Cat, poison, and perils of market prediction

Cat, poison, and perils of market prediction | Daily Tribune

The Bangko Sentral ng Pilipinas (BSP) dropped a bomb just before Valentine’s Day, announcing that it will not be cutting rates and will maintain the policy rate at 5.75 percent.

Prior to this announcement, the overwhelming consensus forecast was that the BSP would cut its policy rate by 25 basis points to 5.5 percent.

Given the gap between expectation and reality, the market was wounded by the surprise announcement, with the Philippine Stock Exchange Index (PSEi) falling below 6,000, approaching its 52-week low. In some ways, the fall was not heartbreaking, considering the markets have been in the doldrums of late.

The reasons provided by the BSP were: “The Monetary Board noted that domestic growth prospects continue to be firm. However, uncertainty over global economic policies and their impact on the domestic economy has increased significantly… Before deciding on the timing and magnitude of further reductions in the policy interest rate, the Monetary Board deems it prudent to await further assessments of the impact of global policy uncertainty and the potential effects of the actual policies.”

While global economic policies were not identified, this was clearly the rollout of the Three Ts of Trump we discussed recently. The more recent ones were: 1) the threat of applying a 25 percent tariff on autos, pharmaceuticals, and chips; 2) the announcement of the streamlining or downsizing of the federal workforce under the Department of Government Efficiency or DoGE; and 3) initiating talks with Russia with the alluded intention of securing peace on their border with Ukraine. The last one resulted in some tension between US President Donald Trump and Ukraine President Volodymyr Zelenskyy.

Those three alone are a lot to unpack for investors and global policymakers. And it is just the second month into the Trump administration.

After reviewing certain assumptions, we need to appreciate the prudence of the BSP’s decision. After all, the entire world is facing a Schrödinger’s Cat paradox. In quantum mechanics, Erwin Schrödinger proposed a thought experiment using a cat, poison and a random event inside a box to explain the behavior of atoms and how it may be possible for them to be simultaneously in two states.

To explain it briefly, a cat is placed in a box with poison, and the latter will be released by a random event, such as the detection of a release of radioactive material (do not worry, no real cat was harmed). From someone observing the box from the outside, the cat is simultaneously dead and alive — until you open the box and see whether the cat is indeed dead or alive. This demonstrates the existence of two states before they become reality.