Chaos Theory
Bonnie Murray, Founder & CEO, Raccord Inc.
June 9, 2022
Small differences in initial conditions due to errors in measurements, can yield widely diverging outcomes, making long-term predictions impossible. The lens in which we view the world today is much cloudier than it was two quarters ago when the S&P was making its 70th new high to ring in the New Year. The market is a complex, mercurial system, weaving in and out of consciousness. It’s a curious thing, wondrously, that on January 1 all the data points became clear, as It’s been a precipitous fall ever since, with the S&P -13.65% and the Nasdaq -22.75%, respectively. Fibonacci devotees would tell you we have further to go. What's more perplexing is the liquidity spigot remained open the same week the US printed an 8.5% inflation number. Strategy without tactics is the slowest route to victory (The Art of War- Sun Tzu).
Like a clairvoyant, the credit markets offer a glimpse of what’s plausible. The difference, of course, is fortune tellers lean into possibilities while the latter support probabilities. The confluence of $1.1 trillion dollars in loans backed by commercial real estate maturing this year and next ( according to Trepp), negative leverage within the multifamily space and massive pools of capital allocated to non-bank, unregulated sectors have created systematic risk that has largely been ignored. The noise around increased capital requirements at banks is no longer relevant for today’s shadow economy. Some of the largest Funds in the world, “smart money”, are down 50+% on the year, trading profitability for narratives that lead to poor risk management. The ripple effects across capital allocators such as pensions, endowments, foundations, sovereigns and family offices have yet to be fully realized. Historically, cap rates lag economic cycles by two quarters thus the write downs remain on the horizon. If you include a global energy crisis, inclusive of embargoes not seen since the 70’s, a technical accounting within the equity markets, where companies are required to deduct from earnings the impairment in value of their holdings and significant demand destruction impacting future revenue growth, we find ourselves in a perfect storm. Soft landing is the term du-jour, replacing transitory as the next unrealistic expectation of what lies ahead.
Data-led strategies are the only anchor. We are living through a live case study of why it’s imperative to utilize data to drive decision making. Without it, we’re unmoored and drifting (lower). The Nobel Prize winning economist, Robert Shiller, presents the conundrum all too well, “it amazes me how people are often more willing to act based on little or no data than to use data that is a challenge to assemble.” The reason is simple. Most humans consume and process massive amounts of data through their senses, based on contextual connections and then filter the critical information into a decision. Human acuity works synchronously with the senses to analyze and distill. Existing data architectures are broken because they are not built for broad and efficient consumption. Business intelligence is siloed, dependent and yet lacks interoperability, thus making it an added cognitive load. The law of accelerating returns, according to Ray Kurzweil, posits that technology develops at an accelerating pace because of positive feedback loops, supporting the theory that technologies interact and nourish one another to improve outcomes.
This moment may be the greatest work and behavioral transition in history and yet many industries have applied industrial age thinking to exponential age problems. Azeem Azhar astutely points out, “the reality of today is every service we access, both in developed and emerging economies, is mediated through a smartphone and every interaction is handled through software.” Chaos breeds creativity, opening the gateway for new disruptive architectures and tools, like a trusty scythe carving a path ahead of the curve.
