“In this simplified setting of the sandpile, the power law also points to something else: the surprising conclusion that even the greatest of events have no special or exceptional causes. After all, every avalanche large or small starts out the same way, when a single grain falls and makes the pile just slightly too steep at one point. What makes one avalanche much larger than another has nothing to do with its original cause, and nothing to do with some special situation in the pile just before it starts. Rather, it has to do with the perpetually unstable organization of the critical state, which makes it always possible for the next grain to trigger an avalanche of any size .” [Link]
I think we ought to remember this very well because we look for triggers to cause bubbles to collapse, in financial markets, for example. In fact, our expectation is that bigger the bubble, the bigger and proportionately important trigger for it to collapse. Right now, everyone is focusing on the obvious trigger: that the Federal Reserve would raise interest rates. It may well not do so but yet the bubble can collapse simply because many small things add up.
I came across think from John Mauldin’s ‘Thoughts from the Frontline’ titled, ‘On the verge of chaos’ published on 23 November 2014. It is well worth a read. The paragraph above comes from a a book that he has cited in his TFTF published in April 2006! In June 2006, financial markets began a six-week period of turmoil and turbulence.
GMO’s third quarter newsletter too is out and Jeremy Grantham has his own outlook on market, on fossil fuels and Ben Inker has written on the outlook for returns on financial assets titled ‘Purgatory or Hell’. All of them are worth a read.
Greenspan’s conversation with Gillian Tett under the auspices of the ‘Council on Foreign Relations’ in October 2014 was very insightful. I will blog on topics ranging from gold to inflation to bubbles that he addressed in that conversation.
If you read these links and reflect on them, you will know why the ‘grain of sand’ theory makes sense.