Thinking Systemically: Why Simple ISN’T Better For Investing

Thinking Systemically Chaos Theory Butterfly Flapping Its Wings Causing A Tornado Poster

Does the flap of a butterfly’s wings in Brazil set off a tornado in Texas?”Was the question Edward Lorenz posed as he dove into his exploration of Chaos Theory.

It was his way of stating that a tiny, inobservable change in input can lead to a massive, very observable change in output. This occurs in nonlinear (aka chaotic) systems where intricate interdependencies between components of the system take little wing-flaps and amplify them exponentially through a series of feedback loops.

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The Butterfly In The Chip Shortage

Quote on chaos theory It has been said that something as small as the flutter of a butterfly's wing can ultimately cause a typhoon halfway around the world

The global chip shortage has been rolling on for months now, with no end in sight. While a lot of it can, and has, been attributed to Covid disrupting global supply chains, there is more to it. Using the butterfly effect as a metaphor, Covid is merely the butterfly flapping its wings.

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What You Need To Know About Low Rates & High Stock Prices

Financial markets rarely act as we expect them to

Do low rates lead to higher stock prices?

Or is this a case of correlation ≠ causation?

A common argument used to explain the link between low rates and roaring equities is that low interest rates mean higher present values, and therefore higher equity values.

What does this mean, and more importantly, is it valid?

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An EM Debt Crisis Is Really A Dollar Crisis 1

Emerging market debt crises are more often than not global Dollar crises

The head of the IMF has publicly raised concerns about higher interest rates causing financial conditions to tighten, raising the probability of an emerging market debt crisis.

Her thinking here is decidedly mainstream: high interest rates stifle economic growth by increasing borrowing costs, pulling capital away from emerging markets (EM).

It really isn’t so simple.

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An EM Debt Crisis Is Really A Dollar Crisis 2

Emerging market debt crises are more often than not global Dollar crises

How would an emerging market collapse come about?

Again using the mainstream narrative/paradigm as a starting point, such a collapse comes about from capital outflows. This is just a fancy way of saying that money will move out of one country and into another.

Common reasons for such outflows include political upheaval in a country, more often that not combined with its creditworthiness going out the window  – hence higher rates.

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An EM Debt Crisis Is Really A Dollar Crisis 3

Emerging market debt crises are more often than not global Dollar crises

We already know that supply issues have played a large role in current upward price pressures, as opposed to only demand going gangbusters.

We also know that QE does not work as advertised, and that any inflation that results from Fed intervention is more likely than not to be the “bad kind”.

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