October 25, 2023

Correlation is not Causation

 But that doesn’t stop AI from saying it is. Just a reminder that I’m back in the office and navigating the tidal wave of uncertainties that have captivated the markets recently. Earnings are adding to the volatility, stocks with favorable earnings curiously go down and unfavorable earnings, but positive guidance, they go up, and the rest are just earnings and the market seems too distracted to pay attention. Our investments that continue to represent a diverse strategy and are still good buffers to the volatility, and with little more than Fixed Income ETF exposure to 3mo Treasury Bills the sharp rise in interest rates has also had little impact. It’s nice that Treasury Bills are yielding 5% as well. There is also the potential for the uncertainties to be weaponized through our Algochums and Pindude armies’ day trading, and the huge amount of shorting being taken on by Hedge Funds. The latter I customarily refer to as Hedgefiends since most historically make more money on fees than profits.


I’ve returned to the office with the same technical oversold condition that I left with. While there were some price increases of the broad indexes, as interest rates moved the 10yr Treasury over 5%, a level not seen in 16 years, impulsive selling ensued. That natural reaction was to sell technology, but not to necessarily buy anything else. Hence the oversold condition is diverse by sector, which I find curious. That’s because it’s obvious that investing decisions are being sourced through technology, clearly from the reactionary responses to external conditions such as rising rates, inciteful narratives and other charged uncertainties. And as said conditions reverse the interpretation is for markets to also reverse the impact. However, while some correlation can be taken from the data, such as rising rates, the rest have little correlation and virtually no historical causation. The only good side to all of this is the analysts are feeding off the AI data, lowering expectations, and when those expectations are better than expected, such as with Alphabet (GOOGL) today, the unsubstantiated causes are not correlating with the outcomes. I’m glad machine learning is part of the longer term aim of AI to improve interpretation; I hope analysts can learn as well.


Just as I was leaving the office on October 11th, the Consumer (CPI) and Producer (PPI) data showed higher than expected increases. However, much of the core data, that excludes energy and food, the outcome was fairly stable. Since that release of data, energy has stabilized, and the consumer, while still remaining active is faced with increasing interest rate obligations over credit cards, adjustable mortgages and resumption of the student debt commitment. And the price increase in food is finally getting some scrutiny in the press as being significantly higher than prevailing inflation, getting some political interest as well. In September, Retail Sales increased 0.7%, and Industrial Production increased 0.3%, both are higher over the past year. Housing Starts increased 7.0%, and Existing Home Sales declined 2.0%, both are lower over the past year, -7.2% and 15.4% respectively. This continues to perplex the Fed, who will meet on November 1st to vote on rising rates. For now, the only data that matters is Unemployment, and if that shows any weakness, even marginal, the Fed objective, in my opinion, could materialize over the next few months.

 External Events   

For now, patience in the face of distressing narratives has never been more important than in recent memory. This isn’t a financial crisis looming, the economy is chugging along and banks are only moderately struggling due to rising interest rate exposure to balance sheets. But, with even the Fed potentially raising rates at their next meeting, most of the external dangers surrounding the potential of the US engaging in military confrontation, and the growing dangers of dissention in our own country, while plausible, are also historically prone to presenting shorter term perils to the markets, as the world settles into its future, and with any luck, with more anticipation than anger. For now, even in an oversold condition, it’s okay to refrain from being too optimistic.

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