Why the CPI Did NOT Cause the Market to Go Down
Like bee hives and ant colonies, complex adaptive systems are characterized by critical states - what we at Vicis call bifurcations.
I am always fascinated by the standard cause and effect responses that we get when the market does something unusual. Like the 'reaction' this morning to the CPI statistics which were well - WELL - within normal variance distributions of expectations (that's a fancy way of saying the difference between expectations and reported CPI was negligible).
Readers know that we have long considered asset markets - ANY negotiated market for that matter - to be complex adaptive systems. Like bee hives and ant colonies, complex adaptive systems are characterized by critical states - what we at Vicis call bifurcations. Critical states are nothing more than a state of underlying instability that exists but has not yet manifested.
When that unstable condition - that bifurcation - manifests itself in the system, the human brain automatically and reflexively searches for the proximate cause, even if the cause has nothing whatsoever to do with the emergence of the instability. We can't help that response - it's physiological even if entirely illogical.
The SPX reaction to the CPI statistic is a perfect example of the above process. Our models had the SPX in a very unstable condition - at a potential bifurcation at emini SPX 1300 - 1302 - yesterday. That instability revealed itself but its cause is manifestly NOT the CPI.
Understanding that complex adaptive systems - asset markets - very often do not have linear cause and effect relationships is an essential part of controlling risk.
We can't write the following enough: post hoc ergo propter hoc.*
*Literally, "after this therefore because of this."
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