Bubble Bath

“It's not a ‘tech sell-off.’ It is a massive repricing of abstraction.  We had a bubble in dreams.” – Peter Atwater

The reason oil and water don’t mix comes down to their molecular structures. Water is highly polar and prefers to associate with similarly polar things like table salt or sugar, both of which can be readily dissolved in water. Oil is nonpolar – you can dissolve butter in oil but not in water. Pour oil into a glass of water and the two phases will remain separated with the lower density oil floating on top.

Now imagine a molecule shaped like a string. One end of the string is highly polar, while the other is distinctly nonpolar, but they are firmly connected together. What happens if you add a small number of such molecules to water? In a miracle of chemistry that literally enables cellular life as we know it, the molecules will all float to the surface and orient such that the nonpolar part sticks out of the water and the polar part faces in, like a group of synchronized swimmers treading water in a pool. Put them in oil and they’ll do the same thing in reverse – the polar part will stick out, leaving the nonpolar part to face the oil. A molecular handstand if you will.

These bipolar molecules are “surface actors,” more commonly known as surfactants, and they play a critically important role in many aspects of modern life. For example, good hygiene is achieved by leveraging the science of surfactants – dirt particles are oily, soaps are composed of surfactants, and when you combine soap with water the surfactants surround the dirt particles and make them water-soluble. Rinse away the resulting dirty water and, voila, cleanliness! Should you now think of the green chicken every time you wash your hands, well, we can think of worse legacies.

As you undoubtedly discovered at some point during childhood, if you blow air through a thin film of soapy water, a spherical bubble will form. At the molecular level, bubbles are fascinating metastable thermodynamic states. They consist of an extremely thin layer of water sandwiched on both sides by surfactants oriented with their polar sides facing in. Once formed, these highly ordered wonders of the universe drift along in the air, seemingly unmoored by the laws of gravity, the gentlest of breezes pushing them ever higher. As we’ve discussed previously, disorder is spontaneous, and, as such, the inevitable fate of all bubbles is to pop, sending an explosion of surfactant and water molecules crashing back down to earth. Sometimes the pop comes from the unwelcomed pierce of a sharp object. Quite often, though, they simply “poof” into the air, having eventually succumbed to the fact that water will slowly evaporate from the bubble, disrupting the delicate local equilibrium with fatal consequences. Either way, no such molecular party lasts forever.

When asset prices get stretched beyond all comprehension, the bubble is a near-perfect analogy. An army of investors (surface actors) surround razor-thin slices of value (water) which are promoted by hucksters and influencers as the next great thing (blown into bubbles). And while the bubble floats it is something to marvel at, even knowing the violent end nature inevitably has in store for it. It is mathematically impossible for the average investor to escape a bubble with a meaningful share of the value, because once a small number head for the exits, the bubble necessarily pops. A metastable state is not a stable state, in the same way that a mirage in the desert is not a body of water. The value was never there – the inside of a bubble is nothing but air, after all.

The market era from the post-Covid lows of March 2020 to the end of 2021 will undoubtedly be known as the Great Stonk Bubble™, a time when all manner of financial instruments traded hands for unthinkable sums. Whether it be demonstrably worthless JPEGs on the blockchain selling for millions of dollars each, or an insolvent movie theater company seeing its market capitalization rise by a factor of 60 from its well-deserved (and likely soon to be revisited) lows, signs of recklessly excessive speculation were so obvious that it was impossible to not know we were in a bubble, although predicting how and when it would burst was made no easier by the seemingly comprehensive nature of the pandemonium. 

With central bankers the world over now running around with scissors sharp-ends-out, signs are strong that many of the most egregious bubbles may finally be popping. Last year during the early days of Doomberg, we penned a trilogy of articles under the Super Stonks! banner in which we poked a little fun at some obvious market excesses, focusing on the then high-flying stocks of Beyond Meat, AMC Entertainment Holdings, and Uber Technologies.  Given the passage of time and our authentic desire to understand how well our predictions have held up, we thought it would be instructive to revisit the analyses we laid out in those pieces and determine whether some broader insights into the current market dynamics bubble to the surface.

Let’s dig in.

[Disclosure: No member of the Doomberg team has any position in the companies discussed herein, nor do we intend to open one in the coming weeks.]