The Sands of Time
Back in 1987, three
physicists called Per Bak, Chao Tang and Kurt Weisenfeld wrote a computer
program to simulate what happens when grains of sand are repeatedly dropped onto a
table top. They developed it to try to solve the problem as to why sometimes
the dropping of one small grain of sand on a pile will cause no effect,
sometimes it will create a small avalanche, and sometimes there will be a
catastrophic collapse. After much dropping of sand they concluded that there
was no pattern to the outcome, sometimes it was negligible, sometimes total
collapse ensued, it appeared totally random.
Next they decided to look at the sand pile
from above and show the degree of steepness of the faces by colouring flatter,
more stable areas green and steeper more unstable faces red. As the test
continued and more grains of sand were dropped, more of the face became red.
Starting with small independent areas of red, slowly but surely the area of red
increased and linked together forming a matrix over the surface of the pile. Up
to this point the dropping of one small grain of sand could only affect small
areas of the pile, but once the matrix was complete it had the potential to
cause a total collapse. Scientists refer to this situation as a critical state,
the point at which there is an opportunity for significant change.
Once this discovery was made,
its influence was recognised in a whole range of seemingly random events from
ecological disasters to earthquakes, and epidemics to traffic jams.
We also see this slow development
of a critical state develop in financial markets. As markets rally over a long time period they
often climb a ‘wall of worry’, meaning that despite an increasing stream of
market negative news-flow, investors continue to disregard or put a ‘positive
spin’ on things and drive the market higher. At times investor’s ability to
ignore reality is a sight to behold, as one by one the positive arguments for
the market fall away to be replaced by negatives, they increasingly cling to
the remaining bullish arguments until we finally arrive back at that sand-pile,
and its critical state. At this point the market has reached an incredibly
unstable condition, and any piece of seemingly innocuous bad news can be the
grain of sand that causes the market to crash.
Another area where we are currently
witnessing this phenomenon is in the increasing civil unrest occurring around
the world. Over the last few months we have seen problems occurring in South America,
the Middle East, Spain, Turkey, Thailand,
Malaysia and most recently Ukraine. In all
of these countries the people are rising up to protest at declining living
standards, low economic growth, increasing taxation and rampant corruption.
These problems have been developing for many years, laying the foundations for
the crises we are seeing now. Like the financial ‘wall of worry’, the problems
gradually intensify but change can’t happen until the time is right and we
reach the critical state, then one more event occurs that breaks the camels
back and the civil uprising begins. That is what we are seeing play out around
the globe, and as the months roll on we will see it spread like an epidemic.
As I have discussed in
previous posts, the financial implications of this will be the increasing flow
of money to the last safe haven, the US dollar. Far more concerning will be the
human cost as this cycle plays out, and its predictability doesn’t make it any
easier to witness.
It’s clear to see that the
phenomenon of the critical state is all around us and seems to permeate all
aspects of our lives. But whilst its effects can be immensely damaging, knowledge
of its existence and prevalence gives us all at least a chance to occasionally see
it coming and avoid its outcome.
Cycling around the South
Island of New Zealand
I am a trustee of a New Zealand
based charity called The Shortbread Trust. Based in Nelson, we work to help
people in developing countries by fundraising to build water wells to provide
clean drinking water in Nepal,
funding micro finance projects to give a helping hand to farmers in Africa, and buying Shelter-boxes to send to disaster
zones. We take no administration fee and guarantee that 100% of donations go to
the cause. Please see http://www.theshortbreadtrust.com/
for more information.
Currently our Chairman is
preparing to cycle around the South Island of New Zealand towing a Shelter-box
to raise awareness and as a fundraiser, see https://www.facebook.com/theshortbreadtrust
for the full story.
If you like what we do,
please consider making a donation.
