Building Kennels for the Market: Why Stability is the Ultimate Financial Asset
What can an ancient parable about fighting dogs in Beijing’s Forbidden City teach us about the complexities of modern finance, the volatility of the stock market, and the future of financial technology? It turns out, quite a lot. In October 2022, amidst a period of intense market turmoil in the UK, Godfried De Vidts, a former president of the International Capital Market Association, penned a short but profound letter to the Financial Times. In it, he shared a simple story that serves as a powerful metaphor for one of the most crucial, yet often overlooked, principles in economics and investing: the non-negotiable need for stability, predictability, and clearly defined territory.
The story, as relayed by De Vidts, goes like this: When foreign envoys visited the Chinese emperor, their dogs were not permitted inside the Forbidden City. Left outside together, they would inevitably fight. The emperor’s eunuchs devised a clever solution: they built small, individual kennels, each marked with the name of the envoy’s country. From that day on, the fighting ceased. The dogs, now with a territory to call their own, began defending it, channeling their energy constructively. The lesson, De Vidts concluded, is that “if you give people their own territory, they will start defending it and will work in a constructive way.”
This simple narrative is more than just a historical anecdote; it is a masterclass in risk management, regulatory philosophy, and the psychology that underpins our entire global economy. From the actions of central banks to the strategies of individual traders and the chaotic frontier of blockchain, the “Kennel Principle” reveals why drawing lines in the sand is the foundation of financial order.
The Parable in Action: A Mini-Budget and a Market Meltdown
De Vidts was writing in response to a very specific event: the chaos unleashed by the UK’s “mini-Budget” in September 2022. The new government, under Prime Minister Liz Truss, announced a package of £45 billion in unfunded tax cuts, the largest in 50 years. The move was intended to spur economic growth, but it was executed without the customary independent forecast from the Office for Budget Responsibility. In essence, the government let all the “dogs” out into the yard at once, with no kennels, no rules, and no clear plan.
The market’s reaction was swift and brutal. Investors, spooked by the prospect of massive government borrowing and its inflationary potential, dumped UK government bonds (gilts). As Reuters reported at the time, the pound plummeted to a record low against the dollar, and the cost of government borrowing soared. The sell-off was so severe it triggered a “doom loop” in the pension sector, forcing the Bank of England (BoE) into an emergency intervention to prevent a systemic financial collapse.
Here, the parable comes to life. The BoE’s governor, Andrew Bailey, became the emperor’s eunuch. He didn’t offer a permanent, open-ended bailout. Instead, he drew a clear line in the sand. The Bank announced a temporary and targeted bond-buying program with a firm end date, stating unequivocally that pension funds had a limited window to sort out their liquidity issues. He built a temporary kennel and told everyone exactly how long it would be there. This act of defining the territory—of setting clear, credible boundaries for the intervention—was instrumental in calming the panic. It replaced chaos with a degree of certainty, forcing market participants to act constructively within the new, albeit temporary, rules.
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The Investor’s Kennel: Defining Your Territory in Trading and Investing
The Kennel Principle extends far beyond the realm of central banking and macroeconomic policy. It is a fundamental concept for any individual or institution participating in the financial markets. An investor without a clearly defined strategy is like a dog in an open yard—prone to chasing every fleeting trend, panicking at every loud noise, and fighting losing battles against the market’s volatility.
An investor’s “kennel” is their investment thesis, their risk management framework, and their financial plan. It is a pre-defined territory built on a clear understanding of one’s goals, time horizon, and tolerance for risk. Without these boundaries, investors fall prey to the two great emotional drivers of market chaos: fear and greed. They buy high during euphoric bubbles and sell low during panicked crashes, destroying value in the process.
