When the Paradigm Flips
Lessons from John Law to the Sunbelt Meltdown
Let me paint you a picture.
It’s 1720. A Scottish man is fleeing Paris in the middle of the night, disguised as a woman. He’s terrified. If he’s caught, he will be torn apart by mobs.
Six months earlier, this same man was the most powerful person in France. He controlled the money supply, tax collection, all foreign trade, and the national debt. He had twelve country estates, several Parisian mansions, and a personal library of 45,000 books. He wrote to a friend: “I am probably the richest man who has ever lived.“ He might have been right.
His name was John Law. And within the span of a few months, he went from controlling an enterprise worth the equivalent of $6.5 trillion in today’s money to fleeing for his life. He died nine years later in Venice, broke and alone, gambling in second-rate casinos.
What happened?
The paradigm flipped.
One day, John Law’s paper money system was the future of finance. The next day, it was obvious fraud. One day, shares in the Mississippi Company were the smartest investment in Europe. The next day, owning them made you a fool. The underlying facts hadn’t changed much. Louisiana was still Louisiana. The paper money still existed. But the story — the collective belief that held the whole thing together — evaporated overnight.
In fact, I would argue that all of finance boils down to collective belief systems.
Think about it with more recent memories.
In 2006 everybody believed owning real estate was the surest and best bet. Everybody did it. In 2009 everybody believed owning real estate was a disastrous bet.
In 1999 everybody had to own tech stocks. In 2001 everybody thought it was a terrible idea.
Ironically, in both cases, the best time to buy said investment was after the paradigm had shifted.
But how about this paradigm?
In 2018 office buildings were one of the hottest investments. I fondly remember walking through downtown San Francisco, earpods blaring with some great jam, and looking at the unreal construction of new office towers. Salesforce Tower. Many others. Beautiful. Surreal construction. A physical manifestation of the tech boom’s might.
And then COVID. And then remote work.
And suddenly this entire paradigm of safe, secure and conservative office property ownership was flipped on its head. It wasn’t a safe bet anymore. Arguably, it had undergone a sudden and violent shift - and voila - nobody thought it a good bet anymore.
It was a paradigm shift.
Or imagine investing in a horse and buggy company days before the automobile was revealed? That’s a paradigm shift of an epic magnitude (similar to office? I don’t know).
Point being - psychology rules all, especially in investing. That’s why we focus so much on behavioral finance on The Timeless Investor.
And this is exactly what I want to talk about today. Because this pattern — the sudden inversion of everything investors believed to be true — shows up over and over throughout history. And if you can’t recognize when you’re swimming in a paradigm that’s about to flip, you’re going to get your face ripped off (literally or figuratively - or perhaps both).
The Mechanism
Okay - so we have some understanding of this thing. One day something’s hot, the next day it’s not. What had value suddenly has none.
The Tulip Bulb Mania is perhaps the best known instance of this phenomenon. A mass delusion or paradigm that insisted X is worth X, and then the next day it’s worth Y.
But here’s the critical element; paradigm shifts don’t happen because of new information. The information was usually there all along. What changes is the frame through which people interpret that information.
Think about it like this.
In 1719, sophisticated French investors knew that Louisiana was mostly unexplored wilderness. They knew the Mississippi Company had no actual revenue. They knew the paper money wasn’t backed by sufficient gold. But they reframed all of this through the lens of future potential. No profits? That’s fine — future potential is what matters. No production? Doesn’t matter — the land is valuable. Rising share prices? That’s proof it’s working!
Every piece of negative information got metabolized into the existing story. Until suddenly, it didn’t. Until suddenly, the same facts that had been bullish became bearish. The land that was “priceless” became worthless. The paper that represented “infinite wealth” became kindling.
The facts didn’t change. The frame did.
A Brief Tour of Historical Inversions
Let me walk you through a few of these moments.
Because history, as always, is absolutely filled with them.
August 15, 1971: Nixon Closes the Gold Window
For decades, the entire global monetary system operated on a simple assumption: dollars were backed by gold. You could exchange them. This was the foundation of international trade, central banking, everything.
Then Nixon went on television and announced he was “temporarily” suspending gold convertibility. 54 years later, we’re still temporary.
