The Emperors new clothes

Reliance on authority figures and third party references can sometimes backfire when social pressure, ignorance, and negligence align to create a distorted reality.

When this happens, bad products, poor services, or inferior ideas propagate because "everyone’s doing it" and nobody stands up for the common-sense and obvious reality – exactly like the children’s tale of "The Emperor’s New Clothes."

Now, if you don’t remember the Hans Christian Andersen tale, let me give you fast a refresher.

The Emperor decided he needed some new clothes and called in tailors from around the world.

He was so self-centered that he could not see reality, and that made him an easy mark for a couple of con-artists posing as tailors (authority figures).

"Their colors and patterns, they said, were not only exceptionally beautiful, but the clothes made of their material possessed the wonderful quality of being invisible to any man who was unfit for his office or unpardonably stupid."

Thus they used fear of appearing stupid and social pressure of "everyone else sees it but me, so I’ll just keep quiet!"

Only in the end did the voice of reason come in the form of a small, innocent child who, immune to all these psychological tricks, pointed out the emperor’s naked form and brought most of the adults back to reality.

People get busy and it rates much easier to repeat what someone else said than to do your own research, myths, half-truths or downright lies get passed along without a second thought.

The more popular the idea or timely the topic, the faster it gets transmitted and the less research gets done.

The moral: if something does not look or sound right to you, no matter how many authority figures claim it’s true, do your own research and check the facts.

Second, charlatans and con-artists depend on you to get swept up in the "hype" of promotion.

This fact drives the classic "pump and dump" scam where unscrupulous promoters tout a stock, drive up the price, then sell off their own shares before people get wise.

The moral: become extremely wary whenever people tout a product or service using hyped up promises of instant wealth or results without any real substance or proof.

Third, people will use your fear of appearing stupid or different from others to drive your behavior.

This "social pressure" is perhaps the most dangerous because it is so ingrained in us that we often act because of it with no clue as to why we do things.

The moral: any time you feel pressured into buying or doing something where fear is the primary driver, take a step back and reevaluate before moving ahead.

That is Capitalisim as it stands today. The story is created by those who have a need to drive prices. Assets are accumulated and distributed. As Joe Granville says, the public is the bag holder. They are always driven to believe what the storyteller is saying. The investment bankers, investment firms and business media passes along the story and makes sure the public knows not only the message but that prices are going up. The public passes along that story to each other as prices continue to advance at a faster pace.

The word spreads and the system (I'll uses that word) disposes of the assets that it acquired when prices were cheap. The story reaches absurd levels in the end but price continues to go up. In the end, the story has no fundamental support and just becomes a media hype. You hear people talking to each other about how much money they are making. You wonder why the responsible people in government are allowing their naive citizens to invest to unwisely. Everyone is making money and the investment manager jumps on that pile too. Prices go to levels that you never believed possible.

Their are those who raise the red flag but they appear to be foolish because as the end nears the story becomes louder and the price turn parabolic. Thus, the voice of reason is shouted out and discredited. The end of the story has only one side and one message. That message is buy and get rich and everyday as the prices move up the media makes sure that you see that message every where you go.

In a top, the last 2 months of the move have no pullbacks. Prices are relentless in their move higher. You see the local media commenting on this on the evening news. The Cramers of the world are crowing about how they told you so. Everyone is a expert on the subject because they hear so much about it.

In the end, the public owns the asset and the story changes. The message is then changed to be a long tern holder and do not sell even though prices are declining and the story is starting to unravel. The public has been trapped and the system has survives to tell another story on another day.


I have watched this for 33 years and it has NEVER changed. The biggest hype I have seen and the story that the public has been sold and has bought, hook line and sinker, is the inflation/commodity/emerging markets. That story is going to end bad for those who believe it.

Mikey