popularity of the delusion, it is the desire to belong to some tribe or other. I highlighted some social / pseudoscientific tribes in Rational Thinking < Shared Beliefs.
Rational thinkers are often guilty of underestimating the persuasive power, and more importantly, the durability of belief systems in irrational markets. I would go as far as to say that besides occasional episodic rational resets, irrational markets are the norm. Crazy is normal, rational is occasional.
Rational Thinking < Shared Beliefs in Irrational Markets.
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