The human world, like the natural world, has a tendency to create some very delicate balances.
I was watching a nature documentary the other day – watching a cheetah chase down a gazelle. It was beautiful to watch – the chase bit, not the tearing out the jugular bit.
Anyway, it led me to come up with a theory I call the “knife-edge equilibrium” theory.
The basic idea is that any system will naturally tend to the most delicate balance possible, over time.
Think about the cheetah and the gazelle. The cheetah is the fastest animal on earth. They hunt gazelles. Gazelles are (pretty much) the second fastest animal on earth.
Do you ever wonder why cheetahs just don’t go after slower animals? That aardvark looks pretty tasty.
But the cheetahs and gazelles evolved together. Cheetahs picked off the slower gazelles til only the speedy genes survived. Speedier gazelles meant slower cheetahs went hungry, til only the speedy genes survived.
And on and on it went until you had the two fastest animals on earth living on top of each other.
And now they’re in a delicate balance. One slight stumble and the gazelle is toast. A slight trip out of the blocks and the cheetah goes hungry.
The difference between life and death is a hair’s width across. The balance is as delicate as it is possible to be.
Now think about what that’s like for the cheetah and gazelle. If they had a capacity for stress, they’d probably be pretty nervous. Their fate hangs by a thread.
They say that cheetahs will readily give up their prey if something bigger comes along and tries to steal it from them. The cheetah depends on its speed. It’s its only weapon. If it hurts its arm in a scrap with a lion, it’s toast.
It’s also why they have such an elaborate warm-up routine and a post-game ice bath. Careful Brian, you don’t want to do a hammy.
And if you look around the world, most creatures live like this. Squabbles over territory between species look like fighting to us, but are much more about posturing. Most species have evolved posturing dances that figure out who is top dog, without risking life or limb for the participants involved.
Because all species live in this balance. If they lose an eye or break off a limb, it can mean the difference between eating or not eating, or being eaten and not being eaten.
It’s all a delicate balance. As delicate as it can be.
But humans have escaped this particular tyranny. We don’t feel the breath of lions and tigers on the back of our necks any more.
And injury doesn’t mean what it used to. You can break almost all the bones in your body in a motor-cross accident and it is very unlikely that you will starve.
A cheetah does not have the luxury of lying around for a couple of months watching Simpsons reruns.
And its one of the successes of our society is that there are productive and important roles that people with any disability can find.
Not that long ago, people born blind became poets, bards and entertainers because they couldn’t work the fields. People born with dwarfism were sent off to the circus. But we’ve grown out of that.
And that’s great right? This should give us an enormous sense of ease and well-being.
And yet stress is epidemic.
Why’s that? Well I would say that this knife-edge equilibrium theory applies as much to human systems as it does to natural systems.
We have a tendency to push things to their limits. We push and push and push.
Think about mortgage rates. They’ve come down and down, and as a result people have borrowed more and more. People push their mortgages to the limits of their serviceability.
I know a lot of investors have decent buffers in place, but a lot of people borrow as much as they can. They could probably handle a lift of a percentage point, maybe two, but anything past that, they’re in trouble.
And something like 17%? Forget it. The balance has shifted too far.
The current level of interest rates becomes a knife’s edge with little room to move. Remember Howard’s “Who do you trust on interest rates” and how that scared the poop out of the gazelles?
Same story with the global economy. We feel very sensitive to wobbles in China, or rumours of debt defaults in Neverheardofitistan. During the good times we push it to the limit, and the balance become more and more delicate every year.
And so most people live like cheetahs and gazelles. Nervous that we might lose our jobs, or that the stock market might flop, or the Yuan will collapse, or the Fed will raise rates.
I mean the Fed talks about taking rates back into positive territory and markets freak out.
Before the GFC the idea of negative rates was unheard of!
The balance has shifted and the balance is delicate. It’s just one of the laws of physics. Jon Giaan’s law of knife-edge equilibriums.
I’m thinking a bit about this at the moment because I hear people saying it’s not a good time to get into the market – whether that’s shares or gold or property.
Look under the skirt of any market right now, and they all look pretty fragile. Stocks are hooked on the QE juice, nobody knows what gold is doing, and property is being rattled by APRA restrictions.
And so people say, “too fragile for me, I’ll wait til things look more stable.”
But this is the point. You’ll be waiting forever. Systems seek out the most delicate balance possible. They are always in a fragile and delicate balance.
As investors, we just need to find peace with this. Accept it, work with it, do your best. Find strategies that keep you clear of the major fault lines.
But there’s no point wishing that things were different. No point praying for slower gazelles.
It’s just the law – the law of knife-edge equilibriums.
Do you also think I deserve a Nobel prize for this?
What are you telling people when they get the jitters?