the doctor Would Like To Remind You That Any Balloon Will Pop Under A Sufficient Pressure Differential

I don’t care what it’s made of – there isn’t a container in existence that won’t explode if filled to a point where the internal pressure exceeds the external pressure by a sufficient amount. Remember the second law of thermodynamics – the entropy of an isolated system not in equilibrium will tend to increase over time, approaching a maximum value at equilibrium .

In free-market economics we have a similar law, called the law of supply and demand which predicts that in a competitive market, price will function to equalize the quantity demanded by consumers and the quantity supplied by producers, resulting in an economic equilibrium of price and quantity . Taken to extremes, it means that if prices skyrocket, demand plummets, falling to zero at the extreme. This holds true in the stock market as well, as it’s a free market where the good is ownership.

That’s why we have boom and bust cycles and why an unrestricted boom is guaranteed to result in a spectacular bust. There comes a point where investors en-masse are going to decide that the price is just too damn high and want out, even if we don’t know what that point is in advance. That point is much more likely to be hit if share prices rapidly skyrocket. If this happens market-wide, due to a sizable increase in invested capital in a short time-frame, we have a boom. If the boom continues unabated, a bust is guaranteed.

So, needless to say I was quite annoyed to see an article titled Emerging Market Mania: Is It Different This Time on the Knowledge @ Wharton site (one of my favorite publications) – because the answer is bloody obvious. It’s not different! It’s never different! The laws are immutable! As long as we use a system of measurement that places a finite value on the GDP of each nation, the sum of the GDP for all nations is going to be finite. This guarantees that there will exist a point in each stock market, and each stock, where the price will be too high for the average investor, and these investors will want out en-masse. When this happens, you have a bust. “Market Mania” is always bad! Participating in market madness again and again is equivalent to putting your hand on that hot burner again and again. You’re going to get burned. That’s not going to change! And don’t give me that “it’s a different company” or “it’s a different market” bullshit as your excuse. The fact is that any burner on the stove will burn your hand just like any burner on any stove will burn your hand.

So, before you go diving into a market everyone else is diving into, be sure to do your homework and make sure it’s a justified move. If a market is extremely under-valued or under-served or has a considerable excess of supply, then it will be able to support a large influx of competitors and currency. However, if it is over-valued or over-served or does not have enough supply to meet current demand, any investment or entry by any organization is a very bad idea and you never know what entry is going to be the entry that causes the market to reach the tipping point and start the rapid downhill slide from boom to bust.

If you’re wondering why I’m rambling on about the inevitable bust that’s sure to follow an irrational boom, just remember that it’s not just finance that needs to worry about market valuations – supply management has to as well! The financial strength of your supplier is at least partially dependent on the financial strength of the market it’s shares are traded in or on the strength of the local economy. From a risk management perspective, the financial strength of your supplier is a key factor in terms of evaluating how much risk an award to that supplier poses – and any supplier in a risky market is going to carry a certain amount of risk.

Before I conclude this blogologue, I should point out that the article did have some good points. It pointed out that emerging markets cannot be evaluated en-masse – each is distinct and needs to be evaluated on its own. It stated the need for differentiation between emerging markets like Brazil, Russia, India, and China (the “BRIC”) and the frontier markets like Egypt, the Balkans, Bangladesh, and parts of Africa that could be the next investment hotspots. It noted that countries with abundant natural resources will likely experience an economic boom for the foreseeable future (thanks to increasing demands from the developing economies). And it noted that knowing where to go next with investment capital is always a challenge.