A “bubble” is when you don’t own, or no longer own, what kept going up in price. -Nassim Nichol Taleb (#)
When I hear debates about whether there is a tech-bubble, or a real-estate bubble, I think “everything is a bubble” in some way. I don’t mean this as an investment strategy. I’m expressing doubt about the utility of calling out the existence of bubbles. Unless you can predict when the bubble starts or ends awareness of a bubble isn’t interesting. Markets and free-will ensure bubbles are common and unavoidable. Depending on what level you look at, you can find bubbles anywhere.
Since predictions for the future include our assessments of other people’s predictions of the future, any market is a network of speculations built on top of other speculations. This is fragile and prone to feedback loops. Feedback loops generate dramatic rises and falls. Widespread optimism about something can fuel years of investing in something that never pans out, and markets are dominated by optimists about markets.
Many investors love bubbles provided they get in on them early, and get out before they burst. They care nothing about “real” value. They are investing to profit, and don’t need “real” value to profit, but only the stock price to go up.
Here are some examples:
- The sun is going to explode in a few billion years. This makes the earth, and our civilization, a bubble. We will not be here forever. Our certainty about the human world is unfounded. We know we take for granted many things that are not certain or are guaranteed to change for the worse for us. The human species is likely a bubble in the history of the universe.
- The world economy is based on faith in banks and this faith creates a kind of bubble. If everyone asked to withdraw all of their money at the same time the banks would collapse. For economies to work there must be a balance of faith and doubt.
- Some believe our consumption economy is not sustainable. It’s possible we won’t have the resources to cheaply produce, or buy, the kinds of goods that make up much of the world economy. If this is true, the entire economy is a bubble. Which means a bubble in any domain is is really a bubble (domain) on a bubble (entire economy) on a bubble (human race).
- We are all going to die. We behave mostly as if we will live forever. Our lives are bubbles. We live in denial of the great uncertainties of when and how we will die. On the day people die, their families are surprised to learn how much unfounded security they placed in something that disappeared instantly, and possibly without warning.
- People are strange and place value emotionally. Is a rare baseball card or pair of high fashion shoes worth $5000? Not in any practical sense. But civilized humans are not bound by historic practicalities. We are free to confuse perceived value with real utility whenever we like (or more precisely, can, afford to). When the apocalypse comes the survivors will be talking about how electricity, highways and running water were central to the “civilization bubble”.
- Relationships are bubbles. Most of them end. Two people are good friends for a time, then lose interest in each other. If you created a stock price for each friendship, you’d seem them rise and fall. If you moved or took up a new and annoying religion that alienated your friends, you’d see a ‘friendship bubble’ burst, and your stocks drop.
The challenge isn’t identification, its timing:
- If bubbles are easy to find, the challenge isn’t identifying them: it’s predicting when other factors will force those bubbles to burst. Bubbles can last for years, decades, or in the case of dinosaurs, millennia. So what if you see a bubble: that doesn’t necessarily mean anything.
- Awareness of a growing bubble means little, unless you know when the bubble will end.
- Macro-economics do not define micro-economics: A bubble can burst in an industry, but the strongest players may still do well. A bubble can rise in another, and the weakest players may still struggle.
This is why articles making an argument for the existence of a bubble are empty to me. What do you think?