Now, here’s the thing. The smart money already knew the system was under strain. America was bleeding gold to finance Vietnam and the Great Society simultaneously. The French, under de Gaulle, had figured it out — they were demanding gold for their dollars, draining Fort Knox. The fundamentals were deteriorating for years.
But most investors were still operating as if the gold standard would last forever. Because that’s what they’d always known. That was the paradigm. And then one Sunday night, Nixon flipped it.
Imagine being an investor who had built their entire framework around gold-backed currency. Overnight, the rules of the game changed. Everything you thought you understood about money, inflation, and asset pricing became obsolete.
October 6, 1979: The Volcker Shock
By the late 1970s, inflation had become a way of life. It was running at 13% annually. Your money was losing more than a tenth of its value every single year just by existing. And the political establishment kept looking for easy solutions — more spending, more stimulus, more money printing. Because that’s what democracies do when the going gets hard. They choose the path that feels good today and defer the pain.
Then Paul Volcker announced that the Fed would stop targeting interest rates and start targeting money supply directly. Translation: they were going to jack up interest rates as high as necessary to kill inflation, no matter what it did to the economy.
Within months, the federal funds rate hit 20%. Twenty percent. Mortgage rates hit 18%. Think about what we just went through with rates moving from 1% to 5%. Now imagine 5% to 20%.
Every investor who had built their portfolio around the assumption of continued easy money — which was basically everyone — got obliterated. Real estate deals that penciled at 8% rates suddenly didn’t work at 15%. Businesses that depended on cheap credit collapsed. The paradigm of easy money, which had felt permanent, inverted completely.
Japan, 1989: When “They’re Not Making More Land” Stopped Working
This one’s particularly instructive for real estate investors.
At the height of the Japanese bubble, the land under the Imperial Palace — just the land — was said to be worth more than the entire state of California. The story was airtight: Japan is a small island. Only 12% of it is buildable. Demand is growing. Therefore, prices can only go up.
Sound familiar? “They’re not making any more land.” “Everyone’s moving here.” “This market is different.”
Here’s the thing — none of what the Japanese were saying was wrong. The land was scarce. Demand was growing. But valuation can massively outrun any underlying truth. The story can be correct and the price can still be insane.
When the Bank of Japan finally tightened credit and raised rates from 2.5% to 6%, the music stopped. The Nikkei dropped 55% in three years. Urban land prices fell 70%. Some commercial property dropped 80%. On a levered basis, that means you’re completely wiped out. Gone.
And here’s the kicker: adjusted for inflation, Tokyo commercial real estate is still 70% below the 1991 peak. We’re talking about a paradigm flip that happened 35 years ago that still hasn’t fully recovered.
The Sunbelt, 2021-2022: My Favorite Punching Bag
I know, I know. I talk about this one a lot. But it’s the most recent example, and it illustrates the pattern perfectly.
From 2020 to early 2022, the story felt airtight. People fleeing high-tax states. Explosive rent growth. Friendly local governments. Remote work tailwinds. Dirt-cheap debt. Every broker you talked to knew everybody was moving to Austin and Phoenix and Nashville. Every comp supported the next overpriced acquisition.
And for awhile, it was true! Rents did skyrocket. Cap rates did compress. If you bought in 2019 and sold in 2021, you made a killing.
But the whole thing only penciled if rates stayed near zero forever. If taxes and insurance stayed tame. If migration patterns held. If you could always refinance your bridge debt into something permanent.
Then the Fed hiked. Fast. Rates blew out. Insurance premiums doubled. Cap rates normalized. Remote workers moved back home.
Suddenly, everything that was “obvious” wasn’t obvious anymore. By 2023, deals were falling apart. Keys were getting handed back. LPs were taking real losses — many for the first time ever.
I remember a broker during the frenzy telling me that long-term Denver investors were “anchored on old-world pricing” because they wouldn’t pay 3-cap prices for tired buildings. Except, as it turns out, they were right. They’d seen this movie before.
Beyond this point we dive into strategies to future proof your investments, ensure you’re not falling prey to the paradigm, and help build a more resilient portfolio. This segment is for paid subscribers of The Timeless Investor.
