The Main Reason Markets Went Nuts During COVID Wasn't Excess Cash
The main reason the markets went nuts wasn’t too much cash in the system but isolation and the increase in time that market actors spent in their heads. Excess cash in the system wasn’t the cause but only a tool that allowed the human tendencies described bellow to play out.
When we spend more time in our heads, reasoning, we put more emphasis on what is to come. We are focused on the future.
When we spend more time with our feelings we put more emphasis on the past.
When we spend more time with people we are forced to take a step back, understand and take an outside perspective.
The balance of feeling, reasoning and understanding is what allows us to asses the present accurately.
Market actors usually make their decisions with their heads. During COVID and lockdowns, market actors had even more time in their heads without the same amount of opportunity to take a step back and take and outside perspective. The result? Way more emphasis was put on the future, which was reflected in exaggerated valuations. These valuations were not representative of the present. Once these wrong valuations existed, less people where able to take a step back and understand. The understanding took place once lockdowns ended and socializing took place again. The prices crashed.
Our perceptions of the world, which are reflected in valuations are different when we perceive ourselves as individuals vs when we perceive ourselves as being part of a group. Perceptions also change when we spend too much time in our head. The COVID experience showed that.