Details bring me comfort. To-do lists, calendars, and precise directions appear smart. They provide me with an odd air of authority.
I suppose humans feel comfortable wrapped up in details. Imagine the awkwardness of a major league baseball season without the raw partitions of spring training and the World Series? Or the chaos of unstandardized time zones, calendar months, or railroad stops. We need and desire border stones to help us hedge the risk of unpredictability. Concrete things give us comfort, and this happens regardless of how accurate those tangible things are.
In general, there exist two categories of thinking. There is convergent thinking (logical, detail-oriented) and divergent thinking (inventive, high-level). Convergent thinking is concerned with grasping the granular details of a given situation. In contrast, divergent thinking fascinates with a mixture of abstract ideas and general knowledge.
As a culture, we seem to reward convergent (detail-oriented) thinking over divergent (high-level) as detailed knowledge about something is often considered more accomplished. To understand the details is to know what goes into the incident being studied. If we need an expert in something, we look for a person with detailed knowledge.
I applaud the detail-oriented thinking of an air traffic controller, surgeon, or tile floor installer. Yet, I also know that there are times when focusing on details can prove costly – one that increases exponentially with complexity.
Think of the severe amount of dimensionality within culture, economics, society
As the factors of the situation increase, the notion that digging deeper leads to more knowledge disintegrates. To dig deeper is to lose context. The act of stripping away and isolating removes the interactions, and the behavior of any real-world system is determined by those interactions. As we hone in on the specifics, we lose the view that matters most. The part of the phenomenon actually interacts with the environment and affects our observations and often our decisions.
Within a complex system, fixing on details downgrades one's awareness to sterile facts devoid of meaning. And this is the point. In real-world situations, elements have sense only by virtue of the environment they interact with. You're left with inputs to a journey you know nothing about if you shed away the background.
The last vestige of my son's college football career is a plastic to-go cup. The kind you receive at the stadium, helping you to justify the cost of an $8.00 cup of coffee. While on a flight, the lid to the cup fell off and rolled under the seat in front of me. By itself, my to-go cup lid had no meaning. If I dropped it and lost it, nobody would care. It's a to-go cup lid. But to me, that lid meant everything, and losing it could compromise my whole trip. I was disturbing neighboring passengers trying to recover a piece of plastic as if my entire happiness depended on it. The to-go cup lid acquired all of its meaning through context.
This is true of any real-world situation. The components that go into a system mean nothing without considering the circumstances, conditions, surroundings, factors, state of affairs. Only by considering a system's parts within the mess of their interactions do the details of a system have any meaning. The environment in which elements play out their dance must be considered. This is true of any phenomenon with an appreciable amount of complexity, including societal shifts, real estate trends, and guessing the long-term impact of Federal Reserve policy.
The week ahead
In the week ahead, the Federal Reserve meeting represents the main event for financial markets and while my expectations are that the Fed will not announce “Quantitative Easing Tapering”, I’m cognizant that for many people this remains an open question. Some thoughts:
- There is the connectivity with financial conditions and how the above plays into the broader state of markets. Not just via low (real) interest rates, but also equity volatility that remains very suppressed as risk assets continue to perform well. Indeed, if the reaction function of the Fed has been any indication, the Federal Reserve is looking at financial conditions more so than just interest rates.
- It was the sharp tightening of financial conditions in late 2018 that triggered the Fed's shift from a hiking bias to a period on hold, and ultimately the fine-tuning rate cuts that brought the target band lower ahead of the pandemic. In that episode, it was investors' concern that the Fed had gone a hike too far which ultimately inspired the 20% drop in the S&P 500 heading into 2019.
- With the Federal Reserve opting for patience and transparency surrounding the tapering process and what will ultimately be the cycle's first rate hike, I certainly don't anticipate a repeat of this 2018 dynamic, but it offers topical food for thought as the groundwork for the first step down the normalization path is laid.