Stock markets are like Windows - certain to crash

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The Independent Online

Thirteen years ago, I was a different person. And 13 years ago, the stock markets were different: indeed, the whole world was different.

Thirteen years ago, I was a different person. And 13 years ago, the stock markets were different: indeed, the whole world was different.

Then, I worked in the newspaper industry: I had a fun job, but I made less money than most of my peers and spent a lot of time making ends meet (helped by a fabulously organised spouse). And then, the American Nasdaq stock market was worth a fraction of its current value, even including recent events.

Early in 1987, I had become sufficiently affluent to buy my first mutual fund. I happily watched it increase in value. Until Friday, 19 October of that year, that is. Then I watched my mutual fund dive some 20 per cent. I, who had just begun to feel a little affluent, suddenly felt much less so.

In 2000, I watched the 10 per cent decline on 14 April with no great consternation. I wasn't even sweating the 34 per cent decline in the Nasdaq since 10 March, my birthday. My circumstances are very different now.

In 2000, I work in the hi-tech industry, which has been ravaged. Week before last, the Nasdaq lost more than the entire annual federal budget of the United States - over $1,000 billion. The drop in my net worth on 14 April was probably greater than my entire net worth in 1987 (not that I'm a big player in Silicon Valley - I'm a midget in the land of giants). But I don't feel nearly as poor as I did 13 years ago.

And, unlike Black Friday 1987, Black Friday 2000 saw me figuring out how to buy more stock, now that prices were more reasonable. I shunned the market for years after the 1987 crash.

Probably, I'm a complete techno-wonk, a guy who's drunk so much from the well of hi-tech hype that he can't help but plunge straight to his doom. But, I actually don't think so.

What I think is this: the world has changed. The global economy made one of those fundamental shifts that used to take millennia, or hundreds of years, and that now take mere decades. Soon, I think, those leaps will happen in mere years, maybe months.

Every other epoch of remarkable change has seen similar bust and boom. The Industrial Revolution and the attendant shift to merchant economies saw such notable events as the Tulip Bubble in 17th-century Holland, thegreat South Sea Bubble in England in the 18th century, and (my favourite) the Missouri Gold Rush (which happened in France).

But all those worthy nations not only survived the bubbles, but prospered. Britain's wealth would increase some 25 times in the following century. And I, for one, believe that the whole world's wealth is going to increase at least 25 times in the next 13 years, much less the next 100.

Indeed, I think the behaviour of the markets - wild up and down swings - is signalling not the end of overinflated net stocks (of which there are many), but something more fundamental. That fundamental shift is driven by what's been called the "Network Effect".

Information theory says that a network's utility goes up by the square of its nodes: the internet now has hundreds of millions of nodes. As a result, new technologies are being invented, and informing other new technologies, at an ever-increasing rate. New and useful things are being created at a pace unprecedented in the history of civilisation.

No one said that the internet would lead to Linux, but it did. And Linux has begun to grow faster than that last unheralded phenomenon, Microsoft.

But our human capacities, highly evolved over millennia for the job of being hunter-gatherers, are increasing at a much slower pace. Selection operates on the time scale of hundreds of thousands of years. But the internet operates on milliseconds. The resulting effect is that our ability to foresee even the near future - the likely path of inexorable events - is sharply reduced.

The mathematician Vernor Vinge posited a similar theory in 1993, and dubbed it the Technological Singularity - a singularity being an event where old rules stop working and a whole new physics has to be created to describe the phenomenon. Black holes, those mysterious astronomical oddities, are termed singularities by physics professors.

Black holes have an event horizon, a place beyond which information, in the conventional sense, seems to be lost. Similarly, the technological singularity imposes an ever-nearer event horizon in the future, past which us mere humans will have little hope of gauging events.

The stock market is supposed to tell us the net present value of a company's future prospects - and that was once a relatively straightforward job. As populations grew, they would need more cars and bedclothes, and we could guess at what the sales of the relevant vendors would be.

But now, we sense the world is changing dramatically, and we have a really hard time putting a valuation on lots of things. We are trying hard to apply our old models to future events, but they break down in a hurry. Even light behaves peculiarly in the vicinity of a black hole.

We know the future is going to be very different, but we don't yet fully appreciate how quickly it's going to get different. We just don't have a clue - so we bid up the stocks of everything: pet supplies over the internet, for example.

The 2000 Net Pet Bubble may well burst: be prepared for the worst, pet lovers. But 13 years from now, we'll all be wondering why we were so bothered by such a small blip.

cg@gulker.com

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