Schrödinger's Cat

In 1935, Austrian physicist Erwin Schrödinger devised a strange thought experiment. Imagine that a cat, a vial containing some poison, a hammer operated by a Geiger counter, and radioactive material were put inside a sealed box. The level of radioactive material is set to yield a precisely 50-50% probability for the Geiger counter to detect it. If the counter does detect any radiation, it will activate a hammer which will break the vial and release the poison which will kill the cat. Until someone opens the box, it is impossible to find out whether the cat is dead or alive. In quantum physics, the cat is in what is known as a superposition state (see Quantum Industrialsin June ’19): it is both dead and alive because it has to be one and it cannot be neither - something which puzzles Jude Law’s character in the opening scene of Repo Men(2010).

The state of today’s economic situation is like that of Schrödinger’s cat in its box. There is no way to find out about the shape of the economic cycle before the container is opened towards the end of the year. Whilst a ‘consumer recession’ can easily be anticipated, its length, depth and second round impact on the industrial sectors are simply unknown.

This is not preventing many, moved by a primitive impulse, from trying to figure out what is happening in the container. Aside from the flying anecdotes which are given a far greater importance than they deserve, ‘nowcasting’ methodologies, a type of forecasting with a focus on what is happening in real time, can be informative. But they have many limitations, even more frustratingly so during times when they would be most useful. First, they inevitably rely on some historical information as the data needs to be gathered and compiled. To evidence the point, the New York Fed and the Atlanta Fed have warnings on their website stating that their current nowcasts are not fully capturing the current impact of COVID-19 on the economy. In that sense, today’s nowcasting really is yesterday’s nowcasting. Second, nowcasting tends to be at least partially based on surveys which can only provide a false sense of knowing since respondents do not have any privileged information about whether the cat is dead or alive. Third, nowcasts rely on statistical models and algorithms which are put under extreme stress during abnormal times.

Until the Schrödinger box is opened, there exist many contemporary universes according to the supporters of the ‘Many-Worlds Interpretation of Quantum Mechanics: one with a V-shape economic recovery, one with a U-shape recovery, etc. Since any relevant, non-observable item making up the world can be in various, unknown states (like Schrödinger’s cat), there is actually at any point in time an infinite number of parallel universes or a ‘multiverse’ in which the world operates and decisions must be made. This theory is arguably less obscure these days than during times of greater (perceived) certainty.

The coexistence of a vast array of realities has many consequences for leadership teams who must keep as many options open as possible at the lowest possible cost, with some inevitable bets to be placed (mine would rely upon the view that the economy will return to normal faster than generally anticipated due to social and economic pressure). When it comes to communication with investors related to the outlook around the Q1 results, ‘I do not know’ is today the only credible message when referring to macro- and microeconomic trends. Best is to highlight various demand scenarios, explain how the supply chain can be relied upon and adjusted to meet each of them and to avoid expressing any specific views about the most likely scenario.

Because as of now, the economy is both dead and alive.


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