Covid-19 Cargo Cults
February 27, 2020·5 comments·Money
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?
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Comments
Thanks for sharing this, Rafa. I’ll be sure to give it a listen today.
Came home from Costco on Tuesday with a cargo load of non-perishable food. Hope that doesn’t make me a cargo cultist! In any event, I’ll be able to share with neighbors and my church congregation if things go really bad. If things don’t, my local food bank will benefit as I empty my over-stocked pantry shelves in a few months. Clear eyes. Full hearts.
Hah! A different kind of cargo cult. You’re among friends here on that one I expect.
The cargo cult imagery is one of my favourite analogies - it applies so usefully to so many of our attitudes. We can’t seem to help building narratives, and as soon as the narrative takes over from direct observation we’re susceptible to exactly this. It’s not just for investments - we need predictive formulas to survive - but they do take over. You and Ben are onto something so primal in your analyses, and yet so little considered - it’s a real privilege to be able to follow your thinking.
Cargo Cult musings - hoping maybe a conversation…
Capital = “wealth in the form of money or other assets owned by a person or organization, or available or contributed for a particular purpose such as starting a company or investing.” Primary wealth (I.e. resources) has generally been taken rather than earned, because it is the environment, the planet, and only a few aboriginal cultures saw those resources as something for which equal repayment (replenishment/restoration) was required.
Labour = “work, especially physical or manual”, to produce an actual physical or intellectual benefit.
Economy = “the wealth and resources of a country or region, especially in terms of the production and consumption of goods and services.” Combines wealth both earned and taken, and the labour involved.
Cargo cult = copying the observed forms or processes of a productive activity without a complete understanding of both the mechanics and the necessary inputs involved. Generally directed towards improving one’s standard of living with less labour.
Where does the transition from labour to capital take on the characteristics of cargo cult?
Is cargo cult an explicit form of entitlement, ie the right to or expectation of the enjoyment of benefits you have not either directly produced, or used the stored value of your own direct production to aid someone else’s direct production. Does every degree of separation in the process that removes us from an understanding of what produces the benefit, hit one of our hard wired buttons for entitlement?
Has any “advanced” human culture achieved an economy that didn’t require some form of slavery to function? By slavery I mean a severely unequal return for labour, to different groups within the culture. Thus creating, among other effects, ambitions for lifestyles that embrace endless consumption without genuinely equivalent productive labour, and repayment (restoration) of expended resources. Modern western “economies” appear to be dressed up cargo cult. And with the attendant and inevitable frustrations among those benefiting less or not at all.
It’s all appearing to be an ever ballooning illusion. Maybe why many of us have been beset by a sense of unreality and impending doom for a very long time.
“Clear eyes, full hearts”, “Make, protect, teach” points to an attempt to turn this around, is that a fair description? There’re so many levels to our assumptions, so much narrative, so much hard wired survival strategy. We’ve considered the lilies, how they grow, doesn’t look like they’re toiling or spinning much, we’ll ignore their fragility and brevity and figure we’re entitled to achieve that image long term. Because… Yay Jesus? Yay homo sapiens? Yay me? Not so much Yay the exploited labour… somewhere else. NCov19 has the potential to be quite the little wake up call, ennit?
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