A funny thing happens when something everyone already knows suddenly "matters."

Take Trump's tariffs.

He's doing what he promised.

No surprises.

Yet markets are as rattled as a first-time skydiver realizing they actually have to jump.

The same thing happened with DeepSeek.

People knew in December that a Chinese AI company was claiming to outperform the big boys at a fraction of the cost.

The open source model (V3) was available as far back as December 23. (R1 was released on January 20th, but it wasn’t that different from V3.)

But the reaction only came after Trump was inaugurated and the SPY made a marginal new high—a "false break"—then tanked.

As if the market was looking for an excuse to dump—and DeepSeek provided it.

And, Bitcoin? What the HECK happened to Bitcoin?

Behind all the noise, consider what’s slithering behind all of this volatility.

Two words: Max pain.

Let me explain. And then offer three takeaways.

The Max Pain Principle

You’ve probably heard a thousand times that it pays to be contrarian… but far fewer times why.

"The foolishness of the many,” said Dickson G. Watts, “is the opportunity of the few."

“Never follow the crowd,” said Bernard Baruch.

"Berkshire buys when the lemmings are heading the other way,” wrote Warren Buffett.

"It is impossible,” wrote Sir John Templeton, “to produce superior performance unless you do something different from the majority."

The best investors in the world know one thing:

Markets aren’t driven by raw data or facts alone—they react to narratives that shape investor sentiment.

AND, here’s the crucial part: 

Those narratives tend to evolve in ways that maximize volatility and inflict the most pain on the majority.

In other words, markets push prices toward levels where the most people are wrong.

When most traders go long, the market has an incentive to flush them out with a drop. When most go short, a sudden rally triggers short squeezes.

In other words, markets tend to operate on The Max Pain Principle.

To be sure, this isn't a flaw in the market—it's an emergent feature of how liquidity, leverage, and human psychology interact.

A market is a game of competing participants with different strategies, time horizons, and risk tolerances.

Weak hands (short-term, emotional traders using leverage) are (generally) at a disadvantage against strong hands (long-term/ unemotional players).

If we tried to eliminate volatility and "pain," we’d be left with central planning, price controls, or artificially smooth markets—none of which reflect real supply and demand and market dynamics.

The result? Misallocation of capital, stagnant markets, and crushed innovation.

[Sidenote: Indeed, the market could be fairer. DeFi could help by eliminating some manipulative tactics (e.g., wash trading, spoofing). Automated market makers (AMMs), for instance, force traders to use real capital instead of gaming order books. But market pain isn’t a bug—it’s the game. Liquidity traps, volatility, and whale-driven shakeouts remain. DeFi may reduce distortions, but the Max Pain Principle is here to stay.]

What it Means for Investors

The market freaked out, but panic always front-loads.

The people ahead of the curve? They see the opportunity.

Three takeaways:

One, they’re buying the dips. Market tantrums are a gift. Markets price in fear first, logic later.

Two, they’re betting on innovation.

Take, for example, AI efficiency. The major LLM players might be bloated. Even if DeepSeek’s budget isn’t 100% real, it shows that cheaper, open-source models could keep up.

That trend probably won’t reverse.

The big winners, then, are those using the efficiency gains to solve real problems -- i.e. domain-specific AI-driven companies. 

Three? Watch the dollar.

That third one is important. But requires some nuance.

More on that -- and Trump’s tariff tornado -- tomorrow.