With this in mind, one lesson we could usefully learn is that economies can run along a Zeeman cusp catastrophe curve. In this model, devised by celebrated mathematician and geometric topologist Christopher Zeeman, two stable discontinuous equilibria – one optimal and one non-optimal – exist side by side.
Crucially, the transition from one to the other is sudden and dramatic, with any single catalyst hard to identify and still harder to predict. By way of illustration, imagine walking towards Beachy Head in a thick fog, unaware of the drop that awaits: the existing equilibrium would persist if you were to turn, whereas a radically new equilibrium would result if you were to stroll straight ahead and over the cliff edge – or over the cusp.
The economies that the World Bank’s report hailed were not a fantasy. Yet the conditions that fuelled their supranormal growth simultaneously engendered potential economic fractures that, at least under specific conditions, crossed the Zeeman cusp.
Ultimately, maybe the most important lesson of all is that equilibria are stable simply until they are not. Such brutal logic would certainly explain why life can sometimes be rather uncomfortable for investors and why it invariably pays, whether literally or figuratively, to devote close and constant attention to the basics of portfolio construction.
Paul Wharton is chief investment strategist at Tacit Investment Management
