Behind all the hysteria related to the coronavirus, there might be a second, new form of epidemic that is spreading, one with a pattern that ressembles that of a resonance chamber, and where human beings are mere figurants reacting to events of their own creation.
Investment Office, 28 February 2020
Behind all the hysteria related to the COVID-19 virus, there might be a second, new form of epidemic that is spreading, one with a pattern that ressembles that of a resonance chamber, and where human beings are mere figurants reacting to events of their own creation.
Let us try to explain our thinking:
Since February 24th, the interaction between sharp market movements, news-flow and political action is unprecedented, leading to a self-fulfilling vicious loop that keeps reinforcing itself. As of now (February 28), central banks are the only silent actors.
Most market participants are passive institutional investors, essentially aligned to their benchmarks, with portfolio rebalancing being their only form of active investment. This leaves a minority of active players that can (it is only a hypothesis) exercise a disproportionate influence on the market. These few active investors probably all have comparable strategies (constant volatility targets, momentum trades, etc.), based on algorithms that automate the entire investment decision and execution process.
The price that is created reinforces the conviction of the media news flows, with the authors (if they are not already automated) seeing a market confirmation of their gloomy predictions, further reinforcing their posting of negative information (translated into more hits and readers/listeners).
This interaction takes place within a closed system, where the unfolding of events bears a close resemblence to that of a resonance chamber effect.
According to Wikipedia, "a resonance chamber uses resonance to enhance the transfer of energy from a sound source (e.g. a vibrating string) to the air. The chamber has interior surfaces which reflect an acoustic wave. When a wave enters the chamber, it bounces back and forth within the chamber with low loss (See standing wave). As more wave energy enters the chamber, it combines with and reinforces the standing wave, increasing its intensity.
Since the resonance chamber is an enclosed space that has an opening where the sound wave enters and exits after bouncing off of the internal walls producing resonance, commonly acoustic resonance as in many musical instruments (see Sound board (music)), the material of the chamber, particularly that of the actual internal walls, its shape and the position of the opening, as well as the finish (porosity) of the internal walls are contributing factors for the final resulting sound produced.".
As a result, a snow ball effect is put into motion, with almost no human beings involved in the process, which is in bizarre contrast to a virus that is supposed to affect human beings.
Could this be this first case in history of machines literally beating us at our own game?