Building Wealth

Now Is Not the Time for Predictions

While most of the world works to avoid any contact with the novel coronavirus, 2,666 travelers were forced to spend two weeks in a petri dish full of infected people.

We're talking about the now-infamous Diamond Princess, the cruise ship that toured Asia, caught the coronavirus, and went into complete lockdown while docked in Japan.

All told, 705 people who were aboard have tested positive for the virus.

The nightmare started slowly. On the supposed final night of the cruise, the captain made an announcement over the loudspeaker. A passenger who'd fallen ill and left the ship nine days ago had tested positive for the virus.

The guests, with the permission of the crew, continued to vacation as usual. They danced, watched performances, and ate from the buffet together.

But by the next day, things had changed. Guests were checked for high temperatures and coughs. They were confined to their rooms and were told they'd be isolated there for 14 days.

Clearly, the ship was not prepared for this. Medicine was in short supply. Rules were unclear. No virus test kits were available on board. And people didn't know if they could catch this mysterious coronavirus through the ventilation... or what would happen if they got infected.

Each day, many passengers counted the ambulances that pulled up to the docked ship to gauge the number of new infections.

Since then, all the passengers have gotten off the ship – evacuated by their own governments and put into longer quarantines at home. Crew members only started to disembark the ship last Thursday, after weeks on board.

Being confined on the ship was an absolute nightmare. The Japanese government has been roundly criticized for its handling of the situation. And this week, a senior official in Japan's health ministry said, "I admit, our isolation policy was not perfect."

But look how close it came to taking a different trajectory and being even worse... The lockdown was imposed only the night before the passengers were to disembark. It was only a couple days before that when the first positive test came back.

This ship was hours from releasing hundreds of infected patients to a port in Japan, from which they'd have climbed on to planes to take them to the U.S., Australia, Britain, and more.

Had that happened, the spread of coronavirus may have been set on a very different path.

Predicting the Complex

Let's go back to just before the Diamond Princess arrived at its Japanese port.

Had you gathered up all the information on the coronavirus and carefully plotted what would happen next with the virus, you couldn't possibly be right...

First off, the accuracy of your prediction might've hinged entirely on whether those passengers get off the ship. Instead, the quarantine was put in place.

And would your prediction have included the behavior of a couple of panicked Japanese bureaucrats?

The point is, thousands of decisions happen every day, relative to this cruise ship and the financial markets, that could have changed the outcome...

In this case, when does the Chinese government lock down a city? How does Hong Kong encourage people to stay home? Just how much economic growth is a politician willing to sacrifice to prevent the virus's spread?

Both the spread of disease and financial markets are complex... in the mathematical sense.

In the mathematical sense, a complex system has multiple parts that interact in various ways that cannot be predicted.

Put it another way, even if you can describe all the initial conditions and the ways the pieces affect each other, you still cannot predict what will happen.

You've likely heard the saying that a butterfly flapping its wings in Brazil could cause a tornado in Texas. In fact, chaos theory got its start in weather forecasting...

Scientists thought better models and more satellite data could eventually lead you to a perfect model of the weather... But they realized that weather was chaotic. Even if you could plot every atom in the atmosphere, you still couldn't model next week's weather perfectly. A tiny shift in a breeze could end up with much different results.

That brings us back to the virus.

The situation's complexity means that trying to predict how the coronavirus will spread is impossible. We do not know what will happen because we cannot know what will happen.

Anyone who offers you anything else is doing little more than guessing.

To put it back into a mathematical framework... If you precisely knew the initial conditions of the virus right now – meaning, you knew each individual who was infected, how the infection spreads, how many people may spread the disease without any symptoms, what the mortality rate is, and how close we are to a vaccine – you still couldn't predict what would happen.

You'd have to properly predict every decision by a cruise ship captain or government official. You'd have to predict who shakes hands at a meeting or who sits next to whom on an airplane.

The smallest changes can have big effects. You just can't know them all.

Of course, we don't have anywhere near perfect knowledge of the initial conditions. No one can fully answer any of those questions.

Financial markets are the same. One big investor could shift some assets around and that could trigger a panic sell-off. The feedback loop between the market's activity and the people who react to it has so many variables that making large predictions is impossible.

Now let's talk about how this relates to you. And we'll be honest...

We don't know what will happen with the virus and the markets. We could see another 10% or 20% slide. We could see stocks rally briskly. You can make coherent arguments for both.

If you're trying to predict what will happen over the next few days – or even the next few weeks – that's a tough gamble to make. We think it's best to stay out of the action until we get a better understanding of what will occur.

What We're Reading...

Here's to our health, wealth, and a great retirement,

Dr. David Eifrig and the Health & Wealth Bulletin Research Team
March 4, 2020