The market network’s disposition

Dan Ramsden
7 min readMar 13, 2020


What follows is the long-term investment case in the near-term volatility. A major long-term risk is going to be psychological.

The narrative predefined

Recession and bear market are the standard terms these days — both economic milestones that are at once quantitatively definable and deceptively subjective. And both, explicitly or implicitly, suggest a prolonged and persistent pattern, a multi-period continuation that defines its era.

Both captions from Investopedia

The analysts and pundits have designated the 3-week (thus far) turmoil a bear market, rigidly in line with the 20% rule, tuning out the possibility of a rebound (because in fairness who can know), attributing the event to a global recession, per the defining criteria, in anticipation.

Now, if the pandemic at the center of attention turns out to be shorter-lived, and if the economic consequence turns out to be a rebound after the initial shock — a possibility discussed below — the referenced designations will, with hindsight, at that time, not altogether fit, not really.

Which will be noticed only then, weeks or months into the future, long (by today’s standards) after the events they correspond with will have passed.

Semantics, in the meanwhile, are important in a time of rapid-fire social distribution and consumption, where the narrative is shaped sometimes before it’s fully understood, and where, in markets in particular, the trading often happens on the basis of keyword triggers. What’s more, to the extent the label drives behavior, as much as vice versa, the reflexivity can’t be entirely ignored.

These arbitrary near-term guideposts in advance — bear market, recession — suggestive as they are of lasting trends, come with distorting consequences. It is assumed that markets capture all the information, but among this trove of knowledge is the circular reaction in the market itself.

Financial markets are narrative exchanges, and to the extent the market narrative affects the economic result, which in turn perpetuates the market narrative, the observed network pattern is not unlike that of a viral condition. It requires watching and discerning vigilance, lest its growth should dominate and fundamentally take over.

A recession or a blockage

Markets discount the future economy, but only as efficiently as the future economy is clear.

Like the image in the masthead, this WSJ pre-market snapshot is from the morning of March 12.

It’s possible, this time, that the market is in general not distinguishing between economic turbulences of different types.

One type is fundamental and self reinforcing, driven by natural demand deterioration. Another type is a function of self-imposed blockage — which is currently the case — as travel, commerce, and other consumption patterns are purposefully interrupted in response to a temporary and isolated condition.

For us now, looking forward to anticipate our economic future, the question is one of length and breadth of the disruption. Conceivably, the longer and the broader, the more it becomes likely that it spills into intrinsic demand, as incomes and financial asset values fall.

If, on the other hand, the condition is short-lived and in the aggregate marked by proportionately small numbers, demand may be sufficiently pent-up to drive a (substantial) rebound when the blockages are lifted.

That is an investment thesis at this time. It isn’t possible to know, but a case could probably be argued that the more severe and widely spread the conscious barriers now, the better the odds that the condition runs its course with (relatively) mild consequences. The economy we’ll find ourselves in on the other side, if this should come to pass, will be expansionary, perhaps significantly so.

The market doesn’t seem to feel this way, at this time.

The S-curve and the epidemic

It’s been observed that networks grow along the shape of S-curves, where the flattening takes place when limits in network effects are reached. This is a phenomenon we’ve seen in the social networks, which often seek to boost the growth with product introductions or, sometimes, by acquisition.

The desired outcome of such events isn’t only to increase the number of participants, or nodes, that are active in the system, but to increase the ways and reasons to engage, the ties between them. In combination, this should lead to greater network size and density, consisting oftentimes of more and bigger clusters. In commerce, this is a desirable result. In certain other cases — for instance, epidemics — the objective is the opposite.

Among the earliest research on networks and network behavior are studies about epidemics. In these scenarios, the goal is to arrive at the S-curve’s horizontal line as expeditiously as possible, hopefully before the numbers have become large.

The quarantines and lockdowns are a way to cut the ties and isolate infected nodes and the surrounding clusters, where the ties are strongest, from the broader graph and weaker ties to nodes that haven’t been infected. Quarantines and lockdowns aren’t the only way, or not only quarantines and lockdowns literally.

The extra measures that are being taken — the travel bans, the work from home, the event cancellations — are precautionary steps to block network traffic and disrupt engagement where it is most prone to happen. Another mechanism, a universal isolation in a sense, is the individual care being encouraged, such as the persistent cleanliness of hands, which is itself a way to reduce virus flow and disrupt the links throughout the network.

The 9-minute video below is very much worth watching. It illustrates the math behind the epidemic network growth, and frames this section’s commentary in a quantifiable perspective.

Without spoiling any of the substance, the presentation concludes thus:

“If people are sufficiently worried, then there’s a lot less to worry about.”

I believe people are pretty worried, and this will ultimately reduce both the time and magnitude of the epidemic network trajectory.

Framework for the not impatient

An observation: The news is priced in quickly, the resulting economics less so, or less correctly in the near-term, because consequences are complex.

Another observation: The effect of market moves, both up and down, is that the swings are in the near term indiscriminate. This may cause lesser companies to get pulled up on the incline, and the better ones to get unduly dragged down on the fall.

These observations capture the risks and opportunities, and lead to some related questions that are basic:

  • Is there a fundamental economic change afoot, or is the turbulence of a reactive nature?
  • If the latter, which companies are which?
  • And if the former, the same question in a different context…

In any case, the framework probably works better for the long-term oriented, where the element of speculation is, in theory at least, less pronounced. Here, a financially analytic outcome from the virus spread and its economic reactions will be to measure the extent to which software has in fact eaten the world, how this is priced by markets, and the company-specific results that demonstrate their software dominance of scale and operations.

At the extreme, a purely digitized supply and value chain should be immune to biological disturbances. It will also be seen, on a social level, to what extent a software eaten world is possible.

Rowdiness in the classroom

History is a teacher who makes the subject matter interesting, entertaining, inspiring, and pertinent to both the present and the future. But it can be so hard, sometimes, to pay attention in the rowdy class.

The lessons of history — which are lessons about people who behave as people do — don’t predictably repeat (it rhymes more than it repeats, as the saying sort of goes) and it helps, I think, to have an ear for it, or try to. But when the listening is hardest, with the classroom at its rowdiest, that’s when the student might be able to stand out.

S&P 500 Index

There has been turbulence before. Globally, at every level, everyone is in this, and it’s in the collective interest for the current state of things to clear. Health, as a result, will improve. Money, if need be, can be printed.


The preceding sections were originally published separately in my daily journal of snippets about markets, other networks, technology, finance, books, and assorted other subjects. The selections seem to fit together, and collectively comprise a longer post for the benefit of those who like their reading longer.

March 16 update: The psychological unknown.


Finance notes from underground

Market notes from up above