Consider the core components of a robust personal investment framework, which act as the walls of a protective kennel:
| Framework Component | Protective Function (The “Kennel Wall”) |
|---|---|
| Risk Tolerance Assessment | Defines how much volatility you can stomach, preventing panic-selling during downturns. |
| Asset Allocation Strategy | Creates a diversified portfolio (e.g., 60% stocks, 40% bonds) that acts as a structural boundary against over-concentration in a single, risky asset. |
| Clear Time Horizon | Prevents short-term market noise from derailing long-term goals, like retirement or education funding. |
| Rebalancing Rules | Provides a disciplined, unemotional mechanism for selling high and buying low, forcing you to maintain your defined territory. |
On a larger scale, the entire regulatory architecture of the stock market—from SEC disclosure requirements to insider trading laws—is a massive, intricate system of kennels designed to ensure the market is a place for constructive capital formation, not a chaotic free-for-all.
Building Kennels for the Digital Frontier: Fintech and Blockchain
Perhaps nowhere is the image of “dogs fighting in the yard” more apt than in the early, unregulated days of the cryptocurrency market. The world of blockchain was founded on a libertarian ideal of a borderless, permissionless financial system. While noble in theory, the absence of established “kennels” led to predictable results: extreme volatility, rampant scams, and catastrophic collapses like those of Terra/Luna and FTX.
The “crypto winter” was a harsh but necessary lesson in the Kennel Principle. In its wake, a global push for regulation has emerged, representing a concerted effort to build a stable and defined territory for digital assets. Initiatives like the European Union’s Markets in Crypto-Assets (MiCA) regulation are designed to do exactly what the emperor’s eunuchs did: establish clear rules for issuers, exchanges, and custodians. According to a breakdown by EY, MiCA aims to provide legal certainty and a harmonized framework, which in turn fosters investor protection and financial stability.
This isn’t about stifling innovation. It’s about creating an environment where legitimate financial technology can flourish. Even within the world of fintech, the most successful innovations often involve creating smaller, more stable territories. Think of stablecoins like USDC or USDT. Their entire purpose is to be a “kennel” of stability—a predictable, dollar-pegged asset—within the wildly fluctuating ecosystem of blockchain. They provide a safe harbor, a unit of account, and a reliable medium of exchange that enables a more complex and constructive DeFi economy to be built around them.
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The Macro Kennel: Central Banks as Arbiters of Economic Stability
Ultimately, the largest and most important kennel of all is the one maintained by a country’s central bank and its government. A nation’s monetary and fiscal policy framework is the ultimate boundary that dictates the behavior of all other economic actors. As the Bank for International Settlements (BIS) often emphasizes, clear communication and policy credibility are a central bank’s most powerful tools. Their research consistently shows that when a central bank clearly articulates its inflation target and its strategy for achieving it, it helps to anchor inflation expectations and reduce market uncertainty.
This “forward guidance” is the verbal construction of a kennel. It tells businesses, investors, and consumers what to expect, allowing them to plan, invest, and spend with confidence. When that guidance becomes murky, or when fiscal policy (like the UK’s mini-Budget) directly contradicts it, the walls of the kennel are torn down. The dogs get out, and the fighting begins.
The global economy is an infinitely complex system, but the principles that govern it are often remarkably simple. The parable of the envoys’ dogs is a timeless reminder that prosperity is built not on chaos and boundless freedom, but on the foundation of a stable, predictable, and well-defined system of rules. Whether you are a central banker setting interest rates, a fintech entrepreneur building a new platform, or an individual investor planning for retirement, the first and most important task is to build your kennel. Define your territory, defend it with discipline, and you can turn chaos into constructive action.
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Conclusion: The Enduring Wisdom of Order
From a brief letter to the editor emerges a universal truth: structured environments foster productive outcomes. The chaos of the UK gilt market, the volatility of an unplanned investment portfolio, and the wild west of early-stage blockchain all tell the same story. They are tales of what happens when there are no clear boundaries. The response from the Bank of England, the discipline of a sound trading strategy, and the global move towards crypto regulation are the modern-day equivalent of building kennels. They are acknowledgments that for finance to serve its ultimate purpose—the efficient allocation of capital for productive growth—it requires a bedrock of stability. In a world of accelerating change and complexity, the wisest investment we can make is in the very frameworks that protect us from our worst, most chaotic impulses.
