Schrödinger’s Cat paradox

(Ed’s note: In his column last week, Jomar Lacson discussed the Schrödinger’s Cat principle as it relates to postponing bold business decisions. Following is the continuation of his article, exploring the paradox’s application in making strategic investment moves.)

Using the Schrödinger’s Cat model, we can understand why now may not be the best time to make bold decisions. In the model, replace the cat with inflation, and the poison with the Trump policies (the three Ts).

From the perspective of investors and policymakers, inflation in 2025-2026 is simultaneously in two states of either being very high or being manageable.

One of these two states will be realized when we start observing inflation being in this state, i.e., when succeeding inflation reports start coming in. In other words, we do not know jack — at least at this stage.

However, even though caution is understandable, there are several pressing issues. The reasons why the market was expecting a cut are: 1) the BSP had signaled cuts before the announcement; 2) GDP growth in 4Q24 at 5.2 percent was below expectations and government targets; and 3) current Philippine inflation at 2.9 percent in January 2025 is within target — and is slated to further decelerate with a change in rice policy.

Schrödinger’s Cat explains the first reason, so there’s no need to dwell on the surprise.

The implications of the decision though affect the second reason. Without monetary support amidst a slower-than-target GDP growth has certain implications on the fiscal front.

GDP growth is one of the key variables in our fiscal strategy and if its growth is slower, this affects the size of the tax base. Unless the new tax incentives under the Corporate Recovery and Tax Incentives for Enterprises to Maximize Opportunities for Reinvigorating the Economy (CREATE MORE) Act yield new investments in 2025-2026, this may mean we should expect a higher-than-forecast fiscal deficit in the next couple of years.

If interest rates continue to remain at these levels for longer, this also means the national government has to borrow more than target in 2025-2026.

Bringing down our fiscal deficit is a priority for macroeconomic stability.

But beyond managing the fiscal deficit, there are also other interest-rate sensitive issues such as the oversupply of office and residential space in the property sector, and lingering weakness in investments and below optimal capacity utilization in key industries.

These, along with the decline in our US dollar reserves and the exchange rate woes, are primary issues in the BSP’s agenda. What to tweak, how much to tweak, and when to tweak are the questions that just got tougher for the BSP (and its central bank peers) to answer. Investors also need to tweak their assumptions and expectations to meet the uncertainty of the times.

But it is not all cat-astrophic (pun intended). Just as every dog has its day (pun also intended), not all opportunities appear or disappear at the same time. Investors need to appreciate the power of diversification. Instead of big bets on technology, AI and cryptocurrencies, investors and policymakers should consider longer-horizon investment themes such as sustainability, renewable energy, emerging markets, etc.

Schrödinger’s Cat may be imaginary, but it also teaches us to use our imagination — to imagine what is possible and to act on what can become a reality.