The Myth of Market Bubbles, or “On Crashing Waves”

I am currently reading James Gleick’s The Information. Now, I’m a big fan of science books written for educated, if non-technical audiences. Over the past five days of spring break, I’ve read three. If there’s one thing I’ve noticed over the course of my perusal of bookstore shelves, and tracing the curvilinear path toward some overarching theme for all of these books, it’s this: “Popular science” books, lately, use analytical frameworks from natural and physical sciences to help explain topics in the social sciences. Furthermore, there has been a recent trend toward explaining bursts of information, innovation, and activity. I’ve come up with a metaphor.

Below are two paragraphs I brain-dumped into my iPhone. The Apple Mail client didn’t like me for typing so fast. Fair warning, they’re largely unedited.

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Imagine a tsunami. Its genesis, a displacement of undersea tectonic plates gives way to a front of pressure which progresses forward toward shore. When far out at sea, the wave may be a few inches high, but the front moves forward. Relative to all of the available water in a given column, the wave is minuscule. But it’s there. As the front moves closer to shore, into shallower waters, the wave begins to grow; water builds on top of water, the fluid providing solidity. Now, relative to the normal water column, the wave is a greater share of it. But, of course, the tsunami is still not all that dangerous. It could pass right under one’s boat, and the difference would probably go unnoticed. As it gets very close to shore, though, the wave extends significantly above the normal water column; it becomes a greater percentage of it. And as it gets still closer, the wave’s height becomes a multiple of the normal water column. Now, this is when the wave gets dangerous. Here it where it reaches its apogee, and where its mass curls into the hollow concavity before it. When the wave comes on shore, it is by definition an indefinitely large multiple of the normal water column for anything above sea level. It is at this undefined point, point infinity, and beyond it that the wave is most destructive; this, after all, is the plane on which it can destroy. Where it wipes clean our slate, where it leaves in its wake not a return to the origin but an inversion of progress. That’s the bit that hurts.

The term “market bubble” is a misnomer. What begins as a teeny sliver of a trend, spawned of some prediction or cause unknown, moves forward. They propagate, and just like a nascent tsunami, small reverberations go unnoticed. But if we conceptualize the market as we do the ocean, as a medium through which pressure fronts travel through an infinitely dense chain of nows until they reach their then, my point is made. As a trend travels forward through time, more and more dollars ride atop it. As a given trend commands a greater proportion of all of the dollars in a given market, directs those dollars not only into what they’d go but the direction—namely, up—of their going, the wave morphs from sinusoid to a singular peak. When everyone is screaming “buy buy buy”, that’s when one sells. From this peak the wave flops to one side, and the early adopters of that trend, those at the greatest height, come crashing down on the newcomers. It folds into itself. Bubbles don’t crash; breaking waves do. As do markets.


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