Covid-19 Cargo Cults

Market participants are responding to Covid-19 with predictive models based on measurements that don't reflect underlying reality. The initial testing failures weren't just imprecise. They created an epistemic problem: uncertainty so deep that any estimate of where we are now could be off by orders of magnitude. Yet confidence in what these models mean for portfolios remains high.

• Investors are treating Covid-19 predictions as data-driven when the foundational data is unknowable. Testing failures created a gap between what's being measured and what's actually happening that compounds daily.

• Media coverage of Covid-19 dominates but stays siloed. The Fed gets linked to mortgages, elections, everything. Covid-19 mostly just links to itself. The narrative hasn't yet woven into how investors understand systemic interconnection.

• Scenario analyses rely on historical comparisons and backward-looking covariance built from normal periods. But covariance estimates don't capture market behavior when investors are responding to something genuinely unknowable, not just volatile.

• The real risk isn't that Covid-19 will be worse than predicted. It's that all portfolios hold implicit bets on functioning economies and available credit. If investors suddenly reassess those bets together, the measurements being watched right now become meaningless.

• If high-confidence predictions based on unknowable data are wrong, and if portfolio managers haven't yet properly accounted for tail risk, there's a gap between where institutions think they are and where they actually are. How deep is that gap?