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.
Markets and free-will ensure bubbles are common and unavoidable. Depending on what level you look at, you can find bubbles anywhere.
Markets by definition have a multitude of bubbles in them. People place bets on the value of stocks going up. Others bet on the value going down. Stock prices are not a perfect indicator of the value of anything: people invest based on their prediction for the future, not the present.
But predictions for the future include our assessments of other people’s predictions of the future, which makes any market 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.
- Some believe our consumption economy is not sustainable. That at some point we won’t have the resources to 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.
- 